<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MARCH 20, 1997
REGISTRATION NO. 333-
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- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
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. / /
------------------------
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
PROPOSED MAXIMUM
TITLE OF EACH CLASS OF AMOUNT TO AGGREGATE AMOUNT OF
SECURITIES TO BE REGISTERED BE REGISTERED(1) OFFERING PRICE(2) REGISTRATION FEE
<S> <C> <C> <C>
Common Stock, par value $0.01 per share...................... 11,500,000 $507,437,500 $153,769
</TABLE>
(1) Includes 1,500,000 shares which the Underwriters have the option to purchase
to cover over-allotments, if any.
(2) Estimated solely for the purposes of computing the registration fee.
------------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933, AS AMENDED, OR UNTIL THIS REGISTRATION STATEMENT
SHALL BECOME EFFECTIVE ON SUCH DATE AS THE SECURITIES AND EXCHANGE COMMISSION,
ACTING PURSUANT TO SAID SECTION 8(A), MAY DETERMINE.
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<PAGE>
Information contained herein is subject to completion or amendment. A
registration statement relating to these securities has been filed with the
Securities and Exchange Commission. These securities may not be sold nor may
offers to buy be accepted prior to the time the registration statement becomes
effective. This prospectus shall not constitute an offer to sell or the
solicitation of an offer to buy nor shall there be any sale of these securities
in any state in which such offer, solicitation or sale would be unlawful prior
to registration or qualification under the securities laws of any such state.
<PAGE>
SUBJECT TO COMPLETION
MARCH 20, 1997
PROSPECTUS
[LOGO]
10,000,000 SHARES
WELLPOINT HEALTH NETWORKS INC.
COMMON STOCK
($.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 19, 1997, the last sale price of the Common Stock, as
reported on the New York Stock Exchange, was $45 3/8 per share. See "Price Range
of Common Stock."
As of March 19, 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>
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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 ("HMO"), preferred provider organizations ("PPO"),
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 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 1,002,000
</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 $45.38 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 tax liability should arise against which the
Foundation has indemnified, 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 $131,541,250, based upon an assumed
offering price of $45.38 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 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 Requirement" 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 19, 1997)...................................................... 457/8 321/2
--- ---
--- ---
</TABLE>
On March 19, 1997 the closing price on the New York Stock Exchange for the
Company's Common Stock was $45 3/8 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 $45.38 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 $ 493,459
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........................................................ 761,879 893,390
Unrealized valuation adjustment................................................... (9,994) (9,994)
Retained earnings................................................................. 117,909 117,909
---------- ------------
Total stockholders' equity...................................................... 870,459 1,002,000
---------- ------------
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................. -- -- -- -- 625,000 493,459
Stockholders' equity........... 507,483 1,233,190 1,418,919 1,670,226 870,459 1,002,000
</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 $45.38 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.
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<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.
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<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
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<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,
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<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.
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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.........................................................................
</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.
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<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.
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<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.
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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.
II-1
<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>
- ------------------------
(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 opinion of its
counsel the matter has been settled by controlling precedent, submit to a court
of
II-2
<PAGE>
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.
II-3
<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 Registration
Statement to be signed on its behalf by the undersigned, thereunto duly
authorized, in the City of Los Angeles, California, on the 19th day of March,
1997.
WELLPOINT HEALTH NETWORKS INC.
By: /s/ LEONARD D. SCHAEFFER
-----------------------------------------
Leonard D. Schaeffer
CHAIRMAN OF THE BOARD
AND CHIEF EXECUTIVE OFFICER
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints, jointly and severally, Leonard D. Schaeffer and
Thomas C. Geiser and each one of them, his or her true and lawful
attorneys-in-fact and agents, each with full power of substitution, for him or
her and in such person's name, place and stead, in any and all capacities, to
sign any and all amendments (including post-effective amendments) to this
Registration Statement, and to sign any registration statement for the same
offering covered by this Registration Statement that is to be effective upon
filing pursuant to Rule 462(b) promulgated under the Securities Act of 1933, and
all post-effective amendments thereto, and to file the same, with all exhibits
thereto and all documents in connection therewith, with the Securities and
Exchange Commission, granting unto said attorneys-in-fact and agents, and each
of them, full power and authority to do and perform each and every act and thing
requisite and necessary to be done in and about the premises, as fully to all
intents and purposes as he or she might or could do in person, hereby ratifying
and confirming that which each of said attorneys-in-fact and agents or any of
them, or his or their substitute or substitutes, may lawfully do or cause to be
done by virtue hereof.
This Power of Attorney may be executed in multiple counterparts, each of
which shall be deemed an original, but which taken together shall constitute an
instrument.
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities indicated on the 19th day of March, 1997.
SIGNATURE TITLE
- ------------------------------ --------------------------
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)
II-4
<PAGE>
SIGNATURE TITLE
- ------------------------------ --------------------------
Vice President, Chief
/s/ S. LOUISE MCCRARY Accounting Officer and
- ------------------------------ Controller (Principal
S. Louise McCrary Accounting Officer)
/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
II-5
<PAGE>
______________________________________________________________________________
______________________________________________________________________________
WELLPOINT HEALTH NETWORKS INC.
(a California corporation)
10,000,000 Shares of Common Stock
PURCHASE AGREEMENT
Dated: April __, 1997
______________________________________________________________________________
______________________________________________________________________________
<PAGE>
WELLPOINT HEALTH NETWORKS INC.
(a California corporation)
10,000,000 Shares of Common Stock
(Par Value $.01 Per Share)
PURCHASE AGREEMENT
April __, 1997
SALOMON BROTHERS INC
MERRILL LYNCH & CO.
Merrill Lynch, Pierce, Fenner & Smith
Incorporated
BEAR STEARNS & CO. INC.
MORGAN STANLEY & CO. INCORPORATED
as Representatives of the several Underwriters
c/o Salomon Brothers Inc
Seven World Trade Center
New York, New York 10048
Ladies and Gentlemen:
WellPoint Health Networks Inc., a California corporation (the "Company"),
and the California HealthCare Foundation, a California non-profit corporation
(the "Selling Shareholder"), confirm their respective agreements with Salomon
Brothers Inc ("Salomon Brothers") and each of the other Underwriters named in
Schedule A hereto (collectively, the "Underwriters," which term shall also
include any underwriter substituted as hereinafter provided in Section 10
hereof), for whom Salomon Brothers Inc, Merrill Lynch, Pierce, Fenner & Smith
Incorporated ("Merrill Lynch"), Bear, Stearns & Co. Inc. and Morgan Stanley &
Co. Incorporated are acting as representatives (in such capacity, the
"Representatives"), with respect to (i) the sale by the Company and Selling
Shareholder, acting severally and not jointly, and the purchase by the
Underwriters, acting severally and not jointly, of the respective numbers of
shares of Common Stock, par value $.01 per share, of the Company ("Common
Stock") set forth in Schedule A hereto and (ii) the grant by the Selling
Shareholder to the Underwriters, acting severally and not jointly, of the
option described in Section 2(b) hereof to purchase all or any part of
1,500,000 additional shares of Common Stock to cover over-allotments, if any.
The aforesaid 10,000,000 shares of Common Stock (the "Initial Securities")
to be purchased by the Underwriters and all or
1
<PAGE>
any part of the 1,500,000 shares of Common Stock subject to the option described
in Section 2(b) hereof (the "Option Securities") are hereinafter called,
collectively, the "Securities."
The Company and the Selling Shareholder understand that the Underwriters
propose to make a public offering of the Securities in the United States, and a
private placement of the Securities in Canada, as soon as the Representatives
deem advisable after this Agreement has been executed and delivered.
The Company has filed with the Securities and Exchange Commission (the
"Commission") a registration statement on Form S-3 (No. 333-____________)
covering the registration of the Securities under the Securities Act of 1933, as
amended (the "1933 Act"), including the related preliminary prospectus or
Prospectus. Promptly after execution and delivery of this Agreement, the Company
will either (i) prepare and file a prospectus in accordance with the provisions
of Rule 430A ("Rule 430A") of the rules and regulations of the Commission under
the 1933 Act (the "1933 Act Regulations") and paragraph (b) of Rule 424 ("Rule
424(b)") of the 1933 Act Regulations or (ii) if the Company has elected to rely
upon Rule 434 ("Rule 434") of the 1933 Act Regulations, prepare and file a term
sheet (a "Term Sheet") in accordance with the provisions of Rule 434 and Rule
424(b). The information included in any such prospectus or in any such Term
Sheet, as the case may be, that was omitted from such registration statement at
the time it became effective but that is deemed to be part of such registration
statement at the time it became effective (a) pursuant to paragraph (b) of Rule
430A is referred to as "Rule 430A Information" or (b) pursuant to paragraph (d)
of Rule 434 is referred to as "Rule 434 Information." Each Form of Prospectus
used before such registration statement became effective, and any prospectus
that omitted, as applicable, the Rule 430A Information or the Rule 434
Information, that was used after such effectiveness and prior to the execution
and delivery of this Agreement, is herein called a "preliminary prospectus."
Such registration statement, including the exhibits thereto, schedules thereto,
if any, and the documents incorporated by reference therein (including the
exhibits to any such documents) pursuant to Item 12 of Form S-3 under the 1933
Act, at the time it became effective and including the Rule 430A Information and
the Rule 434 Information, as applicable, is herein called the "Registration
Statement." Any registration statement filed pursuant to Rule 462(b) of the
1933 Act Regulations is herein referred to as the "Rule 462(b) Registration
Statement," and after such filing the term "Registration Statement" shall
include the Rule 462(b) Registration Statement. The final Form of Prospectus,
including the documents incorporated by reference therein pursuant to Item 12 of
Form S-3 under the 1933 Act, in the forms first furnished to the Underwriters
for use in connection with the offering of the Securities are herein called the
"Prospectus." If Rule 434 is relied on, the terms "Prospectus" shall refer to
the preliminary Prospectus dated ________, 1997 together with the applicable
Term Sheet and all references in this Agreement to the date of such Prospectus
shall mean the date of the applicable Term Sheet. For purposes of this
Agreement, all references to the Registration Statement, any preliminary
prospectus, the Prospectus or any Term Sheet or any amendment or supplement to
any of the foregoing shall be deemed to include the copy filed with the
Commission pursuant to its Electronic Data Gathering, Analysis and Retrieval
system ("EDGAR").
2
<PAGE>
All references in this Agreement to financial statements and schedules and
other information which is "contained," "included" or "stated" in the
Registration Statement, any preliminary prospectus or the Prospectus (or other
references of like import) shall be deemed to mean and include all such
financial statements and schedules and other information which is incorporated
by reference in the Registration Statement, any preliminary prospectus or the
Prospectus, as the case may be; and all references in this Agreement to
amendments or supplements to the Registration Statement, any preliminary
prospectus or the Prospectus shall be deemed to mean and include the filing of
any document under the Securities Exchange Act of 1934 (the "1934 Act") which is
incorporated by reference in the Registration Statement, such preliminary
prospectus or the Prospectus, as the case may be.
SECTION 1. REPRESENTATIONS AND WARRANTIES.
(a) REPRESENTATIONS AND WARRANTIES BY THE COMPANY. The Company represents
and warrants to each Underwriter as of the date hereof, as of the Closing Time
referred to in Section 2(c) hereof, and as of each Date of Delivery (if any)
referred to in Section 2(b) hereof, and agrees with each Underwriter, as
follows:
(i) COMPLIANCE WITH REGISTRATION REQUIREMENTS. The Company
meets the requirements for use of Form S-3 under the 1933 Act. Each of the
Registration Statement and any Rule 462(b) Registration Statement has
become effective under the 1933 Act and no stop order suspending the
effectiveness of the Registration Statement or any Rule 462(b) Registration
Statement has been issued under the 1933 Act and no proceedings for that
purpose have been instituted or are pending or, to the knowledge of the
Company, are contemplated by the Commission, and any request on the part of
the Commission for additional information has been complied with.
At the respective times the Registration Statement, any Rule 462(b)
Registration Statement and any post-effective amendments thereto became
effective and at the Closing Time (and, if any Option Securities are
purchased, at the Date of Delivery), the Registration Statement, the Rule
462(b) Registration Statement and any amendments and supplements thereto
complied and will comply in all material respects with the requirements of
the 1933 Act and the 1933 Act Regulations and did not and will not contain
an untrue statement of a material fact or omit to state a material fact
required to be stated therein or necessary to make the statements therein
not misleading. Neither the Prospectus nor any amendments or supplements
thereto, at the time the Prospectus or any such amendment or supplement was
issued and at the Closing Time (and, if any Option Securities are
purchased, at the Date of Delivery), included or will include an untrue
statement of a material fact or omitted or will omit to state a material
fact necessary in order to make the statements therein, in the light of the
circumstances under which they were made, not misleading. If Rule 434 is
used, the Company will comply with the requirements of Rule 434. The
representations and warranties in this subsection shall not apply to
statements in or omissions from the Registration Statement or the
Prospectus made in reliance upon and in conformity with information
furnished to the Company in writing by any Underwriter through Salomon
Brothers expressly for use in the Registration Statement or the Prospectus.
3
<PAGE>
Each preliminary prospectus and the Prospectus filed as part of the
Registration Statement as originally filed or as part of any amendment
thereto, or filed pursuant to Rule 424 under the 1933 Act, complied when so
filed in all material respects with the 1933 Act Regulations and each
preliminary prospectus and the Prospectus delivered to the Underwriters for
use in connection with this offering was identical to the electronically
transmitted copies thereof filed with the Commission pursuant to EDGAR,
except to the extent permitted by Regulation S-T.
(ii) INCORPORATED DOCUMENTS. The documents incorporated or
deemed to be incorporated by reference in the Registration Statement and
the Prospectus, at the time they were or hereafter are filed with the
Commission, complied and will comply in all material respects with the
requirements of the 1934 Act and the rules and regulations of the
Commission thereunder (the "1934 Act Regulations") and, when read together
with the other information in the Prospectus, at the time the Registration
Statement became effective, at the time the Prospectus were issued and at
the Closing Time (and, if any Option Securities are purchased, at the Date
of Delivery), did not and will not contain an untrue statement of a
material fact or omit to state a material fact required to be stated
therein or necessary to make the statements therein not misleading.
(iii) INDEPENDENT ACCOUNTANTS. The accountants who certified the
financial statements and supporting schedules included in the Registration
Statement are independent public accountants as required by the 1933 Act
and the 1933 Act Regulations.
(iv) FINANCIAL STATEMENTS. The financial statements included in
the Registration Statement and the Prospectus, together with the related
schedules and notes, present fairly the financial position of the Company
and its consolidated subsidiaries at the dates indicated and the statement
of operations, stockholders' equity and cash flows of the Company and its
consolidated subsidiaries for the periods specified; said financial
statements have been prepared in conformity with generally accepted
accounting principles ("GAAP") applied on a consistent basis throughout the
periods involved. The supporting schedules, if any, included in the
Registration Statement present fairly in accordance with GAAP the
information required to be stated therein. The selected financial data and
the summary financial information included in the Prospectus present fairly
the information shown therein and have been compiled on a basis consistent
with that of the audited financial statements included in the Registration
Statement. The pro forma financial statements and the related notes
thereto included in the Registration Statement and the Prospectus present
fairly the information shown therein, have been prepared in accordance with
the Commission's rules and guidelines with respect to pro forma financial
statements and have been properly compiled on the bases described therein,
and the assumptions used in the preparation thereof are reasonable and the
adjustments used therein are appropriate to give effect to the transactions
and circumstances referred to therein.
(v) NO MATERIAL ADVERSE CHANGE IN BUSINESS. Since the
respective dates as of which information is given in the Registration
Statement and the Prospectus, except as otherwise stated therein, (A) there
has been no material adverse change in the condition,
4
<PAGE>
financial or otherwise, or in the earnings, business affairs or business
prospects of the Company and its subsidiaries considered as one enterprise,
whether or not arising in the ordinary course of business (a "Material
Adverse Effect"), (B) there have been no transactions entered into by the
Company or any of its subsidiaries, other than those in the ordinary course
of business, which are material with respect to the Company and its
subsidiaries considered as one enterprise, and (C) there has been no
dividend or distribution of any kind declared, paid or made by the Company
on any class of its capital stock.
(vi) GOOD STANDING OF THE COMPANY. The Company has been duly
organized and is validly existing as a corporation in good standing under
the laws of the state of California and has corporate power and authority
to own, lease and operate its properties and to conduct its business as
described in the Prospectus and to enter into and perform its obligations
under this Agreement; and the Company is duly qualified as a foreign
corporation to transact business and is in good standing in each other
jurisdiction in which such qualification is required, whether by reason of
the ownership or leasing of property or the conduct of business, except
where the failure so to qualify or to be in good standing would not result
in a Material Adverse Effect.
(vii) GOOD STANDING OF SUBSIDIARIES. Each subsidiary of the
Company listed on Schedule C hereto (the "Subsidiaries") has been duly
organized and is validly existing as a corporation in good standing under
the laws of the jurisdiction of its incorporation, has corporate power and
authority to own, lease and operate its properties and to conduct its
business as described in the Prospectus and is duly qualified as a foreign
corporation to transact business and is in good standing in each
jurisdiction in which such qualification is required, whether by reason of
the ownership or leasing of property or the conduct of business, except
where the failure so to qualify or to be in good standing would not result
in a Material Adverse Effect; except as otherwise disclosed in the
Registration Statement, all of the issued and outstanding capital stock of
each such Subsidiary has been duly authorized and validly issued, is fully
paid and non-assessable and is owned by the Company, directly or through
subsidiaries, free and clear of any security interest, mortgage, pledge,
lien, encumbrance, claim or equity; none of the outstanding shares of
capital stock of any such Subsidiary was issued in violation of the
preemptive or similar rights of any securityholder of such Subsidiary.
Other than the Subsidiaries, the Company has no subsidiaries which either
(i) are "Significant Subsidiaries," as such term is defined under
Regulation S-X under the 1933 Act, or (ii) are material to the Company's
financial condition or results of operations.
(viii) CAPITALIZATION. The authorized, issued and outstanding
capital stock of the Company is as set forth in the Prospectus under the
caption "Capitalization" (except for subsequent issuances, if any, under
the Company's 1994 Stock Option/Award Plan, Employee Stock Option Plan or
Employee Stock Purchase Plan). The Securities to be purchased by the
Underwriters from the Company have been duly authorized for issuance and
sale to the Underwriters pursuant to this Agreement and, when issued and
delivered by the Company pursuant to this Agreement against payment of the
consideration set forth herein, will be validly issued and fully paid and
non-assessable. The shares of issued and
5
<PAGE>
outstanding capital stock, including the Securities to be purchased by the
Underwriters from the Selling Shareholder, have been duly authorized and
validly issued and are fully paid and non-assessable; none of the
outstanding shares of capital stock, including the Securities to be
purchased by the Underwriters from the Company and the Selling Shareholder,
was issued in violation of the preemptive or other similar rights of any
securityholder of the Company.
(ix) AUTHORIZATION OF AGREEMENT. This Agreement has been duly
authorized, executed and delivered by the Company.
(x) ABSENCE OF MANIPULATION. None of the Company or its
subsidiaries or any of their respective officers and directors has taken,
or will take, directly or indirectly, any action which is designed to or
which has constituted or which might reasonably be expected to cause or
result in stabilization or manipulation of the price of any security of the
Company to facilitate the sale or resale of the Securities.
(xi) AUTHORIZATION AND DESCRIPTION OF SECURITIES. The Common
Stock conforms to all statements relating thereto contained in the
Prospectus and such description conforms to the rights set forth in the
instruments defining the same; no holder of the Securities will be subject
to personal liability by reason of being such a holder.
(xii) ABSENCE OF DEFAULTS AND CONFLICTS. Neither the Company nor
any of its subsidiaries is in violation of its charter or bylaws or in
default in the performance or observance of any obligation, agreement,
covenant or condition contained in any contract, indenture, mortgage, deed
of trust, loan or credit agreement, note, lease or other agreement or
instrument to which the Company or any of its subsidiaries is a party or by
which it or any of them may be bound, or to which any of the property or
assets of the Company or any subsidiary is subject (collectively,
"Agreements and Instruments") except for such defaults that would not
result in a Material Adverse Effect; and the execution, delivery and
performance of this Agreement and the consummation of the transactions
contemplated in this Agreement and the Registration Statement and
compliance by the Company with its obligations under this Agreement have
been duly authorized by all necessary corporate action and do not and will
not, whether with or without the giving of notice or passage of time or
both, conflict with or constitute a breach of, or default or Repayment
Event (as defined below) under, or result in the creation or imposition of
any lien, charge or encumbrance upon any property or assets of the Company
or any subsidiary pursuant to, the Agreements and Instruments (except for
such conflicts, breaches, defaults or Repayment Events or liens, charges or
encumbrances that would not result in a Material Adverse Effect), nor will
such action result in any violation of the provisions of the charter or
by-laws of the Company or any subsidiary or any applicable law, statute,
rule, regulation, judgment, order, writ or decree of any government,
government instrumentality or court, domestic or foreign, having
jurisdiction over the Company or any subsidiary or any of their assets,
properties or operations. As used herein, a "Repayment Event" means any
event or condition which gives the holder of any note, debenture or other
evidence of indebtedness (or any person acting on such holder's behalf) the
right to require the repurchase,
6
<PAGE>
redemption or repayment of all or a portion of such indebtedness by the
Company or any subsidiary.
(xiii) ABSENCE OF LABOR DISPUTE. No labor dispute with the
employees of the Company or any subsidiary exists or, to the knowledge of
the Company, is imminent, and the Company is not aware of any existing or
imminent labor disturbance by the employees of any of its or any
subsidiary's principal suppliers, manufacturers, customers or contractors,
which, in either case, may reasonably be expected to result in a Material
Adverse Effect.
(xiv) ABSENCE OF PROCEEDINGS. There is no action, suit,
proceeding, inquiry or investigation before or brought by any court or
governmental agency or body, domestic or foreign, now pending, or, to the
knowledge of the Company, threatened, against or affecting the Company or
any subsidiary, which is required to be disclosed in the Registration
Statement (other than as disclosed therein), or which might reasonably be
expected to result in a Material Adverse Effect, or which might reasonably
be expected to materially and adversely affect the consummation of the
transactions contemplated in this Agreement or the performance by the
Company of its obligations hereunder or thereunder; the aggregate of all
pending legal or governmental proceedings to which the Company or any
subsidiary is a party or of which any of their respective property or
assets is the subject which are not described in the Registration
Statement, including ordinary routine litigation incidental to the
business, could not reasonably be expected to result in a Material Adverse
Effect.
(xv) ACCURACY OF EXHIBITS. There are no contracts or documents
which are required to be described in the Registration Statement, the
Prospectus or the documents incorporated by reference therein or to be
filed as exhibits thereto which have not been so described and filed as
required.
(xvi) POSSESSION OF INTELLECTUAL PROPERTY. The Company and its
subsidiaries own, possess, or can acquire on reasonable terms, adequate
rights to use all patents, patent rights, licenses, inventions, copyrights,
know-how (including trade secrets and other unpatented and/or unpatentable
proprietary or confidential information, systems or procedures),
trademarks, service marks, trade names or other intellectual property
(collectively, "Intellectual Property") necessary for the conduct of the
business now operated or to be operated by the Company and its
subsidiaries, as described in the Prospectus, and neither the Company nor
any of its subsidiaries has received any notice or is otherwise aware of
any infringement of or conflict with asserted rights of others with respect
to any Intellectual Property or of any facts or circumstances which would
render any Intellectual Property invalid or inadequate to protect the
interest of the Company or any of its subsidiaries therein, and which
infringement or conflict (if the subject of any unfavorable decision,
ruling or finding) or invalidity or inadequacy, singly or in the aggregate,
would result in a Material Adverse Effect.
(xvii) ABSENCE OF FURTHER REQUIREMENTS. No filing with, or
authorization, approval, consent, license, order, registration,
qualification or decree of, any court or
7
<PAGE>
governmental authority or agency is necessary or required for the
performance by the Company of its obligations under this Agreement, in
connection with the offering or sale of the Securities by the Selling
Shareholder under this Agreement, or the consummation of the transactions
contemplated by this Agreement, except such as have been already obtained
or made or as may be required under the 1933 Act or the 1933 Act
Regulations or state or foreign securities laws.
(xviii) KNOX-KEENE LICENSE. Each of the Company, CaliforniaCare
Health Plans, WellPoint Pharmacy Plan and WellPoint Dental Plan has been
licensed in the State of California as a health care service plan under the
Knox-Keene Health Care Service Plan Act of 1975, as amended (the "Knox-
Keene Act"), and such licenses have not been modified since the issuance
thereof (other than modifications filed in the ordinary course of business)
in any respect that would materially and adversely affect the ability of
the Company to conduct its business in the manner described in the
Registration Statement. None of the Company's other subsidiaries are
required to be licensed under the Knox-Keene Act.
(xix) BCBSA LICENSE. The Company is in full compliance with the
requirements of the Blue Cross License Agreement, dated as of May 20, 1996,
between the Company and the Blue Cross and Blue Shield Association (the
"BCBSA") and the California Blue Cross License Addendum, dated as of May
17, 1996, between the Company and the BCBSA, except in each case where such
noncompliance would not have a Material Adverse Effect. Each of the
Company's subsidiaries that is required by the BCBSA as of the date hereof,
or that will be required by the BCBSA as of the Closing Time, to be a party
to a Blue Cross Affiliate License Agreement is in full compliance with the
requirements of such agreement, except in each case where such
noncompliance would not have a Material Adverse Effect.
(xx) POSSESSION OF LICENSES AND PERMITS. The Company and its
subsidiaries possess such permits, licenses, approvals, consents and other
authorizations, including, without limitation, under the Knox-Keene Act
(collectively, "Governmental Licenses"), issued by the appropriate federal,
state, local or foreign regulatory agencies or bodies necessary to conduct
the business now operated by them and the Company and its subsidiaries are
in compliance with the terms and conditions of all such Governmental
Licenses, except where the failure so to possess such Governmental Licenses
or to comply would not, singly or in the aggregate, have a Material
Adverse Effect; all of the Governmental Licenses are valid and in full
force and effect, except when the invalidity of such Governmental Licenses
or the failure of such Governmental Licenses to be in full force and effect
would not have a Material Adverse Effect; and neither the Company nor any
of its subsidiaries has received any notice of proceedings relating to the
revocation or modification of any such Governmental Licenses which, singly
or in the aggregate, if the subject of an unfavorable decision, ruling or
finding, would result in a Material Adverse Effect.
(xxi) TITLE TO PROPERTY. The Company and its subsidiaries have
good and marketable title to all real property owned by the Company and its
subsidiaries and good title to all other properties owned by them, in each
case, free and clear of all mortgages,
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pledges, liens, security interests, claims, restrictions or encumbrances of
any kind except such as (a) are described in the Prospectus or (b) do not,
singly or in the aggregate, have a Material Adverse Effect and do not
interfere in any material respect with the use made and proposed to be made
of such property by the Company or any of its subsidiaries; and all of the
leases and subleases material to the business of the Company and its
subsidiaries, considered as one enterprise, and under which the Company or
any of its subsidiaries holds properties described in the Prospectus, are
in full force and effect, and neither the Company nor any subsidiary has
any notice of any material claim of any sort that has been asserted by
anyone adverse to the rights of the Company or any subsidiary under any of
the leases or subleases mentioned above, or affecting or questioning the
rights of the Company or such subsidiary to the continued possession of the
leased or subleased premises under any such lease or sublease.
(xxii) MAINTENANCE OF INSURANCE. The Company and each of its
subsidiaries maintain insurance policies with respect to such insurable
properties, potential liabilities and occurrences that merit or require
catastrophic insurance in amounts deemed adequate in the reasonable opinion
of the management, or the Company and each of its subsidiaries maintain a
system or systems of self-insurance or assumption of risk which accords
with the practices of similar businesses; all such insurance policies are
in full force and effect; and, at the time that each of the physicians and
physicians groups with which the Company or any of its subsidiaries has
contracted entered into such agreement, such physician or physician group
represented that they had professional liability and medical malpractice
insurance in minimum amounts which the Company believes to be adequate for
such physicians and physician groups generally.
(xxiii) COMPLIANCE WITH TAX LAWS. All material income, payroll and
sales tax returns required to be filed by the Company or any of its
subsidiaries, in any jurisdiction, have been so filed, and all material
taxes, including related withholding taxes, penalties and interest,
assessments and other charges due or claimed to be due from such entities
have been paid, other than those being contested in good faith and for
which adequate reserves have been provided or those currently payable
without penalty or interest.
(xxiv) COMPLIANCE WITH CUBA ACT. The Company has complied with,
and is and will be in compliance with, the provisions of that certain
Florida act relating to disclosure of doing business with Cuba, codified as
Section 517.075 of the Florida statutes, and the rules and regulations
thereunder (collectively, the "Cuba Act") or is exempt therefrom.
(xxv) INVESTMENT COMPANY ACT. The Company is not an "investment
company" or an entity "controlled" by an "investment company" as such terms
are defined in the Investment Company Act of 1940, as amended (the "1940
Act").
(xxvi) ENVIRONMENTAL LAWS. Except as described in the Registration
Statement and except as would not, singly or in the aggregate, result in a
Material Adverse Effect, (A) neither the Company nor any of its
subsidiaries is in violation of any federal, state, local or foreign
statute, law, rule, regulation, ordinance, code, policy or rule of common
law or any
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judicial or administrative interpretation thereof, including any judicial
or administrative order, consent, decree or judgment, relating to pollution
or protection of human health, the environment (including, without
limitation, ambient air, surface water, groundwater, land surface or
subsurface strata) or wildlife, including, without limitation, laws and
regulations relating to the release or threatened release of chemicals,
pollutants, contaminants, wastes, toxic substances, hazardous substances,
petroleum or petroleum products (collectively, "Hazardous Materials") or to
the manufacture, processing, distribution, use, treatment, storage,
disposal, transport or handling of Hazardous Materials (collectively,
"Environmental Laws"), (B) the Company and its subsidiaries have all
permits, authorizations and approvals required under any applicable
Environmental Laws and are each in compliance with their requirements, (C)
there are no pending or threatened administrative, regulatory or judicial
actions, suits, demands, demand letters, claims, liens, notices of
noncompliance or violation, investigation or proceedings relating to any
Environmental Law against the Company or any of its subsidiaries and (D)
there are no events or circumstances that might reasonably be expected to
form the basis of an order for clean-up or remediation, or an action, suit
or proceeding by any private party or governmental body or agency, against
or affecting the Company or any of its subsidiaries relating to Hazardous
Materials or any Environmental Laws.
(b) REPRESENTATIONS AND WARRANTIES BY THE SELLING SHAREHOLDER. The Selling
Shareholder represents and warrants to each Underwriter as of the date hereof,
as of the Closing Time and, if the Selling Shareholder is selling Option
Securities on a Date of Delivery, as of each such Date of Delivery, and agrees
with each Underwriter, as follows:
(i) ACCURATE DISCLOSURE. To the extent that any statements or
omissions made in the Registration Statement or Prospectus, or any
amendment or supplement thereto, are made in reliance on, and in conformity
with, written information furnished to the Company by or on behalf of the
Selling Shareholder specifically for use in the preparation thereof, each
such part of the Registration Statement, when it became effective, did not
contain an untrue statement of a material fact or omit to state a material
fact required to be stated therein or necessary to make the statement
therein not misleading, and each such part of either of the Prospectus, or
of any amendments or supplements thereto, at the time it was issued and as
of the Closing Time, did not include nor will it include an untrue
statement of a material fact or omitted or will omit to state a material
fact necessary in order to make the statements therein, in the light of the
circumstances under which they were made, not misleading; the Selling
Shareholder is not prompted to sell the Securities to be sold by the
Selling Shareholder hereunder by any material nonpublic information
concerning the Company or any subsidiary of the Company which is not set
forth in the Prospectus. The Company and the Underwriters acknowledge that
the statements relating to such Selling Shareholder under the heading "Risk
Factors - Future Sales of Common Stock; Principal Shareholder" (but only
insofar as it purports to describe agreements to which the Selling
Shareholder is a party) and "Selling Shareholder" in any Prospectus
constitute the only information furnished in writing by or on behalf of
such Selling Shareholder for inclusion in the Registration Statement or any
Prospectus.
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(ii) AUTHORIZATION OF AGREEMENTS. The Selling Shareholder has
the full right, power and authority to enter into this Agreement and to
sell, transfer and deliver the Securities to be sold by the Selling
Shareholder hereunder. The execution and delivery of this Agreement and
the sale and delivery of the Securities to be sold by the Selling
Shareholder and the consummation of the transactions contemplated in this
Agreement and compliance by the Selling Shareholder with its obligations
hereunder have been duly authorized by the Selling Shareholder and do not
and will not, whether with or without the giving of notice or passage of
time or both, conflict with or constitute a breach of, or default under, or
result in the creation or imposition of any tax, lien, charge or
encumbrance upon the Securities to be sold by the Selling Shareholder
pursuant to any contract, indenture, mortgage, deed of trust, loan or
credit agreement, note, license, lease or other agreement or instrument to
which the Selling Shareholder is a party or by which the Selling
Shareholder may be bound, or to which any of the property or assets of the
Selling Shareholder is subject, nor will such action result in any
violation of the provisions of the charter or by-laws or other
organizational instrument of the Selling Shareholder, if applicable, or any
applicable treaty, law, statute, rule, regulation, judgment, order, writ or
decree of any government, government instrumentality or court, domestic or
foreign, having jurisdiction over the Selling Shareholder or any of its
properties.
(iii) GOOD AND MARKETABLE TITLE. The Selling Shareholder has and
will at the Closing Time and, if any Option Securities are purchased, on
the Date of Delivery have good and marketable title to the Securities to be
sold by the Selling Shareholder hereunder, free and clear of any security
interest, mortgage, pledge, lien, charge, claim, equity or encumbrance of
any kind, other than pursuant to this Agreement and the Voting Agreement
and the Voting Trust Agreement, each as defined in the Registration
Statement; and upon delivery of such Securities and payment of the purchase
price therefor as herein contemplated, assuming each such Underwriter has
no notice of any adverse claim, each of the Underwriters will receive good
and marketable title to the Securities purchased by it from the Selling
Shareholder, free and clear of any security interest, mortgage, pledge,
lien, charge, claim, equity or encumbrance of any kind.
(iv) ABSENCE OF MANIPULATION. The Selling Shareholder has not
taken, and will not take, directly or indirectly, any action which is
designed to or which has constituted or which might reasonably be expected
to cause or result in stabilization or manipulation of the price of any
security of the Company to facilitate the sale or resale of the Securities.
(v) ABSENCE OF FURTHER REQUIREMENTS. No filing with, or
consent, approval, authorization, order, registration, qualification or
decree of, any court or governmental authority or agency, domestic or
foreign, is necessary or required for the performance by the Selling
Shareholder of its obligations under this Agreement or in connection with
the sale and delivery of the Securities under this Agreement or the
consummation of the transactions contemplated by this Agreement, except
such as may have previously been made or obtained or as may be required
under the 1933 Act or the 1933 Act Regulations or state securities laws.
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(vi) RESTRICTION ON SALE OF SECURITIES. During a period of
180 days from the date of the Prospectus, the Selling Shareholder will
not, without the prior written consent of Salomon Brothers and Merrill
Lynch, (i) offer, pledge, sell, contract to sell, sell any option or
contract to purchase, purchase any option or contract to sell, grant any
option, right or warrant to purchase or otherwise transfer or dispose
of, directly or indirectly, any share of Common Stock or any securities
convertible into or exercisable or exchangeable for Common Stock or file
any registration statement under the 1933 Act with respect to any of the
foregoing or (ii) enter into any swap or any other agreement or any
transaction that transfers, in whole or in part, directly or indirectly,
the economic consequence of ownership of the Common Stock, whether any
such swap or transaction described in clause (i) or (ii) above is to be
settled by delivery of Common Stock or such other securities, in cash or
otherwise, provided, that Salomon Brothers and Merrill Lynch shall give
the Selling Shareholder at least two business days' notice of any waiver
of the restriction on sales by the Company contained in Section 3(h)
hereof and the Selling Shareholder shall be deemed to have been granted
a waiver of this subsection 3(b)(vi) on the same terms as any such
waiver granted to the Company. The foregoing sentence shall not apply
to the Securities to be sold hereunder, or to any deposit or withdrawal
of Common Stock in or from the trust established pursuant to the Voting
Trust Agreement.
(vii) NO ASSOCIATION WITH NASD. Neither the Selling Shareholder
nor any of its affiliates directly, or indirectly through one or more
intermediaries, controls, or is controlled by, or is under common control
with, or has any other association with (within the meaning of Article I,
Section 1(m) of the By-laws of the National Association of Securities
Dealers, Inc. (the "NASD")), any member firm of the National Association of
Securities Dealers, Inc.
(c) OFFICER'S CERTIFICATES. Any certificate signed by any officer of the
Company or any of its subsidiaries delivered to Salomon Brothers, the
Representatives or to counsel for the Underwriters shall be deemed a
representation and warranty by the Company to each Underwriter as to the matters
covered thereby; and any certificate signed by or on behalf of the Selling
Shareholder as such and delivered to Salomon Brothers, the Representatives or to
counsel for the Underwriters pursuant to the terms of this Agreement shall be
deemed a representation and warranty by the Selling Shareholder as to the
matters covered thereby.
SECTION 2. SALE AND DELIVERY TO UNDERWRITERS; CLOSING.
(a) INITIAL SECURITIES. On the basis of the representations and
warranties herein contained and subject to the terms and conditions herein set
forth, the Company and the Selling Shareholder agree to sell to each Underwriter
and each Underwriter, severally and not jointly, agrees to purchase from the
Company and the Selling Shareholder, at the price per share set forth in
Schedule B, the number of Initial Securities set forth in Schedule A, plus any
additional number of Initial Securities which such Underwriter may become
obligated to purchase pursuant to the provisions of Section 10 hereof, subject,
in each case, to such adjustments among such Underwriters as the Representatives
in their sole discretion shall make to eliminate any sales or purchases of
fractional securities.
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(b) OPTION SECURITIES. In addition, on the basis of the representations
and warranties herein contained and subject to the terms and conditions herein
set forth, the Selling Shareholder hereby grants an option to the Underwriters,
severally and not jointly, to purchase up to an additional 1,500,000 shares of
Common Stock at the price per share set forth in Schedule B, less an amount per
share equal to any dividends or distributions declared by the Company and
payable on the Initial Securities but not payable on the Option Securities. The
option hereby granted will expire 30 days after the date hereof and may be
exercised in whole or in part from time to time only for the purpose of covering
over-allotments which may be made in connection with the offering and
distribution of the Initial Securities upon notice by Salomon Brothers to the
Selling Shareholder setting forth the number of Option Securities as to which
the several Underwriters are then exercising the option and the time and date of
payment and delivery for such Option Securities. Any such time and date of
delivery (a "Date of Delivery") shall be determined by the Salomon Brothers, but
shall not be later than seven full business days after the exercise of said
option, nor in any event prior to the Closing Time, as hereinafter defined. If
the option is exercised as to all or any portion of the Option Securities, each
of the Underwriters, acting severally and not jointly, will purchase that
proportion of the total number of Option Securities then being purchased which
the number of Initial Securities set forth in Schedule A opposite the name of
such Underwriter bears to the total number of Initial Securities, subject in
each case to such adjustments as the Representatives in their discretion shall
make to eliminate any sales or purchases of fractional shares.
(c) PAYMENT. The closing of the purchase and sale of the Initial
Securities, including acknowledgment of the payment of the purchase price
therefor and delivery of certificates therefor, shall be at the offices of
Latham & Watkins, 633 West Fifth Street, Suite 4000, Los Angeles, CA 90071, or
at such other place as shall be agreed upon by the Representatives, the Company
and the Selling Shareholder, at 7:00 A.M. (California time) on the third
business day (or the fourth business day, if the pricing occurs after 4:30 P.M.
(Eastern time) on any given business day) after the date hereof (unless
postponed in accordance with the provisions of Section 10), or such other time
not later than ten business days after such date as shall be agreed upon by the
Representatives, the Company and the Selling Shareholder (such time and date of
payment and delivery being herein called "Closing Time"). Delivery of
certificates for the Initial Securities shall be made at the Closing Time at the
offices of Salomon Brothers Inc, Seven World Trade Center, New York, New York
10048.
In addition, in the event that any or all of the Option Securities are
purchased by the Underwriters, payment of the purchase price for, and delivery
of certificates for, such Option Securities shall be made at the above-mentioned
offices, or at such other place as shall be agreed upon by the Representatives,
the Company and the Selling Shareholder, on each Date of Delivery as specified
in the notice from the Representatives to the Company and the Selling
Shareholder.
Payment shall be made to the Company and the Selling Shareholder by wire
transfer of immediately available funds to a bank accounts designated by each of
the Company and the Selling Shareholder, respectively, not later than two
business days preceding the Closing Time against delivery to the Representatives
for the respective accounts of the Underwriters of certificates for the
Securities to be purchased by them. It is understood that each Underwriter has
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authorized the Representatives, for its account, to accept delivery of, receipt
for, and make payment of the purchase price for, the Initial Securities and the
Option Securities, if any, which it has agreed to purchase. Salomon Brothers,
individually and not as representative of the Underwriters, may (but shall not
be obligated to) make payment of the purchase price for the Initial Securities
or the Option Securities, if any, to be purchased by any Underwriter whose funds
have not been received by the Closing Time or the relevant Date of Delivery, as
the case may be, but such payment shall not relieve such Underwriter from its
obligations hereunder.
(d) DENOMINATIONS; REGISTRATION. Certificates for the Initial Securities
and the Option Securities, if any, shall be in such denominations and registered
in such names as the Representatives may request in writing at least one full
business day before the Closing Time or the relevant Date of Delivery, as the
case may be. The certificates for the Initial Securities and the Option
Securities, if any, will be made available for examination and packaging by the
Representatives in The City of New York not later than 10:00 A.M. (Eastern time)
on the business day prior to the Closing Time or the relevant Date of Delivery,
as the case may be.
SECTION 3. COVENANTS OF THE COMPANY. The Company covenants with each
Underwriter as follows:
(a) COMPLIANCE WITH SECURITIES REGULATIONS AND COMMISSION REQUEST. The
Company, subject to Section 3(b), will comply with the requirements of Rule 430A
or Rule 434, as applicable, and will notify the Representatives immediately, and
confirm the notice in writing, (i) when any post-effective amendment to the
Registration Statement shall become effective, or any supplement to the
Prospectus or any amended Prospectus shall have been filed, (ii) of the receipt
of any comments from the Commission, (iii) of any request by the Commission for
any amendment to the Registration Statement or any amendment or supplement to
the Prospectus or for additional information, and (iv) of the issuance by the
Commission of any stop order suspending the effectiveness of the Registration
Statement or of any order preventing or suspending the use of any preliminary
prospectus, or of the suspension of the qualification of the Securities for
offering or sale in any jurisdiction, or of the initiation or threatening of any
proceedings for any of such purposes. The Company will promptly effect the
filings necessary pursuant to Rule 424(b) and will take such steps as it deems
necessary to ascertain promptly whether the form of any prospectus transmitted
for filing under Rule 424(b) was received for filing by the Commission and, in
the event that it was not, it will promptly file such prospectus. The Company
will make every reasonable effort to prevent the issuance of any stop order and,
if any stop order is issued, to obtain the lifting thereof at the earliest
possible moment.
(b) FILING OF AMENDMENTS. The Company will give the Representatives
notice of its intention to file or prepare any amendment to the Registration
Statement (including any filing under Rule 462(b)), any Term Sheet or any
amendment, supplement or revision to the prospectus included in the Registration
Statement at the time it became effective or to the Prospectus, whether pursuant
to the 1933 Act, the 1934 Act or otherwise, will furnish the Representatives
with copies of any such documents a reasonable amount of time prior to such
proposed filing or use, as the case may be, and will not file or use any such
document to which the Representatives or counsel for the Underwriters shall
object.
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(c) DELIVERY OF REGISTRATION STATEMENTS. The Company has furnished or
will deliver to the Representatives and counsel for the Underwriters, without
charge, signed copies of the Registration Statement as originally filed and of
each amendment thereto (including exhibits filed therewith or incorporated by
reference therein and documents incorporated or deemed to be incorporated by
reference therein) and signed copies of all consents and certificates of
experts, and will also deliver to the Representatives, without charge, a
conformed copy of the Registration Statement as originally filed and of each
amendment thereto (without exhibits) for each of the Underwriters. The copies
of the Registration Statement and each amendment thereto furnished to the
Underwriters will be identical to the electronically transmitted copies thereof
filed with the Commission pursuant to EDGAR, except to the extent permitted by
Regulation S-T.
(d) DELIVERY OF PROSPECTUS. The Company has delivered to each
Underwriter, without charge, as many copies of each preliminary prospectus as
such Underwriter reasonably requested, and the Company hereby consents to the
use of such copies for purposes permitted by the 1933 Act. The Company will
furnish to each Underwriter, without charge, during the period when the
Prospectus is required to be delivered under the 1933 Act or the 1934 Act, such
number of copies of the Prospectus (as amended or supplemented) as such
Underwriter may reasonably request. The Prospectus and any amendments or
supplements thereto furnished to the Underwriters will be identical to the
electronically transmitted copies thereof filed with the Commission pursuant to
EDGAR, except to the extent permitted by Regulation S-T.
(e) CONTINUED COMPLIANCE WITH SECURITIES LAWS. The Company will comply
with the 1933 Act and the 1933 Act Regulations and the 1934 Act and the 1934 Act
Regulations so as to permit the completion of the distribution of the Securities
as contemplated in this Agreement and the Prospectus. If at any time when a
prospectus is required by the 1933 Act to be delivered in connection with sales
of the Securities, any event shall occur or condition shall exist as a result of
which it is necessary, in the reasonable opinion of counsel for the Underwriters
or for the Company, to amend the Registration Statement or amend or supplement
the Prospectus in order that the Prospectus will not include any untrue
statements of a material fact or omit to state a material fact necessary in
order to make the statements therein not misleading in the light of the
circumstances existing at the time it is delivered to a purchaser, or if it
shall be necessary, in the reasonable opinion of such counsel, at any such time
to amend the Registration Statement or amend or supplement the Prospectus in
order to comply with the requirements of the 1933 Act or the 1933 Act
Regulations, the Company will promptly prepare and file with the Commission,
subject to Section 3(b) of the 1933 Act, such amendment or supplement as may be
necessary to correct such statement or omission or to make the Registration
Statement or the Prospectus comply with such requirements, and the Company will
furnish to the Underwriters such number of copies of such amendment or
supplement as the Underwriters may reasonably request.
(f) BLUE SKY QUALIFICATIONS. The Company will use its best efforts, in
cooperation with the Underwriters, to qualify the Securities for offering and
sale under the applicable securities laws of such states and other jurisdictions
(domestic or foreign) as the Representatives may designate and to maintain such
qualifications in effect for a period of not less than one year from the later
of the effective date of the Registration Statement and any Rule 462(b)
Registration Statement; provided, however, that the Company shall not be
obligated to file any general consent to service of
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process or to qualify as a foreign corporation or as a dealer in securities in
any jurisdiction in which it is not so qualified or to subject itself to
taxation in respect of doing business in any jurisdiction in which it is not
otherwise so subject. In each jurisdiction in which the Securities have been so
qualified, the Company will file such statements and reports as may be required
by the laws of such jurisdiction to continue such qualification in effect for a
period of not less than one year from the effective date of the Registration
Statement and any Rule 462(b) Registration Statement.
(g) RULE 158. The Company will timely file such reports pursuant to the
1934 Act as are necessary in order to make generally available to its
securityholders as soon as practicable an earnings statement for the purposes
of, and to provide the benefits contemplated by, the last paragraph of Section
11(a) of the 1933 Act.
(h) RESTRICTION ON SALE OF SECURITIES. During a period of 180 days
from the date of the Prospectus, the Company will not, without the prior
written consent of Salomon Brothers and Merrill Lynch, (i) directly or
indirectly, offer, pledge, sell, contract to sell, sell any option or
contract to purchase, purchase any option or contract to sell, grant any
option, right or warrant to purchase or otherwise transfer or dispose of any
share of Common Stock or any securities convertible into or exercisable or
exchangeable for Common Stock or file any registration statement under the
1933 Act with respect to any of the foregoing or (ii) enter into any swap or
any other agreement or any transaction that transfers, in whole or in part,
directly or indirectly, the economic consequence of ownership of the Common
Stock, whether any such swap or transaction described in clause (i) or (ii)
above is to be settled by delivery of Common Stock or such other securities,
in cash or otherwise. The foregoing sentence shall not apply to (A) the
Securities to be sold under this Agreement, (B) any shares of Common Stock
issued by the Company upon the exercise of an option or warrant or the
conversion of a security outstanding on the date hereof and referred to in
the Prospectus, (C) any shares of Common Stock issued or options to purchase
Common Stock granted pursuant to the Company's 1994 Stock Option/Award Plan,
Employee Stock Option Plan, Employee Stock Purchase Plan or any other
existing employee benefit plans of the Company referred to in the Prospectus
(as well as the filing of any registration statement on Form S-8 (or similar
form) for the purpose of registering under the 1933 Act shares of Common
Stock issued in connection with any such plan), (D) any shares of Common
Stock issued pursuant to any dividend reinvestment plan or (E) cash-settled
stock appreciation rights that the Company may issue to agents or brokers.
(i) REPORTING REQUIREMENTS. The Company, during the period when the
Prospectus is required to be delivered under the 1933 Act or the 1934 Act, will
file all documents required to be filed with the Commission pursuant to the 1934
Act within the time periods required by the 1934 Act and the 1934 Act
Regulations.
SECTION 4. PAYMENT OF EXPENSES.
(a) EXPENSES. The Company will pay or cause to be paid all expenses
incident to the performance of its or the Selling Shareholder's obligations
under this Agreement, including (i) the preparation, printing and filing of the
Registration Statement (including financial statements and exhibits) as
originally filed and of each amendment thereto, (ii) the preparation, printing
and delivery to the Underwriters of this Agreement, any Agreement among
Underwriters and such other
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documents as may be required in connection with the offering, purchase, sale,
issuance or delivery of the Securities, (iii) the preparation, issuance and
delivery of the certificates for the Securities to the Underwriters, including
any stock or other transfer taxes and any stamp or other duties payable upon the
sale or delivery of the Securities to the Underwriters, (iv) the fees and
disbursements of the Company's counsel, accountants and other advisors, (v) the
qualification of the Securities under securities laws in accordance with the
provisions of Section 3(f) hereof, including filing fees and the reasonable fees
and disbursements of counsel for the Underwriters in connection therewith and in
connection with the preparation of the Preliminary Blue Sky Survey, the Final
Blue Sky Survey and any supplements thereto, (vi) the printing and delivery to
the Underwriters of copies of each preliminary prospectus, any Term Sheets and
of the Prospectus and any amendments or supplements thereto, (vii) the
preparation, printing and delivery to the Underwriters of copies of the
Preliminary Blue Sky Survey, the Final Blue Sky Survey and any supplements
thereto, (viii) the fees and expenses of any transfer agent or registrar for the
Securities, (ix) the filing fees incident to the review by the NASD of the terms
of the sale of the Securities and (x) the fees and expenses incurred in
connection with the listing of the Securities on the New York Stock Exchange.
The Selling Shareholder will pay or cause to be paid the fees and expenses of
its counsel, agents and advisors for which it is responsible under the terms of
the Registration Rights Agreement between the Selling Shareholder and the
Company.
(b) TERMINATION OF AGREEMENT. If this Agreement is terminated by the
Representatives in accordance with the provisions of Section 5 or
Section 9(a)(i) hereof, the Company shall reimburse the Underwriters for all of
their out-of-pocket expenses, including the reasonable fees and disbursements of
counsel for the Underwriters. If this Agreement is terminated by the
Representatives in accordance with the provisions of Section 11 hereof, the
Selling Shareholder shall reimburse the Underwriters for all of their
out-of-pocket expenses, including the reasonable fees and disbursements of
counsel for the Underwriters.
(c) ALLOCATION OF EXPENSES. The provisions of this Section shall not
affect any agreement that the Company and the Selling Shareholder may make for
the sharing of such costs and expenses.
SECTION 5. CONDITIONS OF UNDERWRITERS' OBLIGATIONS. The obligations of
the several Underwriters hereunder are subject to the accuracy of the
representations and warranties of the Company and the Selling Shareholder
contained in Section 1 hereof or in certificates of any officer of the Company
or any subsidiary of the Company or on behalf of the Selling Shareholder
delivered pursuant to the provisions hereof, to the performance by the Company
of its covenants and other obligations hereunder, and to the following further
conditions:
(a) EFFECTIVENESS OF REGISTRATION STATEMENT. The Registration Statement,
including any Rule 462(b) Registration Statement, has become effective and at
Closing Time no stop order suspending the effectiveness of the Registration
Statement shall have been issued under the 1933 Act or proceedings therefor
initiated or threatened by the Commission, and any request on the part of the
Commission for additional information shall have been complied with to the
reasonable satisfaction of counsel to the Underwriters. A prospectus containing
the Rule 430A Information shall have been filed with the Commission in
accordance with Rule 424(b) (or a post-effective
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amendment providing such information shall have been filed and declared
effective in accordance with the requirements of Rule 430A) or, if the Company
has elected to rely upon Rule 434, a Term Sheet shall have been filed with the
Commission in accordance with Rule 424(b).
(b) OPINION OF COUNSEL FOR COMPANY. At Closing Time, the Representatives
shall have received the favorable opinion, dated as of Closing Time, of Brobeck,
Phleger & Harrison LLP, counsel for the Company, in form and substance
satisfactory to counsel for the Underwriters, together with signed or reproduced
copies of such letter for each of the other Underwriters to the effect set forth
in Exhibit A hereto and to such further effect as counsel to the Underwriters
may reasonably request.
(c) OPINION OF GENERAL COUNSEL FOR THE COMPANY. At Closing Time, the
Representatives shall have received the favorable opinion, dated as of Closing
Time, of Thomas C. Geiser, Esq., general counsel for the Company, in form and
substance satisfactory to counsel for the Underwriters, together with signed or
reproduced copies of such letter for each of the other Underwriters to the
effect set forth in Exhibit B hereto and to such further effect as counsel to
the Underwriters may reasonably request.
(d) OPINION OF COUNSEL FOR THE SELLING SHAREHOLDER. At Closing Time,
the Representatives shall have received the favorable opinion, dated as of
Closing Time, of Munger, Tolles & Olson LLP, counsel for the Selling
Shareholder, in form and substance satisfactory to counsel for the
Underwriters, together with signed or reproduced copies of such letter for
each of the other Underwriters to the effect set forth in Exhibit C hereto
and to such further effect as counsel to the Underwriters may reasonably
request.
(e) OPINION OF COUNSEL FOR UNDERWRITERS. At Closing Time, the
Representatives shall have received the favorable opinion, dated as of Closing
Time, of Latham & Watkins, counsel for the Underwriters, together with signed or
reproduced copies of such letter for each of the other Underwriters with respect
to the matters set forth in clauses (i) (solely with respect to the Company),
(ii) (solely with respect to the Company), (v) through (vii), inclusive, (ix)
(solely as to the information in the Prospectus under "Description of Capital
Stock--Common Stock") and the penultimate paragraph of Exhibit A hereto. In
giving such opinion such counsel may rely, as to all matters governed by the
laws of jurisdictions other than the laws of the States of New York and
California and the federal securities laws of the United States, upon the
opinions of counsel satisfactory to the Representatives. Such counsel may also
state that, insofar as such opinion involves factual matters, they have relied,
to the extent they deem proper, upon certificates of officers of the Company and
its subsidiaries and certificates of public officials.
(f) OFFICERS' CERTIFICATE. At Closing Time, there shall not have been,
since the date hereof or since the respective dates as of which information is
given in the Prospectus, any material adverse change in the condition, financial
or otherwise, or in the earnings, business affairs or business prospects of the
Company and its subsidiaries considered as one enterprise, whether or not
arising in the ordinary course of business, and the Representatives shall have
received a certificate of the President or a Vice President of the Company and
of the chief financial or chief accounting officer of the Company, dated as of
Closing Time, to the effect that (i) there has been no such
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material adverse change, (ii) the representations and warranties in Section 1(a)
hereof are true and correct with the same force and effect as though expressly
made at and as of Closing Time, (iii) the Company has complied in all material
respects with all agreements and satisfied all conditions on its part to be
performed or satisfied at or prior to Closing Time, and (iv) no stop order
suspending the effectiveness of the Registration Statement has been issued and
no proceedings for that purpose have been instituted or are pending or, to such
persons' knowledge, are contemplated by the Commission.
(g) CERTIFICATE OF SELLING SHAREHOLDER. At Closing Time, the
Representatives shall have received a certificate of an officer of the Selling
Shareholder, dated as of Closing Time, to the effect that (i) the
representations and warranties of the Selling Shareholder contained in Section
1(b) hereof are true and correct in all respects with the same force and effect
as though expressly made at and as of Closing Time and (ii) the Selling
Shareholder has complied in all material respects with all agreements and all
conditions on its part to be performed under this Agreement at or prior to
Closing Time.
(h) ACCOUNTANT'S COMFORT LETTER. At the time of the execution of this
Agreement, the Representatives shall have received from Coopers & Lybrand L.L.P.
a letter dated such date, in form and substance satisfactory to the
Representatives, together with signed or reproduced copies of such letter for
each of the other Underwriters containing statements and information of the type
ordinarily included in accountants' "comfort letters" to underwriters with
respect to the financial statements and certain financial information (other
than relating to the group benefits operations of John Hancock Mutual Life
Insurance Company) contained in the Registration Statement and the Prospectus.
(i) ACCOUNTANT'S COMFORT LETTER. At the time of the execution of this
Agreement, the Representatives shall have received from Ernst & Young L.L.P. a
letter dated such date, in form and substance satisfactory to the
Representatives, together with signed or reproduced copies of such letter for
each of the other Underwriters containing statements and information of the type
ordinarily included in accountants' "comfort letters" to underwriters with
respect to the interim unaudited financial information contained in the
Registration Statement and the Prospectus relating to the group benefits
operations of John Hancock Mutual Life Insurance Company.
(j) BRING-DOWN COMFORT LETTER. At Closing Time, the Representatives shall
have received from Coopers & Lybrand L.L.P. a letter, dated as of Closing Time,
to the effect that they reaffirm the statements made in the letter furnished
pursuant to subsection (h) of this Section, except that the specified date
referred to shall be a date not more than three business days prior to Closing
Time.
(k) BRING-DOWN COMFORT LETTER. At Closing Time, the Representatives shall
have received from Ernst & Young L.L.P. a letter, dated as of Closing Time, to
the effect that they reaffirm the statements made in the letter furnished
pursuant to subsection (i) of this Section, except that the specified date
referred to shall be a date not more than three business days prior to Closing
Time.
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(l) LOCK-UP AGREEMENTS. At the date of this Agreement, the
Representatives shall have received an agreement substantially in the form of
Exhibit D-1 hereto signed by the Company's Chief Executive Officer, and in the
form of Exhibit D-2 hereto from each of the persons listed on Schedule D hereto.
(m) CONDITIONS TO PURCHASE OF OPTION SECURITIES. In the event that the
Underwriters exercise their option provided in Section 2(b) hereof to purchase
all or any portion of the Option Securities, the representations and warranties
of the Company and the Selling Shareholder contained herein and the statements
in any certificates furnished by the Company, any subsidiary of the Company and
the Selling Shareholder hereunder shall be true and correct as of each Date of
Delivery and, at the relevant Date of Delivery, the Representatives shall have
received:
(i) OFFICERS' CERTIFICATE. A certificate, dated such Date of
Delivery, of the President or a Vice President of the Company and of
the chief financial or chief accounting officer of the Company
confirming that the certificate delivered at the Closing Time pursuant
to Section 5(f) hereof remains true and correct as of such Date of
Delivery.
(ii) CERTIFICATE OF SELLING SHAREHOLDER. A certificate, dated
such Date of Delivery, of an officer of the Selling Shareholder
confirming that the certificate delivered at Closing Time pursuant to
Section 5(g) remains true and correct as of such Date of Delivery.
(iii) OPINION OF COUNSEL FOR COMPANY. The favorable opinion
of Brobeck, Phleger & Harrison LLP, counsel for the Company, in
form and substance satisfactory to counsel for the Underwriters,
dated such Date of Delivery, relating to the Option Securities to
be purchased on such Date of Delivery and otherwise to the same
effect as the opinion required by Section 5(b) hereof.
(iv) OPINION OF GENERAL COUNSEL FOR COMPANY. The favorable
opinion of Thomas C. Geiser, Esq., general counsel for the Company,
in form and substance satisfactory to counsel for the Underwriters,
dated such Date of Delivery, relating to the Option Securities to
be uprchased on such Date of Delivery and otherwise to the same
effect as the opinion required by Section 5(c) hereof.
(v) OPINION OF COUNSEL FOR THE SELLING SHAREHOLDER. The
favorable opinion of Munger, Tolles & Olson LLP, counsel for the
Selling Shareholder, in form and substance satisfactory to counsel
for the Underwriters, dated such Date of Delivery, relating to the
Option Securities to be purchased on such Date of Delivery and
otherwise to the same effect as the opinion required by Section
5(d) hereof.
(vi) OPINION OF COUNSEL FOR UNDERWRITERS. The favorable
opinion of Latham & Watkins, counsel for the Underwriters, dated
such Date of Delivery, relating to the Option Securities to be
purchased on such Date of Delivery and otherwise to the same effect
as the opinion required by Section 5(e) hereof.
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(vii) BRING-DOWN COMFORT LETTER. A letter from Coopers &
Lybrand L.L.P., in form and substance satisfactory to the
Representatives and dated such Date of Delivery, substantially in the
same form and substance as the letter furnished to the Representatives
pursuant to Section 5(h) hereof, except that the "specified date" in
the letter furnished pursuant to this paragraph shall be a date not
more than five days prior to such Date of Delivery.
(viii) BRING-DOWN COMFORT LETTER. A letter from Ernst & Young
L.L.P., in form and substance satisfactory to the Representatives and
dated such Date of Delivery, substantially in the same form and
substance as the letter furnished to the Representatives pursuant to
Section 5(i) hereof, except that the "specified date" in the letter
furnished pursuant to this paragraph shall be a date not more than
five days prior to such Date of Delivery.
(n) ADDITIONAL DOCUMENTS. At Closing Time and at each Date of Delivery
counsel for the Underwriters shall have been furnished with such documents and
opinions as they may reasonably require for the purpose of enabling them to pass
upon the issuance and sale of the Securities as herein contemplated, or in order
to evidence the accuracy of any of the representations or warranties, or the
fulfillment of any of the conditions, herein contained; and all proceedings
taken by the Company and the Selling Shareholder in connection with the sale of
the Securities as herein contemplated shall be satisfactory in form and
substance to the Representatives and counsel for the Underwriters.
(o) TERMINATION OF AGREEMENT. If any condition specified in this Section
shall not have been fulfilled when and as required to be fulfilled, this
Agreement, or, in the case of any condition to the purchase of Option Securities
on a Date of Delivery which is after the Closing Time, the obligations of the
several Underwriters to purchase the relevant Option Securities, may be
terminated by the Representatives by notice to the Company at any time at or
prior to Closing Time or such Date of Delivery, as the case may be, and such
termination shall be without liability of any party to any other party except as
provided in Section 4 and except that Sections 1, 6, 7 and 8 shall survive any
such termination and remain in full force and effect.
SECTION 6. INDEMNIFICATION.
(a) INDEMNIFICATION OF UNDERWRITERS. The Company and the Selling
Shareholder, jointly and severally, agree to indemnify and hold harmless each
Underwriter and each person, if any, who controls any Underwriter within the
meaning of Section 15 of the 1933 Act or Section 20 of the 1934 Act as follows:
(i) against any and all loss, liability, claim, damage and
expense whatsoever, as incurred, arising out of any untrue statement or
alleged untrue statement of a material fact contained in the Registration
Statement (or any amendment thereto), including the Rule 430A Information
and the Rule 434 Information, if applicable, or the omission or alleged
omission therefrom of a material fact required to be stated therein or
necessary to make the statements therein not misleading or arising out of
any untrue statement or alleged untrue statement of a material fact
included in any preliminary prospectus or the Prospectus (or any
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amendment or supplement thereto), or the omission or alleged omission
therefrom of a material fact necessary in order to make the statements
therein, in the light of the circumstances under which they were made, not
misleading;
(ii) against any and all loss, liability, claim, damage and
expense whatsoever, as incurred, to the extent of the aggregate amount paid
in settlement of any litigation, or any investigation or proceeding by any
governmental agency or body, commenced or threatened, or of any claim
whatsoever based upon any such untrue statement or omission, or any such
alleged untrue statement or omission; provided that (subject to Section
6(d) below) any such settlement is effected with the written consent of the
Company and the Selling Shareholder; and
(iii) against any and all expense whatsoever, as incurred
(including the fees and disbursements of counsel chosen by Salomon
Brothers), reasonably incurred in investigating, preparing or defending
against any litigation, or any investigation or proceeding by any
governmental agency or body, commenced or threatened, or any claim
whatsoever based upon any such untrue statement or omission, or any such
alleged untrue statement or omission to the extent that any such expense is
not paid under (i) or (ii) above;
PROVIDED, HOWEVER, that (A) this indemnity agreement shall not apply to any
loss, liability, claim, damage or expense to the extent arising out of any
untrue statement or omission or alleged untrue statement or omission made in
reliance upon and in conformity with written information furnished to the
Company by any Underwriter through Salomon Brothers expressly for use in the
Registration Statement (or any amendment thereto), including the Rule 430A
Information and the Rule 434 Information, if applicable, or any preliminary
prospectus or the Prospectus (or any amendment or supplement thereto) and (B)
the foregoing indemnity agreement with respect to any untrue statement contained
in or omission from a preliminary prospectus shall not inure to the benefit of
the Underwriter from whom the person asserting any such losses, liabilities,
claims, damages or expenses purchased Securities, or any person controlling such
Underwriter, if (i) the Company and the Selling Shareholder shall sustain the
burden of proving that a copy of the Prospectus (as then amended or
supplemented, if the Company shall have furnished any amendments or supplements
thereto) was not sent or given by or on behalf of the Underwriters to such
person at or prior to the written confirmation of the sale of such Securities to
such person, (ii) the Company shall have delivered the Prospectus (as then
supplemented or amended) to the Underwriters on a timely basis and in the
requisite quantity to permit the Underwriters to send or deliver such
Prospectus to such person at or prior to such written confirmation of the sale
of such Securities and (iii) the untrue statement contained in or omission from
such preliminary prospectus was corrected in the Prospectus (or the Prospectus
as amended or supplemented).
In making a claim for indemnification under this Section 6 or for
contribution under Section 7 hereof by the Company or the Selling Shareholder,
and subject to the further provisions of this paragraph, the indemnified parties
may proceed against either (i) both the Company and the Selling Shareholder
jointly or (ii) the Company only, but may not proceed solely against the Selling
Shareholder. In the event that the indemnified parties are entitled to seek
indemnity or contribution hereunder against any loss, liability, claim, damage
and expense incurred as contemplated by
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clauses (a)(i), (a)(ii) or (a)(iii) of this Section 6, including, without
limitation, a final judgment from a trial court then, as a precondition to any
indemnified party obtaining indemnification or contribution from the Selling
Shareholder, the indemnified parties shall first obtain a final judgment from a
trial court that such indemnified parties are entitled to indemnity or
contribution under this Agreement with respect to such loss, liability, claim,
damage or expense (the "Final Judgment") from the Company and the Selling
Shareholder and shall seek to satisfy such Final Judgment in full from the
Company by making a written demand upon the Company for such satisfaction. Only
in the event such Final Judgment shall remain unsatisfied in whole or in part 30
days following the date of receipt by the Company of such demand shall any party
entitled to indemnification hereunder have the right to take action to satisfy
such Final Judgment by making demand directly on the Selling Shareholder (but
only if and to the extent the Company has not already satisfied such Final
Judgment, whether by settlement, release or otherwise). The indemnified parties
shall, however, be relieved of their obligation to first obtain a Final
Judgment, to seek to obtain payment from the Company with respect to such Final
Judgment or, having sought such payment, to wait such 30 days after failure by
the Company to immediately satisfy any such Final Judgment if (i) the Company
files a petition for relief under the United States Bankruptcy Code (the
"Bankruptcy Code") and such order remains unstayed and in effect for 60 days,
(ii) an order for relief is entered against the Company in an involuntary case
under the Bankruptcy Code and such order remains unstayed and in effect for 60
days, (iii) the Company makes an assignment for the benefit of its creditors, or
(iv) any court orders or approves the appointment of a receiver or custodian for
the Company or a substantial portion of its assets and such order remains
unstayed and in effect for 60 days .
(b) INDEMNIFICATION OF COMPANY, DIRECTORS AND OFFICERS AND SELLING
SHAREHOLDER. Each Underwriter severally agrees to indemnify and hold harmless
the Company, its directors, each of its officers who signed the Registration
Statement, and each person, if any, who controls the Company within the meaning
of Section 15 of the 1933 Act or Section 20 of the 1934 Act, and the Selling
Shareholder and each person, if any, who controls the Selling Shareholder within
the meaning of Section 15 of the 1933 Act or Section 20 of the 1934 Act against
any and all loss, liability, claim, damage and expense described in the
indemnity contained in subsection (a) of this Section, as incurred, but only
with respect to untrue statements or omissions, or alleged untrue statements or
omissions, made in the Registration Statement (or any amendment thereto),
including the Rule 430A Information and the Rule 434 Information, if applicable,
or any preliminary prospectus or the Prospectus (or any amendment or supplement
thereto) in reliance upon and in conformity with written information furnished
to the Company by such Underwriter through Salomon Brothers expressly for use in
the Registration Statement (or any amendment thereto) or such preliminary
prospectus or the Prospectus (or any amendment or supplement thereto).
(c) ACTIONS AGAINST PARTIES; NOTIFICATION. Each indemnified party shall
give notice as promptly as reasonably practicable to each indemnifying party of
any action commenced against it in respect of which indemnity may be sought
hereunder, but failure to so notify an indemnifying party shall not relieve such
indemnifying party from any liability hereunder to the extent it is not
materially prejudiced as a result thereof and in any event shall not relieve it
from any liability which it may have otherwise than on account of this indemnity
agreement. An indemnifying party may participate at its own expense in the
defense of any such action; provided, however, that counsel to
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the indemnifying party shall not (except with the consent of the indemnified
party) also be counsel to the indemnified party. In no event shall the
indemnifying parties be liable for fees and expenses of more than one counsel
(in addition to any local counsel) separate from their own counsel for all
indemnified parties in connection with any one action or separate but similar or
related actions in the same jurisdiction arising out of the same general
allegations or circumstances. No indemnifying party shall, without the prior
written consent of the indemnified parties, settle or compromise or consent to
the entry of any judgment with respect to any litigation, or any investigation
or proceeding by any governmental agency or body, commenced or threatened, or
any claim whatsoever in respect of which indemnification or contribution could
be sought under this Section 6 or Section 7 hereof (whether or not the
indemnified parties are actual or potential parties thereto), unless such
settlement, compromise or consent (i) includes an unconditional release of each
indemnified party from all liability arising out of such litigation,
investigation, proceeding or claim, (ii) is accompanied or preceded by
reimbursement of expenses of each such indemnified party pursuant to clause
(a)(iii) of this Section 6 and (iii) does not include a statement as to or an
admission of fault, culpability or a failure to act by or on behalf of any
indemnified party.
(d) SETTLEMENT WITHOUT CONSENT IF FAILURE TO REIMBURSE. If at any time an
indemnified party shall have requested an indemnifying party to reimburse the
indemnified party for fees and expenses of counsel, such indemnifying party
agrees that it shall be liable for any settlement of the nature contemplated by
Section 6(a)(ii) effected without its written consent if (i) such settlement is
entered into more than 45 days after receipt by such indemnifying party of the
aforesaid request, (ii) such indemnifying party shall have received notice of
the terms of such settlement at least 30 days prior to such settlement being
entered into and (iii) such indemnifying party shall not have reimbursed such
indemnified party in accordance with such request prior to the date of such
settlement.
(e) OTHER AGREEMENTS WITH RESPECT TO INDEMNIFICATION. The provisions of
this Section shall not affect any agreement among the Company and the Selling
Shareholder with respect to indemnification.
SECTION 7. CONTRIBUTION. Subject to the last paragraph of Section 6(a)
hereof, if the indemnification provided for in Section 6 hereof is for any
reason unavailable to or insufficient to hold harmless an indemnified party in
respect of any losses, liabilities, claims, damages or expenses referred to
therein, then each indemnifying party shall contribute to the aggregate amount
of such losses, liabilities, claims, damages and expenses incurred by such
indemnified party, as incurred, (i) in such proportion as is appropriate to
reflect the relative benefits received by the Company and the Selling
Shareholder on the one hand and the Underwriters on the other hand from the
offering of the Securities pursuant to this Agreement or (ii) if the allocation
provided by clause (i) is not permitted by applicable law, in such proportion as
is appropriate to reflect not only the relative benefits referred to in clause
(i) above but also the relative fault of the Company and the Selling Shareholder
on the one hand and of the Underwriters on the other hand in connection with the
statements or omissions which resulted in such losses, liabilities, claims,
damages or expenses, as well as any other relevant equitable considerations.
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The relative benefits received by the Company and the Selling Shareholder
on the one hand and the Underwriters on the other hand in connection with the
offering of the Securities pursuant to this Agreement shall be deemed to be in
the same respective proportions as the total net proceeds from the offering of
the Securities pursuant to this Agreement (before deducting expenses) received
by the Company and the Selling Shareholder and the total underwriting discount
received by the Underwriters, in each case as set forth on the cover of the
Prospectus, or, if Rule 434 is used, the corresponding location on the Term
Sheet bear to the aggregate public offering price of the Securities as set forth
on such cover.
The relative fault of the Company and the Selling Shareholder on the one
hand and the Underwriters on the other hand shall be determined by reference to,
among other things, whether any such untrue or alleged untrue statement of a
material fact or omission or alleged omission to state a material fact relates
to information supplied by the Company or the Selling Shareholder or by the
Underwriters and the parties' relative intent, knowledge, access to information
and opportunity to correct or prevent such statement or omission.
The Company, the Selling Shareholder and the Underwriters agree that it
would not be just and equitable if contribution pursuant to this Section 7 were
determined by pro rata allocation (even if the Underwriters were treated as one
entity for such purpose) or by any other method of allocation which does not
take account of the equitable considerations referred to above in this Section
7. The aggregate amount of losses, liabilities, claims, damages and expenses
incurred by an indemnified party and referred to above in this Section 7 shall
be deemed to include any legal or other expenses reasonably incurred by such
indemnified party in investigating, preparing or defending against any
litigation, or any investigation or proceeding by any governmental agency or
body, commenced or threatened, or any claim whatsoever based upon any such
untrue or alleged untrue statement or omission or alleged omission.
Notwithstanding the provisions of this Section 7, no Underwriter shall be
required to contribute any amount in excess of the amount by which the total
price at which the Securities underwritten by it and distributed to the public
were offered to the public exceeds the amount of any damages which such
Underwriter has otherwise been required to pay by reason of any such untrue or
alleged untrue statement or omission or alleged omission.
No person guilty of fraudulent misrepresentation (within the meaning of
Section 11(f) of the 1933 Act) shall be entitled to contribution from any person
who was not guilty of such fraudulent misrepresentation.
For purposes of this Section 7, each person, if any, who controls a
Underwriter within the meaning of Section 15 of the 1933 Act or Section 20 of
the 1934 Act shall have the same rights to contribution as such Underwriter, and
each director of the Company, each officer of the Company who signed the
Registration Statement, and each person, if any, who controls the Company or the
Selling Shareholder within the meaning of Section 15 of the 1933 Act or Section
20 of the 1934 Act shall have the same rights to contribution as the Company or
the Selling Shareholder, as the case may be. The Underwriters' respective
obligations to contribute
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pursuant to this Section 7 are several in proportion to the number of Initial
Securities set forth opposite their respective names in Schedule A hereto and
not joint.
The provisions of this Section shall not affect any agreement among the
Company and the Selling Shareholder with respect to contribution.
SECTION 8. REPRESENTATIONS, WARRANTIES AND AGREEMENTS TO SURVIVE
DELIVERY. All representations, warranties and agreements contained in this
Agreement or in certificates of officers of the Company or any of its
subsidiaries or the Selling Shareholder submitted pursuant hereto, shall remain
operative and in full force and effect, regardless of any investigation made by
or on behalf of any Underwriter or controlling person, or by or on behalf of the
Company or the Selling Shareholder, and shall survive delivery of the Securities
to the Underwriters.
SECTION 9. TERMINATION OF AGREEMENT.
(a) TERMINATION; GENERAL. The Representatives may terminate this
Agreement, by notice to the Company and the Selling Shareholder, at any time at
or prior to Closing Time (i) if there has been, since the time of execution of
this Agreement or since the respective dates as of which information is given in
the Prospectus, any material adverse change in the condition, financial or
otherwise, or in the earnings, business affairs or business prospects of the
Company and its subsidiaries considered as one enterprise, whether or not
arising in the ordinary course of business, or (ii) if there has occurred any
material adverse change in the financial markets in the United States or the
international financial markets, any outbreak of hostilities or escalation
thereof or other calamity or crisis or any change or development involving a
prospective change in national or international political, financial or economic
conditions, in each case the effect of which is such as to make it, in the
judgment of the Representatives, impracticable to market the Securities or to
enforce contracts for the sale of the Securities, or (iii) if trading in any
securities of the Company has been suspended or materially limited by the
Commission or the New York Stock Exchange, or if trading generally on the
American Stock Exchange or the New York Stock Exchange or in the Nasdaq National
Market has been suspended or materially limited, or minimum or maximum prices
for trading have been fixed, or maximum ranges for prices have been required, by
any of said exchanges or by such system or by order of the Commission, the NASD
or any other governmental authority, or (iv) if a banking moratorium has been
declared by either Federal or New York authorities.
(b) LIABILITIES. If this Agreement is terminated pursuant to this
Section, such termination shall be without liability of any party to any other
party except as provided in Section 4 hereof, and provided further that Sections
1, 6, 7 and 8 shall survive such termination and remain in full force and
effect.
SECTION 10. DEFAULT BY ONE OR MORE OF THE UNDERWRITERS. If one or more
of the Underwriters fail at Closing Time or a Date of Delivery to purchase the
Securities which it or they are obligated to purchase under this Agreement (the
"Defaulted Securities"), the Representatives shall have the right, within
24 hours thereafter, to make arrangements for one or more of the non-defaulting
Underwriters, or any other underwriters, to purchase all, but not less than all,
of the Defaulted Securities in such amounts as may be agreed upon and upon the
terms herein set forth; if,
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however, the Representatives shall not have completed such arrangements within
such 24-hour period, then:
(a) if the number of Defaulted Securities does not exceed 10% of the
number of Securities to be purchased on such date, each of the non-defaulting
Underwriters shall be obligated, severally and not jointly, to purchase the full
amount thereof in the proportions that their respective underwriting obligations
hereunder bear to the underwriting obligations of all non-defaulting
Underwriters, or
(b) if the number of Defaulted Securities exceeds 10% of the number of
Securities to be purchased on such date, this Agreement or, with respect to any
Date of Delivery which occurs after the Closing Time, the obligation of the
Underwriters to purchase and of the Selling Shareholder to sell the Option
Securities to be purchased and sold on such Date of Delivery shall terminate
without liability on the part of any non-defaulting Underwriter.
No action taken pursuant to this Section shall relieve any defaulting
Underwriter from liability in respect of its default.
In the event of any such default which does not result in a termination of
this Agreement or, in the case of a Date of Delivery which is after the Closing
Time, which does not result in a termination of the obligation of the
Underwriters to purchase and the Selling Shareholder to sell the relevant Option
Securities, as the case may be, either (i) the Representatives or (ii) the
Company and the Selling Shareholder shall have the right to postpone Closing
Time or the relevant Date of Delivery, as the case may be, for a period not
exceeding seven days in order to effect any required changes in the Registration
Statement or Prospectus or in any other documents or arrangements. As used
herein, the term "Underwriter" includes any person substituted for a Underwriter
under this Section 10.
SECTION 11. DEFAULT BY THE SELLING SHAREHOLDER. If the Selling
Shareholder shall fail at Closing Time or at a Date of Delivery to sell and
deliver the number of Securities which the Selling Shareholder is obligated to
sell hereunder, then the Underwriters may, at option of the Representatives, by
notice from the Representatives to the Company and the Selling Shareholder
terminate this Agreement without any liability on the fault of any non-
defaulting party except that the provisions of Sections 1, 4, 6, 7 and 8 shall
remain in full force and effect. No action taken pursuant to this Section 11
shall relieve the Selling Shareholder so defaulting from liability, if any, in
respect of such default.
In the event of a default by the Selling Shareholder as referred to in this
Section 11, each of the Representatives and the Company shall have the right to
postpone Closing Time or Date of Delivery for a period not exceeding seven days
in order to effect any required change in the Registration Statement or
Prospectus or in any other documents or arrangements.
SECTION 12. NOTICES. All notices and other communications hereunder
shall be in writing and shall be deemed to have been duly given if mailed or
transmitted by any standard form of telecommunication. Notices to the
Underwriters shall be directed to the Representatives at Seven
27
<PAGE>
World Trade Center, New York, New York 10048, attention of Syndicate Operations
(with a copy, which shall not constitute notice, to Latham & Watkins, 633 W.
Fifth Street, Suite 4000, Los Angeles, California 90071-2007, attention of Gary
Olson, Esq.); notices to the Company shall be directed to it at 21555 Oxnard
Street, Woodland Hills, California 91367, attention of Thomas C. Geiser, Esq.,
General Counsel (with a copy, which shall not constitute notice, to Brobeck,
Phleger & Harrison LLP, One Market, Spear Street Tower, San Francisco,
California 94105, attention of William L. Hudson, Esq.); and notices to the
Selling Shareholder shall be directed to California HealthCare Foundation, c/o
Munger, Tolles & Olson, 355 S. Grand Avenue, Suite 3500, Los Angeles, California
90071, attention of Ruth E. Fisher, Esq.
SECTION 13. PARTIES. This Agreement shall each inure to the benefit of
and be binding upon the Underwriters, the Company and the Selling Shareholder
and their respective successors. Nothing expressed or mentioned in this
Agreement is intended or shall be construed to give any person, firm or
corporation, other than the Underwriters, the Company and the Selling
Shareholder and their respective successors and the controlling persons and
officers and directors referred to in Sections 6 and 7 and their heirs and legal
representatives, any legal or equitable right, remedy or claim under or in
respect of this Agreement or any provision herein contained. This Agreement and
all conditions and provisions hereof are intended to be for the sole and
exclusive benefit of the Underwriters, the Company and the Selling Shareholder
and their respective successors, and said controlling persons and officers and
directors and their heirs and legal representatives, and for the benefit of no
other person, firm or corporation. No purchaser of Securities from any
Underwriter shall be deemed to be a successor by reason merely of such purchase.
SECTION 14. GOVERNING LAW AND TIME. THIS AGREEMENT SHALL BE GOVERNED BY
AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK. SPECIFIED
TIMES OF DAY REFER TO NEW YORK CITY TIME, EXCEPT AS EXPRESSLY NOTED OTHERWISE.
SECTION 15. EFFECT OF HEADINGS. The Article and Section headings herein
and the Table of Contents are for convenience only and shall not affect the
construction hereof.
28
<PAGE>
If the foregoing is in accordance with your understanding of our
agreement, please sign and return to the Company and to the Selling Shareholder
a counterpart hereof, whereupon this instrument, along with all counterparts,
will become a binding agreement among the Underwriters, the Company and the
Selling Shareholder in accordance with its terms.
Very truly yours,
WELLPOINT HEALTH NETWORKS INC.
By
---------------------------------------------------------
Title:
CALIFORNIA HEALTHCARE FOUNDATION
By
---------------------------------------------------------
Acting Chief Executive Officer
CONFIRMED AND ACCEPTED,
as of the date first above written:
SALOMON BROTHERS INC
MERRILL LYNCH & CO.
MERRILL LYNCH, PIERCE, FENNER & SMITH
INCORPORATED
BEAR, STEARNS & CO. INC.
MORGAN STANLEY & CO. INCORPORATED
By: MERRILL LYNCH, PIERCE, FENNER & SMITH
INCORPORATED
By
--------------------------------------------------
Authorized Signatory
For themselves and as Representatives of the other Underwriters named in
Schedule A hereto.
29
<PAGE>
SCHEDULE A
Name of Underwriter Number of
------------------- Initial
Securities
----------
Salomon Brothers Inc. . . . . . . . . . . . . . . . . . . . . . __________
Merrill Lynch, Pierce, Fenner & Smith Incorporated. . . . . . . __________
Bear, Stearns & Co. Inc.. . . . . . . . . . . . . . . . . . . . __________
Morgan Stanley & Co. Incorporated . . . . . . . . . . . . . . . __________
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10,000,000
----------
----------
Sch A-1
<PAGE>
SCHEDULE B
WELLPOINT HEALTH NETWORKS INC.
10,000,000 Shares of Common Stock
(Par Value $.01 Per Share)
1. The public offering price per share for the Securities, determined as
provided in said Section 2, shall be $______.
2. The purchase price per share for the Securities to be paid by the
several Underwriters shall be $_______, being an amount equal to the public
offering price set forth above less $___ per share; provided that the purchase
price per share for any Option Securities purchased upon the exercise of the
over-allotment option described in Section 2(b) shall be reduced by an amount
per share equal to any dividends or distributions declared by the Company and
payable on the Initial Securities but not payable on the Option Securities.
Sch B-1
<PAGE>
SCHEDULE C
List of subsidiaries
1. CaliforniaCare Health Plans
2. WellPoint Life Insurance Company
3. WellPoint Pharmacy Plan
4. WellPoint Dental Plan
5. UNICARE Insurance Company
6. UNICARE Life & Health Insurance Company
7. Affiliated Healthcare, Inc.
8. UNICARE of Texas Health Plans, Inc.
Sch C-1
<PAGE>
SCHEDULE D
List of persons and entities
subject to lock-up
Leonard D. Schaeffer
D. Mark Weinberg
Ronald A. Williams
Howard G. Phanstiel
Thomas C. Geiser, Esq.
Sch D-1
<PAGE>
Exhibit A
FORM OF OPINION OF COMPANY'S COUNSEL
TO BE DELIVERED PURSUANT TO
SECTION 5(b)
(i) The Company and each of its Subsidiaries (a) has been duly organized
and (b) is validly existing as a corporation in good standing under the laws of
its jurisdiction of incorporation.
(ii) The Company and each of its Subsidiaries has corporate power and
authority to own, lease and operate its properties and to conduct its business
as described in the Registration Statement.
(iii) The Company and each of its Subsidiaries, other than UNICARE
Insurance Company and UNICARE Life & Health Insurance Company, is duly qualified
as a foreign corporation to transact business and is in good standing in each
jurisdiction in which such qualification is required, except where the failure
to so qualify would not have a Material Adverse Effect, and each of UNICARE
Insurance Company and UNICARE Life & Health Insurance Company is duly qualified
as a foreign corporation to transact business and is in good standing in
California, Delaware, Florida, Georgia, Illinois, Massachusetts, New Jersey, New
York, Ohio, Texas and Virginia.
(iv) The authorized, issued and outstanding capital stock of the Company is
as set forth in the Prospectus under the caption "Capitalization"; all of the
shares of issued and outstanding capital stock of the Company, including the
Securities to be purchased by the Underwriters from the Selling Shareholder,
have been duly authorized and validly issued and are fully paid and
nonassessable and the shares of issued and outstanding capital stock of each
Subsidiary of the Company are owned, directly or through subsidiaries, by the
Company and have been duly authorized and validly issued, are fully paid and
nonassessable and are owned free and clear of any security interest, mortgage,
pledge, lien, encumbrance, claim or equity.
(v) The Securities to be purchased by the Underwriters from the Company
have been duly authorized for issuance and sale to the Underwriters pursuant to
Purchase Agreement and, when issued and delivered by the Company pursuant to the
Purchase Agreement, against payment of the consideration set forth in the
Purchase Agreement will be validly issued and fully paid and non-assessable and
no holder of the Securities is or will be subject to personal liability by
reason of being such a holder.
(vi) The Purchase Agreement has been duly authorized, executed and
delivered by the Company.
A-1
<PAGE>
(vii) The Registration Statement, including any Rule 462(b) Registration
Statement, has been declared effective under the 1933 Act; any required filing
of the Prospectus pursuant to Rule 424(b) has been made in the manner and within
the time period required by Rule 424(b); and, to the best of our knowledge, no
stop order suspending the effectiveness of the Registration Statement or any
Rule 462(b) Registration Statement has been issued under the 1933 Act and no
proceedings for that purpose have been instituted or are pending or threatened
by the Commission.
(viii) The Registration Statement, including any Rule 462(b) Registration
Statement, the Rule 430A Information and the Rule 434 Information, as
applicable, the Prospectus, excluding the documents incorporated by reference
therein, and each amendment or supplement to the Registration Statement and
Prospectus, excluding the documents incorporated by reference therein, as of
their respective effective or issue dates (other than the financial statements
and supporting schedules included therein or omitted therefrom, as to which such
counsel need express no opinion) complied as to form in all material respects
with the requirements of the 1933 Act and the 1933 Act Regulations.
(ix) The documents incorporated by reference in the Prospectus (other
than the financial statements and supporting schedules included therein or
omitted therefrom, as to which we need express no opinion), when they were filed
with the Commission, complied as to form in all material respects with the
requirements of the 1934 Act and the rules and regulations of the Commission
thereunder.
(x) The capital stock of the Company conforms in all material respects to
the description thereof contained in the Prospectus under the caption
"Description of Capital Stock," and the form of certificate used to evidence the
Common Stock is in due and proper form and complies in all material respects
with all applicable statutory requirements and the requirements of the New York
Stock Exchange.
(xi) There are no legal or governmental proceedings pending or, to the
knowledge of such counsel, threatened to which the Company or any of its
Subsidiaries is or may become a party or to which any of the properties of the
Company or any of its Subsidiaries is or may become subject that are required to
be described in the Registration Statement or the Prospectus and are not so
disclosed therein and described as required, or any statute or regulation that
is required to be described in the Registration Statement or the Prospectus and
is not so disclosed therein and described as required; all pending legal or
governmental proceedings to which the Company or any of its Subsidiaries is a
party or to which any of their property is subject which are not described in
the Registration Statement, including ordinary routine litigation incidental to
the businesses, are, considered in the aggregate, not material.
(xii) To the knowledge of such counsel, there are no contracts, indentures,
mortgages, loan agreements, notes, leases or other instruments required to be
filed as exhibits to the Registration Statement which have not been so filed.
A-2
<PAGE>
(xiii) The information in the Prospectus under the captions "Risk
Factors -- Future Sales of Common Stock; Principal Shareholder," "Business --
Government Regulation," ["Shares Eligible for Future Sale,"] and "Description of
Capital Stock," to the extent that it constitutes matters of law, summaries of
legal matters, documents or proceedings or legal conclusions, has been reviewed
by such counsel and is correct in all material respects.
(xiv) No authorization, approval, consent or order of any court or
governmental authority or agency is required in connection with the sale to the
Underwriters of the Securities, except such as may be required under the 1933
Act, the 1934 Act or the respective rules and regulations of the Commission
thereunder or state or foreign securities laws (on which such counsel expresses
no opinion) and the filing of an amendment to the Company's Health Care Services
Plan application with the California Department of Corporations (which filing
has been made); and the execution, delivery and performance of the Purchase
Agreement, and the consummation of the transactions contemplated thereby by the
Company, will not conflict with or constitute a material breach of or material
default, or cause an acceleration of any obligation under, or result in the
creation or imposition of any lien, charge or encumbrance upon any property or
assets of the Company or any of its Subsidiaries pursuant to, any instrument
included as an exhibit to the Registration Statement to which the Company or any
of its Subsidiaries is a party or by which any of them may be bound, or to which
any of the property or assets of the Company or any of its Subsidiaries is
subject, nor will such action result in any violation of the provisions of the
charter or bylaws of the Company or any of its Subsidiaries, or any applicable
law, administrative regulation or administrative or court decree.
(xv) Neither the Company nor any of its Subsidiaries is (a) in violation of
its articles or certificate of incorporation or bylaws; or (b) to the knowledge
of such counsel, in violation of or in default in the performance or observance
of any obligation, agreement, covenant or condition contained in any instrument
included as an exhibit to the Registration Statement to which the Company or any
of its Subsidiaries is a party or by which any of them may be bound, or to which
any of the property or assets of the Company or any of its Subsidiaries is
subject, or any applicable law, administrative regulation or administrative or
court order or decree, which violation or default would have a Material Adverse
Effect on the Company and its subsidiaries considered as one enterprise, as the
case may be. The applicable law, administrative regulations and administrative
and court orders and decrees referred to in clause (b) above are those that a
lawyer exercising customary professional diligence would reasonably recognize as
being directly applicable to the Company, the Subsidiaries or the transaction
contemplated by the Purchase Agreement.
(xvi) To the knowledge of such counsel, the Company and its
Subsidiaries possess such certificates necessary to conduct the business now
operated by them. The opinion of such counsel for purposes of this paragraph is
limited to certificates the failure of which to possess would have a Material
Adverse Effect on the Company and its Subsidiaries considered as one enterprise.
(xvii) The Company is not an "investment company" or an entity
"controlled" by an "investment company," as such terms are defined in the 1940
Act.
A-3
<PAGE>
Nothing has come to the attention of such counsel that would lead such
counsel to believe that the Registration Statement or any amendment thereto,
including the Rule 430A Information and Rule 434 Information (if applicable),
(except for financial statements and schedules and other financial data included
or incorporated by reference therein or omitted therefrom, as to which such
counsel need make no statement), at the time such Registration Statement or any
such amendment became effective, contained an untrue statement of a material
fact or omitted to state a material fact required to be stated therein or
necessary to make the statements therein not misleading or that the Prospectus
or any amendment or supplement thereto (except for financial statements and
schedules and other financial data included or incorporated by reference therein
or omitted therefrom, as to which such counsel need make no statement), at the
time the Prospectus was issued, at the time any such amended or supplemented
prospectus was issued or at the Closing Time, included or include an untrue
statement of a material fact or omitted or omit to state a material fact
necessary in order to make the statements therein, in the light of the
circumstances under which they were made, not misleading.
In rendering such opinion, such counsel may rely, as to matters of fact
(but not as to legal conclusions), to the extent they deem proper, on
certificates of responsible officers of the Company and public officials. Such
opinion shall not state that it is to be governed or qualified by, or that it is
otherwise subject to, any treatise, written policy or other document relating to
legal opinions, including, without limitation, the Legal Opinion Accord of the
ABA Section of Business Law (1991).
A-4
<PAGE>
Exhibit B
FORM OF OPINION OF GENERAL COUNSEL TO THE COMPANY TO BE
DELIVERED PURSUANT TO SECTION 5(c)
(i) The statements in "Business -- Government Regulation" and in
["Business -- Legal Proceedings"] of the Prospectus, insofar as such statements
constitute summaries of the legal matters, documents or proceedings referred to
therein, fairly present the information called for with respect to such legal
matters, documents and proceedings and fairly summarize, in all material
respects, the matters referred to therein.
(ii) The Company, CaliforniaCare Health Plans, WellPoint Dental Plan and
WellPoint Pharmacy Plan each has been duly qualified and licensed in the State
of California as health care service plans under the Knox-Keene Act, and none of
the Company's other subsidiaries are required to be licensed under the Knox-
Keene Act.
(iii) The Company is in full compliance with the requirements of the Blue
Cross License Agreement, dated as of May 20, 1996, between the Company and the
Blue Cross and Blue Shield Association (the "BCBSA") and the California Blue
Cross License Addendum, dated as of May 17, 1996, between the Company and the
BCBSA, except in each case where such noncompliance would not have a Material
Adverse Effect. Each of the Company's subsidiaries that is required by the
BCBSA as of the date of such opinion to be a party to a Blue Cross Affiliate
License Agreement is in full compliance with the requirements of such agreement,
except in each case where such noncompliance would not have a Material Adverse
Effect.
(iv) To such counsel's knowledge, none of the Company and its subsidiaries
has received any notice or correspondence (i) relating to the loss or threatened
loss by the Company or any of its subsidiaries of any material permit, license,
franchise or authorization by any applicable managed health care or insurance
regulatory agency or body or (ii) asserting that the Company or any of its
subsidiaries is not in substantial compliance with any applicable regulation
relating to the operation or conduct of managed health care or insurance
businesses (the "HMO Regulations") or threatening the taking of any action
against the Company or any of its subsidiaries under any HMO Regulation, except
where such noncompliance or the taking of such action, if adversely determined,
would not have a material adverse effect on the business, operations or
financial condition of the Company and its subsidiaries, taken as a whole.
B-1
<PAGE>
Exhibit C
FORM OF OPINION OF COUNSEL FOR THE SELLING SHAREHOLDER
TO BE DELIVERED PURSUANT TO SECTION 5(d)
(i) No filing with, or consent, approval, authorization, license, order,
registration, qualification or decree of, any court or governmental authority or
agency (other than the issuance of the order of the Commission declaring the
Registration Statement effective and such authorizations, approvals or consents
as may be necessary under state securities laws, as to which we need express no
opinion), is necessary or required to be obtained by the Selling Shareholder for
the performance by the Selling Shareholder of its obligations under the Purchase
Agreement or in connection with the offer, sale or delivery of the Securities.
(ii) The Purchase Agreement has been duly authorized, executed and
delivered by or on behalf of the Selling Shareholder.
(iii) The execution, delivery and performance of the Purchase Agreement and
the sale and delivery of the Securities and the consummation of the transactions
contemplated in the Purchase Agreement and compliance by the Selling Shareholder
with its obligations under the Purchase Agreement have been duly authorized by
all necessary action on the part of the Selling Shareholder and do not and will
not, whether with or without the giving of notice or passage of time or both,
conflict with, constitute a breach of, or default under or result in the
creation or imposition of any tax, lien, charge or encumbrance upon the
Securities pursuant to, the terms of any contract, indenture, mortgage, deed of
trust, loan or credit agreement, note, license, lease or other instrument or
agreement known to such counsel and to which the Selling Shareholder is a party
or by which it may be bound, or to which any of the property or assets of the
Selling Shareholder may be subject nor will such action result in any violation
of the provisions of the charter or by-laws of the Selling Shareholder, if
applicable, or any law, administrative regulation, judgment, order or decree
known to us to be applicable to the Selling Shareholder of any court, regulatory
body, administrative agency or governmental body or arbitrator having
jurisdiction over the Selling Shareholder or any of its properties.
(iv) To the best of such counsel's knowledge, the Selling Shareholder has
valid and marketable title to the Securities to be sold by the Selling
Shareholder pursuant to the Purchase Agreement, free and clear of any pledge,
lien, security interest, charge, claim, equity or encumbrance of any kind, other
than as disclosed in the Registration Statement, and has full right, power and
authority to sell, transfer and deliver such Securities pursuant to the Purchase
Agreement. By delivery of a certificate or certificates therefor the Selling
Shareholder will transfer to the Underwriters who have purchased such Securities
pursuant to the Purchase Agreement (without notice of any defect in the title of
the Selling Shareholder and who are otherwise bona fide purchasers for purposes
of the Uniform Commercial Code) valid and marketable title to such Securities,
free and clear of any pledge, lien, security interest, charge, claim, equity or
encumbrance of any kind.
C-1
<PAGE>
[FORM OF LOCK-UP FROM DIRECTORS, OFFICERS OR OTHER STOCKHOLDERS PURSUANT TO
SECTION 5(l)]
Exhibit D-1
_______________, 1997
SALOMON BROTHERS INC
MERRILL LYNCH & CO.
Merrill Lynch, Pierce, Fenner & Smith
Incorporated
BEAR, STEARNS & CO. INC.
MORGAN STANLEY & CO. INCORPORATED
as Representatives of the several Underwriters
c/o Salomon Brothers Inc
Seven World Trade Center
New York, New York 10048
Re: PROPOSED PUBLIC OFFERING BY WELLPOINT HEALTH NETWORKS INC.
Dear Sirs:
The undersigned, a shareholder and an officer and/or director of
WellPoint Health Networks Inc., a California corporation (the "Company"),
understands that Salomon Brothers Inc ("Salomon Brothers"), Merrill Lynch &
Co., Merrill Lynch, Pierce, Fenner & Smith Incorporated ("Merrill Lynch"),
Bear, Stearns & Co. Inc. and Morgan Stanley & Co. Incorporated propose to
enter into a Purchase Agreement (the "Purchase Agreement") with the Company
and the Selling Shareholder providing for the public offering of shares (the
"Securities") of the Company's common stock, par value $.01 per share (the
"Common Stock"). In recognition of the benefit that such an offering will
confer upon the undersigned as a shareholder and an officer and/or director
of the Company, and for other good and valuable consideration, the receipt
and sufficiency of which are hereby acknowledged, the undersigned agrees with
each underwriter to be named in the Purchase Agreement that, during a period
of 180 days from the date of the Purchase Agreement provided that such person
continues to be an officer of the Company during such period, the undersigned
will not, without the prior written consent of Salomon Brothers and Merrill
Lynch, directly or indirectly, (i) offer, pledge, sell, contract to sell,
sell any option or contract to purchase, purchase any option or contract to
sell, grant any option, right or warrant for the sale of, or otherwise
dispose of or transfer any shares of the Company's Common Stock or any
securities convertible into or exchangeable or exercisable for Common Stock,
whether now owned or hereafter acquired by the undersigned or with respect to
which the undersigned has or hereafter acquires the power of disposition, or
file any registration statement under the Securities
D-1 1
<PAGE>
Act of 1933, as amended, with respect to any of the foregoing or (ii) enter into
any swap or any other agreement or any transaction that transfers, in whole or
in part, directly or indirectly, the economic consequence of ownership of the
Common Stock, whether any such swap or transaction is to be settled by delivery
of Common Stock or other securities, in cash or otherwise.
Notwithstanding the provisions of the preceding sentence, the undersigned
shall be permitted to sell, transfer or otherwise dispose of shares of Common
Stock to: (1) the undersigned's spouse, children, spouses of children, siblings
and spouses of siblings, provided that any such transferee shall have agreed in
writing to be subject to the terms of this letter; and (2) any trust or
charitable foundation established by the undersigned and/or one or more of the
persons listed in the foregoing clause (1), provided that any such trust or
charitable foundation and their respective beneficiaries shall have agreed in
writing to be subject to the terms of this letter.
Very truly yours,
Signature:
------------------------
Print Name:
-----------------------
D-1 2
<PAGE>
[FORM OF LOCK-UP FROM DIRECTORS, OFFICERS OR OTHER STOCKHOLDERS PURSUANT TO
SECTION 5(L)]
Exhibit D-2
_______________, 1997
SALOMON BROTHERS INC
MERRILL LYNCH & CO.
Merrill Lynch, Pierce, Fenner & Smith
Incorporated
BEAR, STEARNS & CO. INC.
MORGAN STANLEY & CO. INCORPORATED
as Representatives of the several Underwriters
c/o Salomon Brothers Inc
Seven World Trade Center
New York, New York 10048
Re: PROPOSED PUBLIC OFFERING BY WELLPOINT HEALTH NETWORKS INC.
Dear Sirs:
The undersigned, a shareholder and an officer and/or director of
WellPoint Health Networks Inc., a California corporation (the "Company"),
understands that Salomon Brothers Inc ("Salomon Brothers"), Merrill Lynch &
Co., Merrill Lynch, Pierce, Fenner & Smith Incorporated ("Merrill Lynch"),
Bear, Stearns & Co. Inc. and Morgan Stanley & Co. Incorporated propose(s) to
enter into a Purchase Agreement (the " Purchase Agreement") with the Company
and the Selling Shareholder providing for the public offering of shares (the
"Securities") of the Company's common stock, par value $.01 per share (the
"Common Stock"). In recognition of the benefit that such an offering will
confer upon the undersigned as a shareholder and an officer and/or director
of the Company, and for other good and valuable consideration, the receipt
and sufficiency of which are hereby acknowledged, the undersigned agrees with
each underwriter to be named in the Purchase Agreement that, during a period
of 90 days from the date of the Purchase Agreement provided that such person
continues to be an officer of the Company during such period, the undersigned
will not, without the prior written consent of Salomon Brothers and Merrill
Lynch, directly or indirectly, (i) offer, pledge, sell, contract to sell,
sell any option or contract to purchase, purchase any option or contract to
sell, grant any option, right or warrant for the sale of, or otherwise
dispose of or transfer any shares of the Company's Common Stock or any
securities convertible into or exchangeable or exercisable for Common Stock,
whether now owned or hereafter acquired by the undersigned or with respect to
which the undersigned has or hereafter acquires the power of disposition, or
file any registration statement under the Securities Act of 1933, as amended,
with respect to any of the foregoing or (ii) enter into any swap or any other
agreement or any transaction that transfers, in whole or in part, directly or
indirectly, the
D-2 1
<PAGE>
economic consequence of ownership of the Common Stock, whether any such swap or
transaction is to be settled by delivery of Common Stock or other securities, in
cash or otherwise.
Notwithstanding the provisions of the preceding sentence, the undersigned
shall be permitted to sell, transfer or otherwise dispose of shares of Common
Stock to: (1) the undersigned's spouse, children, spouses of children, siblings
and spouses of siblings, provided that any such transferee shall have agreed in
writing to be subject to the terms of this letter; and (2) any trust or
charitable foundation established by the undersigned and/or one or more of the
persons listed in the foregoing clause (1), provided that any such trust or
charitable foundation and their respective beneficiaries shall have agreed in
writing to be subject to the terms of this letter.
Very truly yours,
Signature:
------------------------
Print Name:
-----------------------
D-2 2
<PAGE>
EXHIBIT 5.1
[LETTERHEAD]
March 20, 1997
WellPoint Health Networks Inc.
21555 Oxnard Street
Woodland Hills, CA 91367
Ladies and Gentlemen:
We have acted as counsel to WellPoint Health Networks Inc. a
California corporation (the "Company"), in connection with its registration of
11,500,000 shares (the "Shares") of Common Stock, par value $0.01 per share,
proposed to be sold by the Company and California HealthCare Foundation (the
"Selling Shareholder"). Of the total amount of Shares registered, the Company
will issue and sell up to 3,000,000 Shares (the "Company Shares") and the
Selling Shareholder will sell up to 8,500,000 Shares, including an over-
allotment of 1,500,000 Shares (the "Selling Shareholder Shares"). The Shares are
to be sold pursuant to an Underwriting Agreement to be entered into among the
Company, the Selling Shareholder and Salomon Brothers Inc, Merrill Lynch & Co.,
Bear, Stearns & Co. Inc. and Morgan Stanley & Co. Incorporated, as
Representatives of the several underwriters named in such Underwriting
Agreement (the "Underwriting Agreement").
As such counsel, we have examined such corporate records, certificates
and other documents and have made such other factual and legal investigations as
we have deemed relevant and necessary as the basis for the opinions hereinafter
expressed. In such examinations, we have assumed the genuineness of all
signatures, the authenticity of all documents submitted to us as originals and
the conformity to original documents of all documents submitted to us as
conformed or photostatic copies.
Based on the foregoing, we are of the opinion that (i) the Company
Shares have been duly authorized and, when sold and paid for in accordance with
the terms of the Underwriting Agreement, will be validly issued, fully paid and
non-assessable and (ii) the Selling Shareholder Shares have been duly and
validly issued and are outstanding, fully paid and non-assessable.
We hereby consent to the filing of this opinion as an exhibit to the
Registration Statement and to the reference to our firm under the caption "Legal
Matters" in the Prospectus.
Very truly yours,
/s/ Brobeck, Phleger & Harrison LLP
-------------------------------------
BROBECK, PHLEGER & HARRISON LLP
<PAGE>
EXHIBIT 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the incorporation by reference in this registration statement of
WellPoint Health Networks Inc. on Form S-3 (File No. 333- ) of our report
dated February 14, 1997, except Note 18 as to which the date is March 17, 1997,
on our audits of the consolidated financial statements of WellPoint Health
Networks Inc. We also consent to the reference to our firm under the caption
"Experts."
COOPERS & LYBRAND L.L.P.
Los Angeles, California
March 20, 1997
<PAGE>
EXHIBIT 23.2
CONSENT OF INDEPENDENT AUDITORS
We consent to the reference to our firm under the caption "Experts" in the
Registration Statement (Form S-3) and related Prospectus of WellPoint Health
Networks Inc. for the registration of 11,500,000 shares of its common stock
(including 1,500,000 shares to cover over-allotments, if any) and to the
incorporation by reference therein of our report dated September 27, 1996, with
respect to the combined financial statements of The Group Benefits Operations of
John Hancock Mutual Life Insurance Company and subsidiaries included in
WellPoint Health Networks Inc.'s Current Report on Form 8-K dated October 9,
1996, filed with the Securities and Exchange Commission.
ERNST & YOUNG LLP
Boston, Massachusetts
March 20, 1997
