<PAGE>
SCHEDULE 14A INFORMATION
Proxy Statement Pursuant to Section 14(a) of
the Securities Exchange Act of 1934 (Amendment No. )
Filed by the Registrant /X/
Filed by a party other than the Registrant / /
Check the appropriate box:
/ / Preliminary Proxy Statement
/ / Confidential, for Use of the Commission Only (as permitted by Rule
14a-6(e)(2))
/X/ Definitive Proxy Statement
/ / Definitive Additional Materials
/ / Soliciting Material Pursuant to 240.14a-11(c) or 240.14a-12
WELLPOINT HEALTH NETWORKS INC.
- --------------------------------------------------------------------------------
(Name of Registrant as Specified In Its Charter)
- --------------------------------------------------------------------------------
(Name of Person(s) Filing Proxy Statement, if other than the Registrant)
Payment of Filing Fee (Check the appropriate box):
/X/ No fee required.
/ / Fee computed on table below per Exchange Act Rules 14a-6(i)(1)
and 0-11
(1) Title of each class of securities to which transaction applies:
------------------------------------------------------------------------
(2) Aggregate number of securities to which transaction applies:
------------------------------------------------------------------------
(3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (set forth the amount on which the
filing fee is calculated and state how it was determined):
------------------------------------------------------------------------
(4) Proposed maximum aggregate value of transaction:
------------------------------------------------------------------------
(5) Total fee paid:
------------------------------------------------------------------------
/ / Fee paid previously with preliminary materials.
/ / Check box if any part of the fee is offset as provided by Exchange Act Rule
0-11(a)(2) and identify the filing for which the offsetting fee was paid
previously. Identify the previous filing by registration statement number,
or the Form or Schedule and the date of its filing.
(1) Amount Previously Paid:
------------------------------------------------------------------------
(2) Form, Schedule or Registration Statement No.:
------------------------------------------------------------------------
(3) Filing Party:
------------------------------------------------------------------------
(4) Date Filed:
------------------------------------------------------------------------
<PAGE>
[LOGO]
March 26, 1998
To our Stockholders:
You are cordially invited to attend the 1998 Annual Meeting of Stockholders
of WellPoint Health Networks Inc. (the "Company") which will be held on May 12,
1998, at 10:00 a.m., at the Warner Center Marriott, 21850 Oxnard Street,
Woodland Hills, California 91367.
At the meeting, you will be asked to vote upon proposals to elect two Class
II directors; approve an amendment to the Company's 1994 Stock Option/Award Plan
(the "Stock Option Plan") changing various provisions of the Stock Option Plan;
and ratify the selection of Coopers & Lybrand L.L.P. as the Company's
independent public accountants. Details of business to be conducted at the
Annual Meeting are given in the attached Notice of Annual Meeting and Proxy
Statement.
Please take this opportunity to participate in the affairs of the Company by
voting on the business to be presented at this meeting. Whether or not you plan
to attend the meeting, please sign, date, and return the enclosed proxy promptly
in the accompanying reply envelope. Returning the proxy does not deprive you of
your right to attend the meeting and to vote your shares in person for the
matters acted upon at the meeting.
If you plan to attend the Annual Meeting and are a registered stockholder,
please bring the admission ticket which is attached to your proxy card. If your
shares are registered in the name of a bank or your broker, please bring your
bank or broker statement showing your beneficial ownership with you to the
Annual Meeting.
We look forward to your attendance at the Annual Meeting.
Sincerely,
[/S/ LEONARD D. SCHAEFFER]
Leonard D. Schaeffer
CHAIRMAN OF THE BOARD
AND CHIEF EXECUTIVE OFFICER
<PAGE>
WELLPOINT HEALTH NETWORKS INC.
----------------
NOTICE OF ANNUAL MEETING OF STOCKHOLDERS
TO BE HELD ON MAY 12, 1998
------------------------
The 1998 Annual Meeting of Stockholders of WellPoint Health Networks Inc.
(the "Company") will be held on Tuesday, May 12, 1998, at 10:00 a.m., local
time, at the Warner Center Marriott, located at 21850 Oxnard Street, Woodland
Hills, California 91367 to act on the following matters:
1. To elect two Class II directors of the Company to serve until the 2001
Annual Meeting or the election of their successors.
2. To approve an amendment to the Company's 1994 Stock Option/Award Plan
(the "Stock Option Plan") which, among other things, provides for
automatic annual option grants to the Company's non-employee directors,
permits discretionary grants to non-employee directors, modifies the
Stock Option Plan's limit on aggregate grants to a single person and
allows the Company to incorporate a "reload" feature into new and
existing stock option grants.
3. To ratify the selection of Coopers & Lybrand L.L.P. as the Company's
independent public accountants for the fiscal year ending December 31,
1998.
4. To transact such other business as may properly come before the meeting
or any adjournment or postponement thereof.
These matters are more fully described in the Proxy Statement accompanying
this Notice.
Only stockholders of record at the close of business on March 27, 1998 are
entitled to notice of and to vote at the Annual Meeting. A complete list of the
stockholders entitled to vote at the meeting will be available for at least 10
days prior to the Annual Meeting at the Company's principal executive office
located at 21555 Oxnard Street, Woodland Hills, California 91367 for the
examination of any stockholders and will also be available for inspection at the
meeting.
By Order of the Board of Directors
[/S/ THOMAS C. GEISER]
Thomas C. Geiser
SECRETARY
Woodland Hills, California
March 26, 1998
YOUR VOTE IS IMPORTANT
ALL STOCKHOLDERS ARE CORDIALLY INVITED TO ATTEND IN PERSON. HOWEVER, TO
ENSURE YOUR REPRESENTATION AT THE MEETING, PLEASE MARK, SIGN, DATE AND RETURN
THE ENCLOSED PROXY CARD AS SOON AS POSSIBLE IN THE ENCLOSED POSTAGE-PAID
ENVELOPE. IF YOU ATTEND THE MEETING, YOU MAY VOTE IN PERSON EVEN IF YOU HAVE
PREVIOUSLY RETURNED A PROXY.
<PAGE>
WELLPOINT HEALTH NETWORKS INC.
----------------
PROXY STATEMENT
1998 ANNUAL MEETING OF STOCKHOLDERS
---------------------
GENERAL
The enclosed proxy is solicited on behalf of the Board of Directors of
WellPoint Health Networks Inc. (the "Company" or "WellPoint") for use at the
Annual Meeting of Stockholders to be held on May 12, 1998, at 10:00 a.m., local
time, or at any adjournment or postponement thereof, for the purposes set forth
in the foregoing Notice of Annual Meeting of Stockholders. The Annual Meeting
will be held at the Warner Center Marriott located at 21850 Oxnard Street,
Woodland Hills, California 91367. The Company's principal executive office is
located at 21555 Oxnard Street, Woodland Hills, California 91367 and the
Company's telephone number is (818) 703-4000. This Proxy Statement and the proxy
card are being mailed to stockholders on or about March 31, 1998.
PROXIES
If any stockholder is unable to attend the Annual Meeting, such stockholder
may vote by proxy. The enclosed proxy is solicited by the Company's Board of
Directors (the "Board of Directors" or the "Board") and, when the proxy card is
returned properly completed, it will be voted as directed by the stockholder on
the proxy card. Stockholders are urged to specify their choices on the enclosed
proxy card. If a proxy card is signed and returned without choices specified, in
the absence of contrary instructions, the shares of Common Stock represented by
such proxy will be voted "FOR" Proposals 1, 2 and 3 and will be voted in the
proxyholders' discretion as to other matters that may properly come before the
Annual Meeting. Any proxy given pursuant to this solicitation may be revoked by
the person giving it at any time before its use by (i) delivering to the
Company's principal executive office, 21555 Oxnard Street, Woodland Hills,
California 91367, Attention: Secretary, a written notice of revocation or duly
executed proxy bearing a later date, or (ii) attending the Annual Meeting and
voting in person.
The cost of soliciting proxies will be borne by the Company. The Company
expects to reimburse brokerage firms and other persons representing beneficial
owners of shares for their expenses in forwarding solicitation materials to such
beneficial owners. Proxies may be solicited by certain of the Company's
directors, officers and regular employees, without additional compensation, in
person, by telephone or facsimile. The Company's transfer agent, ChaseMellon
Stockholder Services, L.L.C., will assist in the solicitation of proxies as part
of its transfer agent services to the Company. The fee for such services will be
approximately $4,500 plus reasonable expenses.
SHARE OWNERSHIP AND VOTING
Only holders of Common Stock of record at the close of business on March 27,
1998, the record date and time fixed by the Board of Directors, are entitled to
vote at the meeting. As of March 15, 1998, approximately 69,971,937 shares of
the Company's Common Stock were issued and outstanding. Each stockholder is
entitled to one vote for each share of Common Stock held by such stockholder. A
majority of the shares of Common Stock will constitute a quorum for the
transaction of business at the Annual Meeting.
Each share of Common Stock outstanding on the record date is entitled to
vote. Except to the extent that a stockholder withholds votes from the nominees,
the proxyholders named in the accompanying form
1
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of proxy, in their sole discretion, will vote such proxy for the election of the
nominees listed below as directors of the Company.
An affirmative vote of a majority of shares of Common Stock present and
voting at the meeting is required for approval of all items being submitted to
the stockholders for their consideration, other than the election of directors.
Directors are elected by a plurality of votes cast. An automated system
administered by the Company's transfer agent tabulates stockholder votes.
Abstentions will be treated as the equivalent of a negative vote for the purpose
of determining whether a proposal has been adopted and will have no effect for
the purpose of determining whether a director has been elected. Abstentions will
be counted in determining whether there is a quorum. As to certain matters other
than the election of directors, the New York Stock Exchange Rules generally
require when shares are registered in "street" or nominee name that their member
brokers receive specific instruction from the beneficial owners in order to vote
on such a proposal. If a member broker indicates on the proxy that such broker
does not have discretionary authority as to certain shares to vote on a
particular matter, those shares will not be considered as present and entitled
to vote with respect to those matters. The shares represented by such "broker
non-votes" will, however, be counted in determining whether there is a quorum.
The shares of Common Stock beneficially owned by the California HealthCare
Foundation (the "Foundation"), which as of March 15, 1998 owned 29,910,000
shares (or approximately 42.7% of the outstanding Common Stock), will be voted
in accordance with the terms of the existing voting agreements. See "May 1996
Recapitalization."
Under the provisions of the Company's Salary Deferral Savings Program (the
"401(k) Plan"), approximately 284,287 shares (as of March 17, 1998) of Common
Stock of the Company held by Vanguard Fiduciary Trust Company, the trustee of
the 401(k) Plan, may be voted at the meeting pursuant to confidential
instructions from participating employees.
MAY 1996 RECAPITALIZATION
On May 20, 1996, Blue Cross of California ("BCC") and the Company's
predecessor, WellPoint Health Networks Inc., a Delaware corporation ("Old
WellPoint"), concluded a recapitalization (the "Recapitalization") pursuant to
which, among other actions, Old WellPoint merged with and into BCC and the
surviving entity changed its name to WellPoint Health Networks Inc. 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 Blue Cross Blue Shield Association (the "BCBSA"), which licenses the use
of the Blue Cross name and mark. The BCBSA and the Company entered into a
License Agreement (the "License Agreement"), pursuant to which the Company
became the exclusive licensee for the right to use the Blue Cross name and
related service marks in California and became a member of the BCBSA.
The License Agreement required that the Foundation enter into a voting trust
agreement (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 must be
voted (i) with respect to elections and removal of directors, calling of
stockholder meetings and amendment of the Company's Certificate 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, in the identical proportion in favor of or in opposition to such
matters as non-Voting Trust Shares vote. In addition, the Voting Trust Agreement
requires that the Foundation, through sales (which may involve exercises of
registration rights granted to the Foundation at the time of the
Recapitalization) or
2
<PAGE>
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. As a result of sales of its
holdings of Common Stock, as of March 15, 1998, no shares held by the Foundation
were subject to the provisions of the Voting Trust Agreement.
Pursuant to an addendum to the License Agreement, the Foundation's Board of
Directors was required to consist of a majority of persons that served as
directors of BCC on or before May 17, 1996 (the "Original Blue Cross
Directors"). In March 1998, the Company, the BCBSA and the Foundation
tentatively agreed to modify this restriction. Pursuant to a proposed amendment
to the Voting Trust Agreement (the "Amended Voting Trust Agreement"), in the
event that the number of Original Blue Cross Directors were to become equal to
the number of non-Original Blue Cross Directors (such occurrence being known as
the "Even Division Date"), the Foundation would be required to immediately make
deposits into the Voting Trust to reduce its holdings outside the Voting Trust
to 20% of the outstanding Common Stock and make additional deposits into the
Voting Trust within one year thereafter to reduce its holdings outside of the
Voting Trust to 5% of the outstanding Common Stock. The Foundation has indicated
to the Company that an Even Division Date may occur in April 1998. In order for
a change in the composition of the Foundation Board to be permitted, the
Foundation must obtain the approval of the California Attorney General and the
California Department of Corporations. There can be no assurance that such
approvals will be obtained or that the Amended Voting Trust Agreement will be
executed prior to the Annual Meeting or at all.
With respect to those shares held by the Foundation in excess of the
Ownership Limit (as such term is defined in the Company's Restated Certificate
of Incorporation) that are not subject to the Voting Trust Agreement, the
Foundation has also entered into a voting agreement (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
stockholder meetings and amendment of the Company's Certificate 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. As of March 15, 1998, the number of shares of Common
Stock subject to the Voting Agreement was 26,411,404 (or approximately 37.7% of
the outstanding Common Stock).
Each of the material agreements entered into in connection with the
Recapitalization was amended and restated on substantially similar terms at the
time of the Company's August 1997 reincorporation in Delaware (which was
approved by the stockholders at the Company's 1997 Annual Meeting).
3
<PAGE>
PROPOSAL NO. 1:
ELECTION OF DIRECTORS
The Board of Directors proposes the election of the two Class II directors
at the Annual Meeting. The Company's Bylaws provide for nine directors. The
Board of Directors is divided into three classes, each serving three-year terms,
as provided in the Company's Restated Certificate of Incorporation. There are
currently two Class II directors. The three Class III directors hold office
until the 1999 Annual Meeting and the three Class I directors hold office until
the 2000 Annual Meeting. The two Class II directors hold office until this
Annual Meeting. Unless otherwise instructed, the proxyholders will vote the
proxies received by them for the two Class II director nominees to the Board of
Directors named below. Mr. Banks has served as a director of the Company since
April 1993, and Mr. Davenport has served as a director of the Company since May
1996. If a nominee is unable or declines to serve as a director at the time of
the Annual Meeting, the proxies will be voted for any nominee designated by the
proxyholders to fill such vacancy. However, it is not expected that any nominee
will be unable or will decline to serve as a director. The term of office of
each person elected as a Class II director will continue until the 2001 Annual
Meeting of Stockholders or until the director's successor has been elected.
Although the Company's Restated Certificate of Incorporation currently provides
for a total of three Class II director positions, the Board of Directors has
determined that it is in the best interests of the Company to maintain the Board
of Directors at its current size and accordingly has nominated only the two
existing Class II directors for reelection. The proxyholders will not be able to
vote for a greater number of nominees at the Annual Meeting than two nominees.
NOMINEES FOR ELECTION AS DIRECTORS
The names of the nominees and certain biographical information about them
are set forth below:
<TABLE>
<S> <C>
DAVID R. BANKS, age 61, has been a director of the Company since April
[LOGO] 1993. He has been Chairman and Chief Executive Officer of Beverly
Enterprises since September 1979. Beverly Enterprises operates health
care facilities in 34 states and the District of Columbia. Mr. Banks
serves as a director of Ralston Purina, Nationwide Health Properties
and Pharmerica, Inc. Mr. Banks serves on the Nominating and Governance
Committee and Compensation Committee of the Board.
STEPHEN L. DAVENPORT, age 65, has been a director of the Company since
[LOGO] May 1996, was an independent director of BCC from 1991 until May 1996
and prior to that served as an advisory director of BCC from 1989. He
is retired. From 1980 to 1995, he was president of D/A Financial
Group. Prior to that he was Senior Vice President of Provident Mutual
Life Insurance Company. Pursuant to an agreement with the California
Department of Corporations (the "DOC") made at the time of the
Recapitalization, Mr. Davenport has effectively agreed not to serve as
a director beyond April 2002. Mr. Davenport serves as the Chairperson
of the Compensation Committee of the Board.
</TABLE>
THE BOARD OF DIRECTORS RECOMMENDS THAT STOCKHOLDERS VOTE FOR THE ELECTION OF
EACH OF THE NOMINEES SET FORTH ABOVE.
4
<PAGE>
DIRECTORS OTHER THAN THE NOMINEES
The directors of the Company other than the nominees are as follows:
<TABLE>
<S> <C>
LEONARD D. SCHAEFFER, age 52, a Class III director, has been Chairman
[LOGO] of the Board of Directors and Chief Executive Officer of the Company
since August 1992. From 1989 until May 1996, Mr. Schaeffer was also
Chairman of the Board of Directors and, from 1986, Chief Executive
Officer of BCC. From 1982 to 1986, Mr. Schaeffer served as President
of Group Health, Inc., an HMO in the midwestern United States. Prior
to joining Group Health, Inc., Mr. Schaeffer was the Executive Vice
President and Chief Operating Officer of the Student Loan Marketing
Association ("Sallie Mae"), a financial institution that provides a
secondary market for student loans, from 1980 to 1981. From 1978 to
1980, Mr. Schaeffer was the Administrator of the Health Care Financing
Administration ("HCFA"). HCFA administers the Federal Medicare,
Medicaid and Peer Review Organization programs. Mr. Schaeffer serves
as a director of Allergan, Inc.
W. TOLIVER BESSON, age 53, a Class III director, has been a director
[LOGO] of the Company since May 1996, was an independent director of BCC from
April 1994 until May 1996 and prior to that served as an advisory
director of BCC from 1989. He has been a partner with the law firm of
Paul, Hastings, Janofsky & Walker since 1978. He served on its
national management committee from 1985 to 1990 and served on the
Board of Governors of the California State Bar from 1979 to 1980. He
currently serves as a member of the management committee of Cross
Country Ventures (a venture capital limited partnership). Pursuant to
an agreement with the DOC, Mr. Besson has effectively agreed not to
serve as a director beyond April 2003. Mr. Besson serves on the Audit
Committee and the Nominating and Governance Committee of the Board.
ROGER E. BIRK, age 67, a Class I director, has been a director of the
[LOGO] Company since April 1993. Mr. Birk served as President of the Federal
National Mortgage Association ("Fannie Mae") from 1987 to 1992 and as
Chairman and Chief Executive Officer of Merrill Lynch & Co., Inc. from
1982 to 1986. Mr. Birk serves as a director of Penske Transportation,
the Federal National Mortgage Association ("Fannie Mae"), Mutual of
America Capital Corp. and Golden Bear Golf, Inc. Mr. Birk serves as
the Chairperson of the Audit Committee of the Board.
SHEILA P. BURKE, age 47, a Class I director, has been a director of
[LOGO] the Company since April 1997. Since December 1996, Ms. Burke has been
an Executive Dean of the John F. Kennedy School of Government, Harvard
University. Previously in 1996, Ms. Burke was a senior advisor to the
Dole for President Campaign. From 1986 until June 1996, Ms. Burke was
the chief of staff for the Office of the Republican Leader of the
United States Senate. Ms. Burke currently serves on the Board of
Directors of Chubb Corp. Ms. Burke serves on the Audit Committee of
the Board.
</TABLE>
5
<PAGE>
<TABLE>
<S> <C>
JULIE A. HILL, age 51, a Class III director, has been a director of
[LOGO] the Company since March 1994. She has been President and Chief
Executive Officer of Costain Homes Inc. ("Costain") since January
1991, having joined Costain in 1988 as Vice President of Sales and
Marketing. Costain is a division of London-based Costain Group PLC and
builds single-family detached residential communities. Ms. Hill serves
on the Compensation Committee and as the Chairperson of the Nominating
and Governance Committee of the Board.
ELIZABETH A. SANDERS, age 52, a Class I director, has been a director
[LOGO] of the Company since May 1996. Ms. Sanders has been a consultant to
executive management from 1990 to the present. She was employed by
Nordstrom Inc. from 1978 to 1990 and served as Vice President and
General Manager of Nordstrom, Inc. from 1978 to 1990. Ms. Sanders is a
founder of the National Bank of Southern California and was on its
board of directors from 1983 to 1990. She currently serves on the
following boards of directors: H. F. Ahmanson & Company, Wal-Mart
Stores, Inc., Wolverine Worldwide, Inc. and the Advantica Restaurant
Group, Inc. Ms. Sanders serves on the Audit Committee of the Board.
</TABLE>
BOARD MEETINGS AND COMMITTEES
The Board of Directors of the Company held a total of eight meetings
(including regularly scheduled meetings and special meetings) during 1997.
During the same period, the Board of Directors acted several times by unanimous
written consent. During 1997, each of the directors attended or participated in
75% or more of the aggregate number of meetings of the Board of Directors and
committees of the Board on which the director served, except Ms. Burke who
attended less than 75% of the meetings of the Board of Directors and Audit
Committee that were held in 1997 after she was elected as a Board member. The
Board of Directors has an Audit Committee, a Compensation Committee and a
Nominating and Governance Committee.
The Audit Committee, which consists of Messrs. Birk and Besson and Mesdames
Burke and Sanders, met three times during 1997. The Audit Committee reviews
financial and auditing issues of the Company, recommends engagement of the
Company's independent auditors, approves the services performed by the Company's
independent auditors and reviews the Company's accounting principles, internal
control structure and policies and procedures. Mr. Birk is chairperson of the
Audit Committee.
The Compensation Committee, which consists of Messrs. Banks and Davenport
and Ms. Hill, met four times during 1997. The Compensation Committee reviews and
makes recommendations to the Board concerning the Company's executive
compensation policy, bonus plans and incentive option plans, and approves the
granting of stock options and awards to executive officers. Mr. Davenport is
chairperson of the Compensation Committee.
The Nominating and Governance Committee, which consists of Ms. Hill and
Messrs. Banks and Besson, met three times during 1997. The Nominating and
Governance Committee recommends qualified candidates for election as directors
of the Company and generally reviews and makes recommendations to the Board
concerning governance issues. Ms. Hill is chairperson of the Nominating and
Governance Committee. Pursuant to the terms of the License Agreement, until the
Foundation ceases to own voting capital stock of the Company in excess of the
Ownership Limit specified in the Company's Restated Certificate of
Incorporation, the Nominating and Governance Committee will be composed of three
directors, each of whom will be an independent director. One of the members of
the Nominating and Governance Committee must be one of the directors (or their
replacement) designated by BCC prior to
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the Recapitalization. The BCC-designated directors are Ms. Burke and Messrs.
Besson and Davenport. Stockholders wishing to recommend candidates for
consideration by the Nominating and Governance Committee may do so by writing to
the Secretary of the Company at the Company's principal executive office, giving
the candidate's name, biographical affidavit and qualifications.
SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Securities Exchange Act of 1934, as amended (the
"Exchange Act"), requires the Company's directors, executive officers and
holders of more than ten percent of the Company's Common Stock to file reports
of ownership and changes in ownership with the Securities and Exchange
Commission ("SEC"). Officers, directors and greater than ten percent
stockholders are required by SEC regulations to furnish the Company with copies
of all Section 16(a) forms they file.
Based solely on a review of the copies of such forms received by it, or
written representations from certain reporting persons, the Company believes
that during the year ended December 31, 1997, the Company's officers, directors
and greater than ten percent beneficial owners complied with all applicable
filing requirements, except Thomas C. Geiser, who reported one transaction late
in 1997.
COMPENSATION OF DIRECTORS
All non-employee directors of the Company are entitled to the following
compensation: (i) $23,000 per year paid in quarterly installments; and (ii)
$1,300 per Board meeting and $900 per committee meeting, with the chairperson of
the committee receiving $1,100 per committee meeting. The meeting fee is $500
for any Board or committee meeting in which a director participates by
telephone. Non-employee directors may elect to defer receipt of a portion or all
of their fees. Deferred amounts are credited with interest quarterly.
On the last business day of the second quarter of each fiscal year of the
Company, continuing non-employee directors who have served for at least six full
calendar months automatically receive 800 shares of Common Stock pursuant to the
Company's Stock Option Plan. If the amendment to the Stock Option Plan presented
as Proposal No. 2 at the Annual Meeting is approved by the stockholders,
eligible non-employee directors will also receive an annual 2,000-share stock
option grant under the Stock Option Plan on the last business day of the second
quarter of each fiscal year.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The Compensation Committee of the Board of Directors is composed of David R.
Banks, Stephen L. Davenport and Julie A. Hill. The Company's Compensation
Committee does not include any present or former officers or employees of the
Company or any of its subsidiaries.
7
<PAGE>
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
The following table sets forth the beneficial ownership of Common Stock of
the Company as of March 15, 1998 by (a) each person known by the Company to own
beneficially more than 5% of the outstanding Common Stock; (b) the Chief
Executive Officer of the Company; (c) each of the four other most highly
compensated executive officers of the Company (determined for the year ended
December 31, 1997) (collectively, the "Named Executive Officers"); (d) each
director of the Company; and (e) all directors and executive officers as a
group:
<TABLE>
<CAPTION>
TOTAL SHARES
BENEFICIALLY
NUMBER OF SHARES NUMBER OF SHARES AND
BENEFICIALLY PERCENT OF SUPPLEMENTALLY SUPPLEMENTALLY PERCENT OF
NAME AND ADDRESS OWNED(1) CLASS(2) OWNED OWNED CLASS
- -------------------------------------------- -------------------- ------------- ----------------- -------------- -----------
<S> <C> <C> <C> <C> <C>
California HealthCare Foundation............ 29,910,000(3) 42.7% -- 29,910,000 42.7%
21560 Oxnard Street
Woodland Hills, CA 91367
Leonard D. Schaeffer........................ 474,420(4) * 64,410(5) 538,830 *
D. Mark Weinberg............................ 223,352(6) * 8,187(7) 231,539 *
Ronald A. Williams.......................... 236,592(8) * 80(9) 236,672 *
Thomas C. Geiser............................ 153,333(10) * 3,053(11) 156,386 *
David C. Colby.............................. 34,410 * 12,500(12) 46,910 *
David R. Banks.............................. 1,967(13) * -- 1,967 *
W. Toliver Besson........................... 2,300(14) * -- 2,300 *
Roger E. Birk............................... 11,302 * -- 11,302 *
Sheila P. Burke............................. -- * -- -- *
Stephen L. Davenport........................ 3,220(15) * -- 3,220 *
Julie A. Hill............................... 1,515 * -- 1,515 *
Elizabeth A. Sanders........................ 800 * -- 800 *
All executive officers and directors as a
group (12 persons)........................ 1,143,211(16) 1.6 88,230 1,231,441 1.7
</TABLE>
- --------------------------
* Less than one percent.
(1) Except as indicated in footnotes to this table, the stockholders named in
this table are known to the Company to have sole voting and investment power
with respect to all shares of Common Stock shown as beneficially owned by
them, subject to community property laws where applicable. Shares shown as
beneficially owned by any person have been determined in accordance with the
requirements of Rule 13d-3 promulgated under the Exchange Act.
(2) Calculation based on approximately 69,971,937 shares of Common Stock
outstanding as of March 15, 1998.
(3) As of March 15, 1998, approximately 26,411,404 shares were held pursuant to
the Voting Agreement. This agreement contains provisions with respect to the
voting of shares subject to it on certain specified matters. See "May 1996
Recapitalization."
(4) Includes 400 shares held in a Keogh account, 200 shares held in an
Individual Retirement Account ("IRA") account and 386 shares held in a
401(k) account for the benefit of Mr. Schaeffer. Includes 466,764 shares
subject to presently exercisable options or options that become exercisable
within 60 days.
(5) Includes 64,187 deferred share units. The Company has agreed to issue such
shares to Mr. Schaeffer upon termination of his employment with the Company.
See "Executive Compensation and Other Information-- Employment Contracts,
Termination of Employment and Change-in-Control Arrangements--Employment
8
<PAGE>
Agreement with Leonard D. Schaeffer." Also includes deferred rights to 223
shares held in a deferred compensation account for the benefit of Mr.
Schaeffer.
(6) Includes 3,120 shares held in a 401(k) account for the benefit of Mr.
Weinberg and 205,633 shares subject to presently exercisable options or
options that become exercisable within 60 days.
(7) Represents deferred rights to 8,187 shares held in a deferred compensation
account for the benefit of Mr. Weinberg.
(8) Includes 103 shares held in a 401(k) account for the benefit of Mr.
Williams and 211,858 shares subject to presently exercisable options or
options that become exercisable within 60 days.
(9) Represents deferred rights to 80 shares held in a deferred compensation
account for the benefit of Mr. Williams.
(10) Includes 98 shares held in a 401(k) account for the benefit of Mr. Geiser
and 141,315 shares subject to presently exercisable options or options that
become exercisable within 60 days.
(11) Represents a restricted share right grant with respect to 3,000 shares made
to Mr. Geiser that vests in equal installments on June 1, 1998 and 1999 and
deferred rights to 53 shares held in a deferred compensation account for the
benefit of Mr. Geiser.
(12) Represents a restricted share right grant made to Mr. Colby that vests in
equal installments on September 1, 1998, 1999, 2000, 2001 and 2002.
(13) Includes 500 shares held in a Keogh account for the benefit of Mr. Banks.
(14) Includes 900 shares owned by the W. Toliver Besson Retirement Plan, of
which Mr. Besson is trustee. Includes 100 shares owned by Mr. Besson's wife.
(15) Includes 1,000 shares held in an IRA for the benefit of Mr. Davenport and
2,220 shares owned by the Davenport Family Trust, of which Mr. Davenport is
trustee.
(16) Includes 1,025,570 shares subject to presently exercisable options or
options that become exercisable within 60 days.
9
<PAGE>
EXECUTIVE COMPENSATION AND OTHER INFORMATION
SUMMARY OF CERTAIN COMPENSATION
The following table provides certain summary information concerning
compensation paid or accrued by the Company and its subsidiaries to or on behalf
of the Company's Chief Executive Officer and each of the four other Named
Executive Officers for the years ended December 31, 1995, 1996 and 1997:
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM COMPENSATION
-----------------------------------------
ANNUAL COMPENSATION AWARDS PAYOUTS
----------------------------------------- ---------------------------- ----------
OTHER ANNUAL SECURITIES LTIP ALL OTHER
NAME AND PRINCIPAL SALARY COMPENSATION RESTRICTED UNDERLYING PAYOUTS COMPENSATION
POSITION YEAR ($) BONUS ($) ($) STOCK($) OPTIONS(#) ($)(1) ($)(2)
- ----------------------- ---- -------- ------------ -------------- ------------- ------------ ---------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Leonard D. Schaeffer... 1997 $856,733 $ 630,000 $ 3,757 -- 200,000 -- $105,607
Chairman and Chief 1996 744,524 532,440 12,908 -- 437,700 $5,475,049 245,777
Executive Officer(3) 1995 636,005 305,280 -- -- -- 136,913 93,818
D. Mark Weinberg....... 1997 $453,302 $ 240,000 $258,734(4) -- 100,000 -- $ 51,023
Executive Vice
President, 1996 456,285 234,000 206,987(4) -- 240,931 $1,976,199 136,473
UNICARE Businesses 1995 407,075 157,538 172,490(4) -- -- 42,736 51,097
Ronald A. Williams..... 1997 $444,540 $ 285,000 $204,701(4) -- 100,000 -- $ 70,399
Executive Vice
President, 1996 430,888 238,743 157,463(4) -- 230,511 $1,866,031 134,256
Blue Cross of
California 1995 371,612 143,814 125,970(4) -- -- 39,043 47,741
Businesses
Thomas C. Geiser....... 1997 $336,119 $ 189,000 $ 34,600(5) -- 75,000 -- $ 30,643
Executive Vice
President, 1996 321,002 155,000 35,989(5) $159,750(7) 128,348 $1,007,791 63,085
General Counsel and 1995 269,170 105,235 220,730(6) -- -- 27,963 20,965
Secretary
David C. Colby(8)...... 1997 $123,077 $ 169,300(9) $ 33,877(10) $706,250(11) 116,673 -- $ 138
Executive Vice
President
and Chief Financial
Officer
</TABLE>
- ------------------------------
(1) For the year ended December 31, 1996, the amounts shown include the
following payments made in May 1996 upon completion of the Recapitalization
and termination of the Special Performance Units ("SPUs") and Performance
Units previously issued under the Company's 1994 Long Term Incentive Plan
(which has been terminated): Leonard D. Schaeffer, $3,848,184; D. Mark
Weinberg, $1,436,867; Ronald A. Williams, $1,364,112; and Thomas C. Geiser,
$739,860. For Mr. Schaeffer, this amount was paid 50% in cash, with the
remaining 50% allocated to deferred share units which will be received by
Mr. Schaeffer upon termination of his employment with the Company. See
"--Employment Contracts, Termination of Employment and Change in Control
Arrangements." For Messrs. Weinberg, Williams and Geiser, these amounts were
paid 50% in cash and 50% in unrestricted Common Stock. These amounts
represented the existing value of such SPUs and Performance Units as of the
time of their termination, but did not constitute regular compensation
payments for 1996. For the year ended December 31, 1996, the amounts shown
also include the following payments made under SPUs that matured on January
31, 1996: Leonard D. Schaeffer, $1,375,000; D. Mark Weinberg, $426,250;
Ronald A. Williams, $398,750; and Thomas C. Geiser, $206,250. For 1995 and
1996, the LTIP payouts also include payments attributable to the three-year
performance period ending in that year, but that were made in the following
year.
(2) For the year ended December 31, 1997, "All Other Compensation" includes the
following: (i) contributions on behalf of Leonard D. Schaeffer, D. Mark
Weinberg, Ronald A. Williams and Thomas C. Geiser in the amount of $8,075,
$7,125, $7,125 and $7,125, respectively, to the 401(k) Plan to match 1997
pre-tax elective deferral contributions (included under Salary) made by each
to such plan, (ii) contributions on behalf of Leonard D. Schaeffer, D. Mark
Weinberg, Ronald A. Williams and Thomas C. Geiser of $77,334, $35,448,
$46,261 and $21,471, respectively, to match 1997 pre-tax contributions
(included under Salary) made by each to WellPoint's deferred compensation
plan and additional contributions made by WellPoint to such plan on behalf
of such person and (iii) life insurance premiums paid on behalf of Leonard
D. Schaeffer, D. Mark Weinberg, Ronald A. Williams, Thomas C. Geiser and
David C. Colby in the amount of $20,198, $8,450, $17,013, $2,047 and $138,
respectively.
10
<PAGE>
(3) Prior to May 20, 1996 (the date of completion of the Recapitalization), Mr.
Schaeffer also received compensation from BCC for his services as Chief
Executive Officer of BCC. For 1995 and such period in 1996, amounts shown
represent an allocation to the Company of the amounts payable under Mr.
Schaeffer's prior employment agreement with BCC (which has been replaced by
the employment agreement described in "--Employment Contracts, Termination
of Employment and Change in Control Arrangements--Employment Agreement with
Leonard D. Schaeffer") and were based on the estimated time spent by Mr.
Schaeffer on the Company's affairs.
(4) Represents a retention bonus paid pursuant to a management retention
agreement that terminated in April 1997.
(5) Includes forgiveness of $25,000 of a relocation loan.
(6) Represents a special relocation bonus of $50,000, forgiveness of a $50,000
relocation loan and reimbursement for relocation expenses.
(7) Represents a restricted share right grant of 4,500 shares vesting in equal
installments on June 1, 1997, 1998 and 1999. As of December 31, 1997, the
shares underlying this grant (1,500 shares of which were vested) had a fair
market value of approximately $190,125, not accounting for vesting
restrictions. The unvested shares underlying this grant are subject to
forfeiture in certain instances and to accelerated vesting upon a change in
control. Dividends will not be paid on any shares prior to the lapsing of
vesting restrictions.
(8) Mr. Colby joined the Company on September 1, 1997.
(9) Includes a sign-on bonus of $100,000.
(10) Includes reimbursement of relocation expenses of $31,662.
(11) Represents a restricted share right grant of 12,500 shares vesting in equal
installments on September 1, 1998, 1999, 2000, 2001 and 2002. As of December
31, 1997, the shares underlying this grant (none of which were vested) had a
fair market value of approximately $528,125, not accounting for vesting
restrictions. The unvested shares underlying this grant are subject to
forfeiture in certain instances and to accelerated vesting upon a change in
control. Dividends will not be paid on any shares prior to the lapsing of
vesting restrictions.
11
<PAGE>
OPTION/SAR GRANTS IN LAST FISCAL YEAR
The following table sets forth certain information with respect to stock
options granted to the Named Executive Officers during 1997. No stock
appreciation rights ("SARs") were granted in 1997.
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS
--------------------------------------------------------
NUMBER OF
SHARES PERCENTAGE OF
UNDERLYING TOTAL OPTIONS GRANT DATE
OPTIONS GRANTED TO EXERCISE EXPIRATION PRESENT
NAME GRANTED EMPLOYEES PRICE DATE VALUE(1)
- ----------------------------- ----------- ----------------- ----------- ----------- ---------------
<S> <C> <C> <C> <C> <C>
Leonard D. Schaeffer......... 200,000 11.6% $ 33.30 2/10/07 $ 2,808,440
D. Mark Weinberg............. 100,000 5.8 $ 33.30 2/10/07 $ 1,404,220
Ronald A. Williams........... 100,000 5.8 $ 33.30 2/10/07 $ 1,404,220
Thomas C. Geiser............. 75,000 4.4 $ 33.30 2/10/07 $ 1,053,165
David C. Colby............... 100,000 5.8 $ 54.38 9/01/07 $ 2,147,060
16,673 1.0 $ 55.85 10/07/07 $ 381,963
</TABLE>
- --------------------------
(1) Grant date present values were calculated using the Black-Scholes option
valuation model with the following assumptions:
<TABLE>
<S> <C>
Expected life of options........................................... Five years
Volatility......................................................... 35.49%
Dividend yield..................................................... 0%
Risk-free interest rate:
For the grants to Messrs. Schaeffer,
Williams, Weinberg and Geiser.................................. 6.31%
For the 100,000 share grant to Mr. Colby......................... 6.11%
For the 16,673 share grant to Mr. Colby.......................... 5.90%
</TABLE>
The actual value, if any, which a Named Executive Officer may realize will
be based upon the difference between the market price of the Company's Common
Stock on the date of exercise and the exercise price. There is no assurance that
the actual realized value, if any, will be at or near the value estimated by the
Black-Scholes model.
Each grant vests in three equal annual installments beginning on the first
anniversary of the grant date. Each grant made contains provisions for earlier
vesting in full upon a change in control.
AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR AND YEAR-END OPTION/SAR
VALUES
The following table sets forth certain information with respect to exercises
by the Named Executive Officers of stock options during 1997 and the value of
all unexercised employee stock options as of
12
<PAGE>
December 31, 1997 held by the Named Executive Officers. No SARs were exercised
or outstanding in 1997.
<TABLE>
<CAPTION>
NUMBER OF SHARES VALUE OF UNEXERCISED IN-
UNDERLYING UNEXERCISED THE-MONEY OPTIONS AT
OPTIONS FISCAL YEAR-END(1)
SHARES ACQUIRED ON VALUE -------------------------- --------------------------
NAME EXERCISE REALIZED EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ------------------------------- --------------------- ------------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Leonard D. Schaeffer........... 0 $ 0 212,081 425,619 $ 546,109 $ 2,370,369
D. Mark Weinberg............... 0 0 121,148 219,783 311,956 1,203,141
Ronald A. Williams............. 0 0 115,922 214,589 298,499 1,189,767
Thomas C. Geiser............... 0 0 64,173 139,175 165,245 836,276
David C. Colby................. 0 0 0 116,673 0 0
</TABLE>
- --------------------------
(1) Value at fiscal year-end is calculated as the difference between the
aggregate trading price as of December 31, 1997 of all shares subject to the
options, less the aggregate option exercise price. The actual amount
realized from unexercised options is dependent upon the price of the
Company's Common Stock at the time shares obtained upon exercise of such
options are sold and, as to unexercisable options, whether restrictions on
exercise of such options lapse.
PENSION PLANS
PENSION PLAN
The Company sponsors the WellPoint Health Networks Inc. Pension Accumulation
Plan (the "Pension Plan"), a cash balance plan that is designed to be a
qualified defined benefit pension plan under the Internal Revenue Code of 1986,
as amended (the "Internal Revenue Code").
The Company also sponsors the Supplemental Pension Plan (the "Supplemental
Plan") of WellPoint Health Networks Inc. which provides additional benefits
payable out of general corporate assets to certain employees equal to the
benefits these employees cannot receive under the Pension Plan because of
Internal Revenue Code limits on benefits and restrictions on participation by
highly compensated employees.
The estimated annual benefit payable upon retirement at age 65 under the
Pension Plan and the Supplemental Plan for the Named Executive Officers as of
December 31, 1997 based on service and compensation to such date and as
projected at age 65 is: Leonard D. Schaeffer, $92,627 and $105,501; D. Mark
Weinberg, $98,974 and $284,212; Ronald A. Williams $75,554 and $210,830; Thomas
C. Geiser, $26,550 and $107,938; and David C. Colby, $2,376 and $107,231. Mr.
Schaeffer is also entitled to an additional annual annuity of $5,135 from the
Prior Plan.
SPECIAL EXECUTIVE RETIREMENT PLAN
The Company maintains a Special Executive Retirement Plan ("SERP") with
respect to Mr. Schaeffer. The SERP, as amended September 1, 1997, provides that,
within 30 days of his retirement, Mr. Schaeffer will begin receiving an annual
benefit equal to two-thirds of his then-current "Target Annual Compensation,"
reduced by the benefits provided by the Pension Plan, the Prior Plan and
Supplemental Plan described above. Target Annual Compensation is defined as base
salary plus target annual incentive. For purposes of the SERP, base salary for
any calendar month beginning after December 31, 1997 shall be computed in the
following manner: (i) on each January 1 through January 1, 2001, Mr. Schaeffer's
base salary, starting with his base salary as of December 31, 1997, shall be
increased by five percent (5%), (ii) on any date after December 31, 1997 and
before January 2, 2001 that Mr. Schaeffer's actual base salary is increased so
that the cumulative increase in his actual base salary since the most recent
December 31 is more than five percent (5%), his base salary shall be increased
by the actual percentage increase in his base salary, but only to the extent
that such increase, when added to earlier actual increases since the most recent
December 31, exceeds five percent (5%), and (iii) on any date after January 1,
2001, his base salary
13
<PAGE>
will be increased in the same percentage amount that his actual base salary is
increased. The benefit will be reduced by 6 1/4% per year for retirement before
age 60. This retirement benefit is to be paid in monthly installments for the
greater of Mr. Schaeffer's lifetime or a ten-year period, with payments, if any,
made to Mr. Schaeffer's designated beneficiary after Mr. Schaeffer's death. On
Mr. Schaeffer's death (or, if later, after retirement payments have been made
for ten years), the SERP provides for a survivor benefit to be paid to his
spouse for her lifetime equal to 50% of the benefit that he would receive. The
Company's obligations under the SERP are secured by a trust to which the Company
makes annual, irrevocable contributions. Based upon fiscal 1997 base salary and
target annual incentive levels, the estimated annual benefit payable to Mr.
Schaeffer under the SERP upon retirement at age 65 is $909,364.
EMPLOYMENT CONTRACTS, TERMINATION OF EMPLOYMENT AND CHANGE IN CONTROL
ARRANGEMENTS
EMPLOYMENT AGREEMENT WITH LEONARD D. SCHAEFFER
In January 1997, Leonard D. Schaeffer entered into an employment agreement
with the Company which covers a five-year period that expires in January 2002,
but which will be extended automatically on January 22 of each year for an
additional year unless the Board of Directors elects to cease such automatic
extension. This employment agreement was amended as of September 1, 1997. Under
Mr. Schaeffer's employment agreement, Mr. Schaeffer is entitled to receive an
annual base salary of not less than $850,000, which can be adjusted upward as
determined by the Board of Directors; provided, however, that the base salary in
each successive year may not be less than the base salary in the preceding year.
Mr. Schaeffer's base salary as of March 15, 1998 was $1,000,000.
The employment agreement with Mr. Schaeffer also provides that the Company
will provide long-term disability benefits equal to Mr. Schaeffer's then-current
annual base salary until he reaches age 65 if he continues to be considered
disabled during such period.
In addition, Mr. Schaeffer's employment agreement provides that, in the
event that he is constructively terminated or the Company terminates his
employment other than for cause, he will receive, in addition to payments under
the SERP described above, a lump-sum payment equal to 2.99 times his then-annual
base salary plus an amount equal to 2.99 times his then-current annual target
incentive compensation. Mr. Schaeffer's annual target incentive compensation for
1998 is $750,000. In the event of such termination, he will continue to receive
certain fringe benefits for 48 months. In addition, Mr. Schaeffer will be
entitled to a pro rata portion of any bonus pursuant to the Company's bonus
programs, and any options granted to Mr. Schaeffer on or after January 22, 1997
will immediately become exercisable. If the Company agrees to a change of
control, the employment agreement with Mr. Schaeffer provides that rights and
privileges under the agreement may not be affected. Mr. Schaeffer may elect to
terminate his employment with the Company upon 90 days' written notice to the
Company. In such event, Mr. Schaeffer will continue to receive his salary during
the 90-day notification period. In addition, Mr. Schaeffer will continue to
receive health, dental and life insurance and disability benefits for a
six-month period.
The above-described employment agreement with Mr. Schaeffer replaces
previous employment agreements with BCC and the Company. At the time of the
execution of Mr. Schaeffer's current employment agreement, the Company also
agreed that Mr. Schaeffer will receive 8,821 shares of the Company's Common
Stock upon termination of Mr. Schaeffer's employment with the Company for any
reason. At the time of the termination of outstanding SPUs and Performance Units
in May 1996, the Company granted Mr. Schaeffer deferred share rights with
respect to 55,366 shares of the Company's Common Stock, which will be issued to
Mr. Schaeffer upon his termination from the Company.
OFFICER SEVERANCE AGREEMENTS AND POLICY
D. Mark Weinberg and Ronald A. Williams have each entered into an officer
severance agreement with the Company that provides a lump-sum payment, if either
is involuntarily terminated (other than for
14
<PAGE>
cause), equal to 24 months salary and 200% of the previous fiscal year's target
bonus, plus continuation for 24 months of health, dental, vision and life
insurance premiums paid by the Company.
Thomas C. Geiser has entered into an officer severance agreement with the
Company that provides a lump-sum payment, if he is involuntarily terminated
(other than for cause), equal to 18 months salary and 150% of the previous
fiscal year's target bonus, plus continuation for 18 months of health, dental,
vision and life insurance premiums paid by the Company.
The Company maintains an officer severance policy for the benefit of
officers not otherwise covered by employment agreements or special officer
severance agreements. David C. Colby is covered under this policy. With respect
to persons holding the title of Executive Vice President, this policy provides
for a lump-sum payment, if an officer is involuntarily terminated (other than
for cause), equal to 12 months salary and 100% of the previous fiscal year's
target bonus, plus continuation for 12 months of health, dental, vision and life
insurance premiums paid by the Company.
RELOCATION LOANS
In connection with Thomas C. Geiser's purchase of a residence, the Company
made an interest-free loan of $125,000 to Mr. Geiser in 1995, forgivable in five
annual installments of $25,000, so long as he remains employed by the Company.
Should he terminate employment before the entire balance of the loan is
forgiven, the remaining unpaid, unforgiven balance would become due. Mr. Geiser
was also entitled to a relocation bonus of $50,000, paid in 1995.
CHANGE IN CONTROL
The Company has adopted the WellPoint Health Networks Inc. Officer Change in
Control Plan (the "Change in Control Plan") effective as of February 12, 1998 to
provide officers of WellPoint and affiliates controlled by WellPoint with
benefits in the event of a "Change in Control" within the two-year term of the
Change in Control Plan. The Change in Control Plan defines a Change in Control
as (i) the acquisition, directly or indirectly by any person or related group of
persons, but other than WellPoint or a person that directly or indirectly
controls, is controlled by, or is under, control with the Company, of beneficial
ownership of securities of the Company that results in such person or related
group of persons beneficially owning securities representing 40% or more of the
combined voting power of the Company's then-outstanding securities; provided
that this provision does not apply to an acquisition by the Foundation that
either: (a) is on or before May 20, 1996, or (b) is both (I) after May 20, 1996
but before the first day thereafter, if any, that the Foundation's beneficial
ownership is less than 35% and (II) involves securities representing less than
50% (or, if lower, the lowest percentage of beneficial ownership by the
Foundation on or after May 20, 1996 plus 10%) of the combined voting power of
the Company's then-outstanding securities; (ii) a merger, recapitalization,
consolidation or similar transaction to which WellPoint is a party, if (a) the
beneficial owners of WellPoint's securities immediately before the transaction,
do not, immediately after the transaction, have beneficial ownership of
securities of the surviving entity or parent thereof representing at least 60%
of the combined voting power of the then-outstanding securities of the surviving
entity or parent, and (b) the directors of WellPoint immediately prior to
consummation of the transaction do not constitute at least a majority of the
board of directors of the surviving entity or parent upon consummation of the
transaction; (iii) a change in the composition of the Board of Directors of
WellPoint (the "Board") over a period of thirty-six (36) consecutive months or
less such that a majority of the Board members ceases by reason of one or more
contested elections for Board membership, to be comprised of individuals who
either (a) have been Board members since the beginning of such period or (b)
have been elected or nominated for election as Board members during such period
by at least a majority of the Board members described in clause (a) who were
still in office at the time the Board approved such election or nomination; or
(iv) the sale, transfer or other disposition of all or substantially all of the
Company's assets in complete liquidation or dissolution of WellPoint unless (a)
the beneficial owners of WellPoint's securities immediately before the
transaction have, immediately after the transaction, beneficial ownership
15
<PAGE>
of securities representing at least 60% of the combined voting power of the
then-outstanding securities of the entity acquiring WellPoint's assets, and (b)
the directors of WellPoint immediately prior to consummation of the transaction
constitute a majority of the board of directors of the entity acquiring
WellPoint's assets after consummation of the transaction.
Officers will be eligible to receive Change in Control Plan severance
benefits if the Company or any Affiliate (as defined in the Change in Control
Plan) involuntarily terminates (other than for cause) or constructively
discharges the officer within 36 months after a Change in Control. An officer is
deemed constructively discharged for purposes of the Change in Control Plan if,
after a Change in Control, the Company or any Affiliate significantly reduces
the officer's duties, responsibilities, status, titles or offices, reduces the
officer's aggregate salary and target bonus by more than 10%, requests the
officer to relocate further than 35 miles from the officer's place of employment
or fails to assume the Company's obligations under the plan. Severance payments
will consist of a base amount plus an outplacement benefit. The base amount is
2.75 times base salary plus 2.75 times target annual bonus in effect for an
Executive Vice President. The outplacement benefit consists of outplacement
services consistent with the Company's then-current policy. Each of Mr.
Weinberg, Mr. Williams, Mr. Geiser and Mr. Colby currently participates in the
Change in Control Plan. Mr. Schaeffer does not participate.
Payments under the Change in Control Plan are reduced to the extent
necessary to ensure that those payments do not constitute excess parachute
payments within the meaning of Section 280G of the Internal Revenue Code.
An officer who is to receive other severance benefits from an Affiliate will
not receive benefits under the Change in Control Plan unless the other severance
benefit plan so provides or the officer waives benefits under the other
severance benefit plan. The Change in Control Plan is effective until February
12, 2000 and automatically renews for successive one-year terms thereafter
unless the Compensation Committee (which administers the plan) terminates the
plan as of the end of its initial term or any renewal term. The Compensation
Committee may not amend or terminate the plan during the initial term or any
renewal term.
In addition to the benefits under the Change in Control Plan, options
granted under the Company's stock option plans, including grants to the Named
Executive Officers under the Stock Option Plan, contain provision for immediate
acceleration of vesting upon a change in control (which is defined in
substantially similar terms as in the Change in Control Plan).
16
<PAGE>
REPORT OF THE COMPENSATION COMMITTEE
OF THE BOARD OF DIRECTORS
THE REPORT OF THE COMPENSATION COMMITTEE SHALL NOT BE DEEMED INCORPORATED BY
REFERENCE BY ANY GENERAL STATEMENT INCORPORATING BY REFERENCE THIS PROXY
STATEMENT INTO ANY FILING UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE
"SECURITIES ACT"), OR UNDER THE EXCHANGE ACT, EXCEPT TO THE EXTENT THAT
WELLPOINT SPECIFICALLY INCORPORATES THIS INFORMATION BY REFERENCE AND SHALL NOT
OTHERWISE BE DEEMED FILED UNDER SUCH ACTS.
The Compensation Committee (the "Committee") of the Board of Directors is
responsible for determining the compensation of the executive officers of the
Company, including the Named Executive Officers. In making its determinations,
the Committee relies on input from Fredric W. Cook & Co., compensation
consultants, and reviews appropriate decisions with all non-employee directors
who constitute a majority of the full Board of Directors. Four Committee
meetings were held during 1997.
COMPENSATION PHILOSOPHY
The Company's executive compensation program reflects the philosophy that
executives' rewards should be structured to closely align their interests with
those of the stockholders. The program emphasizes pay for performance and
stock-based incentives, and extends these concepts beyond the executive officers
to other employees in the interests of motivation, teamwork and fairness. Annual
return on stockholders' equity ("ROE") and earnings per share ("EPS") growth are
the measures of short-term success, and are rewarded through the Corporate
Incentive Plan (the "CIP"). Stockholder value (as indicated by stock price
appreciation) is the long-term measure and is rewarded through stock options
which are currently the sole form of long-term incentive compensation. Stock
ownership is an important element of the Company's compensation philosophy, and
there are guidelines for Company stock ownership levels covering officers
(including the Named Executive Officers) and non-employee directors.
Compensation surveys and external competitiveness are used as tests for
reasonableness, but corporate, business unit and individual performance are the
primary determinants of individual pay amounts. The competitive market is viewed
to be the Company's competitors in the managed-care industry (which includes
some but not all of the companies that are included in the peer group indices
described under "Stock Performance" below) as well as companies in general
industry of similar market value, size, operating complexity and growth
potential, so that the Company can compete for the best talent across different
market segments.
PROGRAM OVERVIEW
The elements of the Company's executive compensation program in 1997
consisted of base salaries, annual cash incentives (under the CIP) and stock
options. The mix of compensation for executive officers is weighted more heavily
toward performance-based incentives rather than base salaries as position level
increases.
BASE SALARIES
Base salaries for the Named Executive Officers were set based upon the
competitive market and individual responsibilities, experience and performance.
In 1997, the Named Executive Officers received increases partly for merit, and
partly for market adjustments to recognize the Company's significantly increased
revenues from internal growth and acquisitions. The Committee believes that
current base salaries for the Named Executive Officers generally are between the
competitive median and 75th percentile for comparable positions, which is in
accordance with the Company's pay-for-performance philosophy.
17
<PAGE>
ANNUAL INCENTIVES
The CIP is a goal-driven plan where participants, including all of the Named
Executive Officers, have the opportunity to earn annual cash bonus awards in
relation to specified target award levels defined as percentages of base
salaries. Target awards correspond to 100% goal achievement. They are intended
to result in approximately median-to-75th-percentile total annual compensation
as compared to the competitive market when combined with WellPoint base
salaries. An award pool or fund is determined based on Company-wide annual
financial performance and is allocated to individuals primarily to reward
teamwork, and secondarily to reward business-unit performance and individual
accomplishments. The allocation is discretionary as determined by the Committee,
giving strong consideration to the Chief Executive Officer's recommendations for
positions other than his own.
Company financial performance is measured against an index ("Performance
Growth Index" or "PGI") established by the Committee at the start of the year,
combining equally weighted goals for annual pre-tax ROE and annual EPS growth.
The goals are based on internal business-plan objectives. No awards are earned
unless a specified PGI threshold performance level is achieved. Overall, the
Company moderately exceeded its financial goals for 1997, reflecting the
combination of above-plan performance in some business units and below-plan
performance in others. There were also significant strategic accomplishments
during 1997, which included exceeding enrollment targets, completing the
acquisition of the Group Benefits Operations of John Hancock Mutual Life
Insurance Company, continuing the integration of the group health and related
life business of Massachusetts Mutual Life Insurance Company and significantly
increasing stockholder value ahead of averages for other large managed-care
organizations.
STOCK OPTIONS
The Committee discontinued the use of all long-term incentive awards other
than stock options following the Company's Recapitalization in May 1996. Stock
options are currently granted on an annual schedule. They generally have 10-year
terms and become vested in one-third cumulative installments on each of the
first three annual grant date anniversaries. Individual option grants are based
on grant guidelines designed to approximate the present value of median
competitive annual long-term incentives for comparable companies and positions.
Individual grants to the Named Executive Officers under the Stock Option Plan
varied above and below the guidelines based upon the Committee's evaluation of
individual performance, past grant history and other relevant factors. The
Committee believes that 1997 option grants for the Named Executive Officers
generally are between the competitive median and 75th percentile for comparable
positions, and the Committee intends to continue to use similar competitive
guidelines for determining option grants after 1997.
CHIEF EXECUTIVE OFFICER COMPENSATION
Mr. Schaeffer's base salary was increased by 5.8% in 1997. This was for
merit and to reflect WellPoint's revenue growth. The Committee believes that Mr.
Schaeffer's salary is in the median-to-75th-percentile competitive range for
comparable positions. Mr. Schaeffer's annual incentive bonus was $630,000 for
1997 performance, based on the Company moderately exceeding its ROE and EPS
growth goals for the year and his leadership in accomplishing critical strategic
objectives. These include the accomplishments summarized earlier in the annual
incentive discussion plus successfully completing a major primary and secondary
stock offering in April 1997, strengthening the senior management team and
implementing a new technology strategy.
COMPLIANCE WITH INTERNAL REVENUE CODE SECTION 162(m)
Section 162(m) of the Internal Revenue Code generally disallows a tax
deduction to public companies for compensation in excess of $1 million paid to a
company's Chief Executive Officer or any of the four other most highly
compensated executive officers. Qualifying performance-based compensation is not
18
<PAGE>
subject to the deduction limit if Internal Revenue Code requirements are met.
The Committee believes that stock options granted under the Stock Option Plan at
an exercise price of 100% of the fair market value of the underlying common
stock on the date of grant will qualify as performance-based compensation.
However, the Committee determined not to qualify annual cash incentive
compensation as performance-based compensation under Section 162(m), because to
do so would require restricting the Committee's discretion over the amount of
such compensation in a manner the Committee feels would not be beneficial to the
Company. The Committee will make future determinations as to whether to qualify
annual cash incentive compensation as performance-based compensation each year,
taking into account the cost of potential loss of deductibility as one of the
factors in such determination.
The foregoing report has been furnished by the Compensation Committee of the
Board of Directors of WellPoint Health Networks Inc.
Stephen L. Davenport, Chairperson
David R. Banks
Julie A. Hill
19
<PAGE>
STOCK PERFORMANCE
THE STOCK PERFORMANCE GRAPHS SHALL NOT BE DEEMED INCORPORATED BY REFERENCE
BY ANY GENERAL STATEMENT INCORPORATING BY REFERENCE THIS PROXY STATEMENT INTO
ANY FILING UNDER THE SECURITIES ACT OR UNDER THE EXCHANGE ACT, EXCEPT TO THE
EXTENT THAT WELLPOINT SPECIFICALLY INCORPORATES THIS INFORMATION BY REFERENCE,
AND SHALL NOT OTHERWISE BE DEEMED FILED UNDER SUCH ACTS.
In accordance with regulations of the Securities and Exchange Commission,
the following graph compares the cumulative total stockholder return on the
Company's Common Stock with the cumulative total stockholder returns of the
Standards & Poor's 500 stock index, an HMO Peer Group(1), a California-based HMO
Peer Group(2) and a Managed Care Peer Group(3). The comparison assumes the
investment of $100 on January 27, 1993 (the date the Common Stock of the
Company's predecessor became registered under Section 12 of the Exchange Act).
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C>
Jan. 27, 1993 Dec. 31, 1993 Dec. 31, 1994 Dec. 31, 1995 Dec. 31, 1996 Dec. 31, 1997
- --------------------------------------------------------------------------------------------------------------
WellPoint $100.00 $110.74 $104.05 $114.76 $112.50 $138.29
HMO Peer Group $100.00 $124.40 $163.71 $217.82 $174.86 $151.58
CA HMO Peer Group $100.00 $80.71 $140.68 $180.45 $164.09 $108.13
Managed Care Peer
Group $100.00 $119.55 $131.16 $185.90 $189.09 $193.57
S&P 500 $100.00 $109.17 $110.61 $152.18 $187.12 $249.54
</TABLE>
- ------------------------
(1) The HMO Peer Group is comprised of the following publicly traded companies:
Coventry Corporation; Foundation Health Systems, Inc.; Humana Inc.; Mid
Atlantic Medical Services, Inc.; Maxicare Health Plans, Inc.; Oxford Health
Plans, Inc.; PacifiCare Health Systems, Inc.; Ramsay Health Care, Inc.;
Sierra Health Services, Inc.; United American Healthcare Corporation; and
United HealthCare Corporation. The returns of each company in the peer group
indices have been weighted according to their respective stock market
capitalization for purposes of arriving at a peer group average.
(2) The California-based HMO Peer Group is a subset of the HMO Peer Group, and
is comprised of the following California-based publicly traded companies:
Foundation Health Systems, Inc.; Maxicare Health Plans, Inc.; and PacifiCare
Health Systems, Inc.
(3) The Managed Care Peer Group is comprised of the following publicly traded
managed care companies: Aetna Inc.; CIGNA Corporation; Coventry Corporation;
First Health Group Corp.; Foundation
20
<PAGE>
Health Systems, Inc.; Humana Inc.; Mid Atlantic Medical Services, Inc.;
Oxford Health Plans, Inc. ; PacifiCare Health Systems, Inc.; United
HealthCare Corporation; and WellPoint.
The following graph compares the cumulative total stockholder return on the
Company's Common Stock with the cumulative total stockholder returns of the same
peer group indices (computed using the same methodology as the prior graph) for
the period from July 1, 1996 (the first fiscal quarter beginning after the
Recapitalization) until December 31, 1997. The comparison assumes the investment
of $100 on July 1, 1996. The Company believes that this time period provides a
relevant comparison because the Recapitalization involved a significant
restructuring of the Company and, prior to the Recapitalization, the Company was
prohibited by the DOC from taking certain actions such as the implementation of
the Stock Option Plan and other stock-based compensation plans.
21
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C> <C>
July 1, 1996 Sept. 30, 1996 Dec. 31, 1996 March 31, 1997 June 30, 1997 Sept. 30, 1997 Dec. 31, 1997
- -----------------------------------------------------------------------------------------------------------------
WellPoint $100.00 $102.77 $108.70 $131.23 $145.06 $183.20 $133.60
HMO Peer Group $100.00 $96.67 $100.52 $106.76 $116.34 $117.39 $87.06
CA HMO Peer Group $100.00 $113.41 $110.49 $117.30 $100.77 $103.34 $74.21
Managed Care Peer
Group $100.00 $97.81 $106.04 $114.06 $131.78 $132.02 $108.17
S&P 500 $100.00 $103.09 $111.68 $114.68 $134.70 $144.79 $148.95
</TABLE>
The following companies which were included in prior years in the HMO Peer
Group or California-based HMO Peer Group have been deleted because they were
acquired or otherwise ceased operations during the period covered by the graphs:
CareNetwork, Inc.; FHP International Corporation; GenCare Health Systems, Inc.;
Foundation Health Corporation; Healthsource, Inc.; Intergroup HealthCare Corp.;
Physician Corporation of America; Physicians Health Services, Inc.; Takecare,
Inc.; and U.S. Healthcare, Inc.
The Managed Care Peer Group is included in these performance graphs because,
as a result of mergers and acquisitions in the managed care industry, the
Company does not believe that the HMO Peer Group and California-based HMO Peer
Group continue to provide the most relevant comparisons of the Company's stock
performance. As a result of the Company's national expansion and the expansion
and consolidation of other participants in the managed care industry, the
Managed Care Peer Group represents the publicly traded companies with which
WellPoint most directly competes. The Company does not intend to present the HMO
Peer Group or California-based HMO Peer Group in any future proxy statement
stock performance graphs.
22
<PAGE>
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Mr. Besson is a partner in the law firm of Paul, Hastings, Janofsky &
Walker. Paul, Hastings, Janofsky & Walker has been retained by the Company to
advise it on a variety of matters. During 1997, approximately $239,000 was paid
by WellPoint to such firm for legal fees and disbursements.
Pursuant to the requirements of the BCBSA in connection with the
Recapitalization, the Common Stock owned by the Foundation is subject to the
terms of the Voting Trust Agreement and the Voting Agreement. Pursuant to the
Voting Trust Agreement, as of March 15, 1998 the voting power of the Foundation
was limited to less than 50% of the voting power of the outstanding shares of
WellPoint Common Stock. WellPoint Common Stock owned by the Foundation above
such limit is required to be held in a voting trust and will be voted by the
voting trustee (i) with respect to elections and removal of directors, calling
of stockholder meetings and amendments of the WellPoint charter and bylaws, to
support the position of the Board of Directors, and (ii) with respect to other
matters generally to support the vote of the other stockholders. Shares in
excess of the Ownership Limit contemplated by WellPoint's Restated Certificate
of Incorporation (currently set at up to, but not equal to or in excess of, 5%
for noninstitutional investors such as the Foundation) will be subject to the
Voting Agreement, which contains provisions similar to the Voting Trust
Agreement with respect to elections and removal of directors, calling of
stockholder meetings and amendment of the WellPoint charter and bylaws. As of
March 15, 1998, no shares of Common Stock held by the Foundation were subject to
the Voting Trust Agreement and approximately 26,411,404 shares of Common Stock
(or approximately 37.7% of the outstanding Common Stock) held by the Foundation
were subject to the Voting Agreement. See "May 1996 Recapitalization" for a more
complete description of the restrictions in the Voting Trust Agreement and the
Voting Agreement, including an anticipated change in the 50% ownership
limitation under the Voting Trust Agreement.
In connection with the Recapitalization, the Company and the Foundation also
entered into a Registration Rights Agreement. Under certain circumstances and
subject to certain limitations, the Registration Rights Agreement requires
WellPoint to effect under applicable securities laws the registration of shares
of WellPoint Common Stock held by the Foundation for sale to the public, as well
as permit the Foundation to participate in certain of such registrations which
WellPoint effects on its own initiative. The undertakings which the Foundation
made to the California Department of Corporations (the "DOC") in order to secure
the DOC's approval of the Recapitalization include annual distribution of
approximately 5% of the value of its investment assets beginning in 1997. In
order to fund such required distributions, the Foundation may sell shares of
WellPoint. In November 1996, the Company effected a registration pursuant to
which the Foundation sold 14,950,000 shares of WellPoint Common Stock to the
public. In April 1997, the Company effected a registration statement pursuant to
which the Foundation sold an additional 8,500,000 shares of WellPoint Common
Stock to the public.
22
<PAGE>
PROPOSAL NO. 2:
AMENDMENT TO 1994 STOCK OPTION/AWARD PLAN
GENERAL
At the 1994 Annual Meeting, the Company's stockholders approved the Stock
Option Plan. At the 1997 Annual Meeting, the Company's stockholders approved an
amended and restated Stock Option Plan. At the 1998 Annual Meeting, the
stockholders will be asked to approved a further amended and restated Stock
Option Plan (the "Amended Plan").
The amendments included in the Amended Plan provide for automatic annual
option grants with respect to 2,000 shares to each of the Company's non-employee
directors on the last business day of the second fiscal quarter of the year;
permit discretionary grants to non-employee directors; allow the Company to
incorporate a "reload" feature into new and existing stock option grants under
the Amended Plan; and revise the restrictions under the Stock Option Plan on the
maximum number of shares that may be issued to a single individual under the
Stock Option Plan.
If stockholder approval of the Amended Plan is not obtained, awards under
the Stock Option Plan will continue to be granted in accordance with the Stock
Option Plan provisions in effect before the Board adopted the Amended Plan.
The description of the Amended Plan contained below is qualified in its
entirety by reference to the provisions of the Amended Plan, which is attached
as Appendix I to this Proxy Statement. As of March 15, 1998, approximately 431
employees (including officers and directors and the seven non-employee
directors) were eligible to participate in the Stock Option Plan.
PURPOSE
The purpose of the Stock Option Plan is to enable the Company to offer
options, restricted stock, performance shares, performance units, phantom stock
and automatic stock appreciation rights to key employees, officers, consultants
and independent contractors of the Company or of an affiliate of the Company
linked to the Company by a 50% or greater chain of ownership or in which the
Company had a significant ownership interest. In addition, the Stock Option Plan
provides for annual automatic stock grants to non-employee members of the Board.
Under the Amended Plan, but not the Stock Option Plan as previously in effect,
the non-employee members of the Board will also receive annual automatic option
grants and may receive discretionary awards.
ADMINISTRATION
The Stock Option Plan is administered by a committee or committees
("Committee") appointed by the Board, consisting of two or more members of the
Board. In establishing the composition of the Committee, the Board will
consider, but is not bound by compliance with, Rule 16b-3 under the Exchange Act
and Section 162(m) of the Internal Revenue Code. Rule 16b-3 provides several
alternative means of exempting transactions under the Stock Option Plan from the
short-swing trading liability provisions of Section 16 of the Exchange Act,
including but not limited to administration by a committee that satisfies
certain requirements as to composition.
The Committee is generally authorized to construe and interpret the Stock
Option Plan, to select eligible individuals for Stock Option Plan participation
and to specify the terms of awards under the Stock Option Plan.
The Company will pay all costs of administration of the Stock Option Plan.
Cash proceeds received from the issuance of awards under the Stock Option Plan
will be used for general corporate purposes.
23
<PAGE>
SHARES AND TERMS
Stock subject to awards granted under the Stock Option Plan is the Company's
authorized but unissued or reacquired Common Stock. The stockholders have
previously approved for issuance under the Stock Option Plan 5,000,000 shares of
Common Stock, subject to future adjustments for certain changes in capital
structure. The Stock Option Plan also provides that the maximum number of shares
that may be subject to incentive stock options is 5,000,000 shares, subject to
future adjustment for certain changes in capitalization.
Subject to such limits, regulatory approvals and stockholder approvals as
the Committee determines to be necessary, Common Stock issuable under the Stock
Option Plan may include the stock of an affiliate, a subsidiary or a joint
venture in which the Company is a participant.
To the extent that an option expires or is terminated, canceled or forfeited
for any reason without having been exercised in full, any remaining shares
allocable to the unexercised portion of such option again become available for
subsequent grants under the Stock Option Plan. Unvested shares that have been
issued but forfeited or repurchased by the Company pursuant to its forfeiture
and repurchase rights under the Stock Option Plan are available for the grant of
new awards under the Stock Option Plan. Any shares held by an award holder that
are delivered to the Company or that are otherwise withheld from shares issuable
under an award in payment of all or a portion of the exercise price or tax
withholding obligations for such award will be available for subsequent grants
and awards. Finally, shares for which a cash payment is made in lieu of payment
in stock will be available for subsequent grants and awards under the Amended
Plan.
The market value of the Company's Common Stock as reported on the New York
Stock Exchange as of March 13, 1998 was $66 5/8 per share.
The amended and restated Stock Option Plan as approved by the stockholders
at the 1997 Annual Meeting provided that no individual may receive awards with
respect to greater than 1,000,000 shares during any consecutive five-year
period. The Board of Directors believes that this limitation will not allow the
Company to make grants to the Company's Chief Executive Officer and other key
executives on a competitive basis. Therefore, the Amended Plan provides that no
individual may receive rewards with respect to greater than 1,000,000 shares
during any consecutive three-year period.
Nothing in the Stock Option Plan prohibits the Company from adopting other
equity compensation programs for employees of the Company and its subsidiaries,
including employees eligible for grants under the Plan. In 1996, the Company
adopted the Employee Stock Option Plan (the "Employee Plan"), which permits the
grant of nonstatutory stock options to those employees of the Company and its
subsidiaries other than executive officers. The terms of options granted under
the Employee Plan are substantially similar to the terms of options granted
under the Stock Option Plan. Two million shares are reserved for issuance under
the Employee Plan. Through March 15, 1998, 24,437 shares had been issued under
the Employee Plan and 1,283,956 shares were subject to options outstanding
thereunder.
AWARDS
The recipients of awards under the Stock Option Plan, the number of shares
subject to those awards, and the terms, conditions and restrictions of those
awards will be determined in the sole discretion of the Committee, subject to
the limitations set forth below, and may vary from award to award.
STOCK OPTIONS
The Committee may grant incentive stock options, which satisfy the
requirements of Section 422 of the Internal Revenue Code, or non-statutory
options, which are not intended to satisfy those requirements. Incentive stock
options may only be granted to employees.
24
<PAGE>
The exercise price of an option will be determined by the Committee. In no
event, however, will the exercise price of an incentive stock option be less
than 100% of the fair market value (as defined in the Stock Option Plan) of the
option shares on the date of the grant of the option. The duration of an option
may not exceed 10 years. The exercise price will generally be payable in full in
cash or, at the Committee's discretion, in previously owned shares held for the
requisite period to avoid a charge to earnings or, under certain conditions, by
the proceeds of a same-day sale of the award shares.
Under the Amended Plan, any option granted under the Stock Option Plan may
provide that upon exercise of the option, the option holder will automatically
be granted a reload option covering the number of shares equal to (i) the number
of shares delivered to the Company by the option holder or withheld from shares
otherwise issuable to the option holder upon exercise in payment of the exercise
price of the option or the applicable tax withholding obligation and/or (ii)
that number of shares with a then-fair market value equal to the amount of
withholding obligations paid in cash by the holder. The Company may incorporate
a reload feature into any options granted prior to or after the approval of the
Amended Plan.
RESTRICTED STOCK, PERFORMANCE SHARES, PHANTOM STOCK AND PERFORMANCE UNITS
The Committee may provide award holders with an election, or require award
holders to receive, a percentage of the total value of restricted stock or
performance shares in cash, subject to such terms, conditions and restrictions
as the Committee may specify. The Committee will also determine whether any
consideration is to be received by the Company or its affiliates with regard to
the awards described below.
a. RESTRICTED STOCK
Restricted stock is Common Stock, the retention and transfer of which is
subject to terms and conditions determined by the Committee. At the time the
restricted stock award is made, the Committee will establish a restriction
period applicable to the award. Generally, the recipient of the award will enjoy
all stockholder rights (including dividends) during the restriction period,
except that a breach of the terms and conditions of the award will result in a
forfeiture of the award.
b. PERFORMANCE SHARES
A performance share or share right consists of the holder's right, subject
to terms, conditions and restrictions (including, but not limited to,
performance standards) established by the Committee, to receive shares of Common
Stock.
c. PHANTOM STOCK
Phantom stock consists of the holder's right to receive an amount in cash
equal to the fair market value of Common Stock on a valuation date, including if
determined by the Committee, a cash dividend equivalent. The Committee will
determine the terms and conditions of such a payment.
d. PERFORMANCE UNITS
A performance unit is the right to receive cash, subject to such terms,
conditions and restrictions (including, but not limited to, performance
standards) as the Committee may determine.
AUTOMATIC GRANTS TO NON-EMPLOYEE DIRECTORS
The Stock Option Plan provides for automatic annual grants of 800 shares to
each of the Company's non-employee directors that has served for a minimum of
six months on the last business day of the second quarter of each fiscal year of
the Company.
Under the terms of the Amended Plan, on the last business day of the second
quarter of the Company's fiscal year, each continuing non-employee director that
has served for a minimum of six months
25
<PAGE>
will also receive an option with respect to 2,000 shares of the Company's Common
Stock. The exercise price per share for such option will be equal to the fair
market value on the date of grant. Each automatic option grant will have a term
of 10 years and will be exercisable at any time during the 10-year term for all
or any part of the option shares. Upon exercise of any automatic option granted,
the option price will be payable immediately in cash or in shares of Common
Stock that such non-employee director has held for at least six months. If the
exercise price (or any tax obligations attributable thereto) is paid in shares
of Common Stock (whether delivered to the Company or withheld from shares
otherwise issuable), the non-employee director will automatically be granted a
"reload" option covering the number of shares so delivered or withheld. The
provisions of the "reload" option shall be the same as the option exercised,
except that the per-share exercise price of the reload option will be the fair
market value of the Common Stock on the date of grant of the reload option and
the term of the reload option will be equal to the remaining term of the option
exercised. In the event that a non-employee director ceases to provide services
to the Company, the automatic option granted may be exercised within 12 months
after the date that such non-employee director ceases to provide services.
ADJUSTMENTS
If there is a change in the Common Stock due to a change in the corporate or
capital structure of the issuer of the Common Stock, the Committee will make
appropriate adjustments to the maximum number and class of shares subject to the
Stock Option Plan, to the maximum number and class of securities issuable under
automatic options and stock grants to non-employee directors, to the maximum
number and class of shares issuable to one individual and to the number and
class of shares and price per share of Common Stock subject to outstanding
awards. The Committee's determination will be conclusive.
ASSIGNMENT
The Stock Option Plan permits the assignment of awards to members of the
recipient's immediate family or a family trust. Otherwise, awards under the
Stock Option Plan may not be assigned or transferred during the lifetime of the
award holder.
CORPORATE TRANSACTIONS
Under the Amended Plan, the Committee may determine and set forth in any
award the effect, if any, that any sale of stock or assets, merger, combination,
spin-off, reorganization or liquidation of the Company will have upon the term,
exerciseability or vesting of outstanding awards, provided that any awards that
are continued, assumed or replaced with comparable award in connection with any
transaction will be appropriately adjusted.
TAX WITHHOLDING
The Committee may, in its discretion and on such terms and conditions as it
deems appropriate, require or permit award holders to elect to have a portion of
the shares of Common Stock otherwise issuable to them under the Stock Option
Plan withheld in satisfaction of Federal, state and local employment and income
taxes incurred in connection with the acquisition of those shares. Award holders
may also be granted the right to deliver previously acquired shares of Common
Stock held for the requisite period to avoid a charge to earnings in
satisfaction of these taxes. The withheld or delivered shares will be valued at
fair market value on the applicable determination date for the taxes.
TERM OF STOCK OPTION PLAN
The Stock Option Plan, as approved by the stockholders at the 1997 Annual
Meeting, provides that no further awards may be made under the Stock Option Plan
after June 10, 2002, the date five years after the date of such approval.
26
<PAGE>
AMENDMENT OR TERMINATION
The Amended Plan provides that the Board may amend, suspend or discontinue
the Stock Option Plan at any time, provided that, without stockholder approval,
the Board may not make any change with respect to which the Board determines
that stockholder approval is required by applicable law or regulatory standards.
To the extent not inconsistent with the Stock Option Plan, the Committee may
modify or waive the terms of any outstanding award, provided that no
modification or waiver may adversely affect a holder's rights without the
holder's consent.
NEW PLAN BENEFITS
Generally, future awards under the Stock Option Plan are discretionary so
that it is impossible to determine who will receive awards and in what amounts
in the event the Amended Plan is approved. However, annual automatic option
grants with respect to 2,000 shares of the Company's Common Stock would occur to
each eligible non-employee director if the Amended Plan were approved.
If the Amended Plan is approved by the stockholders at the Annual Meeting,
the Company intends to allow non-employee directors to defer all or a portion of
their annual retainer and meeting fees in the form of a right to receive Common
Stock.
The following table contains information on stock options and other awards
granted under the Stock Option Plan for the period January 1, 1997 through March
15, 1998.
STOCK OPTIONS AND OTHER AWARDS GRANTED UNDER THE STOCK OPTION PLAN
<TABLE>
<CAPTION>
OTHER COMMON
STOCK OR
RESTRICTED
NUMBER OF SHARES AVERAGE EXERCISE SHARE
NAME AND POSITION SUBJECT TO OPTIONS(#) PRICE OF OPTIONS($) RIGHT AWARDS
- ------------------------------------------------------ --------------------- ------------------- ---------------
<S> <C> <C> <C>
Leonard D. Schaeffer.................................. 335,000 $ 42.50 --
D. Mark Weinberg...................................... 160,000 41.86 --
Ronald A. Williams.................................... 160,000 41.86 --
Thomas C. Geiser...................................... 111,000 40.70 --
David C. Colby........................................ 158,673 55.00 12,500
Current executive officers as a group (five
persons)............................................ 924,673 44.21 12,500
Non-executive Director group (seven persons).......... -- -- 5,802
All employees, including all current officers who are
not executive officers, as a group (468 employees).. 1,374,454 45.45 17,000
</TABLE>
FEDERAL INCOME TAX CONSEQUENCES
The following is only a summary of the Federal income taxation consequences
to the participant and the Company with respect to the awards under the Stock
Option Plan. Reference should be made to the applicable provisions of the
Internal Revenue Code. In addition, the summary does not discuss the tax
consequences of a participant's death or the income tax laws of any city, state
or foreign country in which the participant may reside.
OPTIONS
The Company will be entitled to a business expense deduction equal to the
ordinary income recognized by an award holder on exercise of a non-statutory
stock option. The ordinary income recognized will generally equal the excess of
the fair market value of the purchased shares on the date of recognition over
the exercise price. Generally, the date of recognition will be the date the
option is
27
<PAGE>
exercised or, if later, the first date shares acquired on exercise are not
subject to a substantial risk of forfeiture.
The Company will also be entitled to a business expense deduction equal to
the ordinary income recognized by an award holder due to a "disqualifying
disposition" of stock acquired pursuant to an incentive stock option. A
disqualifying disposition occurs if an award holder disposes of the acquired
shares within two years of the date of the option grant, or within one year of
the date the shares are acquired by the award holder. In the case of a
disqualifying disposition, the award holder will generally recognize ordinary
income in the year of disposition, in an amount equal to the amount of ordinary
income the award holder would have recognized from the exercise of the option
had the option been a non-statutory stock option at the time of exercise. If no
disqualifying disposition is made of shares acquired under an incentive stock
option, any gain on the subsequent sale of those shares will constitute
long-term capital gains and the Company will not be entitled to any deduction
with respect to such shares. For purposes of the alternative minimum tax, an
award holder will incur alternative minimum taxable income upon exercise of an
incentive stock option in an amount of ordinary income that the optionee would
have recognized had the incentive stock option been a non-statutory stock
option.
To the extent that the aggregate fair market value (determined as of the
respective date or dates of grant) of shares with respect to which options that
would otherwise be incentive stock options are exercisable for the first time by
any individual during any calendar year exceeds $100,000, such options will be
treated as non-statutory stock options.
RESTRICTED STOCK
An award holder receiving restricted stock recognizes ordinary income with
respect to such stock at the time the restrictions lapse or, if the holder so
elects, at the time of receipt of the stock. The amount of ordinary income is
the fair market value of the stock at the applicable time, less any
consideration paid by the award holder for the stock. The Company will be
entitled to deduct from its taxable income an amount equal to the ordinary
income recognized by the award holder in the year so recognized by the award
holder. Dividends paid with respect to restricted stock will be taxable
compensation income to the award holder and the Company will be entitled to a
corresponding deduction, unless the award holder elects to be taxed on such
stock at the time of receipt, in which case the award holder would recognize
taxable dividend income upon receipt of the dividends and the Company would not
be entitled to any corresponding deduction with respect to such dividends.
PERFORMANCE SHARES
An award holder who is granted performance shares under the Stock Option
Plan would recognize no taxable income by reason of such grant. However, when
the conditions precedent to the issuance of shares pursuant to such performance
shares are satisfied, the award holder would recognize ordinary income equal to
the fair market value on the date of issuance of the shares less any
consideration paid by the award holder. Any cash dividend equivalent paid to
holders of performance shares is ordinary income. The Company will be entitled
to deduct from its taxable income an amount equal to the award holder's ordinary
income recognized pursuant to the issuance of shares under the award, in the
year recognized by the award holder.
PHANTOM STOCK
An award holder who has been granted a phantom stock award will not realize
taxable income at the time of grant, and the Company will not be entitled to a
deduction at such time. Whether a phantom stock award is paid in cash or in
shares of Common Stock, the award holder will have ordinary income and the
Company will have a corresponding deduction when the award is paid. The measure
of such income and deduction will be the fair market value of the shares at the
time the phantom stock award is paid out.
28
<PAGE>
PERFORMANCE UNITS
An award holder who has been granted a performance unit award will realize
ordinary income and the Company will have a corresponding deduction when the
award is paid, in the amount paid.
SPECIAL DEDUCTION LIMITS
If an award is accelerated as a result of a change in control of the
Company, all or a portion of the value of the award at that time may be a
parachute payment for purposes of the Internal Revenue Code's excess parachute
provisions. Those provisions generally provide that if parachute payments exceed
three times an award holder's average compensation for the five tax years
preceding the change in control, the Company loses its deduction and the
recipient is subject to a 20% excise tax for the amount of the parachute
payments in excess of one times such average compensation.
Section 162(m) limits federal income tax deductions for compensation paid to
the Company's Chief Executive Officer and the four other most highly compensated
officers of a public company to $1 million per year, but contains an exception
for performance-based compensation that satisfies certain conditions. The
Company believes that options granted to an individual with an option price at
100% or more of fair market value of the underlying shares pursuant to the Stock
Option Plan will qualify for the performance based-compensation exception to the
deduction limit to the extent that such individual does not receive awards under
the Stock Option Plan for more than 1,000,000 shares in any consecutive
five-year period (three years if the Amended Plan is approved). However, there
can be no assurance that the awards will so qualify.
ACCOUNTING TREATMENT
The following is a summary of certain accounting consequences of awards
under generally accepted accounting principles. In October 1995, the Financial
Accounting Standards Board issued Statement of Financial Accounting Standards
No. 123, "Accounting for Stock-Based Compensation" ("FAS No. 123"). This
standard defines a fair value based method of accounting for stock-based
employee compensation plans; however, it also allows an entity to continue to
measure compensation cost for those plans using the provisions of APB Opinion
No. 25, "Accounting for Stock Issued to Employees" ("Opinion 25"). Under the
fair value based method, compensation cost is measured at the grant date based
on the fair value of the award and is recognized over the service period, which
is usually the vesting period. Under Opinion 25, compensation cost is recognized
based on the difference, if any, between the market price of the stock and the
amount an employee must pay to acquire the stock. The Company has elected to
continue accounting for compensation cost arising from its stock-based
compensation plans under the Opinion 25 approach, which serves as a basis for
the following description.
An option granted with an exercise price less than the fair market value of
the option shares on the date of grant will give rise to compensation expense
equal to the difference between the fair market value of the shares on the date
of grant and the exercise price. The expense will be accrued as the optionee
vests in the option or the shares purchasable under the option. Option grants at
100% of fair market value will not result in any charge to the Company's
earnings.
The grant of restricted stock or share rights will generally result in
compensation expense equal to the market value of the underlying shares of
Common Stock on the date of grant (less any consideration paid therefor). This
expense will generally be amortized over the term of the vesting of such awards,
but the expense may be subject to periodic adjustment depending on performance
criteria. The expense may be amortized or the recognition and measurement of the
expense may be delayed until the performance criteria are attained or are likely
to be attained.
Generally, the fair market value of a share unit on the date of grant (less
any consideration paid therefor) will be accrued as an expense and, at the end
of each fiscal quarter thereafter, the amount (if
29
<PAGE>
any) by which the fair market value of the unit has increased or decreased from
the amount previously accrued will be recorded as an adjustment to compensation
expense. In the case of certain vesting or performance criteria, the expense may
be amortized or the recognition and measurement of the expense may be delayed
until the performance criteria are attained or are likely to be attained.
The number of outstanding options, restricted stock and share rights will be
a factor in determining earnings per share on a fully diluted basis.
For fiscal years beginning with the Company's 1996 fiscal year, FAS No. 123
requires the Company to disclose, in footnotes to the Company's financial
statements, the impact the options and other awards granted under the Stock
Option Plan would have had on the Company's reported earnings were the fair
value of those awards treated as compensation expense.
VOTE REQUIRED FOR APPROVAL OF THE AMENDED AND RESTATED 1994 STOCK OPTION/AWARD
PLAN
The affirmative vote of a majority of the shares of Common Stock represented
and voting at the Annual Meeting is necessary to approve the Amended Plan. The
Board believes that Amended Plan is in the best interests of the Company and its
stockholders.
THE BOARD OF DIRECTORS RECOMMENDS THAT THE STOCKHOLDERS VOTE FOR THIS PROPOSAL.
PROPOSAL NO. 3:
RATIFICATION OF SELECTION OF INDEPENDENT PUBLIC ACCOUNTANTS
The firm of Coopers & Lybrand L.L.P. served as the Company's independent
public accountants for the fiscal year ended December 31, 1997. The Board of
Directors has selected that firm to continue in this capacity for the current
fiscal year. Ratification by the stockholders will be sought by the Board of
Directors for the selection of Coopers & Lybrand L.L.P. as independent public
accountants to audit the accounts and records of the Company for the fiscal year
ending December 31, 1998, and to perform other appropriate services.
THE BOARD OF DIRECTORS RECOMMENDS THAT STOCKHOLDERS VOTE FOR THE PROPOSAL TO
RATIFY COOPERS & LYBRAND L.L.P. AS INDEPENDENT PUBLIC ACCOUNTANTS OF THE COMPANY
FOR THE FISCAL YEAR ENDING DECEMBER 31, 1998.
A representative of Coopers & Lybrand L.L.P. will be present at the Annual
Meeting to respond to appropriate questions and to make a statement if the
representative so desires.
OTHER MATTERS
The Company knows of no other matters to be submitted to this meeting. If
any other matters properly come before the meeting, the persons named in the
accompanying form of proxy will vote the shares represented by proxy as the
Board of Directors may recommend or as the proxyholders, acting in their sole
discretion, may determine.
STOCKHOLDERS PROPOSALS FOR 1999 ANNUAL MEETING
Proposals to be presented by stockholders of the Company at the 1999 Annual
Meeting must be received by the Company at its principal executive office at
21555 Oxnard Street, Woodland Hills, California 91367 no later than November 27,
1998. Such proposals may be included in next year's Proxy Statement if they
comply with certain rules and regulations promulgated by the Securities and
Exchange Commission.
30
<PAGE>
ADDITIONAL INFORMATION
The audited financial statements of the Company for the year ended December
31, 1997, a Management's Discussion and Analysis of Financial Condition and
Results of Operations and certain other information are included as supplemental
information to this Proxy Statement.
THE COMPANY WILL MAIL WITHOUT CHARGE TO ANY STOCKHOLDER, UPON WRITTEN OR
ORAL REQUEST, A COPY OF THE COMPANY'S ANNUAL REPORT ON FORM 10-K FOR THE YEAR
ENDED DECEMBER 31, 1997, INCLUDING THE FINANCIAL STATEMENTS, SCHEDULES AND A
LIST OF EXHIBITS. REQUESTS SHOULD BE SENT TO INVESTOR RELATIONS, WELLPOINT
HEALTH NETWORKS INC., 21555 OXNARD STREET, WOODLAND HILLS, CALIFORNIA 91367. THE
COMPANY'S TELEPHONE NUMBER IS (818) 703-4000.
By Order of the Board of Directors
[/S/ THOMAS C. GEISER]
Thomas C. Geiser
SECRETARY
31
<PAGE>
WELLPOINT HEALTH NETWORKS INC.
SUPPLEMENTAL INFORMATION
TO 1998 PROXY STATEMENT
INDEX TO SUPPLEMENTAL INFORMATION
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
Executive Officers of the Registrant....................................................................... 33
Market for Registrant's Common Equity and Related Stockholder Matters...................................... 34
Selected Financial Data.................................................................................... 35
Management's Discussion and Analysis of Financial Condition and Results of Operations...................... 36
Selected Quarterly Financial Information (Unaudited)....................................................... 49
Report of Independent Accountants.......................................................................... 50
Consolidated Balance Sheets as of December 31, 1997 and 1996............................................... 51
Consolidated Income Statements for the Three Years Ended December 31, 1997................................. 52
Consolidated Statements of Changes in Stockholders' Equity for the Three Years Ended December 31, 1997..... 53
Consolidated Statements of Cash Flows for the Three Years Ended December 31, 1997.......................... 54
Notes to Consolidated Financial Statements................................................................. 55
</TABLE>
32
<PAGE>
EXECUTIVE OFFICERS OF THE REGISTRANT
Leonard D. Schaeffer, age 52, has been Chairman of the Board of Directors
and Chief Executive Officer of the Company since August 1992. From 1989 until
May 1996, Mr. Schaeffer was also Chairman of the Board of Directors and, from
1986, Chief Executive Officer of BCC. From 1982 to 1986, Mr. Schaeffer served as
President of Group Health, Inc., an HMO in the midwestern United States. Prior
to joining Group Health, Inc., Mr. Schaeffer was the Executive Vice President
and Chief Operating Officer of the Student Loan Marketing Association ("Sallie
Mae"), a financial institution that provides a secondary market for student
loans, from 1980 to 1981. From 1978 to 1980, Mr. Schaeffer was the Administrator
of HCFA. HCFA administers the Federal Medicare, Medicaid and Peer Review
Organization programs. Mr. Schaeffer serves as a director of Allergan, Inc.
D. Mark Weinberg, age 45, has been Executive Vice President, UNICARE
Businesses of the Company since October 1995. From August 1992 until May 1996,
Mr. Weinberg served as a director of the Company. From February 1993 to October
1995, Mr. Weinberg was Executive Vice President, Consumer and Specialty Services
of the Company. Prior to February 1993, Mr. Weinberg was Executive Vice
President of BCC's Consumer Services Group from December 1989 to February 1993
and was Senior Vice President of Individual and Senior Services of BCC from
April 1987 to December 1989. From 1981 to 1987, Mr. Weinberg held a variety of
positions at Touche Ross & Co. From 1976 to 1981, Mr. Weinberg was general
manager for the CTX Products Division of PET, Inc.
Ronald A. Williams, age 48, has been Executive Vice President, Blue Cross of
California Businesses of the Company since October 1995. From August 1992 until
May 1996, Mr. Williams served as a director of the Company. From February 1993
to October 1995, Mr. Williams was Executive Vice President, Group and Network
Services of the Company. Prior to February 1993, Mr. Williams was Executive Vice
President of BCC's Group Services from May 1992 to February 1993. Prior to that
time, Mr. Williams served as Executive Vice President of BCC's Health Services
and Products Group from December 1989 to May 1992 and as BCC's Senior Vice
President of Marketing and Related Products from November 1988 to December 1989.
From May 1987 to November 1988 he was Vice President of Corporate Services of
BCC. From July 1984 to May 1987 he was Senior Vice President of Vista Health
Corporation, an alternative delivery system for outpatient psychological and
substance abuse services of which he was also a co-founder.
David C. Colby, age 44, joined the Company in September 1997 as Executive
Vice President and Chief Financial Officer. From April 1996 until joining the
Company, Mr. Colby was Executive Vice President, Chief Financial Officer and
Director of American Medical Response, Inc., a health care services company
focusing on ambulance services and emergency physician practice management. From
July 1988 until March 1996, Mr. Colby was with Columbia/HCA Healthcare
Corporation, most recently serving as Senior Vice President and Treasurer. From
September 1983 until July 1988, Mr. Colby was Senior Vice President and Chief
Financial Officer of The Methodist Hospital in Houston, Texas. Mr. Colby also
serves as a director of 2 Connect Express, Inc. and OMNIS Technology
Corporation.
Thomas C. Geiser, age 47, has been Executive Vice President, General Counsel
and Secretary of the Company since May 1996. From July 1993 until May 1996, Mr.
Geiser held the position of Senior Vice President, General Counsel and
Secretary. Prior to joining the Company, he was a partner in the law firm of
Brobeck, Phleger & Harrison from June 1990 to June 1993 and a partner in the law
firm of Epstein Becker Stromberg & Green from May 1985 to May 1990. Mr. Geiser
joined the law firm of Hanson, Bridgett, Marcus, Vlahos & Stromberg as an
associate in March 1979 and became a partner in the firm, leaving in May 1985.
33
<PAGE>
MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
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.
<TABLE>
<CAPTION>
HIGH LOW
------- -------
<S> <C> <C>
PRE-RECAPITALIZATION:
Year Ended December 31, 1996
First Quarter................................................................ $36 $31 7/8
Second Quarter (through May 20, 1996)........................................ 36 5/8 26
POST-RECAPITALIZATION:
Second Quarter (May 21, 1996 to June 30, 1996)............................... $39 1/8 $31 1/8
Third Quarter................................................................ 33 3/4 23 3/8
Fourth Quarter............................................................... 35 1/2 28 1/4
Year Ended December 31, 1997
First Quarter................................................................ $45 7/8 $32 7/8
Second Quarter............................................................... 51 37 3/4
Third Quarter................................................................ 60 1/2 46 1/4
Fourth Quarter............................................................... 58 13/16 38 13/16
</TABLE>
On March 13, 1998 the closing price on the New York Stock Exchange for the
Company's Common Stock was $66 5/8 per share. As of March 13, 1998, there were
approximately 1,117 holders of record of Common Stock.
The Company did not pay any dividends on its Common Stock in 1996 or 1997,
other than the payment of the $995 million special dividend in connection with
the Recapitalization. Management currently expects that all of WellPoint's
future income will be used to expand and develop its business. The Board of
Directors has determined to retain its net earnings during 1998.
34
<PAGE>
SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------------------------
1997 1996 1995 1994 1993
--------- --------- --------- --------- ---------
(IN THOUSANDS, EXCEPT PER SHARE DATA, MEMBERSHIP
DATA AND OPERATING STATISTICS)
<S> <C> <C> <C> <C> <C>
CONSOLIDATED INCOME STATEMENTS
Revenues:
Premium revenue............................................. $5,227,904 $3,879,806 $2,910,622 $2,647,951 $2,355,980
Management services revenue................................. 383,238 147,948 61,151 36,274 18,121
Investment income........................................... 215,302 142,028 135,306 107,447 75,074
--------- --------- --------- --------- ---------
5,826,444 4,169,782 3,107,079 2,791,672 2,449,175
Operating Expenses:
Health care services and other benefits..................... 4,245,281 3,003,117 2,199,953 1,927,954 1,719,853
Selling expense............................................. 260,523 224,453 190,161 169,483 147,097
General and administrative expense.......................... 853,100 545,942 344,427 334,206 266,295
Nonrecurring costs.......................................... 14,535 -- 57,074 -- --
--------- --------- --------- --------- ---------
5,373,439 3,773,512 2,791,615 2,431,643 2,133,245
--------- --------- --------- --------- ---------
Operating Income.............................................. 453,005 396,270 315,464 360,029 315,930
Interest expense............................................ 36,658 36,628 -- -- --
Other expense, net.......................................... 34,147 20,134 12,677 8,008 2,901
--------- --------- --------- --------- ---------
Income before Provision for Income Taxes and Cumulative Effect
of Accounting Changes....................................... 382,200 339,508 302,787 352,021 313,029
Provision for income taxes.................................. 154,791 137,506 122,798 138,851 126,385
--------- --------- --------- --------- ---------
Income before Cumulative Effect of Accounting Changes......... 227,409 202,002 179,989 213,170 186,644
Cumulative Effect of Accounting Changes--Adoption of SFAS
Nos. 106 and 109.......................................... -- -- -- -- (21,260)
--------- --------- --------- --------- ---------
Net Income.................................................... $ 227,409 $ 202,002 $ 179,989 $ 213,170 $ 165,384
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
Per Share Data(A)(B)(C)
Income before Cumulative Effect of Accounting Changes:
Earnings Per Share.......................................... $ 3.30 $ 3.04 $ 2.71 $ 3.21 $ 2.81
Earnings Per Share Assuming Full Dilution................... $ 3.27 $ 3.04 $ 2.71 $ 3.21 $ 2.81
Cumulative Effect of Accounting Changes--Adoption of SFAS
Nos. 106 and 109:
Earnings Per Share.......................................... -- -- -- -- (0.32)
Earnings Per Share Assuming Full Dilution................... -- -- -- -- (0.32)
Net Income:
Earnings Per Share.......................................... $ 3.30 $ 3.04 $ 2.71 $ 3.21 $ 2.49
Earnings Per Share Assuming Full Dilution................... $ 3.27 $ 3.04 $ 2.71 $ 3.21 $ 2.49
OPERATING STATISTICS(D)
Loss ratio.................................................. 81.2% 77.4% 75.6% 72.8% 73.0%
Selling expense ratio....................................... 4.6% 5.6% 6.4% 6.3% 6.2%
General and administrative expense ratio.................... 15.2% 13.6% 11.6% 12.5% 11.2%
Net income ratio............................................ 4.1% 5.0% 6.1% 7.9% 7.0%
<CAPTION>
DECEMBER 31,
-----------------------------------------------------
1997 1996 1995 1994 1993
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA
Cash and investments.......................................... $2,939,445 $2,165,492 $2,257,269 $1,973,388 $1,779,495
Total assets.................................................. $4,533,415 $3,405,542 $2,679,257 $2,385,636 $1,921,832
Long-term debt................................................ $ 388,000 $ 625,000 -- -- --
Total equity.................................................. $1,223,169 $ 870,459 $1,670,226 $1,418,919 $1,233,190
Cash dividends declared per common share(E)................... -- $ 10.00 -- -- --
Medical Membership(F)......................................... 6,638,000 4,485,000 2,797,000 2,617,000 2,322,000
</TABLE>
- ------------------------------
(A) Per share data for all periods presented prior to 1996 have been recomputed
using 66,366,500 shares, the number of shares outstanding immediately
following completion of the Recapitalization. Per share data for the year
ended December 31, 1996 has been calculated using such 66,366,500 shares,
plus the weighted average number of shares issued since the
Recapitalization.
(B) Per share data includes nonrecurring costs of $0.13 per share and $0.52 per
share for 1997 and 1995, respectively.
(C) Per share data for periods prior to 1997 has been restated to reflect the
adoption of SFAS No. 128, "Earnings Per Share."
(D) 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.
(E) The Company paid a $995.0 million special dividend in conjunction with the
Recapitalization which occurred on May 20, 1996. Management currently
expects that all of the Company's future income will be used to expand and
develop its business.
(F) 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.
35
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
This discussion contains forward-looking statements which involve risks and
uncertainties. The Company's actual results may differ materially from those
anticipated in these forward-looking statements as a result of certain factors
including, but not limited to, those set forth under "Factors That May Affect
Future Results of Operations."
GENERAL
The Company is one of the nation's largest publicly traded managed health
care companies with approximately 6.6 million medical members and approximately
22 million specialty members as of December 31, 1997. The Company offers a
diversified mix of managed care products, including health maintenance
organizations ("HMOs"), preferred provider organizations ("PPOs"), point of
service ("POS") plans, other hybrid plans and traditional indemnity products. In
addition, WellPoint offers managed care services for self-funded employers under
management services contracts, including claims processing, actuarial services,
network access, medical cost management and other administrative services. The
Company also offers a broad array of specialty and other products, including
pharmacy, dental, utilization management, life, integrated workers'
compensation, preventive care, disability, behavioral health, COBRA and flexible
benefits account administration.
RECENT ACQUISITIONS AND MAY 1996 RECAPITALIZATION
On March 1, 1997, the Company completed its acquisition of certain portions
of the health and related life group benefits operations (the "GBO") of the John
Hancock Life Insurance Company. The purchase price was $89.7 million, subject to
adjustment upon completion of a post-closing audit (which is still pending). The
purchase method of accounting has been used to account for the acquisition of
the GBO. The GBO, with an associated 1.3 million acquired members, targets large
employers with 5,000 or more employees and a majority of the medical members it
serves are in health plans that are self-funded by employers. The GBO offers
indemnity and PPO plans and also provides life, dental, pharmacy, utilization
management and disability coverage to a variety of employer groups. The GBO has
historically experienced a higher administrative expense ratio than the
Company's traditional California business due to the GBO's higher percentage of
management services business. The higher administrative expense ratio of the GBO
has contributed and may continue to contribute to an increase in the Company's
overall administrative expense ratio in current and future periods.
The Company expects to incur approximately $21 to $25 million of costs
relating to the GBO acquisition during 1998, a portion of which is expected to
be reflected in the Company's results of operations. At the time that the GBO
Acquisition was consummated, the Company expected that it would experience
material membership attrition of up to 30% as it integrated the GBO operations
and implemented its strategy of motivating traditional indemnity insurance
members to select managed care products through, among other things, product
design and premium increases. Premium increases implemented in the second and
third quarters of 1997 did not result in the expected membership attrition. The
Company is currently unable to determine if and to what extent the Company may
experience additional membership attrition as it continues to integrate this
acquired business.
On March 31, 1996, the Company acquired the Life and Health Benefits
Management Division ("MMHD") of Massachusetts Mutual Life Insurance Company (the
"MMHD Acquisition"). The acquired MMHD operations focus on employers with 250 to
5,000 employees and provide administrative services, PPO and indemnity insurance
products. The Company has experienced membership attrition of approximately 18%
through December 31, 1997 on acquired membership, a portion of which is the
result of recently instituted premium increases with respect to certain
accounts. The Company expects that it will experience some level of further
membership attrition of its acquired MMHD members as it pursues its strategy of
motivating members to select managed care products.
36
<PAGE>
On May 20, 1996, the Company completed the Recapitalization, including the
acquisition of the commercial operations of BCC (the "BCC Commercial
Operations") for $235.0 million in cash. The Recapitalization included the
payment of a $995.0 million special dividend funded by $775.0 million in
revolving debt and the remainder in cash (see Note 2 to the Consolidated
Financial Statements for a description of the Recapitalization).
As a result of the GBO and MMHD acquisitions, the Company has significantly
expanded its operations outside of California. In order to implement the
Company's regional expansion strategy, the Company will need to continue its
development of satisfactory provider and sales networks and successfully convert
these books of business to the Company's existing information systems, which
will require additional expenditures by the Company.
Prior to their acquisitions by WellPoint, each of the GBO, MMHD and the BCC
Commercial Operations experienced a higher overall loss ratio than the Company.
The inclusion of these acquisitions has contributed to an increase in the
Company's overall loss ratio. In order to control the respective loss ratios and
reduce the financial risk of these acquired businesses, the Company has
undertaken a variety of measures, including the imposition of significant
premium increases and changes in product design. The Company also implemented a
series of price increases for certain of its California managed care businesses
in response to an increased loss ratio in the second and third quarters of 1997.
The Company will continue to evaluate the need for further price increases, plan
design changes and other appropriate actions in the future. There can be no
assurances, however, that the Company will be able to take subsequent pricing or
other actions or that any actions previously taken or implemented in the future
will be successful in addressing any concerns that may arise with respect to the
performance of certain businesses.
LEGISLATION
A variety of health care reform measures are currently pending or have been
recently enacted at the Federal, state and local levels. Recent Federal
legislation seeks, among other things, to insure the portability of health
coverage and mandates minimum maternity hospital stays. These and other proposed
measures may have the effect of dramatically altering the regulation of health
care and of increasing the Company's loss ratio or decrease the affordability of
the Company's products. In May 1997, the Texas Legislature adopted Senate Bill
No. 386 ("SB 386"), which purports to make managed care organizations ("MCOs"),
such as the Company, liable for the failure by the MCO, its employees or agents
to exercise ordinary care when making "health care treatment decisions" (as
defined in SB 386). The legislation became effective as of September 1, 1997. It
is too early to determine what effect, if any, this legislation may have on the
Company. However, to the extent that this legislation (or similar legislation
that may be subsequently adopted at the Federal or state level) effectively
expands the scope of liability of MCOs such as the Company, it may have a
material adverse effect on the Company's results of operations and financial
condition.
YEAR 2000
The Company is substantially dependent on its computer systems and
applications due to the nature of its managed health care business and the
increasing number of electronic transactions in the industry. Historically, some
computer systems and applications were developed to recognize the year as a
two-digit number, with the digits "00" being recognized as the year 1900. The
year 2000 presents a number of potential problems for such systems, including
potentially significant processing errors or failure. In order to address these
problems, the Company has developed and is in the midst of executing a
comprehensive plan designed to address the "year 2000" issue for its computer
systems and applications. During 1997, the Company completed a detailed risk
assessment of its various computer systems and applications, formulated a plan
for specific remediation efforts and began certain of such remediation efforts.
During 1998 and the first quarter of 1999, the Company expects to continue and
complete its remediation efforts and to undertake internal testing of its
systems and applications. In the second quarter of 1999, the Company
37
<PAGE>
expects to undergo third-party testing of its applications and systems. The
Company currently estimates that its costs related to year 2000 compliance
remediation for Company-owned systems and applications will be approximately $20
million in 1998 and approximately $2 million in 1999. The Company expects that
these costs will be expensed as incurred and will be funded through cash flow
from operations.
The Company has begun to assemble survey data from health care providers,
health care transaction clearing houses, employers, agents and brokers and other
parties with which it communicates electronically to determine the compliance
efforts being undertaken by these parties and to assess WellPoint's potential
business exposure to any non-compliant systems operated by these parties.
Although the Company is implementing programs and procedures designed to
mitigate the aforementioned risks, there can be no assurances that all potential
problems may be mitigated by these procedures.
DELAWARE REINCORPORATION
On August 4, 1997, the Company completed a reincorporation in Delaware (the
"Reincorporation") through the formation of a new holding company structure. The
Reincorporation involved a merger among the Company, WellPoint Health Networks
Inc., a California corporation ("WellPoint California"), and WLP Acquisition
Corp. (the "Merger Subsidiary"), a wholly owned subsidiary of the Company.
Merger Subsidiary was merged with and into WellPoint California, and WellPoint
California's shareholders became stockholders of the Company. As a result of
such merger, WellPoint California became a wholly owned subsidiary of the
Company. The principal purpose of the Reincorporation was to allow a
restructuring of the Company and its various subsidiaries in order to improve
the Company's capital as measured for BCBSA purposes.
RESULTS OF OPERATIONS
WellPoint's revenues are primarily generated from premiums earned for
risk-based health care and specialty services provided to its members, fees for
administrative services, including claims processing and access to provider
networks for self-insured employers, and investment income. WellPoint's
operating expenses include health care services and other benefits expenses,
consisting primarily of payments for physicians, hospitals and other providers
for health care and specialty products claims; selling expenses for broker and
agent commissions; general and administrative expenses; interest expense;
depreciation and amortization expense; and income taxes.
The Company's consolidated results of operations for the year ended December
31, 1997 include a full year of earnings for MMHD and BCC Commercial Operations,
and ten months of earnings for the GBO. The results of operations for the year
ended December 31, 1996 include the results of MMHD for the period from April 1,
1996 (its date of acquisition) to December 31, 1996 and BCC Commercial
Operations for the period from May 20, 1996 (its date of acquisition) to
December 31, 1996.
38
<PAGE>
The following table sets forth selected operating ratios. The loss ratio for
health care services and other benefits is shown as a percentage of premium
revenue. All other ratios are shown as a percentage of premium revenue and
management services revenue combined.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------
1997 1996 1995
--------- --------- ---------
<S> <C> <C> <C>
Operating Revenues:
Premium revenue.................................................... 93.2% 96.3% 97.9%
Management services revenue........................................ 6.8% 3.7% 2.1%
--------- --------- ---------
100.0% 100.0% 100.0%
Operating Expenses:
Health care services and other benefits............................ 81.2% 77.4% 75.6%
Selling expense.................................................... 4.6% 5.6% 6.4%
General and administrative expense................................. 15.2% 13.6% 11.6%
</TABLE>
39
<PAGE>
MEMBERSHIP
The following table sets forth membership data and the percent change in
membership:
<TABLE>
<CAPTION>
AS OF DECEMBER 31,
-------------------------- PERCENT
MEDICAL MEMBERSHIP: 1997 1996 CHANGE
- ------------------------------------------------------- ------------ ------------ ---------
<S> <C> <C> <C>
CALIFORNIA
Group Services:
HMO................................................ 812,180 677,850 19.8%
PPO and Other...................................... 1,475,360 1,298,359 13.6%
------------ ------------
Total............................................ 2,287,540 1,976,209 15.8%
------------ ------------
Individual, Small Group and Senior:
HMO................................................ 316,350 269,495 17.4%
PPO and Other...................................... 1,282,511 1,197,306 7.1%
------------ ------------
Total............................................ 1,598,861 1,466,801 9.0%
------------ ------------
Medi-Cal HMO Programs.............................. 284,281 111,029 156.0%
------------ ------------
Total California Medical Membership.................. 4,170,682 3,554,039 17.4%
------------ ------------
TEXAS
Group Services....................................... 202,239 77,254 161.8%
Individual, Small Group and Senior................... 74,261 29,095 155.2%
------------ ------------
Total............................................ 276,500 106,349 160.0%
------------ ------------
GEORGIA
Group Services....................................... 91,070 50,713 79.6%
Individual, Small Group and Senior................... 8,139 460 1,669.3%
------------ ------------
Total............................................ 99,209 51,173 93.9%
------------ ------------
OTHER STATES
Group Services....................................... 2,083,122 773,140 169.4%
Individual, Small Group and Senior................... 8,644 -- N/A
------------ ------------
Total............................................ 2,091,766 773,140 170.6%
------------ ------------
Total National Medical Membership.................... 2,467,475 930,662 165.1%
------------ ------------
TOTAL MEDICAL MEMBERSHIP(A)(B)....................... 6,638,157 4,484,701 48.0%
------------ ------------
------------ ------------
NETWORKS(B)(C)
Proprietary Networks............................... 3,941,220 3,324,331 18.6%
Other Networks..................................... 1,560,276 774,719 101.4%
Non-Network........................................ 1,136,661 385,651 194.7%
------------ ------------
TOTAL MEDICAL MEMBERSHIP............................. 6,638,157 4,484,701 48.0%
------------ ------------
------------ ------------
</TABLE>
- ------------------------
(a) Medical membership includes 2,765,856 and 1,229,308 management services
members as of December 31, 1997 and 1996, respectively, of which those
management services members outside of California were 1,792,151 and
563,854, as of December 31, 1997 and 1996, respectively.
(b) Membership as of December 31, 1997 includes the acquired GBO medical
membership (approximately 1.3 million members as of the date of
acquisition).
(c) Proprietary networks consist of California, Texas and other
WellPoint-developed networks. Other networks consist of third-party networks
and networks owned by the Company as a result of acquisitions that
incorporate provider discounts and some basic managed care elements.
Non-network consists of fee for service and percentage-of-billed charges
contracts with providers.
40
<PAGE>
<TABLE>
<CAPTION>
AS OF DECEMBER 31,
-------------------------- PERCENT
1997 1996 CHANGE
------------ ------------ ---------
<S> <C> <C> <C>
SPECIALTY MEMBERSHIP:
Pharmacy................................................. 12,290,221 11,516,824 6.7%
Dental................................................... 3,183,477 1,559,391 104.1%
Utilization Management................................... 2,750,767 -- N/A
Life Insurance........................................... 1,757,881 722,964 143.1%
Disability............................................... 1,125,571 107,350 948.5%
Behavioral Health........................................ 721,350 502,212 43.6%
</TABLE>
The specialty membership as of December 31, 1997 includes the acquired GBO
operations, which had approximately 0.3 million pharmacy members, 1.5 million
dental members, 2.7 million utilization management members, 0.9 million life
insurance members and 1.0 million disability members at the date of acquisition.
COMPARISON OF RESULTS FOR THE YEAR ENDED DECEMBER 31, 1997 TO THE YEAR ENDED
DECEMBER 31, 1996
Premium revenue increased 34.7%, or $1,348.1 million, to $5,227.9 million
for the year ended December 31, 1997 from $3,879.8 million for the year ended
December 31, 1996. The 1997 acquisition of the GBO contributed $419.4 million,
or 31.1% of this increase. The 1996 acquisitions of MMHD and the BCC Commercial
Operations contributed an incremental increase in 1997 premium revenue of $163.0
million and $147.7 million, respectively, or an aggregate of 23.0% of the total
increase. Also, contributing to increased premium revenue in 1997 was an
increase in insured member months of 12.9%, excluding the GBO from both periods
and excluding MMHD and BCC Commercial Operations from the periods prior to their
respective dates of acquisition in both periods. Additionally, there was an
increase in the per member per month revenues as a result of premium increases
associated with several of the Company's medical products.
Management services revenue increased 159.1%, or $235.3 million, to $383.2
million for the year ended December 31, 1997 from $147.9 million for the year
ended December 31, 1996. The increase was primarily due to $189.9 million of
management services revenue related to the 1997 acquisition of the GBO and $18.9
million and $3.9 million, respectively, of incremental increase in management
services revenue related to the acquisitions of MMHD and the BCC Commercial
Operations in 1996, which together represented 90.4% of the increase. Also
contributing to the increase was an increase in the California large group
management services membership and the addition of a management services
contract with the state of Illinois on July 1, 1997.
Investment income increased $73.3 million to $215.3 million for the year
ended December 31, 1997, compared to $142.0 million for the year ended December
31, 1996. Net realized gains from equity securities increased $45.5 million to
$62.0 million for the year ended December 31, 1997 in comparison to $16.5
million for the year ended December 31, 1996. The year ended December 31, 1997
included a gain of $30.3 million related to the stock-for-stock exchange of the
Company's interest in Health Partners, Inc. ("HPI"), a physician practice
management company, for the common stock of FPA Medical Management, Inc. ("FPA")
as a result of HPI's October 1997 merger with FPA. See Note 4 to the Notes to
Consolidated Financial Statements. Net interest and dividend income increased
$25.9 million to $153.4 million for the year ended December 31, 1997 in
comparison to $127.5 million for the year ended December 31, 1996, primarily due
to increased interest income on the investment portfolios of GBO and MMHD
acquired businesses and slightly higher yields in 1997 over 1996, partially
offset by the foregone interest from cash and investments used to finance the
GBO, MMHD and BCC Commercial Operations acquisitions, the Recapitalization and
cash used for repayment of indebtedness under the Company's senior credit
facility.
Health care services and other benefits expense increased 41.4%, or $1,242.2
million, to $4,245.3 million for the year ended December 31, 1997 from $3,003.1
million for the year ended December 31,
41
<PAGE>
1996. The acquisition of the GBO accounted for 32.9% of the increase, or $408.2
million. The inclusion of MMHD and the BCC Commercial Operations for a full
twelve months in 1997 accounted for an aggregate of 22.0% of the increase and
resulted in increased health care expense of $133.9 million and $139.1 million,
respectively. Additionally, the Company's health care benefits and other
expenses for the year ended December 31, 1997 increased in comparison to the
prior year as a result of the aforementioned increase in insured member months
of 12.9%.
The loss ratio for 1997 increased to 81.2% compared to 77.4% in 1996. The
acquired MMHD operations, the GBO and the BCC Commercial Operations have
traditionally experienced a higher loss ratio than the Company. Additionally,
the MMHD operations experienced an increase in loss ratio for the year ended
December 31, 1997 in comparison to 1996 due to higher actual claims incurred as
a result of higher cost trends. Excluding the effects of the acquired
businesses, the loss ratio in 1997 would have been 79.2%. The increase in loss
ratio excluding acquired operations is due to a loss ratio increase in the
Company's California businesses, primarily due to slightly higher medical
utilization for certain managed care products and increased pharmacy costs.
Selling expense consists of commissions paid to outside brokers and agents
representing the Company. Selling expense for the year ended December 31, 1997
increased 16.0% to $260.5 million, compared to $224.5 million for the year ended
December 31, 1996, corresponding with continued overall premium revenue growth
and an additional $7.2 million in selling expense attributable to the GBO and
the incrementatal impact in 1997 of the MMMD acquisition. The selling expense
ratio for the year ended December 31, 1997 decreased to 4.6% from 5.6% for the
year ended December 31, 1996, largely due to the acquisitions of the GBO and
MMHD, which have lower selling expense ratios than the Company's existing
business, and the BCC Commercial Operations, which has no selling expense.
Excluding the effects of the acquisitions for the years ended December 31, 1997
and 1996, the selling expense ratio would have been 5.4% and 5.6%, respectively.
This decrease is due to lower selling costs, in comparison to the Company's
other products, for Medi-Cal and large employer group medical products which
experienced higher growth in premium revenue in 1997.
General and administrative expense for the year ended December 31, 1997
increased 56.2%, or $307.1 million, to $853.1 million from $546.0 million for
the same period in 1996. The increase was primarily due to $196.9 million of
general and administrative expense related to the Company's acquisition of the
GBO in 1997 and $46.0 million and $8.0 million, respectively, of incremental
increase in general and administrative expense related to the Company's
acquisitions of MMHD and the BCC Commercial Operations in 1996.
The administrative expense ratio increased to 15.2% for 1997 compared to
13.6% for 1996, primarily due to the increased administrative expense associated
with the Company's continued investment in national expansion and the
acquisition of the GBO. The GBO has historically experienced a higher
administrative expense ratio than the Company's traditional California-based
businesses due to the GBO's higher percentage of management services business.
The increase was partially offset by the BCC Commercial Operations' lower
administrative expense ratio. The administrative expense ratio for the year
ended December 31, 1997, excluding the effect of the GBO acquisition in 1997 and
the incremental effect in 1997 of MMHD and BCC Commercial Operations, was 13.0%.
The Company recorded $14.5 million of nonrecurring costs for the year ended
December 31, 1997, of which $8.0 million recorded in the second quarter of 1997
related primarily to the write-down of the Company's dental practice management
operations and discontinuance of the Company's medical practice management
operations. In addition, the Company incurred $6.5 million in the first quarter
related to severance and retention payments associated with the GBO acquisition.
Interest expense increased for the year ended December 31, 1997 to $36.7
million, from $36.6 million for the year ended December 31, 1996. The increase
is primarily due to interest on debt incurred as a result of the
Recapitalization in May 1996 being included in the results of operations for the
entire year
42
<PAGE>
ended December 31, 1997 in comparison to a shorter period of time in the year
ended December 31, 1996, partially offset by debt repayments during 1997. The
weighted average interest rate for all debt for the year ended December 31,
1997, including the fees associated with the borrowings and interest rate swaps,
was 7.45%. See "--Liquidity and Capital Resources."
The Company's net income for the year ended December 31, 1997 was $227.4
million, compared to $202.0 million for the year ended December 31, 1996.
Earnings per share totaled $3.30 and $3.04 for the years ended December 31, 1997
and 1996, respectively. Earnings per share assuming full dilution totaled $3.27
and $3.04 for the years ended December 31, 1997 and 1996, respectively. Earnings
per share for the year ended December 31, 1997 included nonrecurring costs of
$0.13 per share. Earnings per share for all periods presented has been
calculated in accordance with Statement of Financial Accounting Standards No.
128, Earnings Per Share ("SFAS No. 128").
Earnings per share for the year ended December 31, 1997 is based upon
weighted average shares outstanding of 68.8 million, excluding common stock
equivalents, and 69.5 million shares, assuming full dilution. Earnings per share
for the year ended December 31, 1996 has been calculated using 66.4 million
shares for both measures. Common stock equivalents did not have a dilutive
effect on earnings per share in 1996. The 1996 weighted average reflects the
number of shares outstanding immediately following the Recapitalization, plus
the weighted average number of shares issued in 1996 subsequent to the
Recapitalization. For the year ended December 31, 1997, the increase in weighted
average shares outstanding primarily relates to the public offering of 3,000,000
shares of the Company's common stock in April 1997 and, on a diluted basis, the
inclusion of 651,000 common stock equivalents related to the Company's stock
option plans.
COMPARISON OF RESULTS FOR THE YEAR ENDED DECEMBER 31, 1996 TO THE YEAR ENDED
DECEMBER 31, 1995
Premium revenue increased 33.3% to $3,879.8 million for the year ended
December 31, 1996 from $2,910.6 million for the year ended December 31, 1995.
Premium revenue for 1996 of $523.4 million and $200.2 million was attributable
to MMHD and the BCC Commercial Operations, respectively. Also contributing to
increased premium revenue in 1996 was a 9.8% increase in medical membership,
excluding management services members and the acquired members of MMHD and the
BCC Commercial Operations. Workers' compensation premium revenue increased 34.6%
in 1996 from 1995, due to a large increase in the number of insured employer
groups, primarily in the small employer and California school districts workers'
compensation markets. In addition, an increase in premium revenue resulted from
moderate increases in the premiums per member in the individual, senior and
small group markets.
Management services revenue increased $86.7 million to $147.9 million for
the year ended December 31, 1996 from $61.2 million for the year ended December
31, 1995. The increase was primarily due to $62.9 million of management services
revenue from MMHD. Also contributing to the increase were a 31.7% membership
increase in the California large group market, excluding the acquired members of
MMHD and the BCC Commercial Operations, new pharmacy and clinical management
accounts and revenue from the BCC Commercial Operations.
Investment income increased to $142.0 million for the year ended December
31, 1996 compared to $135.3 million for the year ended December 31, 1995.
Interest and dividend income increased to $127.5 million in 1996 from $122.1
million in 1995. The increase in interest and dividend income was primarily due
to MMHD interest income of $21.6 million and slightly higher yields in 1996 over
1995, offset by the foregone interest earned on cash and investments used to
finance the MMHD and BCC Commercial Operations acquisitions, the
Recapitalization, and cash used for repayment of indebtedness under the
Company's senior credit facility.
Health care services and other benefits expense increased 36.5% to $3,003.1
million for the year ended December 31, 1996 from $2,200.0 million for the year
ended December 31, 1995. Of the $803.1 million increase, $412.2 million was
attributable to MMHD and $189.9 million was attributable to the BCC
43
<PAGE>
Commercial Operations. Excluding MMHD and the BCC Commercial Operations,
increased health care services expense also resulted from medical membership
growth. In addition, mix and product design changes, for example, the
elimination of deductibles for some PPO plans and pharmacy products, contributed
to an increase in health care expenses. Growth in the workers' compensation
business also contributed to the increase. These increases were partially offset
by savings from hospital recontracting, which was implemented in late 1995.
Additional savings were realized by savings from specialist and laboratory
recontracting, which was implemented during the third quarter of 1996.
The loss ratio for 1996 increased to 77.4% compared to 75.6% in 1995 due to
the PPO benefits changes described above, an increase in the loss and loss
adjustment expense reserves related to a portion of the Company's workers'
compensation business and the incremental effect of the MMHD Acquisition and the
BCC Commercial Operations on the Company's overall results. The acquired MMHD
operations and the BCC Commercial Operations have traditionally experienced a
higher loss ratio than the Company. The increase in the loss ratio was partially
offset by the Company's continuing cost containment efforts, such as the
hospital recontracting program. Excluding the Company's workers' compensation
business and the acquisitions of the MMHD operations and the BCC Commercial
Operations, the loss ratio would have been 74.7% for the year ended December 31,
1996. The loss ratio for 1995, also excluding the workers' compensation
business, was 75.2%.
Selling expense for the year ended December 31, 1996 increased 18.0% to
$224.5 million compared to $190.2 million in 1995, corresponding with continued
overall premium revenue growth and an additional $21.4 million in selling
expense attributable to MMHD. The selling expense ratio for 1996 decreased to
5.6% from 6.4% for the prior year, largely due to the acquisition of MMHD, which
has a lower selling expense ratio than the Company's existing business and the
BCC Commercial Operations, which has no selling expense. Excluding the
acquisitions, the selling expense ratio would have been 6.3% for the year ended
December 31, 1996, consistent with the prior year.
General and administrative expense for the year ended December 31, 1996
increased 58.5% to $545.9 million from $344.4 million for the same period in
1995. Of the $201.5 million increase, $153.3 million resulted from the MMHD
Acquisition. The administrative expense ratio increased to 13.6% for 1996
compared to 11.6% in 1995, primarily due to the increased administrative expense
associated with the Company's continued investment in geographic expansion and
the MMHD Acquisition. MMHD has historically had a higher administrative expense
ratio due to its higher percentage of management services business. The Company
also incurred additional expenses in 1996 for network development costs. The
above increases were partially offset by the BCC Commercial Operations' lower
administrative expense ratio. Excluding MMHD and the BCC Commercial Operations,
the administrative expense ratio would have been 11.9% in 1996.
Interest expense was $36.6 million for the year ended December 31, 1996. The
Company had no interest expense in 1995. The interest expense in 1996 related
primarily to $775.0 million drawn under the Company's revolving credit facility
on May 15, 1996 to fund a special dividend paid in connection with the
Recapitalization, as well as interest on amounts payable to MassMutual,
including a Series A term note of $62.0 million issued in connection with the
MMHD Acquisition. At December 31, 1996, the Company's outstanding long-term
indebtedness was $625.0 million. The weighted average interest rate for all debt
for the year ended December 31, 1996 was 5.9%.
The Company's net income for the year ended December 31, 1996 was $202.0
million or $3.04 per share compared to $180.0 million or $2.71 per share for the
year ended December 31, 1995. Earnings per share for the years ended December
31, 1996 and 1995 are based on 66.4 million shares, the number of shares
outstanding immediately following the Recapitalization, plus the weighted
average number of shares issued in 1996 subsequent to the Recapitalization. The
number of shares outstanding prior to the Recapitalization were adjusted to
reflect the two-for-three share exchange that occurred in connection with the
Recapitalization. Earnings per share is determined by dividing net income by the
weighted
44
<PAGE>
average number of common shares outstanding. Earnings per share for the year
ended December 31, 1995 included nonrecurring costs of $0.52 per share. For the
year ended December 31, 1995, there were no stock
options outstanding and, for the year ended December 31, 1996, stock options did
not have a dilutive effect on weighted average shares outstanding. Therefore,
for 1995 and 1996 there is no difference between earnings per share and earnings
per share assuming full dilution as calculated under SFAS No. 128.
FINANCIAL CONDITION
The Company's consolidated assets increased by $1,127.9 million from
$3,405.5 million as of December 31, 1996 to $4,533.4 million as of December 31,
1997. This represents a 33.1% increase and resulted primarily from the GBO
acquisition as well as cash flows generated from operations. Cash and
investments were $2,939.4 million as of December 31, 1997, or 64.8% of total
assets.
As of December 31, 1997, $388.0 million was outstanding under the Company's
long-term debt facilities, compared to $625.0 million at December 31, 1996. Debt
repayments were funded from the proceeds from the Company's April 1997 common
stock offering and from cash flow from operations.
Equity totaled $1,223.2 million as of December 31, 1997, an increase of
$352.7 million from $870.5 million as of December 31, 1996. The increase
resulted primarily from the net income of $227.4 million for the year ended
December 31, 1997, $110.3 million and $9.9 million in additional paid-in capital
from the Company's public offering of three million shares of common stock and
stock issuances under the Company's stock option and stock purchase plans,
respectively, and $4.9 million change in net unrealized valuation adjustments on
investment securities, net of tax.
LIQUIDITY AND CAPITAL RESOURCES
The Company's primary sources of cash are premium and management services
revenues received and investment income. The primary uses of cash include health
care claims and other benefits, capitation payments, income taxes, repayment of
long-term debt, interest expense, broker and agent commissions, administrative
expenses and capital expenditures. In addition to the foregoing, other uses of
cash include costs of provider networks and systems development, and costs
associated with acquisitions and the integration of acquired businesses. The
Company receives premium revenue in advance of anticipated claims for related
health care services and other benefits. The Company's investment policies are
designed to provide liquidity, preserve capital and maximize yield. Cash and
investment balances maintained by the Company are sufficient to meet applicable
regulatory financial stability and net worth requirements. As of December 31,
1997, the Company's investment portfolio consisted primarily of fixed maturity
securities (which are primarily rated "A" or better by rating agencies) and
equity securities.
Net cash flow provided by operating activities was $539.8 million for the
year ended December 31, 1997, compared with $410.9 million in 1996. The positive
cash flow from operations is due primarily to net income of $227.4 million,
adjusted for certain operating liabilities such as increased medical claims
payable of $170.7 million and accounts payable and accrued expenses of $116.9
million.
Net cash used in investing activities in 1997 totaled $452.6 million,
compared with net cash used in investing activities of $736.2 million in 1996.
The cash used in 1997 was attributable primarily to the purchase of investments
for $2,747.2 million partially offset by the proceeds from investments sold and
matured of $2,009.4 million and the net cash acquired from the GBO purchase of
$362.0 million. The GBO was acquired for a total purchase price of $89.7
million, all of which was funded with cash. GBO net cash acquired was $451.7
million.
Net cash used in financing activities totaled $116.6 million in 1997,
compared to net cash used in financing activities of $431.0 million in 1996. The
net cash used in financing activities in 1997 was primarily due to borrowings
and repayments on long-term debt which totaled $150.0 million and $387.0
million, respectively partially offset by net proceeds from the common stock
offering of $110.3 million.
45
<PAGE>
The Company has a $1.0 billion unsecured revolving credit facility.
Borrowings under the credit facility bear interest at rates determined by
reference to the bank's base rate or to the London Interbank Offered Rate
("LIBOR") plus a margin determined by reference to the Company's leverage ratio
(as defined in the credit agreement) or the then-current rating of the Company's
unsecured long-term debt by specified rating agencies. Borrowings under the
credit facility are made on a committed basis or pursuant to an auction-bid
process. The credit facility expires as of May 15, 2002, although it may be
extended for an additional one-year period under certain circumstances. The
credit agreement requires the Company to maintain certain financial ratios and
contains restrictive covenants, including restrictions on the occurrence of
additional indebtedness and the granting of certain liens, limitations on
acquisitions and investments and limitations on changes in control. The total
amount outstanding under the credit facility was $368.0 million and $555.0
million as of December 31, 1997 and 1996, respectively. The weighted average
interest rate for the year ended December 31, 1997, including the facility and
other fees and the effect of the interest rate swaps discussed in the following
paragraph, was 7.45%.
As part of a hedging strategy to limit exposure to interest rate increases,
in August 1996 the Company entered into a swap agreement for a notional amount
of $100.0 million bearing a fixed interest rate of 6.45% and having a maturity
date of August 17, 1999. In September 1996, the Company entered into two
additional swap agreements for notional amounts of $150.0 million each, bearing
fixed interest rates of 6.99% and 7.05%, respectively, and having maturity dates
of October 17, 2003 and October 17, 2006, respectively.
Prior to the Reincorporation, the Company held a license as a health care
service plan under the California Knox-Keene Health Care Service Plan Act of
1975 (the "Knox-Keene Act"). As such, the Company was required to maintain
minimum tangible net equity ("TNE") by the DOC, in addition to meeting minimum
capital requirement prescribed by the BCBSA. As a DOC licensee, the Company used
TNE in measuring capital for the BCBSA. The failure to meet a specified level
(the "BCBSA Minimum Capital") of the BCBSA's base capital requirement can
subject the Company to certain corrective actions, while the failure to meet a
lower specified level can result in the termination of the Company's license
agreement with BCBSA. As a result of the Reincorporation, the Company is no
longer licensed under the Knox-Keene Act (Blue Cross of California remains a DOC
licensee) and, as a result, its capital for BCBSA purposes is measured based on
GAAP equity. As of December 31, 1997, the Company's GAAP equity was in excess of
the BCBSA's Minimum Capital requirement. A principal purpose of the
Reincorporation was to allow restructuring of the Company and its various
subsidiaries in order to improve the Company's capital as measured for BCBSA
purposes.
In November 1996, in order to address an anticipated shortfall in its
capital for BCBSA purposes, the Company entered into a subordinated debt
agreement for $200 million. On March 17, 1997, prior to the Reincorporation, the
Company borrowed $150.0 million under its subordinated debt agreement to ensure
compliance with the Company's BCBSA capital requirements, bringing its total
indebtedness under the facility to $200 million at that date. The Company used
the proceeds of its April 1997 public offering of 3,000,000 shares of its common
stock to pay down outstanding indebtedness under the Company's subordinated debt
agreement. On July 1, 1997, the Company repaid the remaining $90.0 million
outstanding under the subordinated debt agreement with borrowings under the
revolving credit facility.
Certain of the Company's subsidiaries are required to maintain minimum
capital requirements prescribed by various regulatory agencies, including the
California Department of Corporations and the Department of Insurance in various
states. As of December 31, 1997, those subsidiaries of the Company were in
compliance with all minimum capital requirements.
In July 1996, the Company filed a registration statement relating to the
issuance of $1.0 billion of senior or subordinated unsecured indebtedness. As of
December 31, 1997, no indebtedness had been issued pursuant to this registration
statement.
46
<PAGE>
The Company believes that cash flow generated by operations, its cash and
investment balances, supplemented by the Company's ability to borrow under its
existing revolving credit facility or to conduct a public offering under its
debt registration statement will be sufficient to fund continuing operations and
expected capital requirements for the foreseeable future.
NEW ACCOUNTING PRONOUNCEMENTS
In June 1997, the Financial Accounting Standards Board (the "FASB") issued
Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive
Income" ("SFAS No. 130"). SFAS No. 130 will require companies to present all
non-owner changes in equity, (e.g., market value adjustments to investments and
adjustments to the minimum pension liability) that are currently included as a
component of stockholders' equity as a component of comprehensive income. The
new disclosures will be effective beginning in the first quarter of 1998.
In June 1997, the FASB also issued Statement of Financial Accounting
Standards No. 131, "Disclosures About Segments of an Enterprise and Related
Information" ("SFAS No. 131"). SFAS No. 131 requires that companies disclose
"operating segments" based on the way management disaggregates the company for
making internal operating decisions. The new disclosures will be effective for
the Company's fiscal year ending on December 31, 1998. Abbreviated quarterly
disclosure will be required beginning with the period ending March 31, 1999,
with comparative information required for the corresponding period in the prior
fiscal year.
In February 1998, the FASB issued Statement of Financial Accounting
Standards No. 132, "Employers' Disclosures about Pensions and Other
Postretirement Benefits" ("SFAS No. 132"). SFAS No. 132 standardizes the
disclosure requirements of pension and other postretirement benefits under
previous guidance. In addition, SFAS 132 requires additional disclosures
regarding changes in the benefit obligations and fair values of plan assets,
eliminates certain disclosures no longer deemed useful, permits aggregation of
information about certain plans and revises disclosure about defined
contribution plans. The new disclosures are required for year-end financial
statements for the year ending December 31, 1998.
The Company is presently assessing the presentation and effect of SFAS Nos.
130, 131 and 132 on the financial statements of the Company.
FACTORS THAT MAY AFFECT FUTURE RESULTS OF OPERATIONS
Certain statements contained herein, such as statements concerning potential
or future loss ratios, expected membership attrition as the Company continues to
integrate its recently acquired operations and other statements regarding
matters that are not historical facts, are forward-looking statements (as such
term is defined in the Exchange Act). Such statements involve a number of risks
and uncertainties that may cause actual results to differ from those projected.
Factors that can cause actual results to differ materially include, but are not
limited to, those discussed below and those discussed from time to time in the
Company's various filings with the Securities and Exchange Commission.
As part of the Company's business strategy, the Company has recently
acquired substantial operations in new geographic markets. These businesses,
which include substantial indemnity-based insurance operations, have experienced
varying profitability or losses in recent periods. During 1997, the Company
worked extensively on the integration of these businesses, which will be
continuing in 1998; however, there can be no assurances regarding the ultimate
success of the Company's integration efforts or regarding the ability of the
Company to maintain or improve the results of operations of these businesses as
the Company pursues its strategy of motivating the acquired members to select
managed care products. In order to implement this strategy, the Company has and
will, among other things, need to continue to incur considerable expenditures
for provider networks and information systems in addition to the costs
associated with the integration of these acquisitions. The integration of these
complex businesses may result in,
47
<PAGE>
among other things, temporary increases in claims inventory or other
service-related issues. The Company's results of operations could be adversely
affected in the event that the Company experiences such problems or is otherwise
unable to implement fully its expansion strategy.
The Company's operations are subject to substantial regulation by Federal,
state and local agencies in all jurisdictions in which the Company now operates.
Many of these agencies have increased their scrutiny of managed health care
companies in recent periods. Future regulatory actions by any such agencies may
have a material adverse affect on the Company's business.
The Company's future results will depend in large part on accurately
predicting health care costs and upon the Company's ability to control future
health care costs through underwriting criteria, utilization management and
negotiation of favorable provider contracts. Changes in utilization rates,
demographic characteristics, health care practices, provider consolidation,
inflation, new technologies, clusters of high-cost, the regulatory environment
and numerous other factors are beyond the control of any health plan and may
adversely affect the Company's ability to predict and control health care costs
and claims, as well as the Company's financial condition or results of
operations. Additionally, the Company faces competitive pressure to contain
premium prices. Fiscal concerns regarding the continued viability of government
sponsored programs such as Medicare and Medicaid may cause decreasing
reimbursement rates for these programs. Any limitation on the Company's ability
to increase or maintain its premium levels, design products, or select
underwriting criteria may adversely affect the Company's financial condition or
results of operations.
Managed care organizations, both inside and outside California, operate in a
highly competitive environment that has undergone significant change in recent
periods as a result of business consolidations, new strategic alliances,
aggressive marketing practices by competitors and other market pressures.
Additional increases in competition could adversely affect the Company's
financial condition or results of operations.
As a result of the Company's recent acquisitions, the Company now operates
on a national basis and offers a spectrum of health care and specialty products
through various risk sharing arrangements. The Company's health care products
include a variety of managed care offerings as well as traditional fee-for-
service coverage. With respect to product type, fee-for-service products are
generally less profitable than managed care products. A critical component of
the Company's expansion strategy is to transition over time the traditional
insurance members of the Company's acquired businesses to more managed care
products. With respect to the risk-sharing nature of products, managed care
products that involve greater potential risk to the Company generally tend to be
more profitable than those managed care products where the Company is able to
shift risks to employer groups and management services products. Individuals and
small employer groups are more likely to purchase the Company's higher-risk
managed care products because such purchasers are generally unable or unwilling
to bear greater liability for health care expenditures. Over the past few years,
the Company has experienced greater margin erosion in its higher risk managed
care products than in its lower-risk managed care and management services
products. This margin erosion is attributable to product mix change, competitive
pressure and greater regulatory restrictions applicable to the small employer
group market. The Company has implemented price increases in certain of its
managed care businesses. While these price increases are intended to improve
profitability, there can be no assurance that this will occur. Subsequent
unfavorable changes in the relative profitability between the Company's various
products could have a material adverse effect on the Company's results of
operations and on the continued feasibility of the Company's geographic
expansion strategy.
Substantially all of the Company's investment assets are in yielding
securities of varying maturities. The value of such securities are highly
sensitive to fluctuations in short-and long-term interest rates, with the value
decreasing as such rates increase or increasing as such rates decrease. Changes
in the value of the Company's investment assets, as a result of interest rate
fluctuations, can impact the Company's total assets and stockholders' equity and
can also result in gains or losses which impact the Company's results of
48
<PAGE>
operations. There can be no assurance that interest rate fluctuations will not
have a material adverse affect on the results of operations or financial
condition of the Company.
SELECTED QUARTERLY FINANCIAL INFORMATION
(UNAUDITED)
IN THOUSANDS, EXCEPT PER SHARE DATA AND MEMBERSHIP DATA
<TABLE>
<CAPTION>
FOR THE QUARTER ENDED
-------------------------------------------------------
MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31,
1997 1997 1997 1997
------------ ------------ ------------- ------------
(IN THOUSANDS, EXCEPT PER SHARE DATA AND MEMBERSHIP
DATA)
<S> <C> <C> <C> <C>
Total revenues...................................... $ 1,271,632 $ 1,485,609 $ 1,511,580 $1,557,623
Operating income.................................... 103,916(A) 97,858(A) 108,415 142,816
Income before provision for income taxes............ 85,279(A) 82,818(A) 93,383 120,720
Net income.......................................... $ 50,755(A) $ 49,263(A) $ 55,568 $ 71,823
------------ ------------ ------------- ------------
------------ ------------ ------------- ------------
Per Share Data(B):
Earnings Per Share................................ $ 0.76(A) 0.71(A) $ 0.80 $ 1.03
------------ ------------ ------------- ------------
------------ ------------ ------------- ------------
Earnings Per Share Assuming Full Dilution......... $ 0.76(A) 0.70(A) $ 0.79 $ 1.02
------------ ------------ ------------- ------------
------------ ------------ ------------- ------------
Medical membership.................................. 5,914,726 6,067,966 6,473,467 6,638,157
------------ ------------ ------------- ------------
------------ ------------ ------------- ------------
</TABLE>
<TABLE>
<CAPTION>
FOR THE QUARTER ENDED
-------------------------------------------------------
MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31,
1996 1996 1996 1996
------------ ------------ ------------- ------------
(IN THOUSANDS, EXCEPT PER SHARE DATA AND MEMBERSHIP
DATA)
<S> <C> <C> <C> <C>
Total revenues.......................................... $ 817,582 $ 1,065,459 $ 1,130,686 $1,156,055
Operating income........................................ 104,057 100,754 94,181 97,278
Income before provision for income taxes................ 101,045 83,662 75,859 78,942
Net income.............................................. $ 60,133 $ 49,772 $ 45,101 $ 47,016
------------ ------------ ------------- ------------
------------ ------------ ------------- ------------
Per Share Data(B)(C):
Earnings Per Share.................................... $ 0.91 $ 0.75 $ 0.68 $ 0.71
------------ ------------ ------------- ------------
------------ ------------ ------------- ------------
Earnings Per Share Assuming Full Dilution............. $ 0.91 $ 0.75 $ 0.68 $ 0.71
------------ ------------ ------------- ------------
------------ ------------ ------------- ------------
Medical membership...................................... 3,926,820 4,243,673 4,387,510 4,484,701
------------ ------------ ------------- ------------
------------ ------------ ------------- ------------
</TABLE>
- --------------------------
(A) The first and second quarters of 1997 include nonrecurring costs of $6.5
million and $8.0 million, before taxes, $3.8 million and $4.8 million, after
tax, or $0.06 and $0.07 per share on a basic and diluted basis,
respectively.
(B) Per share data for all periods prior to the fourth quarter of 1997 has been
restated to reflect the adoption of SFAS No. 128.
(C) Per share data for all periods presented prior to the quarter ended June 30,
1996 has been recomputed using 66,366,500 shares, the number of shares
outstanding immediately following completion of the Recapitalization. Per
share data for the quarters ended June 30, September 30 and December 31,
1996 has been calculated using such 66,366,500 shares, plus the weighted
average number of shares issued subsequent to the Recapitalization.
49
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Stockholders and Board of Directors
WellPoint Health Networks Inc.
We have audited the accompanying consolidated balance sheets of WellPoint
Health Networks Inc. and subsidiaries (the "Company") as of December 31, 1997
and 1996, and the related consolidated income statements, and consolidated
statements of changes in stockholders' equity and cash flows for each of the
three years in the period ended December 31, 1997. These financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of WellPoint
Health Networks Inc. and subsidiaries as of December 31, 1997 and 1996, and the
consolidated results of their operations and cash flows for each of the three
years in the period ended December 31, 1997 in conformity with generally
accepted accounting principles.
Coopers & Lybrand L.L.P.
Los Angeles, California
February 2, 1998
50
<PAGE>
WELLPOINT HEALTH NETWORKS INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------
1997 1996
----------- -----------
(IN THOUSANDS, EXCEPT
SHARE DATA)
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents............................................................ $ 283,851 $ 313,256
Investment securities, at market value............................................... 2,552,775 1,728,305
Receivables, net..................................................................... 537,454 401,300
Deferred tax assets.................................................................. 79,733 67,147
Other current assets................................................................. 52,004 28,463
----------- -----------
Total Current Assets............................................................. 3,505,817 2,538,471
Property and equipment, net............................................................ 115,193 82,720
Intangible assets...................................................................... 698,507 552,279
Long-term investments.................................................................. 102,819 123,931
Deferred tax assets.................................................................... 62,487 57,830
Other non-current assets............................................................... 48,592 50,311
----------- -----------
Total Assets..................................................................... $ 4,533,415 $ 3,405,542
----------- -----------
----------- -----------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Medical claims payable............................................................... $ 922,658 $ 667,540
Loss and loss adjustment expense reserves............................................ 115,325 102,152
Reserves for future policy benefits.................................................. 51,189 13,001
Unearned premiums.................................................................... 210,337 160,036
Accounts payable and accrued expenses................................................ 372,441 251,480
Experience rated and other refunds................................................... 255,625 146,882
Income taxes payable................................................................. 107,018 99,086
Other current liabilities............................................................ 309,712 118,303
----------- -----------
Total Current Liabilities........................................................ 2,344,305 1,558,480
Accrued postretirement benefits........................................................ 63,891 61,086
Loss and loss adjustment expense reserves, non-current................................. 134,933 131,079
Reserves for future policy benefits, non-current....................................... 332,033 91,507
Long-term debt......................................................................... 388,000 625,000
Other non-current liabilities.......................................................... 47,084 67,931
----------- -----------
Total Liabilities................................................................ 3,310,246 2,535,083
Stockholders' Equity:
Preferred stock--$0.01 par value, 50,000,000 shares authorized, none issued and
outstanding........................................................................ -- --
Common stock--$0.01 par value, shares authorized 300,000,000; issued 69,778,086 and
66,526,985 in 1997 and 1996, respectively.......................................... 698 665
Treasury stock, at cost, 4,571 shares in 1997........................................ (103) --
Additional paid-in capital........................................................... 882,312 761,879
Unrealized valuation adjustment...................................................... (5,056) (9,994)
Retained earnings.................................................................... 345,318 117,909
----------- -----------
Total Stockholders' Equity....................................................... 1,223,169 870,459
----------- -----------
Total Liabilities and Stockholders' Equity..................................... $ 4,533,415 $ 3,405,542
----------- -----------
----------- -----------
</TABLE>
See the accompanying notes to the consolidated financial statements.
51
<PAGE>
WELLPOINT HEALTH NETWORKS INC.
CONSOLIDATED INCOME STATEMENTS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------------
1997 1996 1995
------------ ------------ ------------
(IN THOUSANDS, EXCEPT EARNINGS PER
SHARE)
<S> <C> <C> <C>
Revenues:
Premium revenue....................................................... $ 5,227,904 $ 3,879,806 $ 2,910,622
Management services revenue........................................... 383,238 147,948 61,151
Investment income..................................................... 215,302 142,028 135,306
------------ ------------ ------------
5,826,444 4,169,782 3,107,079
Operating Expenses:
Health care services and other benefits............................... 4,245,281 3,003,117 2,199,953
Selling expense....................................................... 260,523 224,453 190,161
General and administrative expense.................................... 853,100 545,942 344,427
Nonrecurring costs.................................................... 14,535 -- 57,074
------------ ------------ ------------
5,373,439 3,773,512 2,791,615
------------ ------------ ------------
Operating Income........................................................ 453,005 396,270 315,464
Interest expense...................................................... 36,658 36,628 --
Other expense, net.................................................... 34,147 20,134 12,677
------------ ------------ ------------
Income before Provision for
Income Taxes.......................................................... 382,200 339,508 302,787
Provision for income taxes............................................ 154,791 137,506 122,798
------------ ------------ ------------
Net Income.............................................................. $ 227,409 $ 202,002 $ 179,989
------------ ------------ ------------
------------ ------------ ------------
Earnings Per Share...................................................... $ 3.30 $ 3.04 $ 2.71
------------ ------------ ------------
------------ ------------ ------------
Earnings Per Share Assuming Full Dilution............................... $ 3.27 $ 3.04 $ 2.71
------------ ------------ ------------
------------ ------------ ------------
</TABLE>
See the accompanying notes to the consolidated financial statements.
52
<PAGE>
WELLPOINT HEALTH NETWORKS INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
COMMON STOCK
---------------------------------------
CLASS A
ISSUED IN TREASURY COMMON STOCK
PREFERRED ------------------------ ------------- ----------------------
(IN THOUSANDS) STOCK SHARES AMOUNT AMOUNT SHARES AMOUNT
- ------------------------------------------------ ------------- ----------- ----------- ------------- --------- -----------
<S> <C> <C> <C> <C> <C> <C>
Balance as of January 1, 1995................... $ -- -- $ -- $ -- 19,500 $ 195
Net income....................................
Change in unrealized valuation adjustment on
investment securities, net of tax...........
----- ----------- ----- ----- --------- ---
Balance as of December 31, 1995................. -- -- -- -- 19,500 195
Net income....................................
Recapitalization
Dividends...................................
Share exchange.............................. 66,367 664 (19,500) (195)
Stock grants to employees and directors....... 117 1
Stock issued for employee stock purchase
plan........................................ 43
Change in unrealized valuation adjustment on
investment securities, net of tax...........
----- ----------- ----- ----- --------- ---
Balance as of December 31, 1996................. -- 66,527 665 -- -- --
Net income....................................
Net proceeds from common stock offering....... 3,000 30
Stock grants to employees and directors....... 6
Stock issued for employee stock option and
stock purchase plans........................ 245 3
Stock repurchased, 4,571 shares at cost....... (103)
Change in unrealized valuation adjustment on
investment securities, net of tax...........
----- ----------- ----- ----- --------- ---
Balance as of December 31, 1997................. $ -- 69,778 $ 698 $ (103) -- $ --
----- ----------- ----- ----- --------- ---
----- ----------- ----- ----- --------- ---
<CAPTION>
CLASS B
COMMON STOCK ADDITIONAL UNREALIZED
---------------------- PAID-IN VALUATION RETAINED
(IN THOUSANDS) SHARES AMOUNT CAPITAL ADJUSTMENT EARNINGS TOTAL
- ------------------------------------------------ --------- ----------- ----------- ----------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
Balance as of January 1, 1995................... 80,000 $ 800 $1,100,288 $ (69,498) $ 387,134 $1,418,919
Net income.................................... 179,989 179,989
Change in unrealized valuation adjustment on
investment securities, net of tax........... 71,318 71,318
--------- --- ----------- ----------- --------- ---------
Balance as of December 31, 1995................. 80,000 800 1,100,288 1,820 567,123 1,670,226
Net income.................................... 202,002 202,002
Recapitalization
Dividends................................... (343,784) (651,216) (995,000)
Share exchange.............................. (80,000) (800) 331 --
Stock grants to employees and directors....... 4,082 4,083
Stock issued for employee stock purchase
plan........................................ 962 962
Change in unrealized valuation adjustment on
investment securities, net of tax........... (11,814) (11,814)
--------- --- ----------- ----------- --------- ---------
Balance as of December 31, 1996................. -- -- 761,879 (9,994) 117,909 870,459
Net income.................................... 227,409 227,409
Net proceeds from common stock offering....... 110,310 110,340
Stock grants to employees and directors....... 270 270
Stock issued for employee stock option and
stock purchase plans........................ 9,853 9,856
Stock repurchased, 4,571 shares at cost....... (103)
Change in unrealized valuation adjustment on
investment securities, net of tax........... 4,938 4,938
--------- --- ----------- ----------- --------- ---------
Balance as of December 31, 1997................. -- $ -- $ 882,312 $ (5,056) $ 345,318 $1,223,169
--------- --- ----------- ----------- --------- ---------
--------- --- ----------- ----------- --------- ---------
</TABLE>
See the accompanying notes to the consolidated financial statements.
53
<PAGE>
WELLPOINT HEALTH NETWORKS INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------------
1997 1996 1995
------------ ------------ -----------
(IN THOUSANDS)
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income............................................................. $ 227,409 $ 202,002 $ 179,989
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation and amortization, net of accretion...................... 57,100 37,739 22,034
Gains on sales of assets, net........................................ (59,168) (15,677) (14,510)
Provision (benefit) for deferred income taxes........................ 22,042 (22,341) (17,973)
Amortization of deferred gain on sale of building.................... (4,426) (2,582) --
Writedown for impairment of intangible assets........................ -- -- 27,316
(Increase) decrease in certain assets, net of acquisitions:
Receivables, net................................................... (16,884) 14,812 (37,508)
Other current assets............................................... (29,536) 46,929 (4,907)
Other non-current assets........................................... 1,719 (47,552) --
Increase (decrease) in certain liabilities, net of acquisitions:
Medical claims payable............................................. 170,728 (9,805) (4,422)
Loss and loss adjustment expense reserves.......................... 17,027 59,742 25,581
Reserves for future policy benefits................................ 407 (492) --
Unearned premiums.................................................. 15,798 20,382 4,935
Accounts payable and accrued expenses.............................. 116,926 74,320 3,711
Experience rated and other refunds................................. 20,954 11,043 (34,910)
Income taxes payable and other current liabilities................. 13,350 48,752 (3,304)
Accrued postretirement benefits.................................... 2,805 (1,600) 4,352
Other non-current liabilities...................................... (16,421) (4,772) --
------------ ------------ -----------
Net cash provided by operating activities........................ 539,830 410,900 150,384
------------ ------------ -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Investments purchased.................................................. (2,747,205) (1,220,370) (706,792)
Proceeds from investments sold......................................... 1,854,987 899,080 771,074
Proceeds from matured investments...................................... 154,402 81,448 686,221
Property and equipment purchased, net.................................. (58,442) (43,327) (25,223)
Additional investment in subsidiaries.................................. (18,317) -- --
Purchase of subsidiaries, net of cash acquired......................... 361,977 (453,068) (13,177)
------------ ------------ -----------
Net cash provided by (used in) investing activities.............. (452,598) (736,237) 712,103
------------ ------------ -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from long-term debt........................................... 150,000 825,000 --
Repayment of long-term debt............................................ (387,000) (262,000) --
Net proceeds from common stock offering................................ 110,340 -- --
Proceeds from the issuance of common stock............................. 10,126 962 --
Common stock repurchased............................................... (103) -- --
Dividends paid in connection with the Recapitalization................. -- (995,000) --
Additional capital contributed by Blue Cross of California............. -- -- 43,700
------------ ------------ -----------
Net cash provided by (used in) financing activities.............. (116,637) (431,038) 43,700
------------ ------------ -----------
Net increase (decrease) in cash and cash equivalents..................... (29,405) (756,375) 906,187
Cash and cash equivalents at beginning of year........................... 313,256 1,069,631 163,444
------------ ------------ -----------
Cash and cash equivalents at end of year................................. $ 283,851 $ 313,256 $ 1,069,631
------------ ------------ -----------
------------ ------------ -----------
</TABLE>
See the accompanying notes to the consolidated financial statements.
54
<PAGE>
WELLPOINT HEALTH NETWORKS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION
WellPoint Health Networks Inc. (the "Company" or "WellPoint"), one of the
nation's largest publicly traded managed health care companies, is organized
under the laws of Delaware and holds the exclusive license for the right to use
the Blue Cross name and related service marks in California. The Company has
medical members in all 50 states and the District of Columbia.
On August 4, 1997, the Company completed its plan, which was approved by
shareholders, to reincorporate in Delaware (the "Reincorporation") through the
formation of a new holding company structure. The Reincorporation involved a
merger among the Company, WellPoint Health Networks Inc., a California
corporation ("WellPoint California") and WLP Acquisition Corp. (the "Merger
Subsidiary"), a wholly owned subsidiary of the Company. The Merger Subsidiary
was merged with and into WellPoint California, and WellPoint California's
shareholders became the stockholders of the Company. As a result of such merger,
WellPoint California became a wholly owned subsidiary of the Company and changed
its name to Blue Cross of California. A principal purpose of the Reincorporation
was to allow a restructuring of the Company and its various subsidiaries in
order to improve the Company's capital as measured for purposes of the Blue
Cross Blue Shield Association ("BCBSA") which owns the rights to the Blue Cross
name and mark.
The Company offers a broad spectrum of quality network-based health plans,
including health maintenance organizations ("HMOs"), preferred provider
organizations ("PPOs"), point-of-service ("POS") plans, other hybrid plans and
traditional indemnity products to large and small employers, individuals and
seniors. The Company's managed care plans incorporate a full range of financial
incentives and cost controls for both members and providers. In addition, the
Company provides underwriting, actuarial service, network access, medical cost
management, claims processing and administrative services to self-funded
employers under management services contracts. The Company also provides a broad
array of specialty and other products and services, including pharmacy, dental,
utilization management, life, integrated workers' compensation, preventive care,
disability, behavioral health, COBRA and flexible benefits account
administration.
2. ACQUISITIONS AND RECAPITALIZATION
PURCHASE OF GROUP BENEFITS OPERATIONS OF JOHN HANCOCK MUTUAL LIFE INSURANCE
COMPANY AND LIFE AND HEALTH BENEFITS MANAGEMENT DIVISION OF MASSACHUSETTS
MUTUAL LIFE INSURANCE COMPANY
On March 1, 1997, the Company completed its acquisition of certain portions
of the group benefits operations (the "GBO") of John Hancock Mutual Life
Insurance Company for approximately $89.7 million in cash, subject to adjustment
upon completion of a post-closing audit. The GBO, which is now part of the
Company's wholly owned subsidiary, UNICARE Life & Health Insurance Company,
focuses on the large employer segment (employers with 5,000 or more employees)
and provides medical, life, dental and disability services to some of the
largest employers in the nation.
On March 31, 1996, the Company completed its acquisition of the Life and
Health Benefits Management Division ("MMHD") of Massachusetts Mutual Life
Insurance Company ("MassMutual"), which conducts business under the name UNICARE
Life & Health Insurance Company. The purchase price was $402.2 million, which
was funded with $340.2 million in cash and a Series A term note for $62.0
million, of which $20.0 million was outstanding at December 31, 1997.
The purchase method of accounting has been used to account for both of the
above acquisitions. The acquired operations are included in the Company's
results of operations from their respective date of
55
<PAGE>
WELLPOINT HEALTH NETWORKS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. ACQUISITIONS AND RECAPITALIZATION (CONTINUED)
acquisition. The excess purchase price over net assets acquired was
approximately $148.8 million for the GBO and $251.0 million for MMHD and is
being amortized on a straight-line basis over 35 years for both the GBO and
MMHD.
RECAPITALIZATION AND PURCHASE OF BCC COMMERCIAL OPERATIONS
On May 20, 1996, the Company concluded a series of transactions
(collectively, the "Recapitalization") to recapitalize its publicly traded,
majority-owned subsidiary, WellPoint Health Networks Inc., a California
corporation ("Old WellPoint"), pursuant to the Amended and Restated
Recapitalization Agreement dated as of March 31, 1995 (the "Amended
Recapitalization Agreement"), by and among Old WellPoint, the company formerly
known as Blue Cross of California ("BCC"), the California HealthCare Foundation
(the "Foundation") and the California Endowment (the "Endowment"). In connection
with the Recapitalization, (a) Old WellPoint distributed an aggregate of $995.0
million by means of a special dividend of $10.00 per share to the record holders
of its Class A and Class B Common Stock as of May 15, 1996, (b) BCC, the sole
shareholder of Old WellPoint's Class B Common Stock, donated its portion of such
dividend ($800.0 million) to the Endowment, (c) BCC donated its assets, other
than the shares of the Old WellPoint Class B Common Stock held by BCC and its
commercial operations (the "BCC Commercial Operations"), to the Foundation, (d)
BCC changed its status from a California nonprofit public benefit corporation to
a California for-profit business corporation, in conformity with the terms and
orders of the California Department of Corporations (the "DOC"), immediately
following which BCC issued to the Foundation 53,360,000 shares of its common
stock and (e) Old WellPoint merged with and into BCC (the "Merger"), with the
resulting entity changing its name to WellPoint Health Networks Inc. In
connection with the Merger, (i) each outstanding share of Old WellPoint's Class
A Common Stock was converted into 0.667 shares of the Company's Common Stock,
(ii) the outstanding shares of the Company's common stock issued to the
Foundation prior to the Merger were converted into 53,360,000 shares of the
post-merger Company's Common Stock, (iii) a cash payment of $235.0 million was
made to the Foundation to reflect the value of the BCC Commercial Operations and
(iv) the outstanding shares of Old WellPoint's Class B Common Stock were
canceled. The BCC Commercial Operations consisted of, among other things, the
health care lines of business conducted by BCC, substantially all agreements
with health care providers that provided services to enrollees of BCC and all of
the cash and securities of BCC on hand at the time of closing of the
Recapitalization. In November 1996, the Company and the Foundation amended the
terms of the Recapitalization to provide for the substitution by the Company of
$7.0 million in cash for the capital stock of certain entities owning the real
estate parcel surrounding the Company's headquarters building in Woodland Hills,
California.
The purchase method of accounting has been used to account for the
acquisition of the BCC Commercial Operations. The excess purchase price over
assets acquired was approximately $206.7 million and is being amortized on a
straight-line basis over 40 years.
By virtue of the Merger and the exchange of shares of Old WellPoint for
those of the Company, as of May 20, 1996 (the effective date of the Merger),
there were a total of 66,366,500 shares of the Company's Common Stock
outstanding, of which 53,360,000 shares (or approximately 80.4%) were held
beneficially by the Foundation. On November 21, 1996 and April 10, 1997, the
Foundation sold approximately 15.0 and 8.5 million shares, respectively, of the
Company's Common Stock through public offerings. Upon completion of the April
1997 offering, the Foundation owned 29.9 million shares (or approximately 43.0%)
of the Company's outstanding shares.
56
<PAGE>
WELLPOINT HEALTH NETWORKS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. ACQUISITIONS AND RECAPITALIZATION (CONTINUED)
See Note 19 for unaudited pro forma combined condensed financial statements
for the above acquisitions.
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The following is a summary of significant accounting policies used in the
preparation of the accompanying consolidated financial statements. Such policies
are in accordance with generally accepted accounting principles and have been
consistently applied. The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses for each reporting
period. The significant estimates made in the preparation of the Company's
consolidated financial statements relate to the assessment of the carrying value
of the intangible assets, medical claims payable, loss and loss adjustment
expense reserves, reserves for future policy benefits, experience rated refunds
and contingent liabilities. While management believes that the carrying value of
such assets and liabilities are adequate as of December 31, 1997 and 1996,
actual results could differ from the estimates upon which the carrying values
were based.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the Company
and its subsidiaries. All significant intercompany transactions and accounts
have been eliminated in consolidation.
CASH EQUIVALENTS
The Company considers cash equivalents to include highly liquid debt
instruments purchased with an original remaining maturity of three months or
less.
CONCENTRATION OF CREDIT RISK
Financial instruments that potentially subject the Company to significant
concentrations of credit risk consist principally of cash investments,
investment securities and interest rate swaps. The Company invests its excess
cash primarily in commercial paper and money market funds. Although a majority
of the cash accounts exceed the federally insured deposit amount, management
does not anticipate nonperformance by financial institutions and reviews the
financial viability of these institutions on a periodic basis. The Company
attempts to limit its risk in investment securities by maintaining a diversified
portfolio. The components of investment securities are shown in Note 4.
INVESTMENTS
Investment securities consist primarily of U.S. Treasury and agency
securities, mortgage-backed securities, investment grade corporate bonds and
equity securities. The Company has determined that its investment securities are
available for use in current operations and, accordingly, has classified such
investment securities as current without regard to contractual maturity dates.
Long-term investments consist primarily of restricted assets, equity and
other investments. Restricted assets included in long-term investments at
December 31, 1997 and 1996 were $94.2 million and $93.7 million, respectively,
and consist of deposits required by the DOC. These deposits consist primarily of
U.S.
57
<PAGE>
WELLPOINT HEALTH NETWORKS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Treasury bonds and notes. Due to their restricted nature, such investments are
classified as long-term without regard to contractual maturity.
The Company has determined that its debt and equity securities are available
for sale. Debt and equity securities are carried at estimated fair value based
on quoted market prices for the same or similar instruments. Unrealized gains
and losses are computed on the basis of specific identification and are included
in stockholders' equity, net of applicable deferred income taxes. Realized gains
and losses on the disposition of investments are included in investment income.
The specific identification method is used in determining the cost of debt and
equity securities sold.
The Company participates in a securities lending program whereby marketable
securities in the Company's portfolio are transferred to an independent broker
or dealer in exchange for collateral equal to at least 102% of the market value
of securities on loan.
PREMIUMS RECEIVABLE
Premiums receivable are shown net of an allowance based on historical
collection trends and management's judgment on the collectibility of these
accounts. These collection trends, as well as prevailing and anticipated
economic conditions, are routinely monitored by management, and any adjustments
required are reflected in current operations.
PROPERTY AND EQUIPMENT, NET
Property and equipment are stated at cost, net of depreciation, and are
depreciated on the straight-line method over the estimated useful lives of the
assets. Leasehold improvements are stated net of amortization and are amortized
over a period not exceeding the term of the lease.
INTANGIBLE ASSETS
Intangible assets represent the cost in excess of fair value of the net
assets (including tax attributes) acquired in purchase transactions. Intangible
assets are amortized on a straight-line basis over periods ranging from 25 to 40
years. Amortization charged to operations was $20.9 million, $12.8 million and
$5.6 million for the years ended December 31, 1997, 1996 and 1995, respectively.
Accumulated amortization as of December 31, 1997 and 1996 was $41.9 million and
$21.6 million, respectively.
The Company periodically evaluates whether events or circumstances have
occurred that may affect the estimated useful life or the recoverability of the
remaining balance of goodwill and other identifiable intangible assets.
Impairment of an intangible asset is triggered when the estimated future
undiscounted cash flows (excluding interest charges) do not exceed the carrying
amount of the intangible asset. If the events or circumstances indicate that the
remaining balance of the intangible asset may be permanently impaired, such
potential impairment will be measured based upon the difference between the
carrying amount of the intangible asset and the fair value of such asset
determined using the estimated future discounted cash flows (excluding interest
charges) generated from the use and ultimate disposition of the respective
acquired entity.
58
<PAGE>
WELLPOINT HEALTH NETWORKS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
MEDICAL CLAIMS PAYABLE
The liability for medical claims payable includes claims in process and a
provision for incurred but not reported claims, which is actuarially determined
based on historical claims payment experience and other statistics. Claim
processing expenses are also accrued based on an estimate of expenses necessary
to process such claims. Such reserves are continually monitored and reviewed
with any adjustments reflected in current operations. Capitation costs represent
monthly fees paid to physicians, certain other medical service providers and
hospitals in the Company's HMO networks as retainers for providing continuing
medical care. The Company maintains various programs that provide incentives to
physicians, certain other medical service providers and hospitals participating
in its HMO networks through the use of risk-sharing agreements and other
programs. Payments under such agreements are made based on the providers'
performance in controlling health care costs while providing quality health
care. Expenses related to these programs, which are based in part on estimates,
are recorded in the period in which the related services are rendered.
LOSS AND LOSS ADJUSTMENT EXPENSE RESERVES
The estimated liabilities for loss and loss adjustment expenses relate to
the Company's workers' compensation business and include the accumulation of
estimates for losses and claims reported prior to the balance sheet dates,
estimates (based upon historical information) of claims incurred but not
reported and estimates of expenses for investigating and adjusting all incurred
and unadjusted claims. Amounts reported are estimates of the ultimate net cost
of settlement which is subject to the impact of future changes in economic and
social conditions. Such amounts are not discounted for interest. Reserves are
continually monitored and reviewed, and as settlements are made or reserves
adjusted, differences are reflected in current operations. The current portion
of loss and loss adjustment expense reserves relates to the portion of such
reserves which management expects to pay within one year.
RESERVES FOR FUTURE POLICY BENEFITS
The estimated reserves for future policy benefits relate to the life and
disability business. Reserves for future extended benefit coverage are based on
projections of past experience. Reserves for future policy and contract benefits
for certain long-term disability products and group paid-up life products are
based upon interest, mortality and morbidity assumptions from published
actuarial tables, modified based upon the Company's experience. Reserves are
continually monitored and reviewed, and as settlements are made or reserves
adjusted, differences are reflected in current operations. The current portion
of reserves for future policy benefits relates to the portion of such reserves
which management expects to pay within one year.
POSTRETIREMENT BENEFITS
The Company currently provides certain health care and life insurance
benefits to eligible retirees and their dependents under plans administered by
the Company. The Company accrues the estimated costs of retiree health and other
postretirement benefits during the periods in which eligible employees render
service to earn the benefits.
59
<PAGE>
WELLPOINT HEALTH NETWORKS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
INCOME TAXES
Beginning in 1996, the Company filed a consolidated income tax return with
its subsidiaries. For 1995, the operating results of Old WellPoint were included
in the consolidated income tax returns filed by BCC. The income tax provision
for 1995 was calculated separately for the Company without the benefit of any
special tax provisions applicable to BCC or its other subsidiaries. The
Company's provision for income taxes reflects the current and future tax
consequences of all events that have been recognized in the financial statements
as measured by the provision of currently enacted tax laws and rates applicable
to future periods.
RECOGNITION OF PREMIUM REVENUE AND MANAGEMENT SERVICES REVENUE
For most health care and life insurance contracts, premiums are billed in
advance of coverage periods and are recognized as revenue over the period in
which services or benefits are obligated to be provided. For other contracts,
revenue is recognized based on claims paid, estimated outstanding claims and
related administrative fees. Premium revenue is adjusted by a provision for
experience rated refunds, which are estimated for certain group contracts based
on historical and current claims experience.
Workers' compensation insurance premiums are based upon the payroll of the
employer. Premiums are earned on a pro rata basis over the term of the policy,
generally one year. The ultimate premiums on retrospectively rated policies are
estimated and, if necessary, adjusted for current claims experience.
Premiums applicable to the unexpired contractual coverage periods are
reflected in the accompanying consolidated balance sheets as unearned premiums.
Management services revenue is earned as services are performed and consists
of administrative fees for services provided to third parties, including
management of medical services, claims processing and access to provider
networks.
HEALTH CARE SERVICES AND OTHER BENEFITS
Health care services and other benefits expense includes the costs of health
care services, capitation expenses and expenses related to risk-sharing
agreements with participating physicians, medical groups and hospitals and
incurred losses on the workers' compensation, disability and life products. The
costs of health care services are accrued as services are rendered, including an
estimate for claims incurred but not yet reported.
ADVERTISING COSTS
The Company uses print and broadcast advertising to promote its products.
The cost of advertising is expensed as incurred and totaled approximately $36.6
million, $34.8 million and $21.2 million for the years ended December 31, 1997,
1996 and 1995, respectively.
EARNINGS PER SHARE
The Company has adopted Statement of Financial Accounting Standards No. 128,
"Earnings Per Share," effective for fiscal years ending on or after December 31,
1997. Earnings per share are now presented in a dual format, computed both
including and excluding the impact of common stock equivalents. Prior year
information has been restated in order to provide comparable disclosure.
60
<PAGE>
WELLPOINT HEALTH NETWORKS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
STOCK-BASED COMPENSATION
Statement of Financial Accounting Standards No. 123, "Accounting for
Stock-Based Compensation," effective in 1996 encourages, but does not require,
companies to record compensation cost for stock-based employee compensation
plans at fair value. The Company has chosen to continue to account for stock-
based compensation using the intrinsic method prescribed in Accounting
Principles Board ("APB") Opinion No. 25, "Accounting for Stock Issued to
Employees," and related interpretations. Accordingly, compensation cost for
stock options, under existing plans is measured as the excess, if any, of the
quoted market price of the Company's stock at the date of the grant over the
amount an employee must pay to acquire the stock.
RECLASSIFICATIONS
Certain amounts in the prior year consolidated financial statements have
been reclassified to conform to the 1997 presentation.
4. INVESTMENTS
INVESTMENT SECURITIES
The Company's investment securities consist of the following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31, 1997
------------------------------------------------
GROSS UNREALIZED
AMORTIZED -------------------- ESTIMATED
COST GAINS LOSSES FAIR VALUE
------------ --------- --------- ------------
<S> <C> <C> <C> <C>
U.S. Treasury and agency.................... $ 384,250 $ 2,361 $ 299 $ 386,312
Mortgage-backed securities.................. 721,816 8,370 2,229 727,957
Corporate and other securities.............. 1,248,984 14,679 5,784 1,257,879
------------ --------- --------- ------------
Total debt securities..................... 2,355,050 25,410 8,312 2,372,148
Equity and other investments................ 206,616 8,411 34,400 180,627
------------ --------- --------- ------------
Total investment securities............. $ 2,561,666 $ 33,821 $ 42,712 $ 2,552,775
------------ --------- --------- ------------
------------ --------- --------- ------------
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, 1996
------------------------------------------------
GROSS UNREALIZED
AMORTIZED -------------------- ESTIMATED
COST GAINS LOSSES FAIR VALUE
------------ --------- --------- ------------
<S> <C> <C> <C> <C>
U.S. Treasury and agency.................... $ 831,497 $ 578 $ 14,558 $ 817,517
Mortgage-backed securities.................. 154,249 433 2,751 151,931
Corporate and other securities.............. 650,788 3,309 3,559 650,538
------------ --------- --------- ------------
Total debt securities..................... 1,636,534 4,320 20,868 1,619,986
Equity and other investments................ 109,955 2,519 4,155 108,319
------------ --------- --------- ------------
Total investment securities............. $ 1,746,489 $ 6,839 $ 25,023 $ 1,728,305
------------ --------- --------- ------------
------------ --------- --------- ------------
</TABLE>
The amortized cost and estimated fair value of debt securities as of
December 31, 1997, based on contractual maturity dates are summarized below (in
thousands). Expected maturities for mortgage-
61
<PAGE>
WELLPOINT HEALTH NETWORKS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
4. INVESTMENTS (CONTINUED)
backed securities may differ from contractual maturities because borrowers may
have the right to call or prepay obligations with or without call or prepayment
penalties.
<TABLE>
<CAPTION>
AMORTIZED ESTIMATED
COST FAIR VALUE
------------ ------------
<S> <C> <C>
Due in one year or less........................................... $ 128,499 $ 127,395
Due after one year through five years............................. 866,409 870,574
Due after five years through ten years............................ 764,562 770,004
Due after ten years............................................... 595,580 604,175
------------ ------------
Total debt securities........................................... $ 2,355,050 $ 2,372,148
------------ ------------
------------ ------------
</TABLE>
For the years ended December 31, 1997, 1996 and 1995, proceeds from the
sales and maturities of debt securities were $1,595.7 million, $647.5 million
and $1,253.0 million, respectively. Gross gains of $9.6 million and gross losses
of $7.2 million were realized on the sales of debt securities for the year ended
December 31, 1997. For 1996, gross realized gains and gross realized losses from
sales of debt securities were $2.3 million and $3.0 million, respectively. In
1995, gross realized gains and gross realized losses from sales of debt
securities were $2.2 million and $5.2 million, respectively.
For the years ended December 31, 1997, 1996 and 1995, proceeds from the
sales of equity securities were $413.7 million, $333.0 million and $204.3
million, respectively. Gross gains of $68.5 million and gross losses of $6.5
million were realized on the sales of equity securities in 1997. For 1996, gross
realized gains and gross realized losses on the sales of equity securities were
$19.1 million and $2.5 million, respectively. In 1995, gross realized gains and
gross realized losses on the sales of equity securities were $21.1 million and
$2.7 million, respectively.
Securities on loan under its securities lending program are included in the
Company's cash and investment portfolio shown on the accompanying consolidated
balance sheets. Under this program, broker/ dealers are required to deliver
substantially the same security to the Company upon completion of the
transaction. The balance of securities on loan as of December 31, 1997 and 1996
was $499.3 million and $691.5 million, respectively, and income earned on
security lending transactions for the years ended December 31, 1997, 1996 and
1995 was $2.0 million, $2.2 million and $1.2 million, respectively.
LONG-TERM INVESTMENTS
The Company's long-term investments consist of the following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31, 1997
------------------------------------------------
GROSS UNREALIZED
AMORTIZED -------------------- ESTIMATED
COST GAINS LOSSES FAIR VALUE
------------ --------- --------- ------------
<S> <C> <C> <C> <C>
U.S. Treasury and agency securities......... $ 92,957 $ 214 $ -- $ 93,171
Equity and other investments................ 9,648 -- -- 9,648
------------ --------- --------- ------------
Total long-term investments............. $ 102,605 $ 214 $ -- $ 102,819
------------ --------- --------- ------------
------------ --------- --------- ------------
</TABLE>
62
<PAGE>
WELLPOINT HEALTH NETWORKS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
4. INVESTMENTS (CONTINUED)
<TABLE>
<CAPTION>
DECEMBER 31, 1996
------------------------------------------------
GROSS UNREALIZED
AMORTIZED -------------------- ESTIMATED
COST GAINS LOSSES FAIR VALUE
------------ --------- --------- ------------
<S> <C> <C> <C> <C>
U.S. Treasury and agency securities......... $ 93,718 $ 23 $ 389 $ 93,352
Corporate and other securities.............. 228 -- 16 212
------------ --------- --------- ------------
Total debt securities..................... 93,946 23 405 93,564
Equity and other investments................ 30,367 -- -- 30,367
------------ --------- --------- ------------
Total long-term investments............. $ 124,313 $ 23 $ 405 $ 123,931
------------ --------- --------- ------------
------------ --------- --------- ------------
</TABLE>
At December 31, 1997, the Company's debt securities have contractual
maturity dates: due in one year or less, amortized cost of $26.7 million and
market value of $26.8 million and due after one year and through five years,
amortized cost of $66.2 million and market value of $66.4 million.
In 1997 and 1996, the Company owned an interest in the stock of Health
Partners, Inc. ("HPI") which was accounted for under the equity method. In
October 1997, HPI entered into a business combination with FPA Medical
Management, Inc. ("FPA"), a publicly traded company, which was accounted for as
a pooling of interests. As a result of the transaction, the Company exchanged
its HPI stock for FPA stock and recognized a gain of $30.3 million at the date
of the transaction. At December 31, 1997, the Company's investment in FPA is
held in its investment portfolio at estimated fair value. Fluctuation in the
market price of FPA since the date of the transaction is reflected in
stockholders' equity, net of tax.
5. RECEIVABLES, NET
Receivables consist of the following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------
1997 1996
---------- ----------
<S> <C> <C>
Premiums receivable................................................... $ 357,814 $ 301,897
Investment income and other receivables............................... 212,227 121,060
---------- ----------
570,041 422,957
Less allowance for doubtful accounts.................................. 32,587 21,657
---------- ----------
Receivables, net...................................................... $ 537,454 $ 401,300
---------- ----------
---------- ----------
</TABLE>
63
<PAGE>
WELLPOINT HEALTH NETWORKS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
6. PROPERTY AND EQUIPMENT, NET
Property and equipment, at cost, consist of the following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------
1997 1996
---------- ----------
<S> <C> <C>
Furniture and fixtures................................................ $ 48,715 $ 37,869
Equipment............................................................. 154,878 109,302
Leasehold improvements................................................ 32,227 24,486
---------- ----------
235,820 171,657
Less accumulated depreciation and amortization........................ 120,627 88,937
---------- ----------
Property and equipment, net........................................... $ 115,193 $ 82,720
---------- ----------
---------- ----------
</TABLE>
Depreciation and amortization expense for the years ended December 31, 1997,
1996 and 1995 was $33.2 million, $19.9 million and $16.3 million, respectively.
7. LONG-TERM DEBT
NOTES PAYABLE
In connection with the MMHD acquisition, the Company issued a Series A term
note for $62.0 million on March 31, 1996. At December 31, 1997 and 1996, $20
million was outstanding under this note. The Series A note will mature on March
31, 1999. Interest is paid quarterly and the interest rate is equal to the
Company's average cost on the revolving credit facility, as described below.
REVOLVING CREDIT FACILITY
In May 1996, the Company entered into an agreement with a consortium of
financial institutions for a five-year revolving credit facility to provide a
line of credit up to $1.25 billion. In May 1996, $775.0 million was drawn on
this facility for the payment of a special dividend to the stockholders of Old
WellPoint in connection with the Recapitalization. In April 1997 the Company
amended this facility to decrease the maximum amount which could be borrowed to
$1.0 billion. The facility expires as of May 15, 2002, although it may be
extended for an additional one-year period under certain circumstances. At
December 31, 1997 and 1996, $368.0 million and $555.0 million, respectively, was
outstanding under this facility.
The agreement provides for interest on committed advances at rates
determined by reference to the bank's base rate or to the London Interbank
Offered Rate ("LIBOR") plus a margin determined by reference to the Company's
leverage ratio (as defined in the credit agreement) or the then-current rating
of the Company's unsecured long-term debt by specified rating agencies. Interest
is determined using whichever of these methods is the most favorable to the
Company (6.1% at December 31, 1997). Borrowings under the credit facility are
made on a committed basis or pursuant to an auction-bid process. A facility fee
based on the facility amount, regardless of utilization, is payable quarterly.
The facility fee rate is also determined by the unsecured debt ratings or the
leverage ratio of the Company.
SUBORDINATED DEBT
In November, 1996, the Company entered into a subordinated term loan
agreement with a bank for a $200 million two-year unsecured subordinated term
loan facility, maturing on December 31, 1998. The
64
<PAGE>
WELLPOINT HEALTH NETWORKS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
7. LONG-TERM DEBT (CONTINUED)
agreement provided for interest at rates determined by reference to the bank's
base rate or to the LIBOR plus a margin determined by reference to the Company's
leverage ratio or the then-current rating of the Company's unsecured long-term
debt by specified rating agencies. Interest was determined using whichever of
these methods was the most favorable to the Company and was paid quarterly. On
December 30, 1996, the Company borrowed $50 million in order to meet increased
capital requirements of the BCBSA, which borrowing was outstanding on December
31, 1996. All amounts outstanding under the subordinated term loan agreement
were repaid as of April 1997, and the agreement has expired.
In July 1996, the Company filed a registration statement relating to the
issuance of $1.0 billion of senior or subordinated unsecured indebtedness. As of
December 31, 1997, no indebtedness had been issued pursuant to this registration
statement.
MATURITIES
At December 31, 1997, the Company's long-term debt maturities are as
follows: 1998--zero; 1999-- $20 million; 2000--zero; 2001--zero; 2002--$368
million.
DEBT COVENANTS
The Company's revolving credit facility requires the maintenance of certain
financial ratios and contains other restrictive covenants, including
restrictions on the occurrence of additional indebtedness and the granting of
certain liens, limitations on acquisitions and investments and limitations on
changes in control. As of December 31, 1997, the Company was in compliance with
the requirements outlined in these agreements.
INTEREST RATE SWAPS
During the third quarter of 1996, the Company entered into three interest
rate swap agreements to manage interest costs and risks associated with changing
interest rates. These agreements effectively convert underlying variable-rate
debt (weighted average rate for 1997 of 6.1%) into fixed-rate debt (weighted
average rate for 1997 of 6.9%). The agreements mature at various dates through
2006. As of December 31, 1997 and 1996, the total notional amount outstanding
under the three agreements was $400.0 million. The interest rate swap agreements
subject the Company to financial risk that will vary during the life of this
agreement in relation to market interest rates. The Company does not anticipate
any material adverse effect on its financial position or results of operations
resulting from its involvement in these agreements, nor does it anticipate
non-performance by any of its counterparties. The weighted average interest rate
for the year ended December 31, 1997, including the facility and other fees and
the effect of the interest rate swaps, was 7.45%.
INTEREST PAID
Interest paid on long-term debt for the years ended December 31, 1997 and
1996 was $38.9 million and $30.3 million, respectively. No interest was paid for
the year ended December 31, 1995.
65
<PAGE>
WELLPOINT HEALTH NETWORKS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
8. INCOME TAXES
The components of the provision (benefit) for income taxes are as follows
(in thousands):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------
1997 1996 1995
---------- ---------- ----------
<S> <C> <C> <C>
Current:
Federal................................................ $ 104,258 $ 129,317 $ 111,814
State.................................................. 28,491 30,530 28,957
---------- ---------- ----------
132,749 159,847 140,771
---------- ---------- ----------
Deferred:
Federal................................................ 20,384 (17,813) (14,998)
State.................................................. 1,658 (4,528) (2,975)
---------- ---------- ----------
22,042 (22,341) (17,973)
---------- ---------- ----------
Provision for income taxes............................... $ 154,791 $ 137,506 $ 122,798
---------- ---------- ----------
---------- ---------- ----------
</TABLE>
The overall effective tax rate differs from the statutory federal tax rate
as follows (percent of pretax income):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------
1997 1996 1995
--------- --------- ---------
<S> <C> <C> <C>
Tax provision based on the federal statutory rate...................... 35.0% 35.0% 35.0%
State income taxes, net of federal benefit............................. 5.1 5.0 5.6
Tax exempt income...................................................... (0.6) (1.0) (1.3)
Non-deductible expenses................................................ 0.5 1.6 0.8
Other, net............................................................. 0.5 (0.1) 0.5
--- --- ---
Effective tax rate..................................................... 40.5% 40.5% 40.6%
--- --- ---
--- --- ---
</TABLE>
66
<PAGE>
WELLPOINT HEALTH NETWORKS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
8. INCOME TAXES (CONTINUED)
Net deferred tax assets are comprised of the following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------
1997 1996
---------- ----------
<S> <C> <C>
Gross deferred tax assets:
Market valuation on investment securities........................... $ 5,004 $ 5,536
Vacation and holiday accruals....................................... 7,986 7,046
Incurred claim reserve discounting.................................. 21,686 16,255
Provision for doubtful accounts..................................... 15,733 13,665
Unearned premium reserve............................................ 14,479 11,583
State income taxes.................................................. 9,893 9,316
Postretirement benefits............................................. 26,033 25,073
Policyholder dividends.............................................. -- 796
Deferred gain on building........................................... 8,867 10,748
Deferred compensation............................................... 8,555 6,182
Expenses not currently deductible................................... 44,615 21,450
Intangible asset impairment......................................... 8,189 9,263
Other, net.......................................................... 5,460 3,972
---------- ----------
Total gross deferred tax assets................................... 176,500 140,885
---------- ----------
Gross deferred tax liabilities:
Depreciation and amortization....................................... (11,382) (6,972)
Bond discount and basis differences................................. (20,895) (7,146)
Other, net.......................................................... (2,003) (1,790)
---------- ----------
Total gross deferred tax liabilities.............................. (34,280) (15,908)
---------- ----------
Net deferred tax assets............................................... $ 142,220 $ 124,977
---------- ----------
---------- ----------
</TABLE>
Management believes that the deferred tax assets listed above are fully
recoverable and, accordingly, no valuation allowance has been recorded. Expenses
not currently deductible include various financial statement charges and
expenses that will be deductible for income tax purposes in future periods.
In 1995, in accordance with the tax allocation agreement among BCC and
certain subsidiaries of BCC (including the Company and its subsidiaries), a
portion of BCC's consolidated alternative minimum tax ("AMT") credit was
allocated to the Company based on the respective tax liabilities in the years
that the AMT credits were utilized in the consolidated federal income tax
return. The tax benefits associated with the AMT credits were reflected as
capital contributions from BCC based on the Company's contribution to
consolidated taxable income. An AMT credit of $43.7 million was reflected as a
capital contribution in 1994 and was received in 1995.
Income taxes paid for the years ended December 31, 1997, 1996 and 1995 were
$121.2 million, $90.0 million and $79.0 million, respectively.
67
<PAGE>
WELLPOINT HEALTH NETWORKS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
9. PENSION AND POSTRETIREMENT BENEFITS
The BCC pension and postretirement plans were assumed by the Company as a
result of the Recapitalization in 1996.
PENSION BENEFITS
The Company covers substantially all employees through two non-contributory
defined benefit pension plans. One plan covers bargaining unit employees, while
the second plan, which was established on January 1, 1987, covers all eligible
exempt and administrative employees meeting certain age and employment
requirements. Plan assets are invested primarily in pooled income funds. The
Company's policy is to fund its plans according to the applicable Employee
Retirement Income Security Act of 1974 and income tax regulations. The Company
uses the unit credit method of cost determination.
The funded status of the plans is as follows:
<TABLE>
<CAPTION>
NON-BARGAINING BARGAINING
UNIT EMPLOYEES UNIT EMPLOYEES
DECEMBER 31, DECEMBER 31,
-------------------- --------------------
1997 1996 1997 1996
--------- --------- --------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Actuarial present value of projected benefit
obligations:
Vested........................................... $ 45,904 $ 34,704 $ 9,106 $ 7,962
Non-vested....................................... 3,834 2,546 80 72
--------- --------- --------- ---------
Accumulated benefit obligation..................... 49,738 37,250 9,186 8,034
Provision for future salary increases.............. 3,866 2,798 764 550
--------- --------- --------- ---------
Projected benefit obligation....................... 53,604 40,048 9,950 8,584
Less plan assets at fair value..................... 45,603 35,712 9,570 9,111
--------- --------- --------- ---------
Projected benefit obligation in excess of (less
than) plan assets................................ 8,001 4,336 380 (527)
Unrecognized prior service benefit................. (567) 91 156 204
Unrecognized net loss.............................. (6,860) (4,842) (1,776) (956)
Unrecognized net transition asset.................. -- -- -- 15
Adjustment to recognize minimum liability.......... 3,561 1,953 -- --
--------- --------- --------- ---------
Accrued pension liability (asset).................. $ 4,135 $ 1,538 $ (1,240) $ (1,264)
--------- --------- --------- ---------
--------- --------- --------- ---------
MAJOR ASSUMPTIONS:
Discount rate.................................... 7.25% 7.75% 7.25% 7.75%
Rate of increase in compensation levels.......... 5.50% 5.50% 5.50% 5.50%
Expected long-term rate of return on plan
assets......................................... 8.50% 8.50% 8.50% 8.50%
</TABLE>
68
<PAGE>
WELLPOINT HEALTH NETWORKS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
9. PENSION AND POSTRETIREMENT BENEFITS (CONTINUED)
Net periodic pension expense (benefit) for the Company's defined benefit
pension plans includes the following components:
<TABLE>
<CAPTION>
NON-BARGAINING UNIT EMPLOYEES BARGAINING UNIT EMPLOYEES YEAR
YEAR ENDED DECEMBER 31, ENDED DECEMBER 31,
------------------------------- -------------------------------
1997 1996 1995 1997 1996 1995
--------- --------- --------- --------- --------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Service cost--benefits earned
during the year................ $ 6,347 $ 4,143 $ 3,084 $ 163 $ 108 $ 76
Interest cost on projected
benefits obligations........... 3,675 2,896 2,402 678 642 589
Actual return on plan assets..... (5,538) (3,723) (5,417) (750) (956) (1,062)
Net amortization and deferral.... 2,548 1,754 3,878 (67) 266 342
--------- --------- --------- --------- --------- ---------
Net periodic pension expense
(benefit)...................... $ 7,032 $ 5,070 $ 3,947 $ 24 $ 60 $ (55)
--------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- ---------
</TABLE>
For the year ended December 31, 1997, the pension expense was $7.1 million.
Prior to the Recapitalization in 1996, BCC allocated pension expense to Old
WellPoint based on the number of employees. Management believed this to be a
reasonable and appropriate method of allocation. For the years ended December
31, 1996 and 1995, the pension expense was $5.1 million and $3.6 million,
respectively.
The Company has a Salary Deferral (401(k)) Savings Program (the "401(k)
Plan"). Employees over 18 years of age are eligible to participate in the Plan
if they meet certain length of service requirements. Under this plan, employees
may contribute a percentage of their pre-tax earnings to the 401(k) Plan. After
one year of service, employee contributions up to 6% are matched by an employer
contribution equal to 75% of the employee's contribution. Matching contributions
are immediately vested. Effective January 1, 1997, 25% of the employer
contribution was in the Company's common stock. The employer contribution is 85%
for employees with ten to nineteen years of service as of January 1, 1997 and
100% for employees with twenty years or more of service as of such date. Company
expense related to the 401(k) Plan totaled $11.8 million, $8.2 million and $6.1
million for the years ended December 31, 1997, 1996 and 1995, respectively.
POSTRETIREMENT BENEFITS
The Company provides certain health care and life insurance benefits to
eligible retirees and their dependents. Employees acquired as a result of the
MMHD acquisition and all employees hired after January 1, 1997 are not covered
under the Company's postretirement benefit plan. All other Company employees are
fully eligible for retiree benefits upon attaining 10 years of service and a
minimum age of 55. The plan in effect for those retiring prior to September 1,
1994 provides for Company-paid life insurance for all retirees based on age and
a percent of salary. In addition, the majority of retirees age 62 or greater
receive fully paid health benefit coverage for themselves and their dependents.
For employees retiring on or after September 1, 1994, the Company currently
subsidizes health benefit coverage based on the retiree's years of service at
retirement and date of hire. Life insurance benefits for retirees hired on or
after May 1, 1992 are set at $10,000 upon retirement and are reduced to $5,000
at age 70.
69
<PAGE>
WELLPOINT HEALTH NETWORKS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
9. PENSION AND POSTRETIREMENT BENEFITS (CONTINUED)
The accumulated postretirement benefit obligation ("APBO") and the accrued
postretirement benefits as of December 31, 1997 and 1996 are as follows (in
thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1997 1996
--------- ---------
<S> <C> <C>
Actives not eligible.................................................... $ 29,545 $ 23,312
Actives fully eligible.................................................. 252 221
Retirees and dependents................................................. 24,890 24,333
--------- ---------
Accumulated postretirement benefits obligation.......................... 54,687 47,866
Unrecognized net gain from accrued postretirement benefit cost.......... 9,204 13,220
--------- ---------
Accrued postretirement benefits......................................... $ 63,891 $ 61,086
--------- ---------
--------- ---------
</TABLE>
The above actuarially determined APBO was calculated using discount rates of
7.25% and 7.75% as of December 31, 1997 and 1996, respectively. The medical
trend rate is assumed to decline gradually from 12% (under age 65) and 10% (age
65 and over) to 6% by the year 2002. These estimated trend rates are subject to
change in the future. The medical trend rate assumption has a significant effect
on the amounts reported. For example, an increase in the assumed health care
trend rates of one percent in each year would increase the APBO as of December
31, 1997 by $7.8 million and would increase service and interest costs by $1.0
million. For life insurance benefit calculations, a compensation increase of
5.5% was assumed.
Net periodic postretirement benefit cost includes the following components
(in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------------
1997 1996 1995
--------- --------- ---------
<S> <C> <C> <C>
Service cost..................................................... $ 1,980 $ 2,047 $ 1,691
Interest cost.................................................... 3,783 3,490 3,216
Net amortization and deferral.................................... (621) (438) --
--------- --------- ---------
Net periodic postretirement benefit cost......................... $ 5,142 $ 5,099 $ 4,907
--------- --------- ---------
--------- --------- ---------
</TABLE>
10. COMMON STOCK
STOCK OPTION PLANS
In 1996 the Company adopted its Employee Stock Option Plan (the "Employee
Option Plan"). In May 1996, all eligible employees were granted options to
purchase common stock under the Employee Option Plan. The exercise price of
options granted under the Employee Option Plan is the fair market value of the
Common Stock on the day of the grant. Each option granted has a maximum term of
ten years. The options granted in 1997 and 1996 vest ratably over a three-year
period. The maximum number of shares of Common Stock issuable under the Employee
Option Plan is 2.0 million shares, subject to adjustment for certain changes in
the Company's capital structure.
In 1996, the Company also implemented its Stock Option/Award Plan (the
"Stock Option/Award Plan") for key employees, officers and directors. The
exercise price per share is fixed by the committee appointed by the Board of
Directors to administer the Stock Option/Award Plan, but for any incentive stock
option, the exercise price will not be less than the fair market value on the
date of grant. The number
70
<PAGE>
WELLPOINT HEALTH NETWORKS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
10. COMMON STOCK (CONTINUED)
of shares that may be issued under the Stock Option/Award Plan will not exceed
5.0 million shares, subject to adjustment in accordance with the terms of the
plan. The maximum term for an option is ten years. Options granted will vest in
accordance with the terms of each grant. The Stock Option/Award Plan also allows
the grant or award of restricted stock, performance units, phantom stock and
stock appreciation rights.
The following summarizes activity in the Company's stock option plans for
the year ended December 31, 1997 and 1996:
<TABLE>
<CAPTION>
WEIGHTED
AVERAGE
EXERCISE
PRICE
SHARES PER SHARE
---------- -------------
<S> <C> <C>
Outstanding at January 1, 1996.................................... -- $ --
Granted........................................................... 3,273,089 39.27
Canceled.......................................................... (108,093) 39.68
Exercised......................................................... -- --
----------
Outstanding at December 31, 1996.................................. 3,164,996 39.26
Granted........................................................... 1,698,327 36.13
Canceled.......................................................... (572,511) 37.76
Exercised......................................................... (192,089) 39.61
----------
Outstanding at December 31, 1997.................................. 4,098,723 38.12
----------
----------
Exercisable at:
December 31, 1996................................................. 135,548 39.68
December 31, 1997................................................. 1,077,221 39.32
</TABLE>
The options outstanding at December 31, 1997 have exercise prices ranging
from $25.16 to $60.20 per share.
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
------------------------------------------------- ----------------------------
ACTUAL RANGE NUMBER WEIGHTED AVERAGE WEIGHTED NUMBER WEIGHTED
OF EXERCISE OUTSTANDING REMAINING AVERAGE OUTSTANDING AVERAGE
PRICES AT 12/31/97 CONTRACTUAL LIFE EXERCISE PRICE AT 12/31/97 EXERCISE PRICE
- ---------------- ----------- ------------------- --------------- ----------- ---------------
<S> <C> <C> <C> <C> <C>
$25.16-35.27 1,415,854 9.1 $ 33.06 39,245 $ 30.10
$36.67-56.06 2,682,369 7.8 $ 40.79 1,037,976 $ 39.67
$60.20-60.20 500 9.7 $ 60.20 -- --
----------- -----------
4,098,723 8.2 $ 38.12 1,077,221 $ 39.32
----------- -----------
----------- -----------
</TABLE>
STOCK PURCHASE PLAN
On May 18, 1996, the Company's stockholders approved the Company's Employee
Stock Purchase Plan (the "ESPP"). The ESPP allows eligible employees to purchase
Common Stock at the lower of 85% of the market price of the stock at the
beginning or end of each offering period. The aggregate amount of common stock
that may be issued pursuant to the ESPP shall not exceed 400,000 shares, subject
to adjustment pursuant to the terms of the ESPP. As of December 31, 1997 and
1996, approximately 50,700
71
<PAGE>
WELLPOINT HEALTH NETWORKS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
10. COMMON STOCK (CONTINUED)
and 43,000 shares of common stock were purchased under the ESPP at a purchase
price of $29.22 and $22.53 per share, respectively. Through 1997, shares issued
under the ESPP are generally subject to a one-year holding period. The Company
maintains the right to repurchase shares held in escrow upon termination of the
employee. Beginning in 1998, newly issued shares are no longer subject to such
holding period.
SFAS 123 DISCLOSURE
In accordance with the provisions of SFAS No. 123, the Company applies APB
Opinion No. 25 and related interpretations in accounting for its stock option
plans and, accordingly, does not recognize compensation cost. If the Company had
elected to recognize the compensation cost based on the fair value of the
options granted at grant date as prescribed by SFAS No. 123, net income and
earnings per share for the years ended December 31, 1997 and 1996 would have
been reduced to the pro forma amounts indicated in the table which follows:
<TABLE>
<CAPTION>
1997 1996
--------- ---------
(IN MILLIONS, EXCEPT
PER SHARE AMOUNTS)
<S> <C> <C>
Net income--as reported.................................................... $ 227.4 $ 202.0
Net income--pro forma...................................................... $ 218.2 $ 190.9
Earnings per share--as reported............................................ $ 3.30 $ 3.04
Earnings per share--pro forma.............................................. $ 3.17 $ 2.87
Earnings per share assuming full dilution--as reported..................... $ 3.27 $ 3.04
Earnings per share assuming full dilution--pro forma....................... $ 3.14 $ 2.87
</TABLE>
<TABLE>
<CAPTION>
1997
-------------------------
OFFICERS EMPLOYEES
----------- ------------
<S> <C> <C>
ASSUMPTIONS
Expected dividend yield........................................... -- --
Risk-free interest rate........................................... 6.26% 6.13%
Expected stock price volatility................................... 37.00% 37.00%
Expected life of options.......................................... five years three years
</TABLE>
<TABLE>
<CAPTION>
1996
-------------------------
OFFICERS EMPLOYEES
----------- ------------
<S> <C> <C>
ASSUMPTIONS
Expected dividend yield........................................... -- --
Risk-free interest rate........................................... 6.40% 6.21%
Expected stock price volatility................................... 35.68% 37.16%
Expected life of options.......................................... five years three years
</TABLE>
The above pro forma disclosures may not be representative of the effects on
reported pro forma net income for future years. The weighted average fair value
of options granted during 1997 and 1996 is $13.72 and $15.74 per share,
respectively.
72
<PAGE>
WELLPOINT HEALTH NETWORKS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
11. EARNINGS PER SHARE
In accordance with Statement of Financial Accounting Standards No. 128, the
following is an illustration of the dilutive effect of the Company's common
stock equivalents on earning per share ("EPS"). There were no antidilutive
securities for each of the three periods presented.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------
1997 1996 1995
---------- ---------- ----------
(IN THOUSANDS, EXCEPT
EARNINGS PER SHARE)
<S> <C> <C> <C>
Net Income............................................... $ 227,409 $ 202,002 $ 179,989
Weighted average shares outstanding...................... 68,811 66,433 66,367
Net effect of dilutive stock options..................... 651 -- --
---------- ---------- ----------
Fully diluted weighted average shares outstanding........ 69,462 66,433 66,367
---------- ---------- ----------
---------- ---------- ----------
Earnings Per Share....................................... $ 3.30 $ 3.04 $ 2.71
---------- ---------- ----------
---------- ---------- ----------
Earnings Per Share Assuming Full Dilution................ $ 3.27 $ 3.04 $ 2.71
---------- ---------- ----------
---------- ---------- ----------
</TABLE>
The number of shares outstanding for the year ended December 31, 1995 has
been calculated using 66.4 million shares, the number of shares outstanding
immediately following the Recapitalization, to give effect to the two-for-three
share exchange that occurred as part of the Recapitalization. For the year ended
December 31, 1996, has been calculated using such 66.4 million shares, plus the
weighted average number of shares issued since the Recapitalization.
12. LEASES
Effective January 1, 1996, the Company entered into a new lease agreement
for a 24-year period for its corporate headquarters, expiring in December 2019,
with two options to extend the term for up to two additional five-year terms. In
addition to base rent, beginning in January 1997, the Company must pay a
contingent amount based upon annual changes in the consumer price index. In
1996, the Company paid $30 million to the owner of the building in connection
with the new lease agreement. This prepayment is being amortized on a
straight-line basis over the life of the new lease.
The Company's other lease terms range from one to twenty-two years with
certain options to renew. Certain lease agreements provide for escalation of
payments which are based on fluctuations in certain published cost-of-living
indices.
73
<PAGE>
WELLPOINT HEALTH NETWORKS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
12. LEASES (CONTINUED)
Future minimum rental payments under operating leases utilized by the
Company having initial or remaining noncancellable lease terms in excess of one
year at December 31, 1997 are as follows:
<TABLE>
<CAPTION>
YEAR ENDING
DECEMBER 31,
--------------
(IN THOUSANDS)
<S> <C>
1998.......................................................................... $ 35,373
1999.......................................................................... 35,462
2000.......................................................................... 31,340
2001.......................................................................... 26,197
2002.......................................................................... 16,250
Thereafter.................................................................... 257,123
--------------
Total payments required................................................... $ 401,745
--------------
--------------
</TABLE>
Rental expense for the years ended December 31, 1997, 1996 and 1995 for all
operating leases was $34.8 million, $18.3 million and $18.7 million,
respectively. Contingent rentals included in the above rental expense for the
years ended December 31, 1997 and 1995 were $0.3 million and $2.0 million,
respectively. There were no contingent rentals for the year ended December 31,
1996.
13. RELATED PARTY TRANSACTIONS
Prior to the Recapitalization in May 1996, and pursuant to the
Administrative Services and Product Marketing Agreement by BCC and Old
WellPoint, BCC provided office space and certain administrative and support
services, including computerized data processing and management information
systems, telecommunications systems and other management services to the
Company. These expenses were allocated to and paid by the Company in an amount
equal to the direct and indirect costs and expenses incurred in furnishing these
services. In addition, the Company provided services to BCC which included
health plan services, claims processing related to such plans, other financial
management services and provider contracting (excluding hospitals and other
institutional health care providers), which were reimbursed on a basis that
approximated cost. Management of both the Company and BCC considered the
allocation methodologies and cost approximations to be reasonable and
appropriate.
Intercompany charges between the Company and BCC for the respective periods
prior to the Recapitalization are as follows:
<TABLE>
<CAPTION>
JANUARY 1 YEAR ENDED
TO MAY 20, DECEMBER 31,
1996 1995
----------- ------------
(IN THOUSANDS)
<S> <C> <C>
Services provided by BCC........................................... $ 13,601 $ 17,418
Services provided to BCC........................................... (3,931) (11,592)
----------- ------------
Net intercompany charges included in general and administrative
expense.......................................................... $ 9,670 $ 5,826
----------- ------------
----------- ------------
</TABLE>
As required by the DOC prior to the Recapitalization, non-contract provider
services under the Company and BCC's jointly marketed Prudent Buyer and Medicare
supplement products were required to be provided by BCC, and revenues
attributable to such non-contract provider services were, therefore, not
74
<PAGE>
WELLPOINT HEALTH NETWORKS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
13. RELATED PARTY TRANSACTIONS (CONTINUED)
included in the Company's consolidated financial statements prior to May 20,
1996. BCC recorded a portion of premium revenue for these products based on the
estimated cost of providing these non-contract provider health care services,
plus an underwriting margin equal to the greater of 2.0% or the average
percentage of underwriting gain among member plans of the BCBSA (which included
BCC). For the period January 1, 1996 through May 20, 1996, the underwriting
margin was estimated at 2.0%. For the year ended December 31, 1995, the
underwriting margin was estimated at 2.0%. Such aggregate premium revenue
recognized by BCC related to the non-contract provider services for these
products for the period from January 1, 1996 through May 20, 1996 and for the
year ended December 31, 1995 was $59.3 million, and $163.4 million,
respectively.
Operating income recognized by BCC on such non-contract provider services
for the period from January 1, 1996 through May 20, 1996 and for the year ended
December 31, 1995 was $1.2 million, and $3.2 million, respectively. In
conjunction with the Recapitalization of May 20, 1996, the DOC approved the
Company to offer non-contract provider services, and, therefore, revenues
attributable to such services are included in the Company's 1997 and 1996
consolidated financial statements subsequent to the Recapitalization date.
14. FAIR VALUE OF FINANCIAL INSTRUMENTS
The following methods and assumptions were used to estimate the fair value
of each class of financial instrument:
CASH AND CASH EQUIVALENTS. The carrying amount approximates fair value,
based on the short-term maturities of these instruments.
INVESTMENT SECURITIES. The carrying amount approximates fair value, based
on quoted market prices for the same or similar instruments.
LONG-TERM INVESTMENTS. The carrying amount approximates fair value, based
on quoted market prices for the same or similar instruments and at cost for
certain equity investments.
LONG-TERM DEBT. The carrying amount for long-term debt approximates fair
value as the underlying instruments have variable interest rates at market
value.
INTEREST RATE SWAPS. The fair value of the interest rate swaps is based on
the quoted market prices by the financial institutions which are the
counterparties to the swaps.
The carrying amounts and estimated fair values of the Company's financial
instruments as of December 31, 1997 are summarized below:
<TABLE>
<CAPTION>
CARRYING ESTIMATED
AMOUNT FAIR VALUE
------------ ------------
(IN THOUSANDS)
<S> <C> <C>
Cash and cash equivalents......................................... $ 283,851 $ 283,851
Investment securities............................................. 2,552,775 2,552,775
Long-term investments............................................. 102,819 102,819
Long-term debt.................................................... 388,000 388,000
Interest rate swaps............................................... -- (17,283)
</TABLE>
75
<PAGE>
WELLPOINT HEALTH NETWORKS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
15. CONTINGENCIES
From time to time, the Company and certain of its subsidiaries are parties
to various legal proceedings, many of which involve claims for coverage
encountered in the ordinary course of business. The Company, like HMOs and
health insurers generally, excludes certain health care services from coverage
under its HMO, PPO and other plans. The Company is, in its ordinary course of
business, subject to the claims of its enrollees arising out of decisions to
restrict treatment or reimbursement for certain services. The loss of even one
such claim, if it results in a significant punitive damage award, could have a
material adverse effect on the Company. In addition, the risk of potential
liability under punitive damage theories may increase significantly the
difficulty of obtaining reasonable settlements of coverage claims. However, the
financial and operational impact that such evolving theories of recovery will
have on the managed care industry generally, or the Company in particular, is at
present unknown.
Certain of such legal proceedings are or may be covered under insurance
policies or indemnification agreements. Based upon information presently
available, management of the Company believes that the final outcome of all such
proceedings should not have a material adverse effect on the Company's results
of operations or financial condition.
16. NONRECURRING COSTS
The Company recorded $14.5 million of nonrecurring costs for the year ended
December 31, 1997, of which $8.0 million recorded in the second quarter of 1997
related primarily to the write-down related to the Company's dental practice
management operations and discontinuance of the Company's medical practice
management operations in Santa Barbara and San Luis Obispo. In addition, $6.5
million incurred in the first quarter of 1997 consisted of severance and
retention payments associated with the GBO acquisition.
During the fourth quarter of 1995, the operating results of the Company
included charges of $57.1 million ($34.5 million net of a $22.6 million tax
benefit) for nonrecurring costs. Of the total, $29.8 million resulted from
costs, primarily professional fees, associated with the terminated acquisition
of Health Systems International. In addition, the Company recorded a charge of
$27.3 million for the impairment of its pharmacy benefits management business
based on the Company's analysis evaluating impairment of long-lived assets in
accordance with Company policy. The impairment reflected an anticipated dramatic
reduction in future claims processing fees. The anticipated reduced fees
resulted from an industry market shift whereby pharmaceutical manufacturing
companies had purchased pharmacy benefits management companies to market their
products by reducing claims processing fees.
17. REGULATORY REQUIREMENTS
Certain of the Company's regulated subsidiaries must comply with certain
minimum capital or tangible net equity requirements in each of the states in
which they operate. As of December 31, 1997, the Company's regulated
subsidiaries were in compliance with these requirements.
18. FISCAL INTERMEDIARY FUNCTION
Under an agreement with the BCBSA, the Company has contracted to administer
Part A of Title XVIII of the Social Security Act (Medicare) in certain regions
or for certain healthcare providers. The agreement is renewable annually unless
terminated by the parties involved. As fiscal intermediary under the agreement,
the Company makes disbursements to providers for medical care from funds
provided by
76
<PAGE>
WELLPOINT HEALTH NETWORKS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
18. FISCAL INTERMEDIARY FUNCTION (CONTINUED)
the Federal Government and is reimbursed for these expenses incurred under the
agreement. The Company disbursed approximately $8.4 billion and $4.6 billion and
received administrative fees of approximately $29.9 million and $16.4 million
for the years ended December 31, 1997 and 1996, respectively. The reimbursement
is treated as a direct recovery of administrative expenses.
19. UNAUDITED PRO FORMA FINANCIAL INFORMATION
In accordance with APB No. 16, Business Combinations, the following
unaudited pro forma summary presents revenue, net income and per share data of
WellPoint as if the GBO acquisition had occurred as of the beginning of each
period presented. The pro forma adjustments made include the results of
operations for the GBO prior to its acquisition, amortization of intangible
assets and foregone interest on the net cash used for the acquisition and the
related income tax effects of such adjustments. For comparison purposes,
adjustments also include all pro forma adjustments necessary to reflect the MMHD
acquisition and the Recapitalization as if such transactions had been completed
as of January 1, 1996. The pro forma financial information is presented for
informational purposes only and may not be indicative of the results of
operations as they would have been if WellPoint, the GBO, MMHD and the BCC
Commercial Operations had been a single entity during the years ended December
31, 1997 and 1996, nor is it necessarily indicative of the results of operations
which may occur in the future. Pro forma earnings per share is calculated based
on 68.8 million and 66.4 million shares for the years ended 1997 and 1996,
respectively. Pro forma earnings per share assuming full dilution is calculated
based on 69.5 million and 66.4 million shares for the years ended 1997 and 1996,
respectively.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER
31,
--------------------
1997 1996
--------- ---------
(IN MILLIONS, EXCEPT
EARNINGS PER SHARE)
<S> <C> <C>
Revenues............................................................... $ 5,953.2 $ 5,284.1
Net Income............................................................. $ 223.7 $ 192.0
Earnings Per Share..................................................... $ 3.25 $ 2.89
Earnings Per Share Assuming Full Dilution.............................. $ 3.22 $ 2.89
</TABLE>
77
<PAGE>
APPENDIX I
WELLPOINT HEALTH NETWORKS INC. STOCK OPTION/AWARD PLAN
AS AMENDED THROUGH FEBRUARY 12, 1998
ARTICLE ONE
GENERAL PROVISIONS
1.1 PURPOSE OF THE PLAN
This WellPoint Health Networks Inc. Stock Option\Award Plan ("PLAN"),
originally adopted effective January 1, 1994 ("EFFECTIVE DATE"), is intended to
enable WellPoint Health Networks Inc. ("COMPANY") to offer options, restricted
stock, performance shares, performance units, phantom stock, and automatic stock
appreciation rights to the following eligible individuals ("ELIGIBLE
INDIVIDUALS"): Key employees and officers, directors, consultants and
independent contractors of the Company or of an affiliate ("AFFILIATE") linked
to the Company by a 50% or greater chain of ownership or in which the Company
has a significant ownership interest, directly or indirectly (as determined by
the Committee, as defined below). In addition to the aforementioned
discretionary grants, this Plan provides for automatic stock grants to
non-employee members of the Board of Directors of the Company ("BOARD").
1.2 ADMINISTRATION OF THE PLAN
A. COMMITTEE. The Plan will be administered by a committee or committees
appointed by the Board and consisting of two or more members of the Board. The
Board may delegate responsibility for administration of the Plan with respect to
designated grant and award recipients to different committees, subject to such
limitations as the Board deems appropriate. Members of a committee will serve
for such term as the Board may determine, and may be removed by the Board at any
time. The term "COMMITTEE," when used in this Plan, refers to the committee that
has been delegated authority with respect to a matter.
In determining the composition of any committee or subcommittee, the Board
or committee, as the case may be, shall consider the desirability of compliance
with the compositional requirements of (i) Rule 16b-3 of the Securities and
Exchange Commission with respect to award holders who are subject to the trading
restrictions of Section 16(b) of the Securities and Exchange Act of 1934 ("1934
ACT") with respect to securities of the Corporation and (ii) Section 162(m) of
the Internal Revenue Code ("CODE"), but shall not be bound by such compliance.
B. AUTHORITY. Each Committee has full authority to administer the Plan
within the scope of its delegated responsibilities, including authority to
interpret and construe any relevant provision of the Plan, to adopt rules and
regulations that it deems necessary, to determine which individuals are Eligible
Individuals and which Eligible Individuals are to receive grants and/or awards
under the Plan, to determine the amount and/or number of shares subject to such
a grant or award, and to determine the terms of such a grant or award made under
the Plan (which terms need not be identical). Decisions of a Committee made
within the discretion delegated to it by the Board are final and binding on all
persons.
1.3 STOCK SUBJECT TO THE PLAN
A. NUMBER OF SHARES. Shares of the Company's Common Stock ("COMMON STOCK")
available for issuance under the Plan will be drawn from the Company's
authorized but unissued shares of Common Stock or from reacquired shares of
Common Stock, including shares repurchased by the Company on the open market.
The number of shares of Common Stock that may be issued under the Plan will not
exceed 5 million, after adjustment for the Company's 1996 recapitalization and
subject to further adjustment in accordance with the terms of the Plan. Not more
than 5 million shares, after adjustment for the Company's
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1996 recapitalization and subject to further adjustment as provided in Paragraph
1.3.D., may be subject to Incentive Options (as defined below).
B. AFFILIATE STOCK. Subject to such limits, regulatory approvals and
stockholder approvals as the Committee determines to be necessary, Common Stock
issuable under the Plan may include the stock of an Affiliate, a subsidiary, or
a joint venture in which the Company is a participant.
C. SHARE COUNTING. In determining whether the number shares issued under
the Plan exceeds the maximum number set forth in Paragraph 1.3.A., only the net
number of shares actually issued under an award shall count against the limit.
Thus, if any outstanding grant or award under the Plan expires, is terminated,
is cancelled or is forfeited for any reason before the full number of shares
governed by the grant or award are issued, those remaining shares will not be
charged against the limit in Paragraph 1.3.A. above and will be available for
subsequent grants and awards under the Plan. Shares issued under the Plan and
subsequently forfeited to or repurchased by the Company pursuant to its
forfeiture and repurchase rights under this Plan will be available for
subsequent grants and awards under the Plan. If shares held by an awardholder
are delivered to the Company, or are withheld from shares otherwise issuable
under the award, in payment of all or a portion of the exercise price or tax
withholding obligations under the award, only the net number of shares issued by
the Company (i.e., the gross number less the shares delivered or withheld) shall
be counted toward the limit of Paragraph 1.3.A. Similarly, shares for which a
cash payment is made in lieu of payment in stock will be available for
subsequent grants and awards under this Plan.
D. ADJUSTMENTS. If any change is made to the Common Stock issuable under
the Plan by reason of any stock split, stock dividend, recapitalization,
combination of shares, exchange of shares or other change affecting the
outstanding Common Stock as a class without receipt of consideration, then
appropriate adjustments will be made to (i) the maximum number and/or class of
securities issuable under the Plan, (ii) the number and/or class of securities
and, if applicable, price per share in effect under automatic option and stock
grants to directors and each outstanding grant and award under the Plan and
(iii) the maximum number of shares issuable to one individual pursuant to
Paragraph 1.3.E. The purpose of these adjustments will be to preclude the
enlargement or dilution of rights and benefits under the grants and awards.
E. INDIVIDUAL LIMIT. No Eligible Individual will receive options,
restricted stock, performance shares, performance units, phantom stock,
automatic stock appreciation rights or any combination of each under this Plan
for more than 1 million shares (subject to adjustment as provided in Paragraph
1.3.D.) during any consecutive three-year period.
ARTICLE TWO
OPTIONS
2.1 TERMS AND CONDITIONS OF OPTIONS
A. TYPE AND TERM. The Committee has full authority to determine whether
options are to be incentive stock options ("INCENTIVE OPTIONS") that satisfy the
requirements of Section 422 of the Internal Revenue Code or non-qualified
options not intended to satisfy those requirements ("NON-QUALIFIED OPTIONS"),
the time or times at which grants become exercisable, the maximum term for which
grants remain outstanding and the remaining terms of options, subject to the
remaining provisions of the Plan. No grants under the Plan will be exercisable
after the expiration of 10 years from the date of grant.
B. PRICE. The option price per share will be fixed by the Committee;
provided, however, that in no event will the option price per share for
Incentive Options be less than 100% of the Fair Market Value of a share of
Common Stock on the date of the grant.
C. EXERCISE AND PAYMENT. After any option granted under the Plan becomes
exercisable, it may be exercised by notice to the Company, in such form as the
Committee shall authorize, at any time before termination of the option. The
option price will be payable in full in cash or check made payable to the
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Company; provided, however, that the Committee may, either at the time the
option is granted or at any subsequent time, and subject to such limitations as
it may determine, authorize payment of all or a portion of the option price in
one or more of the following alternative forms:
(1) in shares of Common Stock valued as of the Exercise Date (defined
below) and held for the requisite period to avoid a charge to earnings; or
(2) through a sale and remittance procedure under which the option
holder delivers, in such form as the Committee shall authorize, an exercise
notice and irrevocable instructions to a broker to promptly deliver to the
Company the amount of sale proceeds to pay the option price.
For purposes of Subparagraph (2) immediately above, the "EXERCISE DATE" is
the date on which notice, in such form as the Committee shall authorize, of the
exercise of the option is delivered to the Company. In all other cases, the
Exercise Date is the date on which notice and actual payment is received by the
Company.
An option may provide, to the extent subject to such terms as the Committee
authorizes, that upon the exercise of the option, the holder will automatically
be granted a new option covering that number of shares equal to (i) the number
of shares delivered to the Company by the holder, or withheld from shares
otherwise issuable to the holder upon exercise, in payment of the exercise price
of the option or the tax withholding obligations attributable thereto and\or
(ii) that number of shares with a then Fair Market Value equal to the amount of
the withholding obligations paid in cash by the holder.
D. STOCKHOLDER RIGHTS. An option holder will have no stockholder rights
with respect to any shares covered by an option before the Exercise Date of the
option, as defined in the immediately preceding Paragraph.
E. SEPARATION FROM SERVICE. The Committee will determine and set forth in
each option whether the option will continue to be exercisable, and the terms of
such exercise, on and after the date that an optionee ceases to be employed by
or to provide services to the Company or an Affiliate. The date of termination
of an optionee's employment or services will be determined by the Committee,
which determination will be final.
F. INCENTIVE OPTIONS. Options granted under the Plan that are intended to
be Incentive Options will be subject to the following additional terms:
(1) DOLLAR LIMIT. To the extent that the aggregate fair market value
(determined as of the respective date or dates of grant) of shares with
respect to which options that would otherwise be Incentive Options are
exercisable for the first time by any individual during any calendar year
under the Plan (or any other plan of the Company, a parent or subsidiary
corporation or predecessor thereof) exceeds the sum of $100,000 (or a
greater amount permitted under the Internal Revenue Code), whether by reason
of acceleration or otherwise, those options will not be treated as Incentive
Options. In making this determination, options will be taken into account in
the order in which they were granted.
(2) 10% STOCKHOLDER. If any employee to whom an Incentive Option is to
be granted is, on the date of grant, the owner of stock (determined using
the attribution rules of Section 424(d) of the Internal Revenue Code)
possessing more than 10% of the total combined voting power of all classes
of stock of his or her employer corporation or of its parent or subsidiary
("10% STOCKHOLDER"), then the following special provisions will apply to the
option granted to that individual:
(i) The option price per share of the stock subject to that Incentive
Option will not be less than 110% of the Fair Market Value of the option
shares on the date of grant; and
(ii) The option will not have a term in excess of 5 years from the
date of grant.
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(3) PARENT AND SUBSIDIARY. For purposes of this Paragraph, "PARENT"
and "SUBSIDIARY" will have the meaning attributed to those terms, as they
are used in Section 422(b) of the Internal Revenue Code.
(4) EMPLOYEES. Incentive Options may only be granted to employees of
the Company or of a parent or subsidiary.
G. TRANSFERABILITY. During the lifetime of the optionee, options will be
exercisable only by the optionee and will not be assignable or transferable by
the optionee otherwise than by will or by the laws of descent and distribution
following the optionee's death. However, if and to the extent that the Committee
so authorizes at the time an award is granted or amended, an option or other
award may, in connection with the holder's estate plan, be assigned in whole or
in part during the grantee's lifetime to one or more members of the grantee's
family or to a trust established exclusively for one or more such family
members. Rights under the assigned portion may only be exercised by the person
or persons who acquire a proprietary interest in the award pursuant to the
assignment. The terms applicable to the assigned portion shall be the same as
those in effect for the award immediately prior to such assignment and shall be
set forth in such documents issued to the assignee as the Committee may deem
appropriate.
2.2 REPURCHASE RIGHTS
The Committee may in its discretion determine that it shall be a term and
condition of one or more options exercised under the Plan that the Company or
its assigns will have the right, exercisable upon the optionee's separation from
service with the Company and/or its Affiliates, to repurchase any or all of the
shares of Common Stock previously acquired by the optionee upon the exercise of
that option. Any such repurchase right will be exercisable on such terms and
conditions (including the establishment of the appropriate vesting schedule and
other provisions for the expiration of the repurchase right in one or more
installments) as the Committee may specify in the instrument evidencing the
right. The Committee will also have full power and authority to provide for the
automatic termination of repurchase rights, in whole or in part, thereby
accelerating the vesting of any or all of the purchased shares.
ARTICLE THREE
RESTRICTED STOCK, PERFORMANCE SHARES,
PERFORMANCE UNITS, AND PHANTOM STOCK
3.1 RESTRICTED STOCK
Restricted stock granted under the Plan consists of shares of Common Stock
(together with cash dividend equivalents if so determined by the Committee), the
retention and transfer of which is subject to such terms, conditions and
restrictions (whether based on performance standards or periods of service or
otherwise and including repurchase and/or forfeiture rights in favor of the
Company) as the Committee shall determine. The terms, conditions and
restrictions to which restricted stock is subject will be evidenced by such
instruments as the Committee may from time to time approve and may vary from
grant to grant. The Committee has the absolute discretion to determine whether
any consideration (other than the services of the potential award holder) is to
be received by the Company or its Affiliates as a condition precedent to the
issuance of restricted stock.
3.2 PERFORMANCE SHARES
Performance shares granted under the Plan consist of the right, subject to
such terms, conditions and restrictions as the Committee may determine
(including, but not limited to continued employment and/or performance
standards), to receive a share of Common Stock. Performance shares will be
evidenced by such instruments as the Committee may from time to time approve.
The Committee has the absolute discretion to determine whether any consideration
(other than the services of the potential award holder)
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is to be received by the Company or its Affiliates as a condition precedent to
the issuance of shares pursuant to performance shares. The terms, conditions and
restrictions to which performance shares are subject may vary from grant to
grant.
3.3 PHANTOM STOCK
Phantom stock granted under the Plan consists of the right to receive an
amount in cash equal to the Fair Market Value of one share of Common Stock on
the date of valuation of the phantom stock (together with cash dividend
equivalents if so determined by the Committee) less such amount, if any, as the
Committee shall specify. Phantom stock will be evidenced by such instruments as
the Committee may from time to time approve. The date of valuation and payment
of cash under phantom stock and the conditions, if any, to which such payment
will be subject (whether based on performance standards or periods of service or
otherwise) will be determined by the Committee.
3.4 PERFORMANCE UNITS
Performance units granted under the Plan consist of the right to receive
cash, subject to such terms, conditions and restrictions (including, but not
limited to performance standards) as the Committee may determine. Performance
units will be evidenced by such instruments as the Committee may from time to
time approve. The terms, conditions and restrictions to which performance units
are subject may vary from grant to grant.
3.5 CASH PAYMENTS
The Committee may provide award holders with an election, or require a
holder, to receive a portion of the total value of the Common Stock subject to
restricted stock or performance shares in the form of a cash payment, subject to
such terms, conditions and restrictions as the Committee may specify.
ARTICLE FOUR
AUTOMATIC GRANTS TO NON-EMPLOYEE DIRECTORS
4.1 AUTOMATIC STOCK GRANTS
In consideration of their past services, individuals who have been
non-employee members of the Board for at least six full calendar months on the
last day of the second quarter of each fiscal year of the Company beginning
after December 31, 1997 ("ELIGIBLE INDEPENDENT DIRECTORS") will automatically be
granted on that date ("AUTOMATIC GRANT DATE") 800 shares of Common Stock
("AUTOMATIC STOCK GRANTS"), subject to adjustment under Paragraph 1.3.D. of this
Plan.
4.2 AUTOMATIC STOCK OPTION GRANTS
A. OPTION GRANTS. On each Automatic Grant Date, each continuing Eligible
Independent Director will receive an Automatic Option to purchase 2,000 shares
of Common Stock, subject to adjustment under Paragraph 1.3.D. of this Plan.
B. TERMS AND CONDITIONS. The terms and conditions applicable to each
Automatic Option will be as follows:
(1) PRICE. The option price per share will be equal to one hundred
percent (100%) of the Fair Market Value of one share of Common Stock on the
date of grant.
(2) TERMS. Each Automatic Option will have a term of ten (10) years,
measured from the date of grant, and will be exercisable at any time during
the term for all or any part of the covered shares; provided, however, that
no Automatic Options may be exercised prior to approval by the Company's
stockholders of the amendment to the Plan first providing for the grant of
Automatic Options.
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(3) PAYMENT. Upon exercise of the Automatic Option, the option price
for the purchased shares will become payable immediately in cash or in
shares of Common Stock that the optionee has held for at least six (6)
months. Payment may also be made through a sale and remittance procedure
under which the option holder delivers, in such form as the Committee shall
authorize, an exercise notice and irrevocable instructions to a broker to
promptly deliver to the Company the amount of sale proceeds to pay the
option price. To the extent that the exercise price of an Automatic Option
(or any tax obligations attributable thereto) is paid in shares of Common
Stock (whether delivered to the Company by the holder or withheld from
shares otherwise issuable upon exercise), the holder will automatically be
granted a new Automatic Option covering the number of shares so delivered or
withheld; the terms of the new Automatic Option shall be the same as the
Automatic Option so exercised, except that the per share exercise price of
the new Automatic Option shall be the fair market value of one share of
Common Stock on the date of grant of the new Automatic Option and the term
of the New Automatic Option shall be equal to the remaining term of the
Automatic Option so exercised.
(5) CESSATION. In the event the optionee ceases to provide services to
the Company or its subsidiaries as a director, an employee, a consultant or
an independent contractor, the Automatic Option may be exercised, within the
term of the Automatic Option, for a period of twelve (12) months after the
date of such cessation. In the case of death, the Automatic Option may be
exercised within such period by the estate or heirs of the optionee.
4.3 NO DISCRETION; EFFECT ON OTHER AWARDS
No person will have any discretion to select which Independent Directors
will be granted automatic awards under this Article Four or to determine the
number of shares of Common Stock subject thereto. However, nothing in this Plan
will be construed to prevent an Eligible Independent Director from either
declining to receive an award under this Article Four or to receive a
discretionary award under the Plan or any other compensatory plan or
arrangement. This Article Four and the terms of options granted hereunder may be
amended at any time by action of the Board of Directors, subject only to the
limitations of Section 5.1
ARTICLE FIVE
MISCELLANEOUS
5.1 AMENDMENT
A. BOARD ACTION. The Board may amend, suspend or discontinue the Plan in
whole or in part at any time; provided, however, that (1) except to the extent
necessary to qualify as Incentive Options any or all options granted under the
Plan that are intended to so qualify, such action shall not adversely affect a
holder's rights and obligations with respect to grants and awards at the time
outstanding under the Plan and (2) certain amendments may, as determined by the
Board in its sole discretion, require stockholder approval pursuant to
applicable laws or regulations.
B. MODIFICATION OF GRANTS AND AWARDS. The Committee has full power and
authority to modify or waive any or all of the terms, conditions or restrictions
applicable to any outstanding grant or award under the Plan, to the extent not
inconsistent with the Plan; provided, however, that no such modification or
waiver shall, without the consent of the holder of the grant or award, adversely
affect the holder's rights thereunder.
C. OTHER PROGRAMS. Nothing in this Plan shall prevent the Company from
adopting any other compensation program, including programs involving equity
compensation, for employees, directors or consultants. The adoption or amendment
of any such program shall not be considered an amendment to this Plan.
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5.2 TAX WITHHOLDING
A. OBLIGATION. The Company's obligation to deliver shares or cash upon the
exercise of grants and awards under the Plan is subject to the satisfaction of
all applicable Federal, State and local income and employment tax withholding
requirements.
B. STOCK WITHHOLDING. The Committee may require or permit, in its
discretion and upon such terms and conditions as it may deem appropriate
(including the applicable safe-harbor provisions of SEC Rule 16b-3) any or all
holders of outstanding grants or awards under the Plan to elect to have the
Company withhold, from the shares of Common Stock otherwise issuable pursuant to
such grant or award, one or more of such shares with an aggregate Fair Market
Value equal to the Federal, State and local employment and income taxes
("TAXES") incurred in connection with the acquisition of such shares. Holders of
grants or awards under the Plan may also be granted the right to deliver
previously acquired shares of Common Stock held for the requisite period to
avoid a charge to earnings in satisfaction of such Taxes. The withheld or
delivered shares will be valued at Fair Market Value on the applicable
determination date for such Taxes.
5.3 VALUATION
For all purposes under this Plan, the fair market value per share of Common
Stock on any relevant date under the Plan ("FAIR MARKET VALUE") will be
determined as follows:
(1) NATIONAL EXCHANGE. If the Common Stock is at the time listed or
admitted to trading on any national stock exchange, then the Fair Market
Value will be the closing selling price per share of Common Stock on the day
before the date in question on the stock exchange determined by the
Committee to be the primary market for the Common Stock, as such price is
officially quoted in the composite tape of transactions on such exchange. If
there is no reported sale of Common Stock on such exchange on the day before
the date in question, then the Fair Market Value will be the closing selling
price on the exchange on the last preceding date for which such quotation
exists.
(2) NASDAQ. If the Common Stock is not at the time listed or admitted
to trading on any national stock exchange but is traded in the
over-the-counter market, the fair market value will be the mean between the
highest bid and lowest asked prices (or, if such information is available,
the closing selling price) per share of Common Stock on the date in question
in the over-the-counter market, as such prices are reported by the National
Association of Securities Dealers through its NASDAQ system or any successor
system. If there are no reported bid and asked prices (or closing selling
price) for the Common Stock on the date in question, then the mean between
the highest bid price and lowest asked price (or the closing selling price)
on the last preceding date for which such quotations exist will be
determinative of fair market value.
(3) COMMITTEE. Notwithstanding the foregoing, if the Committee
determines that, as a result of circumstances existing on any date, the use
of the above rules is not a reasonable method of determining Fair Market
Value on that date or if Common Stock is not at the time listed or admitted
to trading as outlined above, the Committee may use such other method as, in
its judgment, is reasonable.
5.4 EFFECTIVE DATE AND TERM OF PLAN
A. EFFECTIVE DATE. This Plan became effective on the Effective Date.
B. TERM. No options or other awards may be granted under the Plan after
June 10, 2002 ("TERMINATION DATE"), the date five years following approval of
the Plan, as amended through January 15, 1997, by the shareholders of the
Company. Subject to this limit, the Committee may make grants and awards under
the Plan at any time after the Effective Date of the Plan and before the
Termination Date.
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C. APPROVALS. The Plan and subsequent amendments thereto were approved by
shareholders on May 10, 1994 and June 10, 1997, respectively. The Board
subsequently further amended the Plan, in the form set forth in this document,
subject to approval of the shareholders at the Company's 1998 annual meeting of
shareholders. If shareholder approval of such amendments is not obtained at such
meeting, the Plan shall continue in accordance with its terms as in existence
immediately before such amendments. The Board may, in its discretion, condition
any award under the Plan upon obtaining any other required or desired regulatory
approvals.
5.5 USE OF PROCEEDS
Any cash proceeds received by the Company from the sale of shares pursuant
to grants and awards under the Plan will be used for general corporate purposes.
5.6 NO EMPLOYMENT/SERVICE RIGHTS
Neither the establishment of this Plan, nor any action taken under the terms
of this Plan, nor any provision of this Plan will be construed to grant any
individual the right to remain in the employ or service of the Company (or any
subsidiary or parent of the Company) for any period of specific duration, and
the Company (or any subsidiary or parent of the Company retaining the services
of such individual) may terminate such individual's employment or service at any
time and for any reason, with or without cause. Nothing contained in this Plan
or in any grant or award under this Plan will affect any contractual rights of
an employee or other service provider pursuant to a written employment or
service agreement executed by both parties.
5.7 DEFERRAL OF AWARDS
The Committee may, subject to such terms as it shall determine, permit the
holder of an award under the Plan to elect to defer receipt of shares or cash
otherwise payable under the award.
5.8 ELECTIVE AND TANDEM AWARDS
The Committee may award stock options, restricted stock, performance shares,
phantom stock and performance units independently of other compensation or in
lieu of other compensation whether at the election of the potential award holder
or otherwise. The number of shares subject to options or shares of restricted
stock, phantom stock, performance shares, or performance units to be awarded in
lieu of other compensation will be determined by the Committee in its sole
discretion and need not be equal to the foregone compensation in Fair Market
Value. In addition, stock options, restricted stock, performance shares, phantom
stock and performance units may be awarded in tandem, so that a portion of that
award becomes payable or becomes free of restrictions only if and to the extent
that the tandem award is not exercised or is forfeited, subject to such terms
and conditions as the Committee may specify.
5.9 CORPORATE TRANSACTIONS
The Committee may determine and set forth in each award, either at the time
of grant or by amendment thereafter, the effect, if any, that any sale of stock
or assets, merger, combination, spinoff, reorganization, or liquidation of the
Company will have upon the term, exercisability and\or vesting of outstanding
awards, provided that any awards that are continued, assumed or replaced with
comparable awards in connection with any transaction will be adjusted as
provided in Section 1.3.D. The grant of awards under this Plan will in no way
affect the right of the issuer of Common Stock to adjust, reclassify,
reorganize, or otherwise change its capital or business structure or to merge,
consolidate, dissolve, liquidate or sell or transfer all or any part of its
business or assets.
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WELLPOINT HEALTH NETWORKS INC.
ANNUAL MEETING OF STOCKHOLDERS
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS
Leonard D. Schaeffer and Thomas C. Geiser, or either of them, are hereby
constituted and appointed to lawful attorneys and proxies of the undersigned,
each with full power of substitution to vote and act as proxy with respect to
all shares of Common Stock of WellPoint Health Networks Inc. ("WellPoint")
standing in the name of the undersigned on the books of WellPoint at the close
of business on March 27, 1998, at the Annual Meeting of Shareholders to be held
at 10:00 A.M. on May 12, 1998, at the Warner Center Marriott, 21850 Oxnard
Street, Woodland Hills, California 91367, or at any adjournment or postponement
thereof (1) as hereinafter specified upon the proposals listed below and as more
particularly described in WellPoint's Proxy Statement, receipt of which is
hereby acknowledged, and (2) in their discretion upon such other matters as may
properly come before the meeting.
The powers hereby granted may be exercised by both of said attorneys or
proxies or their substitutes present and acting at the Annual Meeting of
Shareholders or any adjournment or postponement thereof or, if only one be
present and acting, then by that one. The undersigned hereby revokes any and
all proxies heretofore given by the undersigned to vote at said meeting.
The shares represented hereby shall be voted as specified. If no
specification is made, such shares shall be voted FOR proposals 1 through 3.
Whether or not you are able to attend the meeting, you are urged to sign and
mail the Proxy in the return envelope so that your stock maybe represented at
the meeting.
(CONTINUED AND TO BE SIGNED ON REVERSE SIDE)
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TRIANGLE FOLD AND DETACH HERE TRIANGLE
<PAGE>
ADMISSION TICKET
WELLPOINT HEALTH NETWORKS INC.
1998 ANNUAL MEETING OF STOCKHOLDERS
TUESDAY, MAY 12, 1998
10:00 A.M.
WARNER CENTER MARRIOTT
21850 OXNARD STREET
WOODLAND HILLS, CALIFORNIA 91367
PLEASE ADMIT NON-TRANSFERABLE
<PAGE>
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A VOTE FOR THE FOLLOWING PROPOSALS IS RECOMMENDED BY THE BOARD OF DIRECTORS:
Please mark
vote in the
following /X/
manner using
dark ink only
FOR WITHHOLD
all nominees AUTHORITY
listed (except to vote for
as indicated all nominees
below) listed below
1. Election of the two (2) Class II
directors proposed in the / / / /
accompanying Proxy Statement to
serve until the 2001 Annual Meeting.
Nominees: David R. Banks, Stephen L. Davenport
(INSTRUCTION: To withhold authority to vote for any
individual, cross his or her name out above.)
FOR AGAINST ABSTAIN
2. Approval of an amendment to
WellPoint's 1994 Stock Option/Award / / / / / /
Plan (the "Stock Option Plan") which,
among other things, provides for
automatic annual option grants to the
Company's non-employee directors,
modifies the Stock Option Plan's
limits on aggregate grants to a
single person and allows the Company
to incorporate a reload feature into
new and existing option grants.
FOR AGAINST ABSTAIN
3. Ratification of the appointment of
Coopers & Lybrand L.L.P. as the / / / / / /
Company's independent public
accountants for the fiscal year
ending December 31, 1998.
SIGN EXACTLY AS YOUR NAME(S) APPEARS ON YOUR
STOCK CERTIFICATE. IF SHARES OF STOCK STAND OF
RECORD IN THE NAMES OF TWO OR MORE PERSONS, OR
IN THE NAME OF HUSBAND AND WIFE, WHETHER AS
JOINT TENANTS OR OTHERWISE, BOTH OR ALL OF SUCH
PERSONS SHOULD SIGN THE PROXY. IF SHARES OF
STOCK ARE HELD OF RECORD BY A CORPORATION, THE
PROXY SHOULD BE EXECUTED BY THE PRESIDENT OR
VICE PRESIDENT AND THE SECRETARY OR ASSISTANT
SECRETARY, AND THE CORPORATE SEAL SHOULD BE
AFFIXED THERETO. EXECUTORS OR ADMINISTRATORS OR
OTHER FIDUCIARIES WHO EXECUTE TO ABOVE PROXY
FOR A DECEASED SHAREHOLDER SHOULD GIVE THEIR
FULL TITLE. PLEASE DATE THE PROXY.
Signature(s) Dated , 1998
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TRIANGLE FOLD AND DETACH HERE TRIANGLE
<PAGE>
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VOTING CARD
WELLPOINT HEALTH NETWORKS INC.
ANNUAL MEETING OF STOCKHOLDERS
TO CHASEMELLON SHAREHOLDER SERVICES:
I acknowledge receipt of the Notice of Annual Meeting of Stockholders of
WellPoint Health Networks Inc. ("WellPoint") to be held on May 12,1998 at
10:00 A.M. at the Warner Center Marriott, 21850 Oxnard Street, Woodland
Hills, California 91367, and the Proxy Statement furnished in connection with
the solicitation of proxies by WellPoint's Board of Directors. You are
directed to vote the shares which are held for my account pursuant to the
Salary Deferral Savings Program of WellPoint (401(k) Plan) in the manner
indicated on the reverse side of this card and, in your discretion, upon such
other business as may properly come before the meeting or at any adjournment
or postponement thereof.
I understand that in the event I do not return this card, any shares held
for my account in the 401(k) Plan will be voted by you in accordance with the
direction of the 401(k) Plan's trustee, Vanguard Fiduciary Trust Company.
(Continued and to be signed on reverse side)
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A VOTE FOR THE FOLLOWING PROPOSALS IS RECOMMENDED BY THE BOARD OF DIRECTORS:
Please mark
vote in the
following /X/
manner using
dark ink only
1. Election of the two (2) Class II directors proposed in the
accompanying Proxy Statement to serve until the 2001
Annual Meeting.
FOR WITHHOLD AUTHORITY
all nominees listed to vote for all
(except as indicated below) nominees listed below
/ / / /
Nominees: David R. Banks, Stephen L. Davenport
(INSTRUCTION: To withhold authority to vote for any
individual, cross his or her name out above.)
2. Approval of an amendment to WellPoint's 1994 Stock Option/Award Plan (the
"Stock Option Plan") which, among other things, provides for automatic annual
option grants to the Company's non-employee directors, permits discretionary
grants to non-employee directors, modifies the Stock Option Plan's limit on
aggregate grants to a single person and allows the Company to incorporate a
reload feature into new and existing option grants.
FOR AGAINST ABSTAIN
/ / / / / /
3. Ratification of the appointment of Coopers & Lybrand L.L.P. as the Company's
independent public accountants for the fiscal year ending December 31, 1998.
FOR AGAINST ABSTAIN
/ / / / / /
SIGN EXACTLY AS YOUR NAME(S) APPEARS ON YOUR STOCK CERTIFICATE. IF SHARES OF
STOCK STAND OF RECORD IN THE NAMES OF TWO OR MORE PERSONS, OR IN THE NAME OF
HUSBAND AND WIFE, WHETHER AS JOINT TENANTS OR OTHERWISE, BOTH OR ALL OF SUCH
PERSONS SHOULD SIGN THE PROXY. IF SHARES OF STOCK ARE HELD OF RECORD BY A
CORPORATION, THE PROXY SHOULD BE EXECUTED BY THE PRESIDENT OR VICE PRESIDENT
AND THE SECRETARY OR ASSISTANT SECRETARY, AND THE CORPORATE SEAL SHOULD BE
AFFIXED THERETO. EXECUTORS OR ADMINISTRATORS OR OTHER FIDUCIARIES WHO EXECUTE
TO ABOVE PROXY FOR A DECEASED SHAREHOLDER SHOULD GIVE THEIR FULL TITLE.
PLEASE DATE THE PROXY .
SIGNATURE(S)___________________________________________ DATED _________, 1998
Please sign your name exactly as it appears printed hereon. Executors,
administrators, guardians, officers of corporations and others signing in a
fiduciary capacity should sign their full title as such.
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THIS IS YOUR VOTING INSTRUCTION CARD. PLEASE VOTE, SIGN AND RETURN IN THE
ENCLOSED ENVELOPE.
IT IS IMPORTANT THAT THIS CARD BE RETURNED PROMPTLY. THEREFORE, 401(K) PLAN
PARTICIPANTS ARE URGED TO COMPLETE, SIGN, DATE AND RETURN THE ACCOMPANYING
CARD IN THE ENCLOSED ENVELOPE.
IF YOU HOLD SHARES OF WELLPOINT STOCK OTHER THAN THROUGH THE 401(K) PLAN, YOU
WILL RECEIVE A SEPARATE PROXY CARD TO VOTE SUCH SHARES.
