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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FOR ANNUAL AND TRANSITION REPORTS
PURSUANT TO SECTIONS 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
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FORM 10-K
(MARK ONE)
/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1997
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO
COMMISSION FILE NUMBER 001-13803
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WELLPOINT HEALTH NETWORKS INC.
(Exact name of Registrant as specified in its charter)
DELAWARE 95-4635504
(State of incorporation) (I.R.S. Employer Identification No.)
21555 OXNARD STREET
WOODLAND HILLS, CALIFORNIA 91367
(Address of principal executive (Zip Code)
offices)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (818) 703-4000
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SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH
- -------------------------------------- REGISTERED
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Common Stock, $0.01 par value New York Stock Exchange
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
None
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Indicate by check mark whether the Registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes /X/ No / /
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of the Form 10-K or any amendment to this
Form 10-K. / /
State the aggregate market value of the voting stock held by non-affiliates
of the Registrant as of March 13, 1998: $2,661,288,721 (based on the last
reported sale price of $66 5/8 per share on March 13, 1998, on the New York
Stock Exchange).
Common Stock, $0.01 par value of Registrant outstanding as of March 13,
1998: 69,971,937 shares.
DOCUMENTS INCORPORATED BY REFERENCE
Part III of this Annual Report on Form 10-K incorporates by reference
information from the Registrant's definitive proxy statement for its 1998 Annual
Meeting of Stockholders.
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WELLPOINT HEALTH NETWORKS INC.
1997 FORM 10-K ANNUAL REPORT
TABLE OF CONTENTS
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PART I
Item 1. Business....................................................................................... 1
Item 2. Properties..................................................................................... 21
Item 3. Legal Proceedings.............................................................................. 21
Item 4. Submission of Matters to a Vote of Security Holders............................................ 22
PART II
Item 5. Market for the Registrant's Common Equity and Related Stockholder Matters...................... 23
Item 6. Selected Financial Data........................................................................ 24
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations.......... 25
Item 8. Financial Statements and Supplementary Data.................................................... 37
Item 9. Changes and Disagreements with Accountants on Accounting and Financial Disclosure.............. 37
PART III
Item 10. Directors and Executive Officers of the Registrant............................................. 38
Item 11. Executive Compensation......................................................................... 38
Item 12. Security Ownership of Certain Beneficial Owners and Management................................. 38
Item 13. Certain Relationships and Related Transactions................................................. 38
PART IV
Item 14. Exhibits, Financial Statements Schedules and Reports on Form 8-K............................... 38
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SIGNATURES
INDEX TO FINANCIAL STATEMENTS
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PART I
ITEM 1. BUSINESS
GENERAL
WellPoint Health Networks Inc. (the "Company" or "WellPoint") is one of the
nation's largest publicly traded managed health care companies with
approximately 6.6 million medical members and approximately 22 million specialty
members as of December 31, 1997. The Company offers a broad spectrum of
network-based managed care products, including preferred provider organizations
("PPOs"), health maintenance organizations ("HMOs") and point-of-service ("POS")
and other hybrid plans and indemnity plans to the large and small employer,
individual and senior markets. In addition, the Company offers managed care
services for self-funded employers, including underwriting, actuarial services,
network access, medical cost management and claims processing. The Company
offers a continuum of managed health care plans while providing incentives to
members and employers to select more intensively managed plans. Such plans are
typically offered at a lower cost in exchange for additional cost-control
measures, such as limited flexibility in choosing non-network providers. The
Company believes that it is better able to predict and control its health care
costs as its members select more intensively managed health care plans. 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.
The Company markets its products in California primarily under the name Blue
Cross of California and outside of California primarily under the name UNICARE.
Historically, the Company's primary market for its managed care products has
been California. The Company holds the exclusive right in California to market
its products under the Blue Cross name and mark. The Company is diversified in
its California customer base, with extensive membership among large and small
employer groups and individuals and a growing presence in the Medicare and
Medicaid markets.
In 1996, the Company began pursuing a nationwide expansion strategy through
selective acquisitions and start-up activities in key geographic areas. With the
acquisitions in March 1996 of the Life & Health Benefits Management division
("MMHD") of Massachusetts Mutual Life Insurance Company (the "MMHD Acquisition")
and in March 1997 of certain portions of the health and related life group
benefit operations (the "GBO") of John Hancock Mutual Life Insurance Company
(the "GBO Acquisition"), the Company has significantly expanded its operations
outside of California. The Company's acquisition strategy to date has focused on
large employer group plans that offer indemnity and other health insurance
products that are less intensively managed than the Company's current products
in California. Over the past decade, the Company has transitioned substantially
all of its California indemnity insurance customers to managed care products. An
element of the Company's geographic expansion strategy is to replicate its
experience in California in motivating traditional indemnity members to
transition to the Company's broad range of managed care products. In addition,
the Company focuses on acquiring businesses that provide significant
concentrations of members in strategic locations outside of California. The
Company believes that its current UNICARE medical membership provides its
UNICARE operations with sufficient scale to begin development of proprietary
provider network systems in key geographic areas which will enable the Company
over time to begin offering a broader range of managed care products. The
Company intends to use these new networks to introduce individual, small group
and senior products in these markets. The Company has developed or is actively
developing proprietary networks in Texas, Georgia, Illinois, Indiana, Michigan,
Maryland and Virginia and has introduced new managed care products in, among
other states, Texas, Georgia and Illinois.
The Company also intends to explore opportunities to work with other Blue
Cross Blue Shield entities. The Company currently provides pharmacy benefits
management services to certain Blue Cross Blue Shield entities and may market
additional specialty products to and pursue additional relationships with other
Blue Cross Blue Shield plans in the future.
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MANAGED HEALTH CARE INDUSTRY OVERVIEW
An increasing focus on costs by employers and consumers has spurred the
growth of HMO, PPO, POS and other forms of managed care plans as alternatives to
traditional indemnity health insurance. Typically, HMOs and PPOs, as well as
hybrid plans incorporating features of each (such as POS plans), develop health
care provider networks by entering into contracts with hospitals, physicians and
other providers to deliver health care at favorable rates that incorporate
health care utilization management and other cost-control measures as well as
network credentialing and quality assurance. HMO, PPO and POS members generally
are charged periodic, prepaid premiums, and co-payments or deductibles. PPOs,
POS plans and a number of HMOs allow out-of-network usage, typically at
substantially higher out-of-pocket costs to members. HMO members generally
select one primary care physician from a network who is responsible for
coordinating health care services for the member, while PPOs or other "open
access" plans generally allow members to select physicians without coordination
through a primary care physician. Hybrid plans, such as POS plans, typically
involve the selection of primary care physicians similar to HMOs, but allow
members to choose non-network providers at higher out-of-pocket costs similar to
PPOs.
THE CALIFORNIA MARKET. The desire of California-based employers for a range
of health care choices that promote effective cost controls and quality care has
contributed to substantial market acceptance of managed health care in
California, where the total penetration of managed health care companies is
higher than the national average. The Company is a market leader in offering
managed health care plans to individuals and small employer groups in
California, but has experienced increased competition in this market over the
last several years. WellPoint's large group business, which historically lagged
the performance of its small group and individual business, has experienced
considerable growth since 1994 with the rebound of the California economy and
the enhancement of the Company's reputation for customer service and value,
especially among established companies.
OTHER STATES. Although market acceptance of managed health care continues
to grow throughout the United States, it currently varies widely from state to
state. In some states, members are typically offered a spectrum of health care
choices which are more focused on traditional indemnity health insurance than in
California. Indemnity insurance usually allows members substantial freedom of
choice in selecting health care providers but without significant financial
incentives or cost-control measures typical of managed care plans. Health care
providers are reimbursed on a retrospective basis and there are few, if any,
incentives or measures to control health care costs. Indemnity insurance plans
typically require annual deductible obligations of members. Upon satisfaction of
the deductible, the member is reimbursed for health care expenses on a full or
partial basis of the indicated charges. Health plan reimbursement is often
limited to the health plan's assessment of the reasonable and customary charges
prevailing in a region for the particular health care procedure. PPO coverage
offered by health plans outside of California is often typified by broad-based,
third-party provider networks which do not incorporate the cost-control measures
or discounts typical of the Company's proprietary provider networks in
California. The Company believes the higher costs generally associated with such
third-party PPO networks and traditional indemnity health insurance will
continue to cause employers and members to seek out managed health care
solutions similar to those offered by the Company in California.
BLUE CROSS OF CALIFORNIA
Prior to the MMHD and GBO Acquisitions, the Company's significant operations
were primarily confined to the State of California. Most of the Company's
California operations are conducted under the trade name Blue Cross of
California.
MARKETING AND PRODUCTS
WellPoint's Blue Cross of California products are developed and marketed in
California with an emphasis on four distinct customer groups: large employers
with 51 or more employees, individuals and
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small employers, seniors and Medi-Cal recipients. Medi-Cal is California's
Medicaid program. In addition, the Company's products are marketed to
educational and public entities, federal employee health and benefit programs
and national employers and in conjunction with state-run programs servicing
high-risk and underserved markets. Individual business units are responsible for
enrolling, underwriting and servicing customers in specific segments. Sales
representatives are generally assigned to a specific geographic region of
California to allow WellPoint to tailor its marketing efforts to the particular
health care needs of each regional market. Individual business units also use
advertising, public relations, promotion and marketing research to support their
efforts. The Company believes that one of the keys to its success in California
has been its focus on distinct customer groups defined generally by employer
size and geographic region, which better enables the Company to develop benefit
plans and services that meet the needs of these distinct markets. WellPoint's
managed health care plans to large employers in California are generally sold in
conjunction with a broker or consultant to develop a package of managed health
care benefits specifically tailored to meet the employer's needs. Individual and
small employer group products are marketed in California primarily through sales
managers in both Comprehensive Integrated Marketing Services, Inc. ("CIMS"), a
wholly owned subsidiary of the Company, and WellPoint's sales department, who
oversee independent agents and brokers.
HMO PLANS. The Company offers a variety of HMO products to the members of
its California HMO, CaliforniaCare. CaliforniaCare members are generally charged
periodic, prepaid premiums that do not vary based on the amount of services
rendered, as well as modest copayments (small per-visit charges). Members choose
a primary care physician from the HMO network who is responsible for
coordinating health care services for the member. Certain plans permit members
to receive health care services from providers that are not a part of the
Company's HMO network at a substantial out-of-pocket cost to members which
includes a deductible and higher copayment obligations. To enhance the
marketability of its plans, in 1996 the Company introduced its CaliforniaCare
Saver HMO product, which has deductible obligations for certain hospital and
outpatient benefits. In response to consumer demand for easier access to
specialists, in 1997 the Company introduced the Ready Access program in its
CaliforniaCare HMO. The program expedites the referral process to specialists
within a member's participating medical group ("PMG"). In addition, the program
also allows members of certain PMGs to self-refer to designated frequently used
specialists.
PPO PLANS. The Company's PPO products, which are generally marketed under
the name "Prudent Buyer," are designed to address the specific needs of
different customer segments. The Company's PPO plans require periodic, prepaid
premiums and have copayment obligations for services rendered by network
providers that are often similar to the copayment obligations of its HMO plans.
Unlike WellPoint's HMO and other "closed-access" plans, members are not required
to select a primary care physician who is responsible for coordinating their
care and may be subject to annual deductible requirements. PPO members have the
option to receive health care services from non-network providers, typically at
substantially higher out-of-pocket costs to members. To improve the
attractiveness of its PPO plans to small groups and individual buyers, in 1996
the Company introduced its Prudent Buyer Co-Pay product, which replaces annual
deductible obligations with HMO-like co-payments while maintaining the member
choice typical of PPO plans. In March 1997, the Company introduced new
high-deductible health plans intended for use with medical savings accounts
("MSAs").
MEDICAID PLANS. The California Department of Health Services ("DHS")
administers Medi-Cal, California's Medicaid program. WellPoint has been awarded
contracts to administer Medi-Cal managed care programs in various California
counties. Under these programs, WellPoint provides health care coverage to
Medi-Cal program members and DHS pays WellPoint a fixed payment per member per
month. As of December 31, 1997, approximately 284,000 members were enrolled in
WellPoint's Medi-Cal managed care programs in Los Angeles, Sacramento, Orange,
Riverside, San Bernardino, San Francisco, Alameda, Santa Clara, Fresno, Kern and
Stanislaus counties.
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SENIOR PLANS. WellPoint offers numerous Medicare supplemental plans, which
typically pay the difference between health care costs incurred and amounts paid
by Medicare, using existing PPO and HMO provider networks. One such product is
Medicare Select, a PPO-based product that offers supplemental Medicare coverage.
WellPoint also offers Medicare Select II, a hybrid product which allows seniors
over the age of 65 to maintain their full Medicare benefits for any
out-of-network benefits while enrolled in a supplemental plan that allows them
to choose their own physician with a copayment. As of December 31, 1997, the
Medicare supplemental plans served approximately 166,000 members. WellPoint also
offers Blue Cross Senior Secure, an HMO plan operating in defined geographic
areas, under a Medicare risk contract with the Health Care Financing
Administration ("HCFA"). This contract entitles WellPoint to a fixed per-member
premium from HCFA which is subject to adjustment annually by HCFA based on
certain demographic information relating to the Medicare population and the cost
of providing health care in a particular geographic area. In addition to
physician care, hospitalization and other benefits covered by Medicare, the
benefits under this plan include prescription drugs, routine physical exams,
hearing tests, immunizations, eye examinations, counseling and health education
services. As of December 31, 1997, Blue Cross Senior Secure HMO plans served
over 10,000 members.
MANAGED HEALTH CARE NETWORKS AND PROVIDER RELATIONS
WellPoint's extensive managed health care provider networks in California
include its HMO, PPO and specialty managed care networks. These provider
relationships are monitored regularly in order to control the cost of health
care while providing access to quality providers. As a result of this
network-monitoring process as well as member and provider financial incentives,
WellPoint reduces or eliminates the need to use out-of-network providers that
are not subject to WellPoint's cost and performance controls.
WellPoint uses its large California membership to negotiate provider
contracts at favorable rates that require utilization management and other
cost-control measures. Pursuant to these contracts, physician providers are paid
either a fixed per member monthly amount (known as a capitation payment) or on
the basis of a fixed fee schedule. In selecting providers for its networks,
WellPoint uses its credentialing programs to evaluate the applicant's
professional qualifications and experience, including license status,
malpractice claims history and hospital affiliations.
The following is a more detailed description of the principal features of
WellPoint's California HMO and PPO networks.
HMO NETWORK. Membership in CaliforniaCare has grown to approximately 1.4
million members as of December 31, 1997 from 123,000 members as of December 31,
1987. As of December 31, 1997, the HMO network included approximately 28,000
primary care and specialist physicians and approximately 430 hospitals
throughout California. The physician network of PMGs is comprised of both
multi-specialty medical group practices and individual practice associations
("IPAs").
Substantially all primary care physicians or PMGs in the Company's
California HMO network are reimbursed on a capitated basis that incorporates
financial incentives to control health care costs. These arrangements specify
fixed per member per month payments to providers and may result in a marginally
higher medical loss ratio than a non-capitated arrangement, but significantly
reduce risk to WellPoint. Generally, HMO network hospital provider contracts are
on a nonexclusive basis and provide for a per diem payment (a fixed fee schedule
where the daily rate is based on the type of service), which is below the
hospitals' standard billing rates.
Contractual arrangements with PMGs typically include provisions under which
WellPoint provides limited stop-loss protection. If the PMG's actual charges for
medical services provided to a member exceed an agreed-upon threshold amount,
WellPoint will pay the group a portion of the excess amount. Provider rates are
generally negotiated with PMGs and hospitals on an annual or multi-year basis.
To encourage PMGs to contain costs for claims for non-capitated services such as
inpatient hospital, outpatient surgery, hemodialysis, emergency room, skilled
nursing facility, ambulance, home health and alternative birthing
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center services, WellPoint's PMG agreements provide for a settlement payment to
the PMG based upon the PMG's effective utilization of such non-capitated
services. PMGs are also eligible for additional incentive payments based upon
their management of outpatient prescription drugs and satisfaction of quality
criteria.
PPO NETWORK. The California PPO network included approximately 42,000
physicians and 440 hospitals throughout California as of December 31, 1997.
There were approximately 2.8 million members (including administrative services
members) enrolled in WellPoint's California PPO health care plans as of such
date, approximately 47% of whom were individuals or employees of small groups.
WellPoint endeavors to manage and control costs for its PPO plans by
negotiating favorable arrangements with physicians, hospitals and other
providers, which include utilization management and other cost-control measures.
In addition, WellPoint manages costs through pricing and product design
decisions intended to influence the behavior of both providers and members.
Like WellPoint's HMO plans, WellPoint's California PPO plans provide for the
delivery of specified health care services to members by contracting with
physicians, hospitals and other providers. Hospital provider contracts are on a
nonexclusive basis and are generally paid per diem amounts that provide for
rates that are below the hospitals' standard billing rates. Physician provider
contracts are also on a nonexclusive basis and specify fixed fee schedules that
are below standard billing rates. WellPoint is able to obtain prices for
hospitals and physician services below standard billing rates because of the
volume of business it offers to health care providers that are part of its
network. Provider rates are generally negotiated on an annual or multi-year
basis with hospitals. In 1996, the Company concluded an extensive recontracting
process with hospitals in its provider network, whereby certain hospitals that
demonstrated designated quality and other criteria were given a preferred status
in exchange for, among other things, lower negotiated rates. Provider rates for
physicians in the Company's PPO network are set from time to time by the
Company.
UTILIZATION MANAGEMENT. In order to better manage quality in its
proprietary provider networks WellPoint adopts utilization management systems
and guidelines that are intended to reduce unnecessary procedures, admissions
and other medical costs. The utilization management systems seek to provide
quality care to WellPoint's members by ensuring that medical services provided
are based on medical necessity and that all final decisions are made by
physicians. In its HMO, WellPoint permits PMGs to oversee most utilization
management for their particular medical group under these guidelines. Currently,
substantially all of the PMGs in WellPoint's California HMO network have
established committees to oversee utilization management. For its PPO network,
WellPoint uses treatment guidelines, requires pre-admission approvals of
hospital stays and concurrent review of all admissions and retrospectively
reviews physician practice patterns. Utilization management also includes an
outpatient program, with pre-authorization and retrospective review, ongoing
supervision of inpatient and outpatient care of members, case management and
discharge planning capacity. Review of practice patterns may result in
modifications and refinements to the PPO plan offerings, treatment guidelines
and network contractual arrangements. In addition, WellPoint manages health care
costs by periodically reviewing cost and utilization trends within its provider
networks. Cases are reviewed in the aggregate to identify a high volume of a
particular type of service to identify the most effective method of treatment
while more effectively managing costs. In addition, the Company reviews
high-cost procedures in an effort to provide new quality, cost-effective
treatment, by utilizing new technologies or by creating additional networks,
such as its networks of home health agencies.
UNDERWRITING. In establishing premium rates for its health care plans,
WellPoint uses underwriting criteria based upon its accumulated actuarial data,
with adjustments for factors such as claims experience, member mix and industry
differences to evaluate anticipated health care costs. WellPoint's underwriting
practices in the individual and small group market are subject to California
legislation affecting the individual and small employer group market. See
"--Government Regulation."
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QUALITY MANAGEMENT. Quality management for most of the Company's California
business is overseen by the Company's Quality Management Department and is
designed to ensure that necessary care is provided by qualified personnel.
Quality management encompasses plan level quality performance, physician
credentialing, provider and member grievance monitoring and resolution, medical
group auditing, monitoring medical group compliance with Blue Cross of
California standards for medical records and medical offices, physician peer
review and a quality management committee.
UNICARE
In 1996, the Company began pursuing a nationwide expansion strategy through
selective acquisitions and start-up activities in key geographic areas. The
Company believes that its success in the highly competitive California managed
care market is attributable to its broad range of managed care products that
target the differing needs of specific market segments. The Company's
acquisition strategy to date has focused on large employer group plans that
offer indemnity and other health care products that are less intensively managed
than the Company's current products. In addition, the Company has focused on
acquiring businesses that provide significant concentrations of members in
strategic locations outside of California. As of December 31, 1997, the Company
had approximately 2.4 million members covered under its UNICARE health plans
(including approximately 57,000 members in California). Approximately 55% of
UNICARE medical membership as of such date was concentrated in eight states:
Illinois, Texas, Massachusetts, Ohio, Michigan, New York, Georgia and Indiana.
Most of the Company's non-California business is conducted by the Company's
wholly owned subsidiary UNICARE Life & Health Insurance Company.
MARKETING AND PRODUCTS
Similar to the Company's Blue Cross of California products, WellPoint's
UNICARE products are developed and marketed outside of California with a focus
on specific customer groups. The large employer group businesses that were
previously part of the MMHD and GBO operations have a national focus as a result
of the multi-state needs of such employers. UNICARE's individual and smaller
employer group and senior products are marketed on a more regional basis as a
result of the more localized nature of these customer segments and the agent and
broker communities that serve them. Similar to the Company's Blue Cross of
California business units, individual UNICARE business units are responsible for
marketing, enrolling, underwriting and servicing their respective customers.
Outside of California, the Company offers HMO products in Texas and PPO and
other open access products (using proprietary networks and third-party provider
networks), as well as traditional fee-for-service products. As WellPoint
continues to develop proprietary provider network systems in key geographic
areas, the Company intends to offer more intensively managed products to the
existing members of acquired businesses and to new individual, small group and
senior customers outside of California. The Company offers managed health care
products and services in Texas through certain subsidiaries including UNICARE of
Texas Health Plans, Inc., which is currently licensed as an HMO in the Houston,
Dallas/ Forth Worth and Austin areas. Although the regulatory requirements vary
from state to state, many states require that HMO products be offered by an
entity incorporated and domiciled in that state.
MANAGED HEALTH CARE NETWORKS AND PROVIDER RELATIONS
Due to the more recent development of the Company's national operations, the
Company's relations with health care providers outside of California are more
varied than in California. During 1997, the Company undertook significant
network development efforts in various states, including Georgia, Illinois,
Indiana, Ohio, Texas and Virginia. Some of these network development activities
involved start-up activities, while others involved supplementing existing
networks acquired in the MMHD and GBO acquisitions. As of December 31, 1997,
UNICARE's proprietary networks included approximately 42,000 primary and
specialist physicians and 350 hospitals. These networks included approximately
15,000 primary care and specialist physicians and 150 hospitals in the Company's
Texas HMO network.
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As part of the MMHD Acquisition, the Company also acquired majority
ownership interests in a start-up HMO, National Capital Health Plan ("NCHP"),
and an existing PPO entity, National Capital Preferred Provider Organization
("NCPPO"). Both entities operate in the Maryland/Virginia area and are joint
ventures with local health care providers. The NCPPO network included
approximately 6,700 primary care and specialist physicians and 50 hospitals as
of December 31, 1997.
A large number of UNICARE members are currently served by third-party
provider networks, which generally lack the provider selectivity and discounts
typical of the Company's California proprietary networks. One of the Company's
strategies for the expansion of its UNICARE operations is to continue building
proprietary provider network systems similar to the Company's networks in
California, which provide a continuum of managed-care products to various
customer segments. As the Company expands its out-of-state operations, it
intends to build or acquire such network operations and, as appropriate, to
replace or supplement the current third-party network arrangements.
UTILIZATION MANAGEMENT. For the Company's UNICARE managed care health
plans, utilization management is provided both by UNICARE and third-party
provider networks. As part of the GBO Acquisition, the Company also acquired
CostCare, Inc. ("CCI"), which provides medical management services. The Company
has integrated CCI utilization management services into UNICARE offerings. In
December 1997, CCI (which operates as UNICARE/Cost Care) received a two-year
accreditation from the Utilization Review Accreditation Commission ("URAC"), a
private organization providing voluntary accreditation of utilization review
entities.
UNDERWRITING. As with the Company's Blue Cross of California operations,
the UNICARE underwriting activities use criteria based upon accumulated
actuarial data, with adjustments for factors such as claims experience, member
mix and industry differences to evaluate anticipated health care costs. Because
a significant portion of UNICARE's business is the provision of administrative
services to self-funded employer plans, most of the UNICARE business involves no
underwriting risk to the Company. Because UNICARE's members are in every state,
the Company's underwriting practices, especially in the individual and small
group market, are subject to a variety of legislative and regulatory
requirements and restrictions. See "--Government Regulation."
SPECIALTY MANAGED HEALTH CARE AND OTHER PLANS AND SERVICES
WellPoint offers a variety of specialty managed health care and other
services. WellPoint believes that these specialty networks and plans complement
and facilitate the marketing of WellPoint's medical plans and help in attracting
employer groups and other members that are increasingly seeking a wider variety
of options and services. WellPoint also markets these specialty products on a
stand-alone basis to other health plans and other payors.
PHARMACY PRODUCTS
WellPoint offers pharmacy services and pharmacy benefit management services
to its members. WellPoint's pharmacy services incorporate features such as drug
formularies (a WellPoint-developed listing of preferred, cost-effective drugs),
a pharmacy network and maintenance of a prescription drug database and mail
order capabilities. Moreover, pharmacy benefit management services provided by
WellPoint include management of drug utilization through outpatient prescription
drug formularies, retrospective review and drug education for physicians,
pharmacists and members. As of December 31, 1997, WellPoint had more than 12.3
million risk and non-risk members and approximately 49,000 participating
pharmacies.
DENTAL PLANS
WellPoint's California dental plans include Dental Net, its California
dental HMO, with a provider network of approximately 2,000 dentists reimbursed
on a capitated basis, a dental PPO, with a network of approximately 11,000
dentists, and traditional indemnity plans. As part of the Company's national
expansion efforts, the Company has developed or is developing dental provider
networks in 40 states
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outside of California. As of December 31, 1997, the Company's dental networks
outside of California included 18,900 dentists. The Company's dental products
outside of California currently include a dental PPO in Texas and Georgia. As a
result of the MMHD and GBO acquisitions, the Company has acquired significant
additional dental membership outside of California. The Company's dental plans
provide primary and specialty dental services, including orthodontic services,
and as of December 31, 1997, served approximately 3.2 million dental members.
LIFE INSURANCE
The Company offers primarily term-life insurance to employers, generally in
conjunction with the Company's health plans. As of December 31, 1997, the
Company provided life insurance products to approximately 1.8 million persons.
MENTAL HEALTH PLANS
WellPoint offers specialized mental health and substance abuse programs. The
plans cover mental health and substance abuse treatment services on both an
inpatient and an outpatient basis, through a network of approximately 3,800
contracting providers. In addition, approximately 280 employee assistance and
behavioral managed care programs have been implemented for a wide variety of
businesses throughout the United States. As of December 31, 1997, there were
approximately 700,000 members covered under WellPoint's mental health plans.
WORKERS' COMPENSATION
One of the Company's operating subsidiaries, UNICARE Insurance Company
("UIC"), underwrites workers' compensation insurance primarily in California and
is also licensed in 33 other states. UIC historically focused on insuring large
accounts, working with a select group of large property and casualty insurance
brokers. In August 1994, the Company introduced "UNICARE Integrated," an
integrated managed care product for workers' compensation and medical benefits.
Under UNICARE Integrated, WellPoint has combined its existing HMO and PPO
networks with a workers' compensation occupational medical network of physicians
and clinics. UNICARE Integrated offers single point-of-service and account
management for the employer and provides employees access to existing HMO and
PPO networks. WellPoint believes that, by integrating managed care and workers'
compensation, medical treatment costs and workers' compensation costs can be
reduced. As of December 31, 1997, approximately 275,000 members were covered
under WellPoint's workers' compensation programs.
UTILIZATION MANAGEMENT
In connection with the GBO Acquisition, the Company acquired CCI, a wholly
owned subsidiary of John Hancock. CCI, which now operates under the trade name
UNICARE/Cost Care, provides stand-alone utilization management and other medical
management services to other health plans and self-funded employers. CCI
utilization management services are also integrated into UNICARE product
offerings. In December 1997, CCI received a two-year accreditation from URAC. As
of December 31, 1997, the Company had approximately 2.8 million utilization
management members.
DISABILITY PLANS
As of December 31, 1997, the Company provided long-term and/or short-term
disability coverage to approximately 1.1 million individuals.
LONG-TERM CARE INSURANCE
In November 1997, the Company began offering a group of long-term care
insurance products to its California members through its indirect wholly owned
subsidiary BC Life & Health Insurance Company ("BC Life"). These plans, which
are marketed under the Advantage Blue trade name, involve three
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different products. The Company's long-term care products include both a skilled
nursing home care plan and comprehensive policies covering skilled, intermediate
and custodial long-term care.
ANCILLARY NETWORKS
WellPoint evaluates current and emerging high volume or high cost services
to determine whether developing an ancillary service network will yield cost
control benefits. In establishing these ancillary service networks, WellPoint
seeks to enter into capitation or fixed fee arrangements with providers of these
services. WellPoint regularly collects and analyzes industry data on high cost
or high volume unmanaged services to identify the need for specialty managed
care networks. For example, WellPoint has created Centers of Expertise for
certain transplant services.
MANAGEMENT SERVICES
WellPoint provides administrative services to large group employers that
maintain self-funded health plans. In California, the Company often has been
able to transition these customers into other lines of business by subsequently
introducing WellPoint's underwritten managed care products. WellPoint offers
managed care services, including underwriting, actuarial services, medical cost
management, claims processing and administrative services for self-funded
employers. WellPoint also enables employers with self-funded health plans to use
WellPoint's California PPO and HMO provider networks and to realize savings
through WellPoint's favorable provider arrangements, while allowing employers
the ability to design certain health benefit plans in accordance with their own
requirements and objectives. As of December 31, 1997, WellPoint serviced
self-insured health plans covering approximately 2.7 million medical members.
Management services revenue for these services was $383.2 million, $147.9
million and $61.2 million for the years ended December 31, 1997, 1996 and 1995,
respectively. The Company's managed care services revenues have expanded
considerably during the last two years as a result of the MMHD and GBO
Acquisitions.
MARKET RESEARCH AND ADVERTISING
WellPoint conducts market research and advertising programs to develop
products and marketing techniques tailored specifically to customer segments.
WellPoint uses print and broadcast advertising to promote its health care plans.
In addition, the Company engages in promotional activities with agents, brokers
and consultants. WellPoint incurred costs of approximately $36.6 million, $34.8
million and $21.2 million on advertising for the years ended December 31, 1997,
1996 and 1995 respectively.
COMPETITION
The managed health care industry in California is competitive on both a
regional and statewide basis. In addition, in recent years there has been a
trend of increasing consolidation among both national and California-based
health care companies, which may further increase competitive pressures.
WellPoint competes with other companies that offer similar managed health care
plans, some of which have greater resources than WellPoint. Currently, WellPoint
is a market leader in offering managed health care plans to individuals and
small employer groups in California. The medical loss ratio attributable to
WellPoint's individual and small group business has historically been lower than
that for its large employer group business. As a result, a larger portion of
WellPoint's profitability is due to the individual and small group business.
WellPoint has experienced increased competition in this market over the last
several years, which could adversely affect its medical loss ratio and future
financial condition or results of operations. See "-- Factors That May Affect
Future Results of Operations."
The markets in which the Company operates outside of California are also
highly competitive. Because of the many different markets in which the Company
now serves members, the Company faces unique competitive pressures in regional
markets as well as on a national basis. The Company competes with other
companies that offer managed health care plans as well as traditional indemnity
insurance products. Many of these companies have greater financial and other
resources than the Company and
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greater market share on either a regional or national basis. As the Company
continues to geographically expand its operations, it will be subject to
national competitive factors as well as unique competitive conditions that may
affect the more localized markets in which the Company operates.
WellPoint believes that significant factors in the selection of a managed
health care plan by employers and individual members include price, the extent
and depth of provider networks, flexibility and scope of benefits, quality of
services, market presence, reputation (which may be affected by public rankings
or accreditation by voluntary organizations such as the National Committee for
Quality Assurance ("NCQA") and the Utilization Review Accreditation Commission
("URAC")) and financial stability. WellPoint believes that it competes
effectively against other health care industry participants.
GOVERNMENT REGULATION
CALIFORNIA
DOC REGULATION. WellPoint offers its managed health care services in
California through Blue Cross of California which is subject to regulation
principally by the California Department of Corporations (the "DOC") under the
Knox-Keene Health Care Service Plan Act of 1975 (the "Knox-Keene Act"). Under
the Knox-Keene Act, Blue Cross of California is subject to various minimum
tangible net equity ("TNE"), deposit and other financial requirements. The DOC
also regulates the ability of Blue Cross of California to issue capital stock or
to pay dividends, and of its subsidiaries to pay dividends or to diversify and
implement changes in their products, and the ability to effect intercompany
transactions. Blue Cross of California's managed health care programs are also
subject to extensive DOC regulation regarding minimum benefit and coverage
levels, Blue Cross of California's contractual and business relationships with
health care providers, administrative capacity, marketing and advertising,
procedures for quality assurance and subscriber and enrollee grievance
resolution. Blue Cross of California must file periodic financial reports with
the DOC and is subject to periodic reviews of those activities by the DOC. In
addition, the DOC must approve all forms of individual and group subscriber
contracts. Any material modifications to the organization or operations of Blue
Cross of California are subject to prior review and approval by the DOC. The
approval process can be lengthy and there is no certainty of approval by the
DOC. The failure to comply with DOC regulations can subject the Company to
various penalties, including fines or the imposition of restrictions on the
conduct of its operations. In 1997, the DOC conducted a triennial medical survey
of the Company and each of its subsidiaries licensed under the Knox-Keene Act.
The Company has received preliminary reports from the DOC with respect to three
surveys and is currently in the process of responding to the preliminary
reports. Prior to the Company's August 1997 reincorporation in Delaware, the
Company and two subsidiaries other than Blue Cross of California were Knox-Keene
licensees.
DOI REGULATION. The California Department of Insurance (the "California
DOI") regulates the insurance business, including the managed care services and
workers' compensation activities, conducted by BC Life and UIC. BC Life and UIC
are subject to various capital reserve and other financial requirements
established by the California DOI. The DOI also regulates the ability of the
Company's subsidiaries to issue capital stock, to pay dividends, to diversify
and implement changes in their products, and the ability to effect intercompany
transactions. BC Life and UIC must also file periodic reports regarding their
activities regulated by the California DOI and are subject to periodic reviews
of those activities by the California DOI. BC Life must also obtain approval
from the California DOI for all of its group insurance policies and certain
aspects of its individual policies prior to issuing those policies. CIMS, which
operates a general insurance agency, is also subject to regulation by the
California DOI. There can be no assurance that any future regulatory action by
the California DOI will not have an adverse impact on the ability of BC Life,
UIC and CIMS to conduct their business profitably.
CALIFORNIA HEALTH CARE LEGISLATION. From time to time, new California
legislation is enacted and regulatory interpretations are adopted that adversely
affect WellPoint. For example, California's various
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small group reforms require that coverage be offered to certain small groups,
limit rate increases and exclusions based on pre-existing conditions, limit
waivers (temporary exclusion for individuals with specifically identified
preexisting conditions) and impose other requirements designed to increase the
availability of coverage for small groups. This legislation has resulted in
increased claims expense for the Company. In addition, in 1996 WellPoint
voluntarily removed certain temporary exclusions, including a temporary
exclusion for maternity services, which has resulted in increased claims expense
for the Company. Further California legislation addresses the practice of
"freezing," or discontinuing the offering of certain benefit plans, by health
care service plans and insurance carriers. There can be no assurance that
compliance with the legislation discussed above will not adversely affect
WellPoint's financial condition or results of operations. The legislation
described above and any similar legislation in California or other states may
result in increased claims expense.
In 1997, the California Legislature established the Managed Health Care
Improvement Task Force to study and make recommendations regarding managed
health care issues in the state of California. The task force deliberated in
1997 and issued a preliminary report in January 1998. The task force was
comprised of appointees chosen by California Governor Pete Wilson and by the
Legislature and included representatives from health plans, employer groups,
consumer groups and health care providers. The task force's report includes a
broad range of recommendations to restructure managed health care in California,
including changes in patient confidentiality requirements, quality-of-care
issues, mandated benefit coverage and the restructuring of California regulatory
oversight of managed health care plans. The task force's recommendations have
been provided to Governor Wilson and the California Legislature. No legislation
has yet been implemented as a result of the task force's recommendations. While
it is still too early to determine if any additional legislation will be adopted
as a result of the task force's work, changes recommended by the task force, if
enacted into law, could have a material adverse affect on the Company's results
of operations and financial condition.
FEDERAL
RECENT FEDERAL HEALTH CARE LEGISLATION. In August 1997, the President
signed into law the Balanced Budget Act of 1997 (the "Balanced Budget Act"). The
Balanced Budget Act included a number of measures affecting the provision of
health care. The act placed restrictions on the variation in Medicare
reimbursement amounts between counties. In addition, the Balanced Budget Act
expanded the managed health plan options available to Medicare enrollees to
include PPO, POS and high deductible health plans intended for MSAs. No
regulations regarding this change have yet been adopted. Finally, the Balanced
Budget Act implemented certain changes with respect to Medicare supplement
programs, including guaranteed coverage issues. Certain of the changes under the
Balanced Budget Act could have the result of increasing the Company's costs.
In March 1997, President Clinton appointed the Advisory Commission on
Consumer Protection and Quality in the Health Care Industry (the "Clinton
Quality Commission") to advise the President on changes occurring in the health
care system and to formulate recommendations regarding health care quality and
the protection of consumers. The commission is comprised of representatives from
government, consumer groups, business groups and health care providers. In
November 1997, the Clinton Quality Commission released a "Consumer Bill of
Rights and Responsibilities" containing a number of general and specific
recommendations regarding the provision of health care in the United States. The
Commission's recommendations have been put forth for consideration by the United
States Congress. No legislation has yet been adopted as a result of its
recommendations. In February 1998, the President issued an executive order to
the government administrators of each of the government-sponsored health
programs directing them to take appropriate actions to insure compliance with
some or all of the recommendations made in the Consumer Bill of Rights by
various dates on or before December 31, 1999. Compliance with the President's
executive order is likely to increase health plan costs associated with these
government-sponsored programs.
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On August 21, 1996, the President signed into law the Health Insurance
Portability and Accountability Act of 1996 (originally known in the Senate as
the Kennedy-Kassebaum bill) ("HIPAA"). HIPAA imposes new obligations for issuers
of health insurance coverage and health benefit plan sponsors. Most of the
insurance reform provisions of HIPAA become effective for "plan years" beginning
July 1, 1997.
HIPAA requires health plans in the small group market (generally 50 or fewer
employees) to accept every employer, employee and family member, subject to
certain prescribed exceptions. Plans must apply any restriction uniformly and
without regard to individual member health status. HIPAA also guarantees the
renewability of coverage, regardless of the health status of any member of a
group. Access to coverage in the individual market is guaranteed to people who
lose their group coverage (due to loss of employment, change of jobs or other
reasons), subject to certain limited exceptions. Alternatively, states may
develop programs to assure that comparable coverage is available to these
people. The coverage will be available without regard to health status, and
renewal will be guaranteed.
HIPAA further prohibits health plans in the small group market from
establishing enrollment eligibility rules or premiums based on specified "health
status" related factors. An exception to this policy of nondiscrimination is
provided with respect to premium discounts or rebates, or modified copayments
and deductibles related to health promotion and disease prevention programs.
HIPAA provides parameters for the use of pre-existing condition limits by
health plans. Plans may limit or exclude benefits for a pre-existing condition
only if the exclusion is limited to 12 months for conditions diagnosed or
treated in the previous six months. The pre-existing condition exclusion period
is reduced or credited for each month of prior continuous coverage. Insurers
cannot impose new pre-existing condition exclusions for workers with previous
coverage. Health plans only may use an affiliation period of up to two months.
On September 26, 1996, the President signed maternity length of stay and
mental health parity benefits measures into law. The maternity stay provision
requires health plans to cover the cost of a 48-hour hospital stay (96 hours
following a Caesarian section). This measure does not mandate the length of
hospital stays but requires that longer stays are covered if deemed necessary by
the mother or her physician (in consultation with the mother). Health plans will
be barred from offering financial incentives for early discharges. The mental
health parity provision will require health plans that provide mental health
benefits to set the same level of yearly and lifetime coverage for mental health
benefits as for physical ones. The maternity length of stay and mental health
parity measures are effective for plan years beginning January 1, 1998.
Approximately 30 states already guarantee minimum hospital stays for mothers and
newborns. In many regions, the maternity length of stay provisions reflect the
existing average length of stay. As a result of these factors, it is unclear
what implications, if any, these measures will have on WellPoint's result of
operations.
MEDICARE LEGISLATION. WellPoint's health benefits programs include products
that are marketed to Medicare beneficiaries as a supplement to their Medicare
coverage. These products are subject to Federal regulations intended to provide
Medicare supplement customers with standard minimum benefits and levels of
coverage and full disclosure of coverage terms and assure that fair sales
practices are employed in the marketing of Medicare supplement coverage.
In California, WellPoint provides a senior plan product under a Medicare
risk contract that is subject to regulation by HCFA. Under this contract and
HCFA regulations, if WellPoint's premiums received for Medicare-covered health
care services provided to senior plan Medicare members are more than the
Company's projected costs associated with the provision of health care services
provided to senior plan members, then WellPoint must provide its senior plan
members with additional benefits beyond those required by Medicare or reduce its
premiums, or deductibles or co-payments, if any. WellPoint's senior plan is not
permitted to account for more than one-half of WellPoint's total HMO members in
each of WellPoint's geographic markets in California, although this rule is
currently scheduled to be terminated on or before January 1, 1999. HCFA has the
right to audit HMOs operating under Medicare contracts to
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determine the quality of care being rendered and the degree of compliance with
HCFA's contracts and regulations.
FUTURE HEALTH CARE REFORM. A number of legislative proposals have been made
at the Federal and state levels over the past five years. Certain of these
proposals would restrict coverage decisions or prohibit exclusions or denials of
coverage for pre-existing conditions and would provide for "community rating" of
risks. Certain of these proposals would impose new restrictions or standards on
health plans, including restrictions on incentive payments to providers, and
would require health plans to provide greater information and disclosure to
consumers. There have been proposals made at the Federal level to implement
greater restrictions on employer-funded health plans, which are generally
exempted from state regulation by the Employee Retirement Income Security Act of
1974 ("ERISA"). To control medical costs, proposed legislation may also set or
limit fees of health care providers, which may be established through a
governmental board.
WellPoint is unable to evaluate what legislation may be proposed and when or
whether any legislation will be enacted and implemented. However, certain of the
proposals, if adopted, could have a material adverse effect on WellPoint's
financial condition or results of operations, while others, if adopted, could
potentially benefit WellPoint's business.
OTHER STATES
The Company's activities in other states are subject to state regulation
applicable to the provision of managed health care services and the sale of
traditional health indemnity and workers' compensation insurance. As a result of
the MMHD and GBO Acquisitions, the Company and certain of its subsidiaries are
also subject to regulation by the DOI in Delaware (which is the state of
incorporation of UNICARE Life & Health Insurance Company) and in all other
states. As the Company offers a broad range of managed care products in new
geographic locations, it will be subject to additional regulation by
governmental agencies applicable to the provision of health care services. The
Company believes it is in compliance in all material respects with all current
state regulatory requirements applicable to its business as presently conducted.
However, changes in government regulations could affect the level of services
which the Company is required to provide or the rates which the Company can
charge for its health care products and services. As the Company continues to
expand its operations outside of California, new legislative and regulatory
developments in Delaware, Texas, Georgia and various other states will have
greater potential effect on the Company's financial condition or results of
operations. Over the past few years, there has been an increase throughout the
United States in proposed state legislation regarding, among other things,
mandated benefits, health plan liability, third-party review of health plan
coverage determinations and health plan relationships with providers. The
Company expects that this trend of increased legislation will continue.
In May 1997, the Texas legislature adopted SB 386 which, among other things,
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 the legislation).
The legislation was effective as of September 1, 1997. It is too early to
determine what effect, if any, this legislation will ultimately 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.
In connection with the GBO Acquisition, the Company has entered into a
reinsurance arrangement, on a 100% coinsurance basis, of the insured business of
the GBO. This business includes approximately 125 insured persons in Canada
covered by group policies issued to U.S.-based employers. As a result, the
Company may be subject to certain rules and regulations of applicable Canadian
regulatory agencies.
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SERVICE MARKS
WellPoint and its subsidiaries have filed for registration of and maintain
several service marks, trademarks and trade names at the Federal level and in
California, including "Prudent Buyer Plan," "CaliforniaCare" and "UNICARE."
WellPoint, Blue Cross of California and BC Life are currently parties to license
agreements with the BCBSA which allow them to use the Blue Cross name and mark
in California with respect to WellPoint's HMO and PPO network-based plans. The
BCBSA is a national trade association of Blue Cross and Blue Shield licensees,
the primary function of which is to promote the Blue Cross and Blue Shield
names. Each licensee is an independent legal organization and is not responsible
for the obligations of other BCBSA member organizations. A Blue Cross license
requires payment of a fee to the BCBSA and compliance with various requirements
established by the BCBSA, including the maintenance of a specified base capital
requirements. The failure to meet such capital requirements can subject the
Company to certain corrective action, while the failure to meet a lower
specified level of capital can result in termination of the Company's license
agreement with the BCBSA. WellPoint considers the licensed Blue Cross name and
its registered service marks, trademarks and trade names important in the
operation of its business.
EMPLOYEES
At December 31, 1997, WellPoint and its subsidiaries employed approximately
10,100 people. Approximately 115 of the Company's employees are presently
covered by a collective bargaining agreement with the Office and Professional
Employees International Union, Local 29. As a result of the GBO Acquisition,
approximately 260 of the Company's office clerical employees in the greater
Detroit area are presently covered by a collective bargaining agreement with the
International Brotherhood of Teamsters, Chauffeurs, Warehousemen and Helpers of
America, Local No. 614. WellPoint believes that its relations with its employees
are good, and it has not experienced any work stoppages.
EXECUTIVE OFFICERS
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
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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.
MAY 1996 RECAPITALIZATION AND AUGUST 1997 REINCORPORATION
The Company's predecessor, WellPoint Health Networks Inc., a Delaware
corporation ("Old WellPoint"), was organized in 1992 as a public for-profit
subsidiary of Blue Cross of California ("BCC"), to own and operate substantially
all of the managed health care businesses of BCC. In order to fulfill BCC's
public benefit obligations to the State of California arising out of the
creation of Old WellPoint, BCC and Old WellPoint undertook a recapitalization
(the "Recapitalization") which was concluded on May 20, 1996. As a result of the
Recapitalization, among other things, Old WellPoint merged into BCC, a special
dividend of $995.0 million was made to the shareholders of Old WellPoint and the
California HealthCare Foundation (the "Foundation") became the holder of
53,360,000 shares, or approximately 80%, of the surviving WellPoint entity.
In connection with the Recapitalization, BCC relinquished its rights under
the Blue Cross License Agreement date January 1, 1991, between Blue Cross of
California and the BCBSA. The BCBSA and the Company entered into a new 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. See "--Service Marks."
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
shareholder 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
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vote. In addition, the Voting Trust Agreement requires that the Foundation,
through sales (which may involve exercises of its registration rights discussed
below) or additional deposits into the Voting Trust, reduce its holdings outside
the Voting Trust to 20% and 5% of the outstanding Common Stock on and after
three and five years, respectively, from May 20, 1996. As a result of sales of
its Common Stock holdings, as of March 15, 1998, no shares held by the
Foundation were subject to the provisions of the Voting Trust Agreement. As of
March 15, 1998, the Foundation owned 29,910,000 shares of WellPoint Common
Stock, or approximately 42.7% of the outstanding Common Stock.
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 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.
With respect to those shares held by the Foundation in excess of the
"Ownership Limit" (as defined in the Company's Certificate of Incorporation and
discussed further in the following paragraph) 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 who has been nominated by the Nominating Committee of the Board
of Directors, or under certain circumstances, other subsets of the board, all as
set forth in the Company's Bylaws. With respect to the removal of directors,
calling of shareholder meetings and amendment of the Company's Articles of
Incorporation and Bylaws, where such actions are opposed by the Board of
Directors, the Foundation has also agreed under the Voting Agreement to support
the position of the Board of Directors.
At the time of the Recapitalization, the "Ownership Limit" was established
as one share less than 5% of the Company's outstanding voting securities. In
December 1997, the Company and the BCBSA, in accordance with the provisions of
Article VII, Section 14(f)(2) of the Company's Certificate of Incorporation,
agreed to modify the Ownership Limit to be the following: (i) for any
"Institutional Investor," one share less than 10% of the Company's outstanding
voting securities; and (ii) for any "Noninstitutional Investor," other than the
Foundation, one share less than 5% of the Company's outstanding voting
securities. For these purposes, "Institutional Investor" means any person if
(but only if) such person is (1) a broker or dealer registered under Section 15
of the Securities Exchange Act of 1934 (the "Exchange Act"), (2) a bank as
defined in Section 3(a)(6) of the Exchange Act, (3) an insurance company as
defined in Section 3(a)(19) of the Exchange Act, (4) an investment company
registered under Section 8 of the Investment Company Act of 1940, (5) an
investment adviser registered under Section 203 of the Investment Advisers Act
of 1940, (6) an employee benefit plan, or pension fund which is subject to the
provisions of the Employee Retirement Income Security Act of 1974 or an
endowment fund, (7) a parent holding company, provided the aggregate amount held
directly by the parent, and directly and indirectly by its subsidiaries which
are not persons specified in paragraphs (1) through (6), does not exceed one
percent of the securities of the subject class, or (8) a group, provided that
all the members are persons specified in
16
<PAGE>
paragraphs (1) through (7). In addition, every filing made by such person with
the SEC under Regulation 13D-G (or any successor Regulation) under the Exchange
Act with respect to such person's beneficial ownership must contain a
certification (or a substantially similar one) that the WellPoint Common Stock
acquired by such person was acquired in the ordinary course of business and was
not acquired for the purpose of and does not have the effect of changing or
influencing the control of WellPoint and was not acquired in connection with or
as a participant in any transaction having such purpose or effect. For such
purposes, "Noninstitutional Investor" means any person that is not an
Institutional Investor.
In connection with the Recapitalization, the Company and the Foundation also
entered into a registration rights agreement (the "Registration Rights
Agreement") with respect to the shares of the Company held by the Foundation.
The Registration Rights Agreement grants the Foundation (and certain transferees
of the shares covered by the Registration Rights Agreement), certain demand and
"piggyback" registration rights. The undertakings made by Old WellPoint in order
to secure the DOC's approval of the Recapitalization required the Foundation to
make certain minimum annual distributions beginning in 1997. In order to fund
such required distributions, the Foundation may make sales from time to time of
shares of the Company's Common Stock pursuant to the exercise of its rights
under the Registration Rights Agreement.
In connection with the Recapitalization, BCC also received a ruling from the
IRS that, among other things, the conversion of BCC from a nonprofit public
benefit corporation to a for-profit entity (the "BCC Conversion") qualified as a
tax-free transaction and that no gain or loss was recognized by BCC for Federal
income tax purposes. The Foundation and the Company have entered into an
Indemnification Agreement which provides, with certain exceptions, that the
Foundation will indemnify WellPoint against the net tax liability as a result of
a revocation or modification, in whole or in part, of the ruling by the IRS or a
determination by the IRS that the BCC Conversion constitutes a taxable
transaction for Federal income tax purposes.
In August 1997, pursuant to approval by the stockholders at the Company's
1997 Annual Meeting, the Company reincorporated in the state of Delaware. See
"Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations--General." Each of the material agreements (other than the
Indemnification Agreement) entered into in connection with the Recapitalization
was amended and restated on substantially similar terms at the time of the
reincorporation.
FACTORS THAT MAY AFFECT FUTURE RESULTS OF OPERATIONS
Certain statements contained in "Item 1. Business," such as statements
concerning the Company's geographic expansion and other business strategies, the
effect of recent health care reform legislation and small group membership
growth and other statements contained herein regarding matters that are not
historical facts, are forward-looking statements (as such term is defined in the
Securities Exchange Act of 1934, as amended). 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. Readers are cautioned not to
place undue reliance on these forward-looking statements, which speak only as of
the date hereof.
FEDERAL AND STATE HEALTH CARE REGULATION; LEGISLATIVE REFORM; ACTIVITIES AS
GOVERNMENT CONTRACTOR
WellPoint's operations are subject to substantial regulation by Federal,
state and local agencies. As a result of the MMHD and GBO Acquisitions,
WellPoint is now subject to the authority of state regulatory agencies in all 50
states. Such regulation may either relate to the Company's business operations
or to the financial condition of regulated subsidiaries. With regard to the
former, regulation typically covers prescribed benefits, relationships with
providers, marketing, advertising, quality assurance and member grievance
resolution. With regard to the latter, regulation typically governs the amount
of capital required to be retained in regulated subsidiaries and the ability of
such subsidiaries to pay dividends. There can be
17
<PAGE>
no assurance that any future regulatory action by any such agencies will not
have a material adverse effect on the profitability or marketability of
WellPoint's health plans, the Company's ability to access capital from the
operations of its regulated subsidiaries or on its financial condition or result
of operations.
In addition to capital requirements imposed by the California Department of
Corporations, the Company and its BCBSA-licensed affiliates are required to
maintain certain levels of capital to satisfy BCBSA requirements. The National
Association of Insurance Commissioners (the "NAIC") is currently considering
adopting new capital requirements for licensed HMOs called Health Organization
Risk Based Capital ("HORBC"). When and if adopted by the NAIC, the BCBSA may
adopt HORBC as the basis for its capital requirements. There can be no
assurances that such new minimum capital requirements will not increase the
Company's capital requirements in the future.
The health care industry has become the subject of greater legislative and
media scrutiny in recent years. In 1996, the President signed HIPAA into law as
well as maternity length of stay and mental health parity measures. The
maternity length of stay and mental health parity measures took effect as of
January 1, 1998. See "--Government Regulation." Various states have passed
similar legislation, some providing for more extensive benefits than those
required by HIPAA. An increasing number of proposals are being considered by the
United States Congress and state legislature relating to health care reform and
the Company expects that some of such proposals will be enacted. There can be no
assurance that compliance with recently enacted or future legislation will not
have a material adverse impact on WellPoint's claims expense, its financial
condition or results of operations.
The Company provides administrative services for Medi-Cal for the DHS in
various California counties. The Company also provides similar services for HCFA
in various capacities, including certain Medicare programs and under its Blue
Cross Senior Secure plan. There can be no assurance that acting as a government
contractor in these circumstances will not increase the risk of heightened
scrutiny by such government agencies, particularly in light of governmental
concern with increasing health care costs. Further, there can be no assurance
any such heightened scrutiny will not have a material adverse effect on the
Company either through negative publicity about the Company or through an
adverse impact on the Company's results of operations.
HEALTH CARE COSTS AND PREMIUM PRICING PRESSURES
WellPoint's future profitability will depend in part on accurately
predicting health care costs and on its ability to control future health care
costs through underwriting criteria, utilization management, product design and
negotiation of favorable provider and hospital contracts. Changes in utilization
rates, demographic characteristics, health care practices, inflation, new
technologies, clusters of high-cost cases, continued consolidation of physician,
hospital and other provider groups, the regulatory environment and numerous
other factors affecting health care costs may adversely affect WellPoint's
ability to predict and control health care costs as well as WellPoint's
financial condition or results of operations. Periodic renegotiation of hospital
contracts and continued consolidation of physician, hospital and other provider
groups may result in increased health care costs or limit the Company's ability
to control such costs.
In addition to the challenge of controlling health care costs, the Company
faces competitive pressure to contain premium prices. While health plans compete
on the basis of many factors, including service and the quality and depth of
provider networks, the Company expects that price will continue to be a
significant basis of competition. Fiscal concerns regarding the continued
viability of programs such as Medicare and Medicaid may cause decreasing
reimbursement rates for government-sponsored programs. WellPoint's financial
condition or results of operations would be adversely affected by significant
premium decreases by any of its major competitors or by any limitation on the
Company's ability to increase or maintain its premium levels.
18
<PAGE>
INTEGRATION OF RECENT ACQUISITIONS; GEOGRAPHIC EXPANSION STRATEGY; FUTURE
ACQUISITIONS
One component of the Company's business strategy has been to diversify into
new geographic markets, particularly through strategic acquisitions. The Company
completed the MMHD acquisition in March 1996 and the GBO acquisition in March
1997. During 1997, the Company worked extensively on the integration of these
acquired businesses (especially MMHD), including consolidating existing
operations sites and converting certain accounts to the Company's information
systems. The Company is continuing the consolidation of these recently acquired
operations into its operations, which will require considerable expenditures and
a significant amount of management time. Due to the complex nature of the merger
integration process (especially the information systems designed to serve these
businesses), the Company may temporarily experience increases in claims
inventory, difficulties in determining member eligibility and service and other
issues. The success of these acquisitions will, among other things, also require
the integration of a significant number of the employees into the Company's
existing operations and the completion of the integration of separate
information systems. No assurances can be given regarding the ultimate success
of the integration of these acquisitions into the Company's business, due in
part to the large size and multi-state nature of their businesses.
Both the acquired MMHD operations and the GBO have some indemnity-based
insurance operations, with a significant number of members outside of
California. Each of these operations experienced varying profitability or losses
in recent periods. In addition, the Company has experienced and expects to
continue to experience material membership attrition as it pursues its strategy
of motivating traditional indemnity health insurance members to select managed
care products. There can be no assurances that a sufficient number of these
members will accept managed care health plans or that the Company will be able
to continue existing relationships with provider networks currently serving
those members or develop satisfactory proprietary provider networks in these
geographic areas. The development of such networks will require considerable
expenditures by the Company.
As the Company pursues its geographic expansion strategy, the Company's
market share in new markets will not be as significant, and its provider
networks not as extensive, as in California, and the Company will not have the
benefit of the Blue Cross mark, which are important components of its success in
California. After an initial transition period, the Company will also no longer
have the benefit of the MassMutual or John Hancock trade names under which these
acquired operations were previously conducted. There can be no assurance that
the absence of one or more of these elements will not adversely affect the
success of the Company's geographic expansion strategy.
The Company actively considers acquisition opportunities on a regular basis,
both in connection with its geographic expansion strategy and its California
operations. The Company currently has no existing agreements or commitments to
effect any such acquisition. Accordingly, there can be no assurance that the
Company will be able to identify suitable acquisition candidates available for
sale at reasonable prices or consummate any acquisition or that any discussions
will result in an acquisition. Any such acquisitions may require significant
additional capital resources and there can be no assurance that the Company will
have access to adequate capital resources to effect such future acquisitions. To
the extent that the Company consummates acquisitions, there can be no assurance
that such acquisitions will be successfully integrated into the Company or that
such acquisitions will not adversely affect the Company's results of operations
and financial condition.
COMPETITION
Managed health care organizations operate in a highly competitive
environment that is subject to significant change from business consolidations,
new strategic alliances, legislative reform, aggressive marketing practices by
other managed health care organizations and other market pressures. A
significant portion of the Company's operations are in California, where the
managed health care industry is especially competitive. In addition, the managed
health care industry in California has undergone
19
<PAGE>
significant changes in recent years, including substantial consolidation.
Outside of California, the Company faces competition from other regional and
national companies, many of which have (or due to future consolidation, may
have) significantly greater financial and other resources and market share than
the Company. If competition were to further increase in any of its markets,
WellPoint's financial condition or results of operations could be materially
adversely affected.
A substantial portion of WellPoint's California business is in the
individual and small employer group market, where the loss ratio is
significantly lower than in the large employer group market. The individual and
small employer group business constituted approximately 34% of WellPoint's total
premium revenue for the year ended December 31, 1997. WellPoint has experienced
increasing competition in the individual and small employer group market over
the past several years, which could adversely affect WellPoint's loss ratio and
future financial condition or results of operations. See "Item 7. Management's
Discussion and Analysis of Financial Condition and Results of Operations."
EVOLVING THEORIES OF RECOVERY
WellPoint, like HMOs and health insurers generally, excludes certain health
care services from coverage under its HMO, PPO and other plans. In the ordinary
course of business, WellPoint is subject to the claims of its members from
decisions to restrict reimbursement for certain treatments. The loss of even one
such claim, if it were to result in a significant punitive damage award, could
have a material adverse effect on WellPoint's financial condition or results of
operations. In addition, the risk of potential liability under punitive damage
theories may significantly increase the difficulty of obtaining reasonable
settlements of coverage claims. The financial and operational impact that such
evolving theories of recovery may have on the managed care industry generally,
or WellPoint in particular, is presently unknown. See "--Government Regulation."
DEPENDENCE ON INDEPENDENT AGENTS AND BROKERS
The Company is dependent on the services of independent agents and brokers
in the marketing of its health care plans, particularly with respect to
individual and small employer group members. Such independent agents and brokers
are typically not exclusively dedicated to the Company and may frequently also
market health care plans of the Company's competitors. The Company faces intense
competition for the services and allegiance of independent agents and brokers.
EMPLOYEE MATTERS
The Company is dependent on retaining existing employees and attracting and
retaining additional qualified employees to meet its future needs. The Company
faces intense competition for qualified employees, particularly during the
present economic environment of low unemployment, and there can be no assurance
that the Company will be able to attract and retain such employees or that such
competition among potential employers will not result in increasing salaries.
There can be no assurance that an inability to retain existing employees or
attract additional employees will not have a material adverse effect on the
results of operations of the Company. The Company is especially dependent on
attracting and retaining qualified computer programmers. See "Item 7.
Management's Discussion and Analysis of Financial Condition and Results of
Operations--Year 2000."
EFFECT OF YEAR 2000 ON COMPUTER SYSTEMS AND APPLICATIONS
The year 2000 presents a number of potential problems for computer systems
and applications, including significant processing errors or failures. In order
to address these problems for its systems and applications, the Company has
developed and is in the midst of executing a comprehensive plan designed to
address the year 2000 issue. 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
20
<PAGE>
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 expects to undergo third-party testing of its
applications and systems. See "Item 7. Management's Discussion and Analysis of
Financial Condition and Results of Operations--Year 2000" for a more
comprehensive discussion of the year 2000 issue, the steps being taken by the
Company to address it and the potential effects on the Company's results of
operations and financial condition of this issue.
TAX ISSUES RELATING TO THE RECAPITALIZATION
In connection with the Recapitalization, BCC received a ruling from the IRS
that, among other things, the BCC Conversion qualified as a tax-free transaction
and that no gain or loss was recognized by BCC for Federal income tax purposes.
If the ruling were subsequently revoked, modified or not honored by the IRS (due
to a change in law or for any other reason), WellPoint, as the successor to BCC,
could be subject to Federal income tax on the difference between the value of
BCC at the time of the BCC Conversion and BCC's tax basis in its assets at the
time of the BCC Conversion. The potential tax liability to WellPoint if the BCC
Conversion is treated as a taxable transaction is currently estimated to be
approximately $696 million, plus interest (and possibly penalties). BCC and the
Foundation entered into the Indemnification Agreement that provides, with
certain exceptions, that the Foundation will indemnify WellPoint against the net
tax liability as a result of a revocation or modification, in whole or in part,
of the ruling by the IRS or a determination by the IRS that the BCC Conversion
constitutes a taxable transaction for Federal income tax purposes. In the event
a tax liability should arise against which the Foundation has agreed to
indemnify WellPoint, there can be no assurance that the Foundation will have
sufficient assets to satisfy the liability in full, in which case WellPoint
would bear all or a portion of the cost of the liability, which could have a
material adverse effect on WellPoint's financial condition. See "--May 1996
Recapitalization."
ITEM 2. PROPERTIES.
Effective as of January 1, 1996, the Company entered into a new lease for
its Woodland Hills, California headquarters facility, which provides for a term
expiring in December 2019 with two options to extend the term for up to two
additional five-year terms. Rent expense under the new lease was approximately
$7.8 million during 1997. In 1997, the Company entered into a lease, which
expires in December 2019, for a new facility to be located in Thousand Oaks,
California that will consolidate many corporate and UNICARE functions. The
Company and its subsidiaries have additional offices in the greater Los Angeles
and Ventura County area. As a result of the MMHD and GBO acquisitions and the
Company's continuing national expansion efforts, the Company maintains offices
in various other locations, including Springfield, Massachusetts; Charlestown,
Massachusetts; Schaumburg, Illinois; Dearborn, Michigan; and Plano, Texas.
ITEM 3. LEGAL PROCEEDINGS.
WellPoint and certain of its subsidiaries are parties to various legal
proceedings, many of which involve claims for coverage encountered in the
ordinary course of its business. WellPoint, like health plans generally,
excludes certain health care services from coverage under its HMO, PPO and other
plans. In the ordinary course of its business, WellPoint is subject to the
claims of its enrollees arising out of decisions to restrict reimbursement for
certain treatments. The loss of even one such claim, if it resulted in a
significant punitive damage award, could have a material adverse effect on
WellPoint. 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 WellPoint in particular, is at present unknown.
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<PAGE>
Certain of such legal proceedings are or may be covered under insurance
policies or indemnification agreements. Based upon information presently
available, the Company believes that the final outcome of all such proceedings
should not have a material adverse effect upon WellPoint's results of operations
or financial condition.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None.
22
<PAGE>
PART II
ITEM 5. 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.
23
<PAGE>
ITEM 6. 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.
24
<PAGE>
ITEM 7. 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.
25
<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. See "Business--Government Regulation."
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
26
<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.
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>
27
<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.
28
<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,
29
<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 incremental impact in 1997 of the MMHD 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
30
<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
31
<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
32
<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 common stock
offering of $110.3 million.
33
<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 Knox-Keene Act. See "Item 1. Business--Government
Regulation." 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.
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
34
<PAGE>
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 No. 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 Securities Exchange Act of 1934). Such statements involve
a number of risks and uncertainties that may cause actual results to differ from
those projected. Factors that can cause actual results to differ materially
include, but are not limited to, those discussed below and those discussed from
time to time in the Company's various filings with the Securities and Exchange
Commission. See also "Item 1. Business--Factors That May Affect Future Results
of Operations."
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, 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.
35
<PAGE>
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
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.
36
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The location in this Form 10-K of the Company's Consolidated Financial
Statements is set forth in the "Index" on page 45 hereof.
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.
ITEM 9. CHANGES AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE
None.
37
<PAGE>
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
A. Directors of the Company.
Information regarding the directors of the Company is contained in the
Company's proxy statement for its 1998 Annual Meeting of Stockholders filed with
the SEC on March 27, 1998 and is incorporated herein by reference.
B. Executive Officers of the Company
Information Regarding the Company's executive officers is contained in Part
I above under the caption "Item 1. Business."
ITEM 11. EXECUTIVE COMPENSATION
The information required by Item 11 is contained in the Company's proxy
statement for its 1998 Annual Meeting of Stockholders filed with the SEC on
March 27, 1998 and is incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by Item 12 is contained in the Company's proxy
statement for its 1998 Annual Meeting of Stockholders filed with the SEC on
March 27, 1998 and is incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by Item 13 is contained in the Company's proxy
statement for its 1998 Annual Meeting of Stockholders filed with the SEC on
March 27, 1998 and is incorporated herein by reference.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENTS SCHEDULES AND REPORTS ON FORM 8-K.
A. 1) FINANCIAL STATEMENTS
The consolidated financial statements are contained herein as listed on
the "Index" on page 45 hereof.
2) FINANCIAL STATEMENT SCHEDULES
All of the financial statement schedules for which provision is made in
the applicable accounting regulations of the Commission are not required
under the applicable instructions or are not applicable and therefore have
been omitted.
B. REPORTS ON FORM 8-K
A Current Report on Form 8-K was filed on December 31, 1997 which
reported that the Company and the BCBSA had entered into an amended and
restated California Blue Cross License Addendum modifying the "Ownership
Limit" contained in the Company's Restated Certificate of Incorporation.
38
<PAGE>
C) EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBIT
- --------- --------------------------------------------------------------------------------------------------------
<C> <S>
2.01 Amended and Restated Recapitalization Agreement dated as of March 31, 1995, by and among the Registrant,
Blue Corss of California, WellPoint Health Partnership and Western Foundation for Health Improvements,
incorporated by reference to Exhibit 2.1 of Registrant's Form S-4 dated April 8, 1996
2.02 Purchase and Sale Agreement, dated as of October 10, 1996, by and between the Registrant and John
Hancock Mutual Life Insurance Company ("John Hancock"), incorporated by reference to Exhibit 2.1 of
Registrant's Current Report on Form 8-K dated October 9, 1996
2.03 Agreement and Plan of Reorganization dated as of July 22, 1997 by and among the Registrant, WellPoint
Health Networks Inc., a California corporation ("WellPoint California"), and WLP Acquisition Corp.,
incorporated by reference to Exhibit 99.1 of Registrant's Current Report on Form 8-K filed on August
5, 1997
3.01 Restated Certificate of Incorporation of the Registrant, incorporated by reference to Exhibit 3.1 of
Registrant's Current Report on Form 8-K filed on August 5, 1997.
3.02 Bylaws of the Registrant, incorporated by reference to Appendix B to WellPoint California's Schedule 14A
filed on May 8, 1997, File No. 333-03292-01
4.01 Specimen of common stock certificate of WellPoint Health Networks Inc., incorporated by reference to
Exhibit 4.4 of Registrant's Registration Statement on Form 8-B, Registration No. 001-13083
4.02 Restated Certificate of Incorporation of the Registrant (included in Exhibit 3.01)
4.03 Bylaws of the Registrant (included in Exhibit 3.02)
9.01 Amended and Restated Voting Trust Agreement dated as of August 4, 1997 by and among the California
HealthCare Foundation (the "Foundation") and Wilmington Trust Company, incorporated by reference to
Exhibit 99.2 of Registrant's Current Report on Form 8-K filed on August 5, 1997
10.01 Master Subscriber Agreements dated as of January 27, 1993, between the Registrant's subsidiaries and
BCC, incorporate by reference to Exhibit 10.03 of Registrant's Annual Report on Form 10-K for the
fiscal year ended December 31, 1992
10.02 Tax Allocation Agreement dated as of February 1, 1993, among the Registrant, its subsidiaries and BCC
and its subsidiaries, incorporated by reference to Exhibit 10.04 of Registrant's Annual Report on Form
10-K for the fiscal year ended December 31, 1992
10.03 Undertakings dated January 7, 1993, by the Registrant, Blue Cross of California and certain subsidiaries
to the California Department of Corporations, incorporated by reference to Exhibit 10.24 of the
Registrant's Form S-1 Registration Statement No. 33-54898
10.04* Supplemental Pension Plan of Blue Cross of California, incorporated by reference to Exhibit 10.15 of
Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1992
10.05* Form of Supplemental Life and Disability Insurance Policy, incorporated by reference to Exhibit 10.14 of
the Registrant's Form S-1 Registration Statement No. 33-54898
10.06* Form of Indemnification Agreement between the Registrant and its Directors and Officers, incorporated by
reference to Exhibit 10.17 of the Registrant's Form S-1 Registration Statement No. 33-54898
10.07* Officer Severance Agreement, dated as of July 1, 1993, between the Registrant and Thomas C. Geiser,
incorporated by reference to Exhibit 10.24 of the Registrant's Annual Report on Form 10-K for the
fiscal year ended December 31, 1993
10.08* Form of Officer Severance Agreement of the Registrant, incorporated by reference to Exhibit 10.32 of the
Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1994
</TABLE>
39
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBIT
- --------- --------------------------------------------------------------------------------------------------------
<C> <S>
10.09 Orders Approving Notice of Material Modification and Undertakings dated September 7, 1995, by BCC, the
Registrant and the Registrant's subsidiaries to the California Department of Corporations,
incorporated by reference to Exhibit 10.47 of Registrant's Quarterly Report on Form 10-Q for the
quarter ended September 30, 1995
10.10 Lease Agreement, dated as of January 1, 1996, by and between TA/Warner Center Associates II, L.P., and
the Registrant, incorporated by reference to Exhibit 10.46 of Registrant's Annual Report on Form 10-K
for the fiscal year ended December 31, 1995
10.11* Letter, dated November 13, 1995, from the Registrant to Ronald A. Williams regarding severance benefits,
together with underlying Officer Severance Agreement, incorporated by reference to Exhibit 10.47 of
Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1995
10.12* Letter, dated November 13, 1995, from the Registrant to D. Mark Weinberg regarding severance benefits,
together with underlying Officer Severance Agreement, incorporated by reference to Exhibit 10.48 of
Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1995
10.13* Letter, dated November 13, 1995, from the Registrant to Thomas C. Geiser regarding severance benefits,
incorporated by reference to Exhibit 10.49 of Registrant's Annual Report on Form 10-K for the fiscal
year ended December 31, 1995
10.14 Amended and Restated Undertakings dated March 5, 1996, by BCC, the Registrant and the Registrant's
Subsidiaries to the California Department of Corporations, incorporated by reference to Exhibit 99.1
of the Registrant's Current Report on Form 8-K dated March 5, 1996
10.15 Senior Series A Term Note dated March 31, 1996, between the Registrant and Massachusetts Mutual Life
Insurance Company, incorporated by reference to Exhibit 10.53 of the Registrant's Quarterly Report on
Form 10-Q for the quarter ended March 31, 1996
10.16 Indemnification Agreement dated as of May 17, 1996, by and among the Registrant, WellPoint Health
Networks Inc., a Delaware corporation, and Western Health Partnerships, incorporated by reference to
Exhibit 99.9 of Registrant's Current Report on Form 8-K dated May 20, 1996
10.17 Credit Agreement dated as of May 15, 1996, by and among the Registrant, Bank of America National Trust
and Savings Association ("Bank of America"), as Administrative Agent, NationsBank of Texas, N.A., as
Syndication Agent, Chemical Bank, as Documentation Agent, and the other financial institutions named
therein, incorporated by reference to Exhibit 99.10 of Registrant's Current Report on Form 8-K dated
May 20, 1996
10.18 Amendment No. 1 dated as of June 28, 1996, to the Registrant's Credit Agreement dated as of May 15,
1996, incorporated by reference to Exhibit 10.65 of Registrant's Quarterly Report on Form 10-Q for the
quarter ended September 30, 1996
10.19 Subordinated Term Loan Agreement dated as of November 21, 1996, by and among the Registrant, Bank of
America and the other parties named therein, incorporated by reference to Exhibit 99.1 to the
Registrant's Current Report on Form 8-K filed December 12, 1996
10.20* Employment Agreement dated as of January 22, 1997, by and between the Registrant and Leonard D.
Schaeffer, incorporated by reference to Exhibit 10.50 to Registrant's Annual Report on Form 10-K for
the year ended December 31, 1996
10.21 Modification Agreement dated as of November 26, 1996 by and between the Registrant and California
HealthCare Foundation, incorporated by reference to Exhibit 10.51 to Registrant's Annual Report on
Form 10-K for the year ended December 31, 1996
10.22 Coinsurance Agreement dated as of March 1, 1997 between John Hancock and UNICARE Life & Health Insurance
Company ("UNICARE"), incorporated by reference to Exhibit 99.2 of Registrant's Current Report on Form
8-K filed March 14, 1997
</TABLE>
40
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBIT
- --------- --------------------------------------------------------------------------------------------------------
<C> <S>
10.23 Administration Agreement dated as of March 1, 1997 between John Hancock and UNICARE, incorporated by
reference to Exhibit 99.3 of Registrant's Current Report on Form 8-K filed March 14, 1997
10.24 Amendment No. 1 dated as of February 11, 1997 to Registrant's Subordinated Term Loan Agreement dated as
of November 21, 1996, incorporated by reference to Exhibit 10.54 to Registrant's Annual Report on Form
10-K for the year ended December 31, 1996
10.25 Second Amendment dated as of April 21, 1997 to Registrant's Credit Agreement dated as of May 15, 1996,
incorporated by reference to Exhibit 10.55 of Registrant's Quarterly Report on Form 10-Q for the
quarter ended March 31, 1997
10.26 Third Amendment dated as of April 21, 1997 to Registrant's Credit Agreement dated as of May 15, 1996,
incorporated by reference to Exhibit 10.56 of Registrant's Quarterly Report on Form 10-Q for the
quarter ended March 31, 1997
10.27 Second Amendment dated as of April 21, 1997 to Registrant's Subordinated Term Loan Agreement dated as of
November 21, 1996, incorporated by reference to Exhibit 10.57 of Registrant's Quarterly Report on Form
10-Q for the quarter ended March 31, 1997
10.28 Amended and Restated Voting Agreement dated as of August 4, 1997 by and among the Registrant, WellPoint
California and the Foundation, incorporated by reference to Exhibit 99.3 of the Registrant's Current
Report on Form 8-K filed on August 5, 1997
10.29 Amended and Restated Share Escrow Agent Agreement dated as of August 4, 1997 by and between the
Registrant and U.S. Trust Company of California, N.A., incorporated by reference to Exhibit 99.4 of
the Registrant's Current Report on Form 8-K filed on August 5, 1997
10.30 Amended and Restated Registration Rights Agreement dated as of August 4, 1997 by and among the
Registrant, WellPoint California and the Foundation incorporated by reference to Exhibit 99.5 of
Registrant's Form 8-K filed on August 5, 1997
10.31 Blue Cross License Agreement Effective as of August 4, 1997 by and among the Registrant and the Blue
Cross Blue Shield Association (the "BCBSA"), incorporated by reference to Exhibit 99.6 of Registrant's
Form 8-K filed on August 5, 1997
10.32 Blue Cross Controlled Affiliate License Agreement effective as of August 4, 1997 by and between the
BCBSA and Blue Cross of California, incorporated by reference to Exhibit 99.8 of Registrant's Form 8-K
filed on August 5, 1997
10.33 Blue Cross Affiliate License Agreement effective as of August 4, 1997 by and between the BCBSA and BC
Life & Health Insurance Company, incorporated by reference to Exhibit 99.9 of Registrant's Form 8-K
filed on August 5, 1997
10.34 Blue Cross Controlled Affiliate License Agreement Applicable to Life Insurance Companies effective as of
August 4, 1997 by and between the BCBSA and BC Life & Health Insurance Company, incorporated by
reference to Exhibit 99.10 of Registrant's Form 8-K filed on August 5, 1997
10.35 Fourth Amendment to Credit Agreement and Consent dated as of July 21, 1997 by and among the Registrant,
WellPoint California, Bank of America National Trust and Savings Association, as Administrative Agent,
NationsBank of Texas, N.A., as Syndication Agent, and Chase Manhattan Bank, as Documentation Agent,
and the other financial institutions named therein, incorporated by reference to Exhibit 99.11 to
Registrant's Current Report on Form 8-K filed on August 5, 1997.
10.36 Undertakings dated July 31, 1997 by the Registrant, WellPoint California and WellPoint California
Services, Inc. to the California Department of Corporations, incorporated by reference to Exhibit
99.12 to Registrant's Current Report on Form 8-K filed on August 5, 1997
</TABLE>
41
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBIT
- --------- --------------------------------------------------------------------------------------------------------
<C> <S>
10.37* WellPoint Health Networks Inc. Stock Option/Award Plan, as amended through January 15, 1997 incorporated
by reference to Exhibit 99.1 to the Registrant's Registration Statement on Form S-8, File No.
333-33013
10.38* WellPoint Health Networks Inc. Employee Stock Purchase Plan (as amended and restated effective January
1, 1998), incorporated by reference to Exhibit 10.71 of Registrant's Form 10-Q for the quarter ended
June 30, 1997)
10.39* Amendment No. 1 to Employment Agreement by and between the Registrant and Leonard D. Schaeffer,
incorporated by reference to Exhibit 10.72 to Registrant's Quarterly Report on Form 10-Q for the
quarter ended September 30, 1997
10.40* Amended and Restated Special Executive Retirement Plan effective as of September 1, 1997 by and between
the Registrant and Leonard D. Schaeffer, incorporated by reference to Exhibit 10.73 to Registrant's
Quarterly Report on Form 10-Q for the quarter ended September 30, 1997
10.41* Salary Deferral Savings Program of WellPoint Health Networks Inc., as amended through October 1, 1997,
incorporated by reference to Exhibit 10.74 to Registrant's Quarterly Report on Form 10-Q for the
quarter ended September 30, 1997
10.42* WellPoint Health Networks Inc. Comprehensive Executive Non-Qualified Retirement Plan, incorporated by
reference to Exhibit 4.6 to the Registrant's Registration Statement on S-8 (File No. 333-42073).
10.43 California Blue Cross License Addendum, as amended and restated as of December 30, 1997, between the
Registrant, Blue Cross of California and the BCBSA, incorporated by reference to Exhibit 99.1 of the
Registrant's Current Report on Form 8-K filed December 31, 1997
10.44* WellPoint Health Networks Inc. Officer Change-in-Control Plan as amended and restated February 12, 1998.
10.45 WellPoint Health Networks Inc. Employee Stock Option Plan, as amended through February 12, 1998
10.46* WellPoint Officer Benefit Enrollment Guide Brochure
10.47* Description of WellPoint Health Networks Corporate Incentive Plan
10.48 Office Lease dated as of December 2, 1997 by and among the Registrant and Westlake Business Park, Ltd.
10.49* WellPoint Health Networks Inc. Stock Option/Award Plan, as amended through February 12, 1998
21 List of Subsidiaries of the Registrant
23.1 Consent of Independent Accountants
24 Power of Attorney (included on Signature Page).
27.1 Financial Data Schedule
27.2 Restated Financial Data Schedule for the three months ended March 31, 1996
27.3 Restated Financial Data Schedule for the six months ended June 30, 1997
27.4 Restated Financial Data Schedule for the nine months ended September 30, 1997
</TABLE>
- ------------------------
* Management contract or compensatory plan or arrangement
42
<PAGE>
SIGNATURES
Pursuant to the requirement of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this Report to be signed on
its behalf by the undersigned, thereunto duly authorized.
<TABLE>
<S> <C> <C>
Date: March 30, 1998 WELLPOINT HEALTH NETWORKS INC.
By: /s/ LEONARD D. SCHAEFFER
-----------------------------------------
Leonard D. Schaeffer
CHAIRMAN OF THE BOARD OF DIRECTORS AND
CHIEF EXECUTIVE OFFICER
</TABLE>
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS:
That the undersigned officers and directors of WellPoint Health Networks
Inc. do hereby constitute and appoint Leonard D. Schaeffer and Thomas C. Geiser,
and each of them, the lawful attorney and agent or attorneys and agents with
power and authority to do any and all acts and things and to execute any and all
instruments which said attorneys and agents, or either of them, determine may be
necessary or advisable or required to enable WellPoint Health Networks Inc. to
comply with the Securities and Exchange Act of 1934, as amended, and any rules
or regulations or requirements of the Securities and Exchange Commission in
connection with this Annual Report on Form 10-K. Without limiting the generality
of the foregoing power and authority, the powers granted include the power and
authority to sign the names of the undersigned officers and directors in the
capacities indicated below to this Annual Report on Form 10-K or amendment or
supplements thereto, and each of the undersigned hereby ratifies and confirms
all that said attorneys and agent, or either of them, shall do or cause to be
done by virtue hereof. This Power of Attorney may be signed in several
counterparts.
IN WITNESS WHEREOF, each of the undersigned has executed this Power of
Attorney as of the dated indicated opposite his or her name.
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- ------------------------------ -------------------------- -------------------
<C> <S> <C>
Chairman of the Board of
/s/ LEONARD D. SCHAEFFER Directors and Chief
- ------------------------------ Executive Officer March 30, 1998
Leonard D. Schaeffer (Principal Executive
Officer)
Executive Vice President
/s/ DAVID C. COLBY and Chief Financial
- ------------------------------ Officer (Principal March 30, 1998
David C. Colby Financial Officer)
Senior Vice President,
/s/ S. LOUISE MCCRARY Controller and Chief
- ------------------------------ Accounting Officer March 30, 1998
S. Louise McCrary (Principal Accounting
Officer)
/s/ DAVID R. BANKS
- ------------------------------ Director March 30, 1998
David R. Banks
</TABLE>
43
<PAGE>
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- ------------------------------ -------------------------- -------------------
<C> <S> <C>
/s/ W. TOLIVER BESSON
- ------------------------------ Director March 30, 1998
W. Toliver Besson
/s/ ROGER E. BIRK
- ------------------------------ Director March 30, 1998
Roger E. Birk
/s/ SHEILA A. BURKE
- ------------------------------ Director March 30, 1998
Sheila A. Burke
/s/ STEPHEN L. DAVENPORT
- ------------------------------ Director March 30, 1998
Stephen L. Davenport
/s/ JULIE A. HILL
- ------------------------------ Director March 30, 1998
Julie A. Hill
/s/ ELIZABETH A. SANDERS
- ------------------------------ Director March 30, 1998
Elizabeth A. Sanders
</TABLE>
44
<PAGE>
INDEX TO FINANCIAL STATEMENTS
WELLPOINT HEALTH NETWORKS INC.
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
Report of Independent Accountants.......................................................................... F-1
Consolidated Balance Sheets as of December 31, 1997 and 1996............................................... F-2
Consolidated Income Statements for the Three Years Ended December 31, 1997................................. F-3
Consolidated Statements of Changes in Stockholders' Equity for the Three Years Ended December 31, 1997..... F-4
Consolidated Statements of Cash Flows for the Three Years Ended December 31, 1997.......................... F-5
Notes to Consolidated Financial Statements................................................................. F-6
</TABLE>
45
<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
F-1
<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.
F-2
<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.
F-3
<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.
F-4
<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.
F-5
<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
F-6
<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.
F-7
<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.
F-8
<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.
F-9
<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.
F-10
<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.
F-11
<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-
F-12
<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>
F-13
<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>
F-14
<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
F-15
<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.
F-16
<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>
F-17
<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.
F-18
<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>
F-19
<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.
F-20
<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
F-21
<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
F-22
<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.
F-23
<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 earnings 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.
F-24
<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
F-25
<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>
F-26
<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
F-27
<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>
F-28
<PAGE>
WELLPOINT HEALTH NETWORKS INC.
OFFICER CHANGE-IN-CONTROL PLAN
AS AMENDED AND RESTATED FEBRUARY 12, 1998
This WellPoint Health Networks Inc. Officer Change-in-Control Plan (the
"Plan") is designed to provide officers of WellPoint Health Networks Inc.
("WellPoint" or the "Company") and/or Affiliates of WellPoint with benefits in
the event of a Change-in-Control. Except to the extent provided herein, the
Plan shall replace any similar plan previously in effect as of the date of
adoption of the Plan listed above providing for monetary or other compensation
to any officer in the event of a change in control.
ARTICLE I
DEFINITIONS
Unless otherwise indicated, capitalized terms used herein shall have the
following meaning:
"Affiliate" means an entity that is linked to WellPoint by a 51% or
greater chain of ownership. For this purpose, ownership is determined by
applying the principles of Section 414 of the Code and by substituting a 51%
control test for an 80% control test.
"Affiliated Group" means WellPoint and all of its Affiliates.
"Base Salary" means a Participant's highest base salary paid by a member
of the Affiliated Group during the 12 calendar months immediately preceding the
Participant's Termination Date.
"CEO" means the Chief Executive Officer of WellPoint or his delegate.
"Change-in-Control" shall mean one or more of the following:
(i) The acquisition, directly or indirectly by any person or related
group of persons (as such term is used in Sections 13(d) and 14(d)
of the Exchange Act), 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 (as defined in
Rule 13d-3 of the Exchange Act) 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 shall not apply to an acquisition by the California
HealthCare Foundation that either:
1
<PAGE>
(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 California HealthCare
Foundation's beneficial ownership is less than 35% and (II)
involves securities representing less than 50% (or, if
lower, the lowest percentage of beneficial ownership by the
California HealthCare Foundation on or after May 20, 1996
plus 10%) of the combined voting power of the Company's
then-outstanding securities;
(ii) A merger, 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 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.
"Code" means the Internal Revenue Code of 1986, as amended.
"Committee" shall mean the Compensation Committee of the Board of
Directors of WellPoint, whose membership shall be comprised solely of
independent directors of WellPoint and to which the CEO shall report
periodically regarding actions taken under this Plan.
2
<PAGE>
"Constructive Termination" means one or more of the following:
(i) A material reduction in the duties, responsibilities, status,
reporting responsibilities, titles or offices that a Participant
had with the Affiliated Group immediately before such reduction;
(ii) Reduction by more than 10% of the total annual cash compensation
(including base salary and target bonuses) that a Participant was
eligible to receive from all members of the Affiliated Group
immediately before the reduction except a reduction that both (a)
is part of, and consistent with, an across-the-board reduction in
the salaries of senior officers of the Affiliated Group and (b) is
not implemented on or after, or in contemplation of, a
Change-In-Control;
(iii) A change in the Participant's principal place of employment with
the Affiliated Group such that the Participant's one-way commute
will be increased by more than 35 miles; or
(iv) The failure of any successor to WellPoint by merger, consolidation
or acquisition of all or substantially all of the business of
WellPoint to assume WellPoint's obligations under this Plan.
However, a Constructive Termination will not be deemed to have occurred
unless (i) within sixty (60) days of the occurrence that the Participant deems
to be a Constructive Termination, the Participant notifies WellPoint in writing
that he or she has experienced a Constructive Termination, which notice
describes the event that the Participant believes constitutes a Constructive
Termination, (ii) WellPoint has not, within fifteen (15) days of receipt of such
notice, corrected the circumstance that would otherwise result in a Constructive
Termination, and (iii) the Participant terminates his or her employment within
ninety (90) days of such 15-day period.
"Exchange Act" means the Securities Exchange Act of 1934, as amended.
"Involuntary Termination" means actual termination of a Participant's
employment initiated by one or more members of the Affiliated Group other than
(i) Termination for Cause, (ii) termination due to the Participant's total and
permanent disability, as that term is defined in the WellPoint long-term
disability plan in effect on the date in question, or (iii) termination due to
the Participant's death.
"Participant" means any person holding the title of Vice President or
higher with WellPoint or any member of the Affiliated Group and any other person
as may be designated from time to time by the CEO; provided, however, that it
shall not include (i) any person covered by an employment agreement with any
member of the Affiliated Group on his or her Termination Date unless such
person's employment agreement otherwise provides; and (ii)
3
<PAGE>
unless otherwise designated by the CEO, it shall not include any person holding
the title of "Regional Vice President" or any other title (whether or not such
title includes the term "Vice President") which is not considered to be an
officer position of the Affiliated Group and is not entitled to participate in
benefits generally reserved for officers of the Affiliated Group.
"Termination Date" is the first date that a Participant is subject to a
Constructive Termination or an Involuntary Termination.
"Termination for Cause" means (i) willful engagement by a person in gross
misconduct injurious to WellPoint or the commission by a person of any act of
gross negligence or malfeasance with respect to a person's duties incident to
employment; (ii) failure by a person to attend to the material duties assigned
to such person by such person's supervisor; (iii) a commission by a person of
any act of fraud, embezzlement or dishonesty against any member of the
Affiliated Group; or (iv) conviction of a person for any criminal offense
involving fraud or dishonesty or any similar conduct which is injurious to the
reputation of WellPoint.
ARTICLE II
ELIGIBILITY
If on, or within 36 full calendar months after, a Change in Control that
occurs within the term of the Plan, as set forth in Section 4.5 hereof, a
Participant is subject to a Constructive Termination or an Involuntary
Termination from the Affiliated Group and within 60 days of the Participant's
Termination Date the Participant notifies the CEO that he or she has experienced
a Constructive Termination or an Involuntary Termination, the Participant will
be eligible for the Plan benefits provided in Article III hereof (subject to the
terms and conditions of this Plan); provided, however, that such Participant
will not be eligible for Plan benefits if the Participant has already received
benefits under this Plan due to a previous Constructive Termination or a
previous Involuntary Termination.
ARTICLE III
PLAN BENEFITS
3.1. BASIC BENEFIT. (a) The Basic Benefit for each Participant will be
as provided in this Section 3.1 based upon the Participant's position as of the
Termination Date; provided, however, that in no event will the Basic Benefit be
less than the lowest Basic Benefit for the highest position held by the
Participant with a member of the Affiliated Group at any time during the 12
calendar months immediately preceding the Participant's Termination Date.
(i) EXECUTIVE VICE PRESIDENT: 2.75 times Base Salary, plus 2.75 times
Target Bonus.
(ii) SENIOR VICE PRESIDENT: 2.00 times Base Salary, plus 2.00 times
Target Bonus.
4
<PAGE>
(iii) GENERAL MANAGER: 1.75 times Base Salary, plus 1.75 Times Target
Bonus.
(iv) VICE PRESIDENT: 1.5 times Base Salary, plus 1.5 times Target
Bonus.
(b) For purposes of calculating the Basic Benefit, the TARGET BONUS
referred to above is an amount equal to the annual target bonus (if any) in
effect for the Participant on his or her Termination Date under WellPoint's
then-applicable annual management incentive plan, or any other similar annual
incentive plan maintained by a member of the Affiliated Group.
3.2. OUTPLACEMENT BENEFIT. Each Participant shall receive the
Outplacement Benefit which shall consist of outplacement services consistent
with WellPoint's then-current outplacement policy for persons holding the
Participant's title. The fee for this service will be paid directly by
WellPoint (and/or by an Affiliate controlled by WellPoint) to the outplacement
service vendor.
3.3. OTHER BENEFITS. Each Participant shall receive health, vision,
dental and life insurance benefits at employee rates until the earlier to occur
of:
(i) the Participant becoming eligible for such benefits under the
health and welfare benefit plan or plans maintained by the
Participant's successor employer; and
(ii) depending on the title of the Participant, the following periods:
(a) in the case of division Presidents, two years;
(b) in the case of Executive Vice Presidents, one year;
(c) in the case of Senior Vice Presidents, nine months; and
(d) in the case of General Managers and Vice Presidents, six
months.
In lieu of providing the benefits described in this Section 3.3,
WellPoint may, in its discretion, elect to make cash payments to Participant in
amounts sufficient, on an after-tax basis, for Participant to otherwise purchase
such benefits.
3.4. REDUCTION OF BENEFITS. If the CEO reasonably determines that any
benefit under this Plan, alone or when aggregated with other compensation
payable to the Participant, would constitute an excess parachute payment within
the meaning of Section 280G of the Code, the amount payable under this Plan will
be limited to the extent necessary to avoid creation of an excess parachute
payment.
3.5. OFFSET FOR OTHER PAYMENTS RECEIVED. The Worker Adjustment and
Retraining Notification Act (commonly known as the WARN Act) requires that
advance notice of certain layoffs be given to employees. Other laws may impose
similar notice requirements or require that pay in-lieu of notice, severance pay
or similar benefits be paid. WellPoint and/or its Affiliates shall be entitled
to deduct from any benefits otherwise payable to a Participant under this Plan
due to a Constructive Termination or an Involuntary Termination any other amount
5
<PAGE>
that a member of the Affiliated Group is legally required to pay to the
Participant under such laws due to the same Constructive Termination or
Involuntary Termination, plus any compensation and any benefits paid to the
Participant following distribution of such a legally required notice to the
Participant due to such Constructive Termination or Involuntary Termination.
Similarly, benefits paid under this Plan will be applied to satisfy any legal
obligations that a member of the Affiliated Group may have under such laws or
similar laws due to the Constructive Termination or the Involuntary Termination
for which Plan benefits are paid.
3.6. FORM OF PAYMENT. The Basic Benefit will be paid to the Participant
in a lump sum as soon as reasonably practicable after the Participant's
Termination Date.
3.7. WITHHOLDING. WellPoint and/or the appropriate member of the
Affiliated Group may withhold taxes and other payroll deductions from Plan
benefit payments.
3.8. EFFECT ON OTHER PLANS. Payments under this Plan will not be treated
as compensation for purposes of any other employee benefit plan, unless the
other employee benefit plan expressly provides otherwise.
3.9. COORDINATION WITH OTHER PLANS. If a Participant is covered under
any other severance plan or arrangement of a member of the Affiliated Group
under which benefits are payable on the Participant's Termination Date (each, a
"Severance Plan"), then the Participant will receive benefits under the
Severance Plan or Plans in lieu of benefits under this Plan unless the
Participant waives his or her benefits under the Severance Plan or Plans with
regard to the Constructive Termination or the Involuntary Termination. For
these purposes, such a written waiver must be submitted to the CEO within 30
days of the date, following the Change in Control, on which the Participant is
specifically notified by the CEO that the Participant must waive all benefits
payable under the Severance Plan or Plans with regard to the Constructive
Termination or the Involuntary Termination in order to receive benefits under
this Plan with regard to that Constructive Termination or Involuntary
Termination.
ARTICLE IV
MISCELLANEOUS
4.1. ASSIGNMENT AND SOURCE. Plan benefits are not assignable and will be
paid when due from the general assets of WellPoint and/or from the general
assets of an Affiliate controlled by WellPoint.
4.2. COMPLIANCE WITH AGREEMENTS. Plan benefits are conditioned on an
eligible Participant's compliance with any confidentiality agreement or release
that the Participant has entered into with any member of the Affiliated Group.
6
<PAGE>
4.3. CLAIMS PROCEDURE. If an individual believes that he or she is
entitled to a benefit under this Plan or to a Plan benefit that is greater than
the benefit which such person has received, the individual may submit a signed,
written application to the CEO within 60 days of the date of the individual's
Constructive Termination or Involuntary Termination, as the case may be. The
individual will generally be notified of the approval or denial of this
application within 90 days of the date that the CEO receives the application.
If the individual is not so notified the individual may, but need not, treat the
claim as denied. If the individual's claim is denied, the notification will
state specific reasons for the denial and the individual will have 60 days to
file a signed, written request for a review of the denial with the CEO. This
request should include the reasons the individual is requesting a review, facts
supporting the individual's request, and any other relevant comments. The CEO
will generally make a final, written determination of the individual's
eligibility for Plan benefits within 60 days of receipt of the individual's
request for review.
4.4. ARBITRATION. If an individual is denied part or all of a Plan
benefit pursuant to Section 4.3, the individual's sole remedy will be to appeal
the matter to an impartial arbitrator. Arbitration will be in accordance with
the Model Employment Arbitration Procedures of the American Arbitration
Association (the "AAA") before an arbitrator who is familiar with employee
benefit matters and who is licensed to practice law in the state in which the
arbitration is convened (the "Arbitrator"). The Arbitrator will be selected by
alternate striking from a list of eleven arbitrators drawn by the AAA from its
panel of labor and employment arbitrators. The arbitration will take place in
or near the city in which the individual is or was last employed by WellPoint
and/or an Affiliate controlled by WellPoint or in such other location as may be
acceptable to both the individual and WellPoint. The Arbitrator will have the
exclusive authority to resolve any factual or legal claim relating to the Plan
or relating to the interpretation, applicability or enforceability of this
arbitration provision, including but not limited to, any claim that all or any
part of this provision is void or voidable. The arbitration will be final and
binding upon all parties. The costs of the Arbitration will be split equally
between the parties to the arbitration.
4.5. TERM OF PLAN. This Plan shall have an initial term from the
Effective Date provided in Section 4.8 below until the second anniversary
thereof (the "Initial Term"), and shall automatically renew for successive
one-year terms (each, a "Renewal Term") unless the Committee shall otherwise
determine to terminate the Plan as of the end of such Initial Term or Renewal
Term. The Committee may not amend or terminate the Plan during the Initial Term
or any Renewal Term.
4.6. NO RIGHT TO CONTINUED EMPLOYMENT. This Plan does not provide a
Participant with any right to continue employment with any member of the
Affiliated Group or affect the right of any member of the Affiliated Group to
terminate the services of any individual at any time with or without cause,
subject to the terms of any written employment agreement executed by both
parties thereto.
7
<PAGE>
4.7. GOVERNING LAW. This Plan is intended to be an unfunded welfare
benefit plan for a select group of management or highly compensated employees
within the meaning of the Employee Retirement Income Security Act of 1974, as
amended ("ERISA") and Department of Labor Regulation 2520.104-24. To the extent
applicable and not preempted by ERISA, the laws of the State of California will
govern this Plan.
4.8. EFFECTIVE DATE. This Plan is effective for Constructive
Terminations and Involuntary Terminations occurring on or after February 12,
1998 and during the Initial or any Renewal Term of this Plan.
WELLPOINT HEALTH NETWORKS INC.
BY: /s/ LEONARD D. SCHAEFFER DATE: February 12, 1998
--------------------------------
LEONARD D. SCHAEFFER
8
<PAGE>
WELLPOINT HEALTH NETWORKS INC.
EMPLOYEE STOCK OPTION PLAN
(AS AMENDED THROUGH FEBRUARY 12, 1998)
ARTICLE ONE
GENERAL PROVISIONS
1.1 PURPOSE OF THE PLAN
This WellPoint Health Networks Inc. Employee Stock Option Plan ("PLAN") was
originally adopted effective May 21, 1996 (the "EFFECTIVE DATE"), to enable
WellPoint Health Networks Inc. (the "COMPANY") to offer stock options to non-
executive officers of the Company or any affiliate.
1.2 ELIGIBILITY
The following individuals ("ELIGIBLE INDIVIDUALS") shall be eligible to be
granted stock options under the Plan: Each employee of the Company or of an
affiliate ("AFFILIATE") of the Company 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) who,
on the date of grant or such date before the grant as the Committee shall
specify for administrative purposes is not an executive officer of the Company.
1.3 ADMINISTRATION OF THE PLAN
A. COMMITTEE. The Plan will be administered by a committee or committees
appointed by the Board of Directors of the Company (the "BOARD") and consisting
of two or more members of the Board. If no committee is appointed, the Board
will serve as the committee. The term "COMMITTEE," when used in this Plan,
refers to the committee that has been delegated authority with respect to a
matter, or to the Board if no committee has been delegated such authority.
Members of a committee will serve for such term as the Board may determine, and
may be removed by the Board at any time.
B. AUTHORITY. The 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, to determine which Eligible Individuals shall be granted options
under the Plan, to determine the amount and/or number of shares subject to such
options, and to determine the terms of such an option (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.
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<PAGE>
1.4 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 purchased by the Company on the open market. The
number of shares of Common Stock that may be issued under the Plan will not
exceed two (2) million, subject to adjustment in accordance with Paragraph C
below.
B. SHARE COUNTING. In determining whether the number of shares issued
under the Plan exceeds the maximum number set forth in Paragraph 1.4.A., only
the net number of shares actually issued under an option shall count against the
limit. Thus, if any outstanding option under the Plan expires, is terminated,
is cancelled or is forfeited for any reason before the full number of shares
governed by the option grant are issued, those remaining shares will not be
charged against the limit in Paragraph 1.4.A. above and will be available for
subsequent option grants under the Plan. If shares held by an optionee are
delivered to the Company, or are withheld from shares otherwise issuable under
the option, in payment of all or a portion of the exercise price or tax
withholding obligations under the option, 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 1.4.A.
C. 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 the
Committee shall make appropriate adjustments to (i) the maximum number and/or
class of securities issuable under the Plan and (ii) the number and/or class of
securities and price per share in effect under each option outstanding under the
Plan. The purpose of these adjustments will be to preclude the enlargement or
dilution of rights and benefits under the options.
ARTICLE TWO
TERMS OF OPTIONS
2.1 TERMS AND CONDITIONS OF OPTIONS
A. TYPE AND TERM. All options granted under the Plan shall be non-
qualified options not intended to satisfy the requirements for incentive stock
options under Section 422 of the Internal Revenue Code. No grants under the
Plan will be exercisable after the expiration of 10 years from the date of
grant.
B. PRICE AND EXERCISABILITY. The option price per share and the period
or periods within the term of an option that such option may be exercised will
be fixed by the Committee.
C. EXERCISE AND PAYMENT. After any option granted under the Plan becomes
exercisable, it may be exercised by notice to the Company at any time before
termination of the option. The option price will be payable in full in cash or
check made payable to the Company or, subject to such limitations as the
Committee may determine, in one or more of the following
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<PAGE>
alternative forms:
(1) in shares of Common Stock valued as of the Exercise Date (defined
below) and held by the optionee 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 that, to the extent that the exercise price of an option
(or the Federal, State and local income and employment tax withholding
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 option
covering the number of shares so delivered or withheld; the terms of the new
option shall be the same as the option so exercised, except that the per share
exercise price of the new option shall be the fair market value of one share of
Common Stock on the date of grant of the new option and the term of the new
option shall be equal to the remaining term of the option so exercised.
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. 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 option is granted or amended, an option
may, in connection with the optionee's estate plan, be assigned in whole or in
part during the optionee's lifetime to one or more members of the optionee'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 option pursuant to the
assignment and shall be set forth in such documents issued to the assignee as
the Committee may deem appropriate.
2.2 CORPORATE TRANSACTIONS
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<PAGE>
The Committee may determine and set forth in each option, 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 options, provided that any options that are continued, assumed or
replaced with comparable awards in connection with any transaction will be
adjusted as provided in Section 1.4.C. The grant of options 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.
ARTICLE THREE
MISCELLANEOUS
3.1 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) such action shall not
adversely affect a holder's rights and obligations with respect to options at
the time outstanding under the Plan and (2) the Board shall not, without the
approval of the Company's stockholders, make any change with respect to which
the Board determines that stockholder approval is required by applicable law or
regulatory standards.
B. MODIFICATION OF OPTIONS. The Committee has full power and authority
to modify or waive any or all of the terms, conditions or restrictions
applicable to any outstanding option 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 option, adversely affect
the holder's rights thereunder.
3.2 TAX WITHHOLDING
A. OBLIGATION. The Company's obligation to deliver shares or cash upon
the exercise of options 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, any or
all holders of outstanding options under the Plan to elect to have the Company
withhold, from the shares of Common Stock otherwise issuable pursuant to such
option, one or more of such shares with an aggregate Fair Market Value equal to
the Federal, State and local income and employment taxes ("TAXES") incurred in
connection with the acquisition of such shares. Holders of options 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.
-4-
<PAGE>
3.3 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.
3.4 EFFECTIVE DATE AND TERM OF PLAN
A. EFFECTIVE DATE. This Plan becomes effective on the Effective Date.
B. TERM. The Committee may grant options under the Plan at any time
after the Effective Date of the Plan and before the Plan is terminated by the
Board.
3.5 REGULATORY APPROVALS
The implementation of the Plan, any option grants under the Plan, and the
issuance of stock pursuant to any option granted under the Plan is subject to
the procurement by the Company of all approvals and permits required by
regulatory authorities having jurisdiction over the Plan, option grants made
under the Plan, and stock issued pursuant to the Plan.
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<PAGE>
3.6 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; provided that
nothing contained in this Plan or in any option granted under this Plan will
affect any contractual rights of the Company or an employee pursuant to a
written employment agreement executed by the parties thereto.
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<PAGE>
WELLPOINT
HEALTH NETWORKS
1998
OFFICER
BENEFIT
ENROLLMENT
GUIDE
TABLE OF CONTENTS
- ------------------------------------------------------------------------
OFFICER BENEFITS 1
1998 Executive Summary 1
- ------------------------------------------------------------------------
OPEN ENROLLMENT PROCEDURES 3
- ------------------------------------------------------------------------
FLEXPOINT BENEFITS INFORMATION 4
Medical 4
Dental 8
Vision 11
Employee Life Insurance 12
Dependent Life Insurance Coverage 12
- - Spouse 13
- - Children 13
Spending Accounts 14
- - Health Care 14
- - Dependent Care 15
- ------------------------------------------------------------------------
HEALTH INSURANCE PORTABILITY AND ACCOUNTABILITY ACT 16
- ------------------------------------------------------------------------
FLEXEXEC 17
- ------------------------------------------------------------------------
COMPREHENSIVE NONQUALIFIED RETIREMENT PLAN 19
<PAGE>
YOUR BENEFITS PROGRAM
HERE'S A QUICK LOOK AT THE BENEFITS FOR OFFICERS OF WELLPOINT HEALTH NETWORKS,
INC.
I. FLEXPOINT BENEFITS
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------------
PLAN OPTIONS COMMENTS
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
MEDICAL Waive coverage Requires proof of other coverage
HMO (where applicable) Massachusetts, Georgia, Michigan, California,
Texas, Illinois
WellPoint Preferred (PPO) Choice of 3 deductible levels
WellPoint Group Medical Only an option when PPO network is unavailable
- ----------------------------------------------------------------------------------------------------------------------------------
DENTAL Waive coverage
Dental Net California Only
Prudent Buyer Dental Plan California Only
Basic Dental Outside California Only
Major Dental Outside California Only
- ----------------------------------------------------------------------------------------------------------------------------------
VISION Waive coverage
Vision Services Plan
- ----------------------------------------------------------------------------------------------------------------------------------
GROUP TERM LIFE EMPLOYEE
Waive Coverage
$50,000 plus $50,000 AD&D coverage
1 x base annual salary plus 1 x AD&D coverage
2 x base annual salary plus 1 x AD&D coverage
3 x base annual salary plus 1 x AD&D coverage
SPOUSE
Waive coverage
$5,000
1/2 x base annual salary
1 x base annual salary
CHILD LIFE
Waive coverage
$5,000
$10,000
$25,000
- ----------------------------------------------------------------------------------------------------------------------------------
SPENDING ACCOUNTS Health Care annual maximum $3,000 Dependent Care annual maximum $5,000
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
1
II. FLEXEXEC
(The following benefit plans are provided for all WellPoint Officers. No
enrollment process is needed for participation in these plans.)
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------------
PLAN OPTIONS COMMENTS
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
GROUP UNIVERSAL LIFE* 2 times compensation Vice Presidents and General Managers
3 times compensation Senior and Executive Vice Presidents
- ----------------------------------------------------------------------------------------------------------------------------------
SHORT TERM DISABILITY Maximum of 26 weeks salary continuance
- ----------------------------------------------------------------------------------------------------------------------------------
LONG TERM DISABILITY* 60% compensation Vice Presidents and General Managers
70% compensation Senior and Executive Vice Presidents
- ----------------------------------------------------------------------------------------------------------------------------------
PENSION ACCUMULATION PLAN Years of Service Percentage
3% 5 year vesting
4%
- ----------------------------------------------------------------------------------------------------------------------------------
FINANCIAL PLANNING SEMINARS Periodic seminars to assist officers in obtaining stock ownership guidelines,
financial/retirement planning, etc.
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
III. COMPREHENSIVE EXECUTIVE NONQUALIFIED RETIREMENT PLAN
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------------
PLAN OPTIONS COMMENTS
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
SUPPLEMENTAL 401(K) DEFERRAL Allows deferrals in excess of 401(k) limits. Deferrals are matched; may defer 1-6%
- ----------------------------------------------------------------------------------------------------------------------------------
SALARY DEFERRAL Defer amount in excess of $125,000 May defer 1-100%
base annual salary
- ----------------------------------------------------------------------------------------------------------------------------------
MANAGEMENT BONUS DEFERRAL 1997 bonus to be paid in 1998 May defer 1-100%
1998 bonus to be paid in 1999 May defer 1-100%
- ----------------------------------------------------------------------------------------------------------------------------------
CAR ALLOWANCE DEFERRAL $4,800 for VP/GM Must elect to defer or will receive as taxable
income in 1998
$7,200 for SVP
$9,600 for EVP
- ----------------------------------------------------------------------------------------------------------------------------------
SUPPLEMENTAL PENSION PLAN Employer contributions for compensation in No election necessary; deferral automatic; 5 year
excess of $160,000 cliff vesting schedule
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
IV. ADDITIONAL PLANS
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------------
PLAN OPTIONS COMMENTS
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
SALARY DEFERRAL SAVINGS Highly compensated may defer 2-8% Must elect to participate; Company matches 75% of
PROGRAM/401(K) PLAN first 6% deferred; Eligible for Company match
after 1 year of employment; 10 Vanguard
investment funds.
- ----------------------------------------------------------------------------------------------------------------------------------
EMPLOYEE STOCK PURCHASE PLAN Minimum contribution per pay period: $20.00 2 offering periods; Jan-June; July-December;
Maximum contribution per pay period: $826.93 Stock purchased at 15% discount
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
*Compensation as of September 1, 1997 plus target management bonus.
2
<PAGE>
OPEN ENROLLMENT PROCEDURES
FOR 1998 THE COMPANY HAS MADE NUMEROUS CHANGES TO THE OFFICER BENEFIT PROGRAM.
AS SUCH, ALL OFFICERS MUST COMPLETE A FLEXEXEC ENROLLMENT FORM FOR 1998.
THERE ARE TWO MAJOR COMPONENTS TO THE FORM.
- THE PERSONALIZED SIDE OF THE FORM CONTAINS YOUR FLEXPOINT ELECTIONS,
INCLUDING YOUR NEW LIFE INSURANCE OPTIONS.
- THE OTHER SIDE OF THE FORM CONTAINS YOUR OPTIONS IN THE NEW COMPREHENSIVE
EXECUTIVE NONQUALIFIED RETIREMENT PLAN
DEDUCTIONS AND PAY PERIODS IN 1998
- ----------------------------------
THERE WILL BE 26 PAY PERIOD IN 1998. YOUR BENEFIT DEDUCTIONS AND SALARY
DEFERRALS FOR 1998 WILL BEGIN WITH YOUR JANUARY 9, 1998 PAYCHECK.
3
<PAGE>
FLEXPOINT
BENEFITS INFORMATION
YOUR MEDICAL COVERAGE
THE MEDICAL OPTIONS IN FLEXPOINT ARE DESIGNED TO MEET THE NEEDS OF INDIVIDUALS
WITH WIDELY VARYING PERSONAL SITUATIONS. DEPENDING ON WHERE YOU LIVE, YOU MAY
BE ABLE TO CHOOSE WELLPOINT PREFERRED (A PREFERRED PROVIDER ORGANIZATION (PPO))
OR A HEALTH MAINTENANCE ORGANIZATION (HMO).
POINTS TO CONSIDER
- Do your providers participate in an available HMO or PPO? If you're
enrolling in an HMO or PPO, check the directory in your local Human
Resources department to make sure the primary care physician is accepting
new patients.
- Consider the way you now receive--or would like to receive--medical care,
and identify your alternatives.
- HMOs generally require you to pay a small fee (copay) when you use network
services and provide no benefits when you do not. With WellPoint Preferred
you may also have to satisfy a deductible and coinsurance. However, you
have the option of using a non-network provider if you are willing to share
more of the cost.
- If you have group coverage under another medical plan, you have the option
to waive your FLEXPoint medical coverage. If you waive medical coverage
you will be required to sign a waiver of coverage form certifying coverage
with another group plan.
- For example, you may be covered under your spouse's plan. If so, you can
waive coverage and receive a credit that will be added to your taxable
income in equal installments throughout the year. You also have the option
to use all or part of this credit toward the purchase of additional
benefits.
- If you live in an area where a PPO network is unavailable, you will be
eligible for the WellPoint Group Medical Plan (Idemnity). After
satisfying the deductible which applies to all services, benefits will be
paid at the 80% reimbursement level regardless of which provider you visit.
- ------------------------------------------------------------------------------
SPECIAL CONSIDERATIONS
IF YOU WAIVE COVERAGE, ELECT AN HMO (FOR THE FIRST TIME) OR ADD DEPENDENTS TO
YOUR HMO COVERAGE, YOU MUST SUBMIT THE APPROPRIATE FORM NO LATER THAN JANUARY
1ST (OR THE EFFECTIVE DATE OF YOUR COVERAGE FOR 1998 NEW HIRES) OR YOUR CHANGE
IN MEDICAL COVERAGE WILL NOT GO INTO EFFECT FOR 1998.
- ------------------------------------------------------------------------------
4
<PAGE>
YOUR MEDICAL OPTIONS
THE FOLLOWING COMPARISONS HAVE BEEN DESIGNED TO HELP YOU UNDERSTAND THE
DIFFERENCES BETWEEN THE PLANS. WE ALSO RECOMMEND THAT YOU CAREFULLY REVIEW THE
SUMMARY PLAN DESCRIPTIONS AND SEPARATE HMO LITERATURE FOR ADDITIONAL PLAN
DETAILS, COVERAGE EXCLUSIONS AND LIMITATIONS.
<TABLE>
<CAPTION>
HEALTH MAINTENANCE
WELLPOINT PREFERRED (PPO) ORGANIZATION (HMO)
- ---------------------------------------------------------------------------------------------------------------------------------
DEDUCTIBLE(1)
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
WP250 WP500 WP1000 There is no
deductible;
Individual $250 $500 $1,000 some services
require copay
Family $750 $1,500 $3,000
- ---------------------------------------------------------------------------------------------------------------------------------
OUT OF POCKET MAXIMUM(2)
- ---------------------------------------------------------------------------------------------------------------------------------
WP 250 WP500 WP1000 Refer to HMO
Handbook
Network Non Network Network Non Network Network Non Network
Individual $2,750 $6,917 $3,000 $7,167 $3,500 $7,667
Family $8,250 $20,750 $9,000 $21,500 $10,500 $23,000
- ---------------------------------------------------------------------------------------------------------------------------------
NETWORK PROVIDERS NON NETWORK PROVIDERS
- ---------------------------------------------------------------------------------------------------------------------------------
HOSPITAL SERVICES(3)
- ---------------------------------------------------------------------------------------------------------------------------------
Inpatient 80% after deductible 60% after deductible No charge
Outpatient 80% after deductible 60% after deductible No charge
Skilled Nursing Facility 80% after deductible 60% after deductible Refer to HMO
Handbook
(Limited to 100 days/calendar year)
- ---------------------------------------------------------------------------------------------------------------------------------
PROFESSIONAL SERVICES
- ---------------------------------------------------------------------------------------------------------------------------------
Office Visits - WP250 $15 copay 60% after deductible $10 copay
(routine and non-routine - WP500 $15 copay
exams for all ages
including well-baby - WP1000 (non CA) $20 copay
care)
- WP1000 (CA) 80% after deductible
X-ray and lab tests 80% after deductible 60% after deductible No charge
- ---------------------------------------------------------------------------------------------------------------------------------
EMERGENCY MEDICAL SERVICES
- ---------------------------------------------------------------------------------------------------------------------------------
Professional Services 80% after deductible 80% after deductible No charge
(at hospital)
Hospital Emergency Room 80% after deductible 80% after deductible $25-$50 copay, waived
if admitted
- ---------------------------------------------------------------------------------------------------------------------------------
</TABLE>
5
<PAGE>
<TABLE>
<CAPTION>
HEALTH MAINTENANCE
WELLPOINT PREFERRED (PPO) ORGANIZATION (HMO)
- ---------------------------------------------------------------------------------------------------------------------------------
NETWORK NON NETWORK
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
MATERNITY
- ---------------------------------------------------------------------------------------------------------------------------------
Hospital 80% after deductible 60% after deductible No charge
Office Visits - WP250 $15 copay 60% after deductible $10 copay
- WP500 $15 copay
- WP1000 (non CA) $20 copay
- WP1000 (CA) 80% after deductible
Infertility Diagnostic 80% after the deductible 60% after deductible Refer to HMO Handbook
Procedures
- ---------------------------------------------------------------------------------------------------------------------------------
MENTAL HEALTH CARE/SUBSTANCE ABUSE
- ---------------------------------------------------------------------------------------------------------------------------------
Inpatient 80% after deductible 60% after deductible Refer to HMO Handbook
(up to 30 days per calendar year)
Outpatient 80% after deductible 60% after deductible Refer to HMO Handbook
$50 maximum/visit $40 maximum/visit
(50 visit maximum/calendar year)
- ---------------------------------------------------------------------------------------------------------------------------------
MISCELLANEOUS SERVICES
- ---------------------------------------------------------------------------------------------------------------------------------
Chiropractic WP250 $15 copay 60% ($25 maximum/visit) Refer to HMO Handbook
WP500 $15 copay
WP1000 (non CA) $20 copay
WP1000 (CA) 80% after deductible
(26 visit maximum)
Physical Therapy/ 80% after deductible 60% after deductible Refer to HMO Handbook
Physical Medicine
Allergy Test and - WP250 $15 copay 60% after deductible $10 copay
Treatment
- WP500 $15 copay
- WP1000(non-CA) $20 copay
- WP1000 (CA) 80% after deductible
- ---------------------------------------------------------------------------------------------------------------------------------
PRESCRIPTION DRUG
- ---------------------------------------------------------------------------------------------------------------------------------
$10 brand/$5 generic copay - 30 day supply Refer to HMO Handbook
$5 mail order copay - 90 day supply
</TABLE>
(1) Deductible - Deductible expenses applied to the 4th quarter of the
previous year will be carried over. Copay amounts do not apply toward the
deductible.
(2) Satisfying the smaller in-network coinsurance and deductible will apply
toward, but not satisfy, the large out-of-network coinsurance and deductible
excluding any copays. Satisfying the larger out-of-network coinsurance and
deductible will automatically satisfy the smaller in-network co-insurance and
deductible excluding any copays.
(3) Hospital Services - Pre-certification is required. You must initiate.
Failure to do so will result in a $250 additional deductible for medically
necessary care and no benefits will be payable for unnecessary care.
6
<PAGE>
- -------------------------------------------------------------------------------
PRE-CERTIFICATION
If you're covered under WellPoint Preferred or the WellPoint Group Medical Plan
and need to receive care from a hospital (inpatient only), ambulatory surgical
center (outpatient only) or a chemical dependency rehabilitation facility, you
must obtain a pre-certification. This ensures that you obtain the maximum
benefits available under the Plan.
You must call for a pre-certification THREE DAYS BEFORE YOUR SCHEDULED
ADMISSION OR CARE. To obtain a pre-certification, call the toll-free phone
number listed on your ID card. If treatment will be provided by a network
physician, your physician will make the call for you.
NOTE: IF PRE-CERTIFICATION IS NOT OBTAINED, YOUR BENEFITS WILL BE REDUCED BY
$250 AND THE PLAN WILL NOT COVER SERVICES THAT ARE NOT DEEMED MEDICALLY
NECESSARY.
- -------------------------------------------------------------------------------
Q & A
Q. What coverage is available for my dependent
child attending college out of the PPO/HMO
network areas?
A. If you and your dependents are enrolled in
WellPoint Preferred and if your dependent
uses a WellPoint Preferred provider, the plan
will pay at network levels. If you are in one
of the HMO plans, there is also a provision
for students living outside the service area.
Contact your HMO for more information.
Q. If I was covered under my spouse's medical
plan and he / she loses coverage, what are
the restrictions for us in enrolling in
FLEXPoint medical (waiting period, pre-
existing conditions, etc.)?
A. You can enroll WITHIN 31 DAYS of loss of coverage
with no waiting period or pre-existing conditions.
7
<PAGE>
YOUR DENTAL COVERAGE
FLEXPOINT GIVES YOU A CHOICE OF DENTAL OPTIONS.
POINTS TO CONSIDER
- How much can you afford to pay out of your own pocket toward dental
expenses?
- Are there any dental procedures you know you or a family member will need
in the upcoming year? Is orthodontic coverage necessary?
- If you have coverage available under another dental plan, the coordination
of benefits feature could save you money.
YOUR DENTAL OPTIONS AT A GLANCE
IF YOU LIVE IN CALIFORNIA ...
YOU CAN CHOOSE BETWEEN THE DENTAL NET OR PRUDENT BUYER DENTAL PLANS. YOU ALSO
HAVE THE OPTION TO WAIVE DENTAL COVERAGE.
INSIDE CALIFORNIA
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------------
DENTAL NET PRUDENT BUYER DENTAL
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
ANNUAL DEDUCTIBLE None $ 50 individual
$150 family
- ---------------------------------------------------------------------------------------------------------------------------------
ANNUAL MAXIMUM BENEFIT Pediatric dentist only: $1,500 per individual
$500 per child
- ---------------------------------------------------------------------------------------------------------------------------------
WHAT YOU PAY WHAT THE PLAN PAYS
- ---------------------------------------------------------------------------------------------------------------------------------
DIAGNOSTIC AND PREVENTIVE CARE No charge 100% after deductible
(exams, x-rays, cleanings, fluoride treatments)
RESTORATIVE FILLINGS No charge 80% after deductible
ORAL SURGERY
(includes local anesthesia)
- EXTRACTION No charge 80% after deductible
- SURGICAL EXTRACTION $25-$50
ENDODONTIC CARE - Root canal therapy $60-$100 80% after deductible
PERIODONTICS $9 - $120 50% after deductible
PROSTHODONTICS
- Crowns $85-$120 50% after deductible
- Bridges $120
- Partial dentures $160
- Complete dentures $140
- ---------------------------------------------------------------------------------------------------------------------------------
ORTHODONTIA (Up to 24 Months) Copays: Not covered
Adults (18 & over) $1850
Children $1450
- ---------------------------------------------------------------------------------------------------------------------------------
</TABLE>
8
<PAGE>
DENTAL NET POINTS TO CONSIDER
- If you elect this option, you receive care at negotiated rates. There are
no deductibles or annual maximums. Orthodontic coverage is available
(except if you use a pediatric dentist).
- When you enroll in Dental Net, you must select a participating dental
office for you and your family. Dental Net provider directories are
available in your local Human Resources department.
- The first time you need care, let your dentist know that you're a member of
Dental Net.. ALL COVERED FAMILY MEMBERS MUST GO TO THE SAME PARTICIPATING
DENTAL OFFICE.
PRUDENT BUYER DENTAL PLAN
POINTS TO CONSIDER
- This option gives you the opportunity to use a network of dental providers
who agree to provide services at negotiated rates. Each time you need
care, you decide whether to receive it from a network provider or from a
non-network provider.
- You and each family member can select your own participating provider from
the Prudent Buyer Dental provider directory. You may pay more when you
choose to receive care from a non-participating provider.
- If you use a network provider, the maximum covered expense is the
negotiated rate. Participating dentists will not charge you more than the
negotiated rate. For non network providers the maximum covered expense is
the reasonable and customary (R&C) charge. You will be responsible for any
billed charge which exceeds R&C.
- -------------------------------------------------------------------------------
GENERAL NOTE ABOUT PRUDENT BUYER
PRE-TREATMENT REVIEW
IF YOUR DENTIST ANTICIPATES THE EXPENSE FOR ANY COURSE OF TREATMENT TO EXCEED
$350, YOU SHOULD SUBMIT A BENEFIT ESTIMATION FORM BEFORE TREATMENT BEGINS.
- -------------------------------------------------------------------------------
Q & A
Q. Is Orthodontia Covered?
A. Yes, under the Dental Net Plan. You must
obtain a WRITTEN REFERRAL from Dental Net Customer Services before
receiving treatment.
9
<PAGE>
IF YOU LIVE OUTSIDE OF CALIFORNIA
YOU CAN CHOOSE BETWEEN THE BASIC OR MAJOR DENTAL PLANS. YOU CHOOSE THE PLAN AND
ANY DENTAL PROVIDER YOU WISH. THE LEVEL OF BENEFIT THE PLAN PAYS DEPENDS ON
WHICH OPTION YOU CHOOSE. YOU ALSO HAVE THE OPTION TO WAIVE DENTAL COVERAGE.
OUTSIDE OF CALIFORNIA
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------------
BASIC DENTAL PLAN MAJOR DENTAL PLAN
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
ANNUAL DEDUCTIBLE $ 50 individual $ 50 individual
$200 family $200 family
- ---------------------------------------------------------------------------------------------------------------------------------
ANNUAL MAXIMUM BENEFIT $1,000 per individual $1,000 per individual
- ---------------------------------------------------------------------------------------------------------------------------------
WHAT THE PLAN PAYS
- ---------------------------------------------------------------------------------------------------------------------------------
- PREVENTIVE CARE (exams, cleanings, 100% 100%
fluoride treatments, x-rays etc.)
- BASIC PROCEDURES 80% after the deductible 80% after the deductible
- ORAL SURGERY - EXTRACTIONS,
ANESTHESIA IF NECESSARY
- RESTORATIVE CARE - FILLINGS
- ENDODONTIC CARE - TREATMENT OF
TOOTH PULP, ROOT CANAL THERAPY
- MAJOR PROCEDURES Not covered 50% after the deductible
- CROWNS, JACKETS, CAST
RESTORATIONS
- PERIODONTAL CARE
- TMJ (TEMPOROMANDIBULAR JOINT
DYSFUNCTION) OTHER THAN SURGERY
- PROSTHODONTICS - CONSTRUCTION OR
REPAIR OF FIXED BRIDGES, PARTIAL
OR COMPLETE DENTURES
- IMPLANTS
- ORTHODONTIA Not covered 50% ($1,000 lifetime maximum plan
benefit/individual
- ---------------------------------------------------------------------------------------------------------------------------------
</TABLE>
Note: Covered expenses are paid based on reasonable and customary charges.
Charges in excess of reasonable & customary are your responsibility.
Q & A
Q. Does the orthodontia maximum benefit of $1,000 per person in the Major
Dental Plan count toward the dental annual maximum benefit?
A. No. Those maximum benefits are separate
10
<PAGE>
YOUR VISION COVERAGE
IF YOU ELECT VISION COVERAGE THROUGH THE VISION SERVICE PLAN (VSP), YOU HAVE A
CHOICE OF NETWORK OR NON-NETWORK PROVIDERS EACH TIME YOU NEED EYE CARE OR
PRODUCTS.
POINTS TO CONSIDER
- Vision coverage is optional.
- How much can you afford to pay out of pocket for vision expenses in the
coming year?
- Will you or a family member need eyeglasses or contacts in the coming year?
- EXTRA COST FOR CERTAIN VSP PROVIDER SERVICES - Since this plan is designed
to cover medically necessary eye care, there is an extra charge for these
items: blended lenses, oversize lenses, photochromatic or tinted lenses, or
a frame that costs more than the plan allowance.
- CHARGES FOR NON-VSP PROVIDERS - If you use non-VSP providers, you must pay
any charges above the limits shown in the chart below. You will need to
file a claim with VSP to receive your benefits.
- To obtain a list of VSP providers in your area call 800-622-7444
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------------
VSP PROVIDERS NON-VSP PROVIDERS
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
YOUR ANNUAL COPAYMENT $25 $25
- ---------------------------------------------------------------------------------------------------------------------------------
WHAT THE PLAN PAYS
- ---------------------------------------------------------------------------------------------------------------------------------
EYE EXAMINATIONS (once every 12 months) 100% $40
LENSES (once every 12 months)
-- Single 100% $40
-- Bifocal 100% $60
-- Trifocal 100% $80
-- Lenticular 100% $125
FRAMES (once every 24 months) 100% $45
CONTACTS (including disposables)
-- If medically necessary up to $210, in lieu of other up to $210, in lieu of other
benefits benefits
-- If elective up to $105, in lieu of other up to $105, in lieu of other
benefits benefits
- ---------------------------------------------------------------------------------------------------------------------------------
</TABLE>
Q & A
Q. How is "necessary" defined for contact lenses?
A. They must be medically necessary to correct extreme visual acuity problems
that cannot be corrected with spectacle lenses.
Q. Will the benefit cover both glasses and contacts during the same period?
A. No.
Q. How do I file a claim?
A. Check with your provider to determine if he/she is a VSP provider. If so,
he/she will handle all claim procedures. If not, obtain a claim form from
your local Human Resources Representative
11
<PAGE>
YOUR GROUP TERM LIFE
INSURANCE COVERAGE
FLEXPOINT HELPS YOU PROTECT THOSE YOU CARE ABOUT MOST BY OFFERING SEVERAL LIFE
INSURANCE OPTIONS.
BENEFITS ARE BASED ON YOUR BENEFIT SALARY WHICH IS YOUR ANNUAL BASE PAY AS OF
SEPTEMBER 1.
EMPLOYEE LIFE INSURANCE
- -----------------------
You have five life insurance options:
- Waive coverage
- $50,000 plus $50,000 AD&D coverage
- 1 x benefit salary plus 1 x AD&D
- 2 x benefit salary plus 1 x AD&D
- 3 x benefit salary plus 1 x AD&D
POINTS TO CONSIDER
- If you select a life insurance option that is two levels greater than your
existing coverage, you will need to provide a Statement of Personal
Health. When approved, your increase in coverage will take effect on
January 1st. If approval is received AFTER JANUARY 1ST, coverage and
deductions will be made retroactively to January 1st.
- You will have additional life insurance at no cost under the group
universal life program. See page 17 for more information.
Q & A
Q.. Is there a change in my life insurance amounts if I get a pay raise during
the year?
A. No. For open enrollment, your benefit salary is "locked in" as of
September 1 of the previous year.
YOUR DEPENDENT LIFE INSURANCE COVERAGE
- --------------------------------------
Dependent life insurance enables you to insure the lives of your spouse and/or
dependent child(ren).
POINTS TO CONSIDER
- Spouse life insurance is based on your benefit salary. Life insurance
benefits are paid directly to the employee.
- If you waive employee life insurance you are not eligible for dependent
life insurance.
- Spouse life insurance coverage is limited to a maximum of $125,000.
- Coverage may be reduced when your life insurance is reduced.
- If, during open enrollment, you add or increase your spouse's coverage, you
must complete a Statement of Personal Health. When approved, the increase
in coverage will take effect on January 1st. If approval is received AFTER
JANUARY 1ST, coverage and deductions will be made retroactively to January
1st.
12
<PAGE>
SPOUSE LIFE INSURANCE
- ---------------------
You have several options for spouse life insurance:
- Waive coverage
- $5,000
- 1/2 your benefit salary
- 1 times your benefit salary
CHILD LIFE INSURANCE
- --------------------
You have the following options for child life insurance, or, you can waive
coverage:
<TABLE>
<CAPTION>
FOR EACH DEPENDENT
CHILD OPTION 1 OPTION 2 OPTION 3
------------------ -------- -------- ---------
<S> <C> <C> <C>
Six months through age $5,000 $10,000 $25,000
18 (24 if full-time
student)
Birth to age 14 days $ 500 $ 1,000 $2,500
14 days old to six $2,500 $5,000 $12,500
months
</TABLE>
Q & A
Q. Do I need to provide a Statement of Personal
Health for Child Life Insurance?
A. During open enrollment, you need a statement of Personal Health to
add coverage or increase coverage.
13
<PAGE>
YOUR FLEXIBLE SPENDING ACCOUNTS
Flexible spending accounts provide an opportunity for you to save money on your
out-of-pocket health care or dependent care expenses throughout the year. You
are not taxed on the money you contribute nor on the reimbursements you receive.
- ------------------------------------------------------------------------------
Did you know that Flexible Spending Accounts are considered one of the most
underutilized tax advantages offered by the IRS?
For most employees who elect a flexible spending account, the tax savings are as
much as 40 cents on the dollar - 28 cents in federal income tax, 7.65 cents in
social security and Medicare taxes, as well as any applicable state or local
income tax.
- ------------------------------------------------------------------------------
HOW THE FLEXIBLE SPENDING ACCOUNT WORKS
- ---------------------------------------
YOU ELECT TO HAVE A CERTAIN AMOUNT OF MONEY DEDUCTED FROM YOUR BI-WEEKLY
PAYCHECK ON A PRE-TAX BASIS. WHEN YOU HAVE AN ELIGIBLE EXPENSE, YOU FILE A
CLAIM AND WILL BE REIMBURSED WITHOUT PAYING TAXES ON THIS AMOUNT.
THE FULL ANNUAL AMOUNT YOU ELECT TO DEFER UNDER THE HEALTH CARE SPENDING ACCOUNT
IS AVAILABLE ON THE EFFECTIVE DATE OF YOUR COVERAGE. THUS, IF YOU ELECT $1,000
FOR THE YEAR, AND HAVE AN ELIGIBLE EXPENSE OF $900 IN JANUARY, YOU WILL BE
REIMBURSED THE FULL $900 EVEN THOUGH YOU HAVE ONLY ACCUMULATED $38.46 THUS FAR.
YOUR HEALTH CARE SPENDING ACCOUNT
- ----------------------------------
Health plan deductibles and copayments, mileage and parking expenses while
you're receiving health care and contact lens solutions are normally not
reimbursed by your insurance plan. But, they are eligible for reimbursement
under a Health Care Spending Account.
If you choose to participate, you decide how much to deposit in the health care
spending account to pay for expenses not covered by your medical, dental and
vision plans. IRS publication 502 can be used as a guide for eligible expenses.
Some examples of eligible expenses are:
- Copayments and coinsurance for medical, dental, vision, and prescription
drugs
- Chiropractor expenses, hearing aids and batteries
- Mental Health expenses
HOW MUCH CAN I ELECT?
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------
MINIMUM MAXIMUM
PAY PERIOD ANNUALLY PAY PERIOD ANNUALLY
- ----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Health Care Account $10 $260 $115.39 $3,000
Dependent Care Account* $10 $260 $192.31 $5,000
</TABLE>
*Married employees filing a SEPARATE tax return can only elect $2500 per year.
Married employees filing a JOINT return have a combined maximum of $5000 per
year from all available plans.
For purposes of this section, "deductions" are salary reductions used to pay an
equivalent amount of your eligible health care and/or dependent care expenses.
Additionally, although this section refers to "your accounts," all the
deductions are held as part of the general assets of the Company.
14
<PAGE>
POINTS TO CONSIDER
- Do you anticipate any expenses not covered by you or your spouse's medical,
dental or vision care plans?
- You can participate in the Health Care Spending Account EVEN IF YOU WAIVE
MEDICAL COVERAGE.
- Do you anticipate any large out-of-pocket expenses such as orthodontics,
crowns, hearing aids or the birth of a baby? Do you need eye glasses and
contact lenses this year, and/ or, prescription sun glasses?
- Once you enroll in a spending account, you can not change your election or
contributions for the remainder of that calendar year. The only exception
is if you have a qualified change in status (such as the birth of a child).
YOUR DEPENDENT CARE SPENDING ACCOUNT
- ------------------------------------
YOU CAN PARTICIPATE IN THIS ACCOUNT IF YOU NEED DEPENDENT CARE SERVICES TO
ENABLE YOU TO WORK OR IF YOU ARE MARRIED, FOR BOTH YOU AND YOUR SPOUSE TO WORK.
IF YOUR SPOUSE DOES NOT WORK, YOUR DEPENDENT CARE EXPENSES MAY BE REIMBURSABLE
IF YOUR SPOUSE IS A FULL-TIME STUDENT OR PHYSICALLY OR MENTALLY UNABLE TO
PROVIDE CARE FOR HIMSELF OR HERSELF.
IN GENERAL, ANY EXPENSE THAT QUALIFIES FOR THE FEDERAL DEPENDENT CARE TAX CREDIT
MAY BE REIMBURSED. FOR MORE INFORMATION SEE IRS PUBLICATION 503. YOU WILL NEED
TO SUBMIT A TAX PAYER IDENTIFICATION NUMBER OR SOCIAL SECURITY NUMBER OF THE
PERSON OR ENTITY WHO PROVIDES CARE WITH YOUR DEPENDENT CARE CLAIMS.
UNLIKE THE HEALTH CARE SPENDING ACCOUNT, YOU CAN ONLY BE REIMBURSED FOR THE
AMOUNT IN YOUR ACCOUNT WHEN YOU SUBMIT A CLAIM.
NOTE: ACCORDING TO IRS REGULATIONS, HIGHLY COMPENSATED EMPLOYEES MAY BE SUBJECT
TO FEDERAL GUIDELINE LIMITATIONS. YOU WILL BE NOTIFIED IF YOU ARE AFFECTED BY
THIS RESTRICTION.
POINTS TO CONSIDER
- Will you incur expenses from a licensed day care center or nursery school?
- Will your child (ren) be going to an eligible daytime summer camp and/ or
before / after-school activities?
- A dependent must be under age 13 or physically or mentally incapable of
caring for himself or herself and spend at least 8 hours per day in your
home.
- ------------------------------------------------------------------------------
"USE IT OR LOSE IT" RULE
THE IRS "USE IT OR LOSE IT" RULE" OFTEN CAUSES EMPLOYEES TO DISREGARD USING A
FLEXIBLE SPENDING ACCOUNT. UNDER THIS RULE, YOU MUST USE THE MONEY IN YOUR
ACCOUNT FOR ELIGIBLE EXPENSES YOU INCUR DURING THE YEAR IN WHICH THE
CONTRIBUTIONS ARE MADE.
YOU HAVE UNTIL MARCH 31ST OF THE FOLLOWING YEAR TO REQUEST YOUR REIMBURSEMENT.
IF YOU TERMINATE DURING THE YEAR, YOU CAN REQUEST MONEY IN YOUR DEPENDENT
ACCOUNT AFTER YOU TERMINATE IF YOU INCUR THE EXPENSE ANY TIME DURING THE
CALENDAR YEAR TO THE EXTENT OF THE AMOUNT YOU HAVE WITHHELD FROM YOUR PAYCHECK.
UNDER THE HEALTH CARE ACCOUNT, IF YOU TERMINATE YOU CAN ONLY REQUEST MONEY FOR
EXPENSES INCURRED THROUGH YOUR TERMINATION DATE.
IF YOU HAVE ANY MONEY LEFT IN YOUR FLEXIBLE SPENDING ACCOUNTS AT THE END OF THE
YEAR, THE IRS REQUIRES IT TO BE FORFEITED. ANY FORFEITED AMOUNTS ARE APPLIED TO
THE ADMINISTRATION OF THE FLEXIBLE SPENDING ACCOUNTS.
- -------------------------------------------------------------------------------
15
<PAGE>
THE HEALTH INSURANCE PORTABILITY
AND ACCOUNTABILITY ACT OF 1996 (HIPAA)
SPECIAL ENROLLMENT RIGHTS
- -------------------------
If you are declining enrollment for yourself or your dependents (including your
spouse) because of other health insurance coverage you may in the future be able
to enroll your self or your dependents in a WellPoint Health Plan, provided that
you request enrollment within 31 days after your other coverage ends.
In addition, if you have a new dependent as a result of marriage, birth,
adoption or placement for adoption, you may be able to enroll yourself and your
dependents, provided that you request enrollment within 31 days after the
marriage, birth, adoption or placement for adoption.
ACTIVELY-AT-WORK
- ----------------
If you elect WellPoint Preferred or the WellPoint Group Medical Plan, coverage
will become effective under the plan even if you are hospitalized or on medical
leave on the effective date.
PRE-EXISTING CONDITIONS
- -----------------------
Pre-existing condition exclusions have been eliminated from the WellPoint
Preferred and Group Medical Plans. New special enrollment provisions for
employees declining medical coverage have been adopted.
NEWBORN'S AND MOTHER'S PROTECTION ACT
- -------------------------------------
The minimum stay for mothers and newborn children is 48 hours following a normal
delivery and 96 hours following a cesarean section. Providers are not required
to obtain authorization from the plans or the insurance issuer for prescribing
a length of stay not in excess of the above periods.
16
<PAGE>
FLEXEXEC
IN ADDITION TO THE FLEXPOINT BENEFITS, THE COMPANY PROVIDES THE FOLLOWING
BENEFITS TO OFFICERS OF THE COMPANY AT NO COST.
- SUPPLEMENTAL LIFE INSURANCE
- SHORT-TERM DISABILITY
- LONG-TERM DISABILITY
- PENSION ACCUMULATION PLAN
- FINANCIAL PLANNING SEMINARS
SUPPLEMENTAL LIFE INSURANCE
(GROUP UNIVERSAL LIFE)
In addition to your life insurance options under FlexPoint, the Company will be
providing you with a supplemental life insurance benefit based upon your total
compensation (September 1, 1997 Base Annual Salary plus Target Management
Bonus).
WHAT IS UNIVERSAL LIFE INSURANCE?
In addition to providing a fixed life insurance benefit, you also have the
opportunity to make additional premium payments to increase the amount of your
insurance and/or make investments with the earnings accumulating on a tax-free
basis.
WHAT IS THE COST OF THIS BENEFIT?
The company pays the entire cost of this life insurance benefit. Your only cost
will be the income tax on the premium paid for the coverage.
WHAT HAPPENS AT TERMINATION?
You will receive an individual policy, which can be continued by paying the
premium contributions or surrendered for the cash value, if any.
WHEN WILL THIS COVERAGE BECOME EFFECTIVE?
This new universal life insurance coverage will become effective when the annual
premium becomes due on your current company provided individual term policy.
Rick Davenport, from D/A Financial Group of California will be contacting you
shortly after the first of the year, to explain the provisions of this new
coverage, provide you with beneficiary forms, and explain your options with
respect to the individual term coverage.
17
<PAGE>
YOUR DISABILITY COVERAGE
Short-term disability (STD) and long-term disability (LTD) work together to
provide you with income if you become disabled by illness or injury and are
unable to work.
SHORT-TERM DISABILITY
In the event you are disabled and unable to perform all the essential duties of
your job, the company will continue your base annual salary for up to 26 weeks.
LONG-TERM DISABILITY
If you are disabled longer than 26 weeks, you will be eligible for a Long Term
Disability benefit based upon your total compensation (September 1, 1997 Base
Annual Salary plus 1997 Target Management Bonus).
AMOUNT OF BENEFIT
- ------------------------------------------------------------------------------
- General Manager, Vice President
60% of Compensation
- Senior and Executive Vice
President
70% of Compensation
- ------------------------------------------------------------------------------
WHEN IS THIS COVERAGE EFFECTIVE?
This new coverage will become effective May 1, 1998. You will continue your
current group and individual disability coverage until that date. Rick
Davenport will also be meeting with you to discuss continuing your individual
disability policy.
WHAT IS THE COST OF THIS BENEFIT?
The Company pays the entire cost of this coverage. As such, if you receive any
LTD benefits, they are fully taxable.
WHAT HAPPENS AT TERMINATION/RETIREMENT?
Coverage ceases and cannot be continued or converted.
PENSION ACCUMULATION PLAN
- -------------------------
The company provides a benefit based upon your years of service and eligible
compensation up to $160,000 (1998 IRS maximum). Benefits under this plan become
vested after five years of service.
FINANCIAL PLANNING SEMINARS
- ---------------------------
Starting in 1998, the Company will be providing periodic seminars to discuss
such topics as financial planning, retirement planning, stock ownership
guidelines, income tax, etc.
18
<PAGE>
COMPREHENSIVE EXECUTIVE NONQUALIFIED RETIREMENT PLAN
ELIGIBILITY
An Officer of the Company whose base annual salary and management target bonus
is in excess of $125,000 per year is eligible to participate in the plan.
Generally, elections must be made before the calendar year in which the
compensation is earned. Employees promoted to an Officer position, or newly
hired Officers may elect within 30 days to participate in the plan for the
remaining portion of the calendar year.
DEFERRAL ELECTIONS
There are five basic components to the plan.
- SUPPLEMENTAL 401(k) DEFERRAL
This component is intended to replace the limits established by IRS
regulations in the 401(k) plan and allow you to receive a Company match on
all eligible compensation in a plan year. For 1998, the IRS limits
eligible 401(k) compensation to $160,000 with a maximum deferral of
$10,000. This provision works two ways:
- you may defer up to 6% of your compensation earned after reaching
$160,000 or after deferring $10,000 into the 401(k) plan, whichever
occurs first
- for newly hired Officers, you may defer compensation earned before
becoming eligible for the 401(k) match;
- SALARY DEFERRAL
This component allows you to defer base salary in excess of $125,000.
For example:
<TABLE>
<CAPTION>
BEFORE AFTER
MARCH INCREASE MARCH INCREASE
-------------- --------------
<S> <C> <C>
Base Salary $140,000 $147,000
-$125,000 -$125,000
--------- ---------
Amount available to defer $15,000 $22,000
</TABLE>
You may elect to defer between 1 - 100% of $15,000. The deferral will take
place on a per pay period basis. Using the above example, if you elected
to defer 100% of the $15,000, you would defer $576.92 per pay period.
Additionally, if you were to receive a 5% salary increase in March,
bringing your base salary to $147,000 your deferral would increase to
$846.15 per pay period.
($22,000 26 = $846.15)
- BONUS DEFERRAL
This component allows you to defer all or a portion (1-100%) of your
Management Bonus.
For 1998, you have two options:
Defer 1997 bonus paid in 1998
Defer 1998 bonus paid in 1999
(Election must be made in 1997)
In future years, you will elect to defer in December the management bonus
that will be EARNED IN THE NEXT CALENDAR YEAR, BUT NOT PAID UNTIL THE
FOLLOWING YEAR. (I.E. for bonus earned in 1999, but not paid until 2000,
deferral must be made in 1998.)
- CAR ALLOWANCE
This component allows you to defer your car allowance. You may elect to
defer all of this amount. If you do not defer your car allowance, you will
receive it as taxable income each pay period over the calendar year.
- SUPPLEMENTAL PENSION DEFERRAL
This component is intended to replace the limits established by IRS
regulations in the Pension Accumulation Plan. The Company will
automatically contribute 3%, 4%, or 5% (based on service) of your earnings
in excess of $160,000 per year. THERE IS NO ELECTION NECESSARY. This
component has a vesting feature identical to the Pension Accumulation Plan
(i.e. 5 year cliff vesting).
19
<PAGE>
INVESTMENT FUNDS
The same 10 Vanguard funds utilized for the Salary Deferral Savings Program
401(k) are available for your nonqualified deferrals in this plan. The
funds are listed on your enrollment form.
DISTRIBUTION OF BENEFITS
At the time you elect your deferrals, you must also elect the manner in
which your deferral account will be paid out. You will elect the timing of
when to receive the deferral account and what form of payment you want to
receive. The options for timing are:
- Termination/Retirement Date
- Date of Death
- A specific date
(must be at least 24 months from date of election and not later than
your 65th birthday)
- The earliest of your Termination/Retirement Date, Date of Death or
specific date
- Other - this option is utilized when you elect to receive the
distribution at different intervals (e.g. $25,000 on 7/1/2001, with
the balance at retirement or one year after termination/retirement).
The distribution options are:
- Lump sum
- Annual installments not to exceed 15
- Other - this option is used if you want a combination of the above.
(e.g. $25,000 in a lump sum with the balance in 10 annual
installments).
CHANGING YOUR DISTRIBUTION ELECTION
An Officer may change an existing distribution election by submitting a
written request at least 12 months BEFORE the Officer was originally
scheduled to receive the distribution.
ACCELERATED DISTRIBUTIONS
Hardship Withdrawal - If you have an immediate and heavy financial need and
have no other resources reasonably available to you, you may request a
hardship withdrawal. The 401(k) provisions regarding hardship withdrawal
will be applied. The amount is limited to the portion of your account
attributable to your Salary, Management Bonus and Supplemental 401(k)
deferrals.
Forfeiture - Absent a demonstration of immediate and heavy financial need,
you may elect to receive 85% of your entire vested account in an early
distribution at any time upon 30 days written request. The remaining 15%
will be forfeited. If you elect to receive a forfeiture distribution, your
participation in the plan will be suspended and you may not again
participate in the Plan until the Plan Year that is at least 12 months
following the Plan Year in which such distribution occurred.
WITHHOLDING
The Company will deduct amounts required by law to be withheld for taxes
with respect to benefits under this Plan.
BENEFICIARY ELECTION
The beneficiary designation made on your enrollment form applies to your
1998 election as well as future deferral elections. This designation may
be changed at any time.
20
<PAGE>
WELLPOINT HEALTH NETWORKS INC.
FOCUSED ACHIEVEMENT PLAN
PLAN DOCUMENT
A. PURPOSE AND OBJECTIVES
The Focused Achievement Plan (the "Plan") for WellPoint Health Networks
Inc. is intended to provide financial rewards to select employees for
achieving performance expectations based on Focus Goals. The Plan is
designed to recognize the varying contributions eligible employees
("Participants") make in helping the Company reach its commitments; to
motivate, retain and attract key employees; to create a highly-leveraged
compensation opportunity; and to provide clear linkage with short
and long-term business results.
B. EFFECTIVE DATE
This Plan document is effective as of January 1, 1995. This Plan
supersedes all prior WellPoint Management Incentive Plans and shall remain
in effect until modified and/or terminated by WellPoint.
C. DEFINITIONS
1. ADMINISTRATOR is defined in Section D of the Plan.
2. AFFILIATE means an entity that is linked to the Company by a 50% or
greater chain of ownership, as determined pursuant to the Internal
Revenue Code Section 414(b) and 414(c).
3. BONUS means an award made under the Plan based on satisfaction during
the Plan Period of the Plan Guidelines.
4. CEO means the Chief Executive Officer of WellPoint Health Networks
Inc.
5. COMPANY means WellPoint Health Networks Inc. and its affiliates and
subsidiaries, unless designated otherwise.
6. FOCUS GOALS means individual goals taken from a combination of the
operating objectives of an employee's unit, team and individual
assigned projects.
7. PARTICIPANT means eligible employees selected to participate in the
Plan.
<PAGE>
8. PLAN means this WellPoint Health Networks Inc. Incentive Plan, as
amended from time to time.
9. PLAN PERIOD means a calendar year. The Plan Period begins on January
1, and unless otherwise provided by the Company, a new Plan Period
will begin each subsequent calendar year until the Plan is terminated.
The Plan Period is the period for which Bonuses under the Plan are
paid.
10. PROFITABLE GROWTH INDEX (PGI) means the financial indicators of
overall corporate performance. PGI is comprised of three financial
measures, which may vary from year to year, and is equal to their sum.
It is measured on an actual versus plan basis.
D. ADMINISTRATION OF THE PLAN: AUTHORITY AND RESPONSIBILITY
1. ADMINISTRATOR. The CEO has full discretionary authority to administer
and interpret the Plan and to determine eligibility for participation
and for benefits under the terms of the Plan; provided, however, that
the CEO may delegate all or a portion of this discretionary authority
to one or more delegates. In this Plan, the term "Administrator" is
used to refer to the CEO, or if the CEO has delegated authority, to
the delegate. The Administrator's determinations will be binding and
conclusive upon all persons.
2. ADMINISTRATOR'S AUTHORITY. The Administrator's authority includes,
but not limited to, responsibility for the Bonus pool and funding, for
Bonus calculations, for the establishment, interpretation, amendment
and revocation of rules relating to the Plan, and for the resolution
of questions and problems arising from the Plan operations.
3. INDEMNIFICATION. The Administrator shall not be personally liable for
any claim, action, lawsuit, arbitration or other dispute that arises
in connection with any action, decision, or determination made in
accordance with applicable law with respect to the Plan. The Company
shall indemnify and hold harmless the Administrator for and against
any such losses or demands.
E. PLAN PERIOD
The Plan Period is based on one calendar year, January through December.
F. ELIGIBILITY
Participants shall be selected by the Administrator, based on management
responsibilities and potential impact upon Company operations within any
company of WellPoint Health
<PAGE>
Networks Inc. or other affiliates and subsidiaries, before or at the
beginning of the Plan Period or as otherwise indicated in Section G.
Participants will be notified of their eligibility and module assignment
annually. Currently, Participants are defined as Officers, Directors,
Managers, select Key Contributors and Supervisors not participating in
another incentive plan (including sales incentive).
G. PERSONNEL CHANGES DURING THE PLAN PERIOD
The following rules explain the impact on Plan Participants due to various
employment status changes by a participant during the Plan Period.
1. NEW HIRE, TRANSFER WITH THE COMPANY, PROMOTION, ACQUISITIONS. A newly
hired employee, an employee transferred within the Company or promoted
during the Plan Period to a position qualifying for participation, or
employees deemed eligible as a result of an acquisition or merger as
determined by the Administrator, may be recommended for a pro rata
Bonus based upon the percentage of the Plan Period the employee is in
an eligible position. To be considered, the employee must hold a
qualifying position for at least one (1) quarter during the Plan
Period. Employees newly hired, newly promoted or acquired after
October 1 of any Plan Period are not eligible for Bonus Payout for the
relevant Plan Period.
2. TRANSFER FROM AN AFFILIATE. An employee who transfers to the Company
from an Affiliate may be recommended for a Bonus at the sole
discretion of the Administrator; provided that the employee meets the
eligibility requirements of a Personnel Change as outlined in Section
G, paragraph 1.
3. REINSTATEMENTS. An employee who terminates, either voluntarily or
involuntarily, and is subsequently rehired in the same Plan Period may
be eligible for a pro rata Bonus, provided that the reinstated
employee held a qualifying position in the relevant Plan Period for at
least one (1) calendar quarter. To be eligible for a Bonus payout,
the employee must have been an active employee at the end of the Plan
Period and at the time the Bonus is paid. The decision to pay a Bonus
in this situation shall be made at the sole discretion of the
Administrator and the Bonus, if any, will normally be paid at the end
of the relevant Plan Period as outlined in Section I.
4. REHIRES. No bonus will be paid to an employee who was terminated,
either voluntarily or involuntarily, and is rehired in a subsequent
Plan Period.
5. DEMOTION. No bonus will be paid to an employee who has been demoted
during the Plan Period because of performance. If the demotion is due
to an organization change, or is on a voluntary basis, a full or a pro
rata Bonus may be made provided the employee is otherwise qualified
for a Bonus as stated in Section F.
<PAGE>
The decision to pay a Bonus in this situation shall be made at the
sole discretion of the Administrator and the Bonus, if any, will
normally be paid at the end of the relevant Plan Period as outlined
in Section I.
6. TERMINATION. An employee whose services are terminated by the Company
during the Plan Period, or before the Bonus is paid, shall not be
considered for a Bonus other than as described in Section G, Paragraph
8.
7. RESIGNATION OR RETIREMENT. A Participant or other employee who
voluntarily resigns from the Company or who retires during the Plan
Period or before the bonus is paid will not be eligible to receive a
Bonus at payout.
8. DEATH, DISABILITY, REDUCTION IN FORCE, TRANSFER TO AN AFFILIATE. An
employee whose status as an active employee is changed during the Plan
Period or before the Bonus is actually paid due to death, disability,
reduction in force or transfer to an Affiliate, will be paid a full or
pro rata Bonus payment provided the employee has been a Plan
Participant for at least one (1) quarter. The Bonus may be paid at
the time of termination due to death, disability, reduction-in-force,
or transfer to an affiliate, or as close to termination as
practicable, but no later than the scheduled payout for the relevant
Plan Period as outlined in Section I. The decision to pay a Bonus in
this situation shall be made at the sole discretion of the
Administrator.
9. LEAVE OF ABSENCE. An employee whose status as an active employee is
changed during the Plan Period or before the Bonus is actually paid
due to a leave of absence may be considered for a full or pro rata
Bonus payment if the employee has been a Plan Participant for at least
one 91) calendar quarter and is actively employed as of the end of the
Plan Period and at the time the Bonus is paid. Normally, leaves of
absence of thirty (30) days or less will not impact the Bonus payment.
Leaves of Absences greater than thirty (30) days may result in a pro
rated bonus. The decision to pay such a Bonus in these situations
will be made at the sole discretion of the Administrator and the
Bonus, if any, will be paid at the end of the relevant Plan Period as
outlined in Section I.
H. DETERMINATION OF BONUS AND ELIGIBILITY FOR PAYMENT
After the close of the Plan Period (and preliminary financial statements
are available), the Bonuses shall be calculated by the Administrator
according to the Plan Guidelines. Only employees actively employed at the
Company on the date the bonuses are issued and whose overall performance
appraisal for the Plan Period is "Achieves Expectations" or higher are
eligible to receives payment of the Bonus. Eligibility for payout is based
on the number of months a Participant is in an eligible position.
<PAGE>
I. PAYMENT OF INDIVIDUAL BONUSES
1. TIMING AND FORM. Bonuses will be paid on or before the pay date
closest to March 10th of the calendar year following the Plan Period.
Bonuses will be paid in a lump sum and in cash.
2. WITHHOLDING. The Company will deduct the amounts required by law to
be withheld for federal, state, and local income and employment taxes
for all Bonus Payments. In addition to the taxes herein stated,
eligible participants in the Company's 401(k) plan will have an amount
deducted from his or her Bonus Payment equal to the elected
contribution amount in effect at the time of Bonus Payment. The
Company will match up to 75% of the 401(k) contribution, up to a
maximum of 6% of the total earnings.
3. PLAN FUNDING. Funds available for payout under this Plan are
determined based on performance against PGI. No Bonuses are funded if
PGI and/or net underwriting margin falls below a designated threshold.
4. SOURCE. All payments under the Plan will be paid by the Company from
its general assets. No person will have any right or interest under
the Plan that is superior in any manner to the right of any other
general and unsecured creditor of the Company.
J. IMPACT ON BENEFIT PLANS
To the extent permitted by law, Bonus payments under the Plan will be
treated as compensation for purposes of a Plan participant's benefit
calculations under the Blue Cross of California Pension Accumulation Plan
(of which the companies of WellPoint Health Networks Inc. are participating
subsidiaries) and the Supplemental Pension Plan of Blue Cross of California
(of which the companies of WellPoint Health Networks Inc. are participating
subsidiaries), as those plans may be amended from time to time. Bonus
payments will not affect a participant's (a) coverage under any Company
group insurance plan; or (b) the contributions or the benefits under any
group plan or any kind heretofore or hereafter in effect, under which the
availability or amount of benefits is related to compensation.
K. TERMINATION OR AMENDMENT OF THE PLAN
1. GENERAL PROVISIONS. The CEO, with the approval of the Compensation
Committee of the Board of Directors, may at any time terminate or make
any amendment to the plan without prior notice to Participants. There
can be no oral modifications to the Plan and only modifications in
writing will be honored.
<PAGE>
2. EXTRAORDINARY TRANSACTIONS. Without the consent of any Participant,
the CEO may, with the agreement of the Compensation Committee of the
Company's Board of Directors, modify the Plan to reflect extraordinary
transactions or occurrences affecting the Company of any Affiliate
(e.g., changes to the capital structure of other significant
reorganization of the Company, divestiture of a subsidiary,
acquisition or discontinuance of a material business or product line,
change in accounting procedures/policies, or governmental changes in
the financing of health care delivery, etc.). Any such modification
will be designed to prevent the dilution or enlargement of benefits
under this Plan.
L. MISCELLANEOUS
Nothing in this Plan will be construed as a guarantee of a Bonus or as an
accrued right to receive a Bonus or a portion of a Bonus or a Bonus
payment. Nothing in this Plan shall be construed as creating a contract of
employment. No Bonus payable under this Plan may be alienated or assigned.
<PAGE>
WELLPOINT HEALTH NETWORKS INC.
FOCUSED ACHIEVEMENT PLAN
PLAN GUIDELINES
The following document identifies the key guidelines for the 1995 Focused
Achievement Plan for WellPoint Health Networks Inc. The Plan Guidelines may
change from year to year. This document is intended to be used in conjunction
with the Plan Document and Addendums, which further outline the Focused
Achievement Plan.
INDIVIDUAL PERFORMANCE
Individual Performance will be based on a set of 3-5 unit, team or individual
Focus Goals. Focus Goals are a subset of the overall business goals set during
the performance review process. Focus Goals are not additions or replacements
for business goals.
Unit Focus Goals should be based on the operating objectives of a unit and the
strategic plan. Potential targets which should be considered in setting the
goals are growth, profitability, capital management, penetration of specialty
markets, or other targets specific to the business unit or corporate strategy.
Each goal should be a "stretch" yet attainable goal, and include a deliverable
date and/or success measure.
Individual Focus Goals should be based on individual or team projects or
targeted accomplishments. Each goal should be a "stretch" yet attainable goal,
and include a deliverable date and/or success measure.
The percentage of the individual portion to be paid will be based on the
performance against Focus Goals.
Individual Performance will be defined as:
SIGNIFICANTLY EXCEEDS - Consistently exceeds performance expectations in
such a manner that contribution and/or results attained are significantly
above the norm.
EXCEEDS - Consistently achieves, and often exceeds, performance
expectations.
MEETS - Consistently achieves performance expectations. Shortfalls are
counterbalanced by solid accomplishments in other areas.
MEETS PORTION - Generally achieves, but does not fully meet, performance
expectations.
<PAGE>
Overall performance is inconsistent.
DOES NOT MEET - Fails to achieve performance expectations.
NOTE: UNPLANNED FACTORS OUT OF THE PARTICIPANT'S CONTROL MAY BE TAKEN
INTO ACCOUNT WHEN DETERMINING THE OVERALL PERFORMANCE LEVEL.
PLAN FUNDING
Plan Funding is based on performance of the Profitable Growth Index (PGI) as
determined by Senior Management annually. Amounts available for bonus payouts
at the Group level will be adjusted based on the PGI.
Total payout will not exceed the total payout earned by the PGI. The CEO
reserves the right to adjust the funding available at the Group level.
<PAGE>
OFFICE LEASE
WESTLAKE BUSINESS PARK, LTD.
A CALIFORNIA LIMITED PARTNERSHIP
AS LANDLORD,
AND
WELLPOINT HEALTH NETWORKS INC.,
A DELAWARE CORPORATION
AS TENANT
DATED AS OF DECEMBER 2, 1997
<PAGE>
SUMMARY OF BASIC LEASE INFORMATION
The undersigned hereby agree to the following terms of this Summary of
Basic Lease Information (the "Summary"). This Summary is hereby incorporated
into and made a part of the attached Office Lease (this Summary and the Office
Lease to be known collectively as the "Lease") which pertains to the office
building ("Building") to be constructed on certain land which is located
adjacent to 4553 La Tienda Drive, Thousand Oaks, California 91361. Each
reference in the Office Lease to any term of this Summary shall have the meaning
as set forth in this Summary for such term. In the event of a conflict between
the terms of this Summary and the Office Lease, the terms of the Office Lease
shall prevail. Any capitalized terms used herein and not otherwise defined
herein shall have the meaning as set forth in the Office Lease.
TERMS OF LEASE
(References are to the Office Lease) DESCRIPTION
1. Date: As of December 2, 1997
2. Landlord: Westlake Business Park, Ltd., a
California limited partnership
3. Address of Landlord 9348 Civic Center Drive
(Section 29.15): Suite 400
Beverly Hills, CA 90210
Attention: Mr. Ronald Binder
4. Tenant: WellPoint Health Networks Inc., a
Delaware corporation
5. Address of Tenant 2155 Oxnard Street
(Section 29.15) Woodland Hills, CA 91367
Attention: John F. Siemon, Vice
President Facilities Services
and Property Management
6. Premises: The entire rentable square footage of
the Building, which will be
approximately 88,000 square feet of
space in the aggregate.
7. Term (Article 2)
7.1 Lease Term: From the Lease Commencement Date to
December 31, 2019.
i
<PAGE>
7.2 Rent Commencement Date: The Rent Commencement Date shall be
the earlier of (a) the date that
Tenant commences business operations
in the Premises or (b) eighteen (18)
months after Landlord obtains its
financing commitment described in
Section 1.3.1 of the Lease as such
eighteen (18) month period is extended
by any extensions allowed under
Landlord's financing statement.
7.3 Lease Expiration Date: December 31, 2019.
7.4 Lease Options: Two (2) ten-year options to extend the
Lease Term.
8. Base Rent (Article 3) $101,200 per month adjusted every
thirty (30) months as set forth in
Exhibit E hereto.
8.1 Option Terms: Base Rent for the Option Terms shall
be as set forth in Section 2.2.2 of
the Lease.
9. Brokers (Section 29.20): Representing WellPoint Health Networks
Inc.
Mr. Bruce F. Rutherford and
Mr. John L. Vinnicombe
LaSalle Partners Limited
355 South Grand Avenue, Suite 4280
Los Angeles, CA 90071
Representing Westlake Business Park,
Ltd.
Mr. Ronald Binder and Mr. Michael
Binder
Binder Realty Company
9348 Civic Center Drive, Suite 400
Beverly Hills, CA 90210
ii
<PAGE>
<TABLE>
<CAPTION>
TABLE OF CONTENTS
Page
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<S> <C>
ARTICLE 1 REAL PROPERTY, BUILDING AND PREMISES. . . . . . . . . . . . . 1
ARTICLE 2 LEASE TERM. . . . . . . . . . . . . . . . . . . . . . . . . . . 3
ARTICLE 3 BASE RENT . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
ARTICLE 4 ADDITIONAL RENT . . . . . . . . . . . . . . . . . . . . . . . . 6
ARTICLE 5 USE OF PREMISES . . . . . . . . . . . . . . . . . . . . . . . . 9
ARTICLE 6 SERVICES AND UTILITIES. . . . . . . . . . . . . . . . . . . . .10
ARTICLE 7 REPAIRS . . . . . . . . . . . . . . . . . . . . . . . . . . . .11
ARTICLE 8 CONDITIONS AND ALTERATIONS. . . . . . . . . . . . . . . . . . .13
ARTICLE 9 COVENANT AGAINST LIENS. . . . . . . . . . . . . . . . . . . . .15
ARTICLE 10 INSURANCE . . . . . . . . . . . . . . . . . . . . . . . .15
ARTICLE 11 DAMAGE AND DESTRUCTION. . . . . . . . . . . . . . . . . .18
ARTICLE 12 NONWAIVER . . . . . . . . . . . . . . . . . . . . . . . .20
ARTICLE 13 CONDEMNATION. . . . . . . . . . . . . . . . . . . . . . .21
ARTICLE 14 ASSIGNMENT AND SUBLETTING . . . . . . . . . . . . . . . .22
ARTICLE 15 SURRENDER OF PREMISES; OWNERSHIP
AND REMOVAL OF TRADE FIXTURES . . . . . . . . . . . . . .24
ARTICLE 16 HOLDING OVER. . . . . . . . . . . . . . . . . . . . . . .24
ARTICLE 17 ESTOPPEL CERTIFICATES . . . . . . . . . . . . . . . . . .25
ARTICLE 18 SUBORDINATION . . . . . . . . . . . . . . . . . . . . . .25
ARTICLE 19 DEFAULTS; REMEDIES. . . . . . . . . . . . . . . . . . . .25
ARTICLE 20 COVENANT OF QUIET ENJOYMENT . . . . . . . . . . . . . . .26
ARTICLE 21 FORCE MAJEURE . . . . . . . . . . . . . . . . . . . . . .28
ARTICLE 22 ATTORNEYS' FEES . . . . . . . . . . . . . . . . . . . . .29
iii
<PAGE>
ARTICLE 23 SIGNS . . . . . . . . . . . . . . . . . . . . . . . . . .29
ARTICLE 24 COMPLIANCE WITH LAW . . . . . . . . . . . . . . . . . . .30
ARTICLE 25 LATE CHARGES. . . . . . . . . . . . . . . . . . . . . . .30
ARTICLE 26 LANDLORD'S RIGHT TO CURE DEFAULT; PAYMENTS BY TENANT. . .31
ARTICLE 27 ENTRY BY LANDLORD . . . . . . . . . . . . . . . . . . . .31
ARTICLE 28 TENANT PARKING AND HELISTOP . . . . . . . . . . . . . . .32
ARTICLE 29 MISCELLANEOUS PROVISIONS. . . . . . . . . . . . . . . . .32
</TABLE>
EXHIBITS
A LEGAL DESCRIPTION OF LAND
B WORK LETTER
C FORM OF NOTICE OF LEASE TERMS
D FORM OF ESTOPPEL CERTIFICATE
E BASE RENT ADJUSTMENT
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OFFICE LEASE
This Office Lease ("Office Lease"), includes the preceding Summary of Basic
Lease Information (the "Summary") attached hereto and incorporated herein by
this reference (the Office Lease and Summary to be known sometimes collectively
hereafter as the "Lease"), dated as of the date set forth in Section 1 of the
Summary, is made by and between WESTLAKE BUSINESS PARK, LTD., a California
limited partnership ("Landlord"), and WELLPOINT HEALTH NETWORKS INC., a Delaware
corporation ("Tenant") (collectively, the "Parties" or individually, a "Party").
ARTICLE 1
REAL PROPERTY, BUILDING AND PREMISES
1.1 REAL PROPERTY, BUILDING AND PREMISES. Upon and subject to the terms,
covenants and conditions hereinafter set forth in this Lease, Landlord hereby
leases to Tenant and Tenant hereby leases from Landlord the Premises set forth
in Section 6 of the Summary (the "Premises"), which Premises will consist of the
entire rentable square footage of the Building, as that term is defined in the
Summary, together with the right to use any structures, facilities, fixtures,
equipment, paving, surfacing, sewers, storm drains and other improvements and
appurtenances thereof which may now or hereafter be located on the parcel of
land (the "Land"), described in EXHIBIT A attached hereto, upon which the
building (the "Building") containing the Premises is to be constructed along
with the "Tenant Improvements" (as defined in the Work Letter attached hereto as
EXHIBIT B). The Premises, Building, Tenant Improvements and the Land are
hereafter collectively referred to as the "Real Property".
1.2 VERIFICATION OF RENTABLE SQUARE FEET OF PREMISES AND BUILDING. The
parties acknowledge and agree that there are 88,000 rentable square feet in the
Building and agree to use such number in connection with this Lease regardless
of any subsequent determination that the actual rentable square footage of the
Building differs from such number.
1.3 DELIVERY DELAYS. The date set forth below in this Section 1.3 with
respect to the occurrence of certain events by specific dates, are subject to
extensions of such specific dates to the extent such extensions qualify as
"Force Majeure Delays" (as defined in Article 21 below).
1.3.1 FINANCING. Landlord intends to obtain financing for the
construction of the Tenant Improvements, as defined in Section 1 of the Work
Letter, by January 15, 1998 subject to Tenant's confirmation, in writing, to
Landlord that Tenant has waived its option to terminate this Lease pursuant to
Section 1.3.2 below due to Tenant's receipt of all necessary discretionary
entitlements. If Tenant has not confirmed to Landlord that Tenant has waived
its option to terminate this Lease pursuant to Section 1.3.2 below by
February 15, 1998, Tenant and Landlord shall meet in good faith to discuss the
circumstances surrounding such failure and, based on that discussion, Tenant and
Landlord shall either agree to an extension of the February 15, 1998 date for
such waiver, or terminate this Lease by delivery of written notice from either
Party to the other not later than the close of business on February 20, 1998,
and upon any such termination, neither Party
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shall have any further obligation or liability to the other Party hereunder;
provided that Tenant may override and nullify Landlord's election to
terminate under this Section 1.3.1 if Tenant elects to proceed under Section
2.1 of the Work Letter. Tenant shall not provide any guarantees,
indemnifications or any other form of credit enhancement to Landlord's lender
other than as may arise from Landlord's and Tenant's execution and delivery
of the Lease. Tenant shall cooperate with Landlord and Landlord's efforts to
cause the title insurance company issuing the lender's policy of title
insurance to the lender that its deed of trust is senior to any mechanic's
liens notwithstanding that such mechanic's liens are in fact a priority
including an execution of reasonably necessary and appropriate indemnities,
all subject to Tenant's rights under Section 2.1 of the Work Letter.
1.3.2 ACQUISITION AND ENTITLEMENTS. Tenant intends to obtain all
necessary discretionary entitlements for the operation of the Building
("Entitlements") by December 31, 1997. If the Entitlements have not been
obtained, however, by the later of February 15, 1998 or forty-five (45) days
following the date of a timely filing of an appeal with respect to the granting
of, or the refusal to grant, the Entitlements, Landlord and Tenant shall have an
option to terminate this Lease (subject to the override provisions of
Section 1.3.1 above) by delivery of written notice to the other Party not later
than five (5) business days following the occurrence of the within-described
outside dates for obtaining the Entitlements, and upon any such termination,
neither Party shall have any further obligation or liability to the other Party
hereunder except as otherwise provided herein.
1.3.3 STANDBY FEE. If the Tenant Improvements are not in a state of
Substantial Completion, as defined in Section 3 of the Work Letter, within
eighteen (18) months of Landlord's receipt of its financing commitment described
in Section 1.3.1 above (as such eighteen (18) month period may be extended
pursuant to Landlord's negotiations with its lender as described below) due to
acts or omissions of Tenant, then Tenant shall pay Landlord's standby fee in an
amount up to but not to exceed Three Hundred Sixty Thousand Dollars
($360,000.00) owed to Landlord's lender, if any (the "Standby Fee"). If the
Tenant Improvements are not in a state of Substantial Completion by that date,
which is eighteen (18) months from Landlord's receipt of its financing
commitment because of Force Majeure Delays, then Tenant shall be responsible for
fifty percent (50%) of the penalty owed to Landlord's lender pursuant to the
terms of Landlord's financing commitment and Landlord shall pay the other fifty
percent (50%). By way of illustration, if Landlord is unable to negotiate for a
financing commitment of more than eighteen (18) months, and if the Tenant
Improvements are in a state of Substantial Completion by the end of the
twenty-first (21st) month following Landlord's receipt of its financing
commitment, and if Landlord therefore owes an interest penalty to Landlord's
lender of Seven Hundred Fifty Dollars ($750.00) per day, then each party would
be responsible for the sum of Thirty-Three Thousand Seven Hundred Fifty Dollars
($33,750.00) for such three (3) month delay. Landlord shall use its best
commercially reasonable efforts to negotiate for the longest period possible
whereunder the financing commitment would survive, subject to an interest
penalty; however, if the negotiated date for such outside extension is exceeded
by reason of Force Majeure Delays, Tenant shall be responsible for its one-half
(1/2) of the Standby Fee, with Tenant's obligations with respect to such fee not
to exceed One Hundred Eighty Thousand Dollars ($180,000.00) in addition to its
share of the accumulated interest penalties, if any.
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ARTICLE 2
LEASE TERM
2.l INITIAL TERM This Lease shall commence on the date hereof (the
"Lease Commencement Date") as set forth in Section 7.2 of the Summary, and shall
expire on the date (the "Lease Expiration Date") set forth in Section 7.3 of the
Summary, subject to the options set forth in Section 2.2. For purposes of this
Lease, the term "Lease Year" shall mean each consecutive twelve (12) month
period during the Lease Term. At any time within six (6) months following the
Rent Commencement Date, Landlord may deliver to Tenant a notice in the form as
set forth in EXHIBIT C, attached hereto, which notice Tenant shall execute and
return to Landlord within ten (10) business days of receipt thereof (provided
that if said notice is not factually correct, Tenant shall make any necessary
revisions prior to returning such notice to Landlord).
2.2 OPTION TERMS.
2.2.1 OPTION RIGHTS. Landlord hereby grants Tenant two (2)
consecutive options to extend the Lease Term for the Premises for periods of ten
(10) years each (the "Option Terms"), which options shall be exercisable only by
written notice delivered by Tenant to Landlord as provided below, provided that,
as of the date of delivery of each of such notice and on the commencement of any
such Option Term there is not an outstanding Event of Default, as defined in
Section 19.1 below, by Tenant. Upon the proper exercise of an option to extend,
the Lease Term, as it then applies to the Premises, shall be extended for a
period of ten (10) years, upon the same terms and conditions as this Lease
including the Base Rent adjustment per EXHIBIT E, but subject to the Base Rent
adjustment outlined in Section 2.2.2. below. The rights contained in this
Section 2.2 may only be exercised by Tenant or its "Affiliates" (as defined in
Section 14.5 below).
2.2.2 OPTION RENT.
2.2.2.1 RENT. The monthly Base Rent payable by Tenant during the
Option Term (the "Option Rent") shall be equal to ninety percent (90%) of the
then current "fair market rental rate". Fair market rental rate ("FMRR") shall
mean the base annual rental rate on a square foot basis at which, as of the date
of the Option Notice, landlords and tenants are entering into leases for
non-expansion, non-affiliated, non-subleased, non-encumbered, non-equity space
comparable in size (based on the actual square footage of the Building, if
remeasured during the initial term of this Lease by a space planner, designer or
architect approved by Landlord and Tenant), location and quality to the Premises
for a term of ten (10) years, which comparable space is located in other
comparable buildings with general purpose office space and located in the
Thousand Oaks/Westlake Village/Newbury Park/Conejo Valley area of Ventura
County, California, of similar age, location and quality of initial construction
(the ''Comparable Buildings") taking into consideration, and accounting for any
relevant differences between the Building and the Comparable Buildings,
including, but not limited to, the following, to the extent applicable:
(a) Use, location, height, size and/or floor level(s) of the space
in question;
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(b) The time the particular rental rate under consideration was
agreed upon and became or is to become effective;
(c) Abatement or free rent provisions reflecting free rent (with
respect to base rental, operating expenses, real estate taxes and/or
parking charges) or absence thereof during any period of the lease term,
except as set forth below;
(d) Inclusion (or absence) of parking charges in rental, and/or,
subject to the terms of Article 28, below, the extent of associated parking
rights and the cost thereof and the amount of parking available for use by
the tenant;
(e) Lease takeovers/assumptions;
(f) Relocation/moving allowances;
(g) Space planning allowances;
(h) Tenant improvement, refurbishment and/or repainting
allowances, taking into consideration the condition of the premises at the
time of determination;
(i) Any other concessions or inducements;
(j) The base year or expense-stop, if any, applicable to such
comparable space;
(k) Any other adjustments (including by way of Consumer Price
Index or other indexes) to base rental; and
(l) Term of lease.
Landlord and Tenant acknowledge and agree that the foregoing description of rent
factors is intended to be utilized by the arbitrator selected pursuant to
Section 2.2.3.1 below to equitably adjust the base rental charged by landlords
of Comparable Buildings so as to reflect as accurately as possible the rent
charged for similar space, similarly situated, taking into account that Tenant
may not require certain concessions such as relocation reimbursement, tenant
improvement allowance and the like. To this end, such arbitrator shall (i)
utilize, where possible, rents for Comparable Buildings based upon renewal
tenants and premises that would require only such tenant improvements as would
be reasonably required by Tenant to occupy such premises, and (ii) inquire of
the owners of the Comparable Buildings how much, if at all, the rent for space
in the Comparable Buildings would be adjusted if concessions that are
inapplicable to Tenant were not granted to prospective tenants of the pertinent
Comparable Building.
2.2.3 EXERCISE OF OPTION. The options contained in this Section 2.2
shall be exercised by Tenant, if at all, by giving Landlord written notice of
its intent to exercise the option ("Option Notice") not more than one (1) year
nor less than nine (9) months before the expiration of the initial Lease Term or
the initial Option Term, as applicable. Within thirty (30) days following
Landlord's receipt of the Option Notice, Landlord and Tenant shall attempt to
agree upon the FMRR. Absent an agreement in such period, the FMRR shall be
determined as follows:
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2.2.3.1 Within twenty-one (21) days after the expiration of the
30-day mutual agreement period described above, Tenant and Landlord shall each
appoint one arbitrator who shall by profession be a real estate broker, or
appraiser who shall have been active during the then preceding five (5) year
period in the leasing or appraisal of commercial buildings in the Thousand
Oaks/Westlake Village/Newbury Park/Conejo Valley area, such as Comparable
Buildings, exclusive of any broker from any brokerage firm then currently
representing either party. The determination of the arbitrators shall be
limited solely to the issue of whether Landlord's or Tenant's submitted FMRR is
closest to the actual FMRR as determined by the arbitrators, taking into account
the requirements of Section 2.2.2
2.2.3.2 The two (2) arbitrators shall, within ten (10) days of
the date of appointment of the last appointed arbitrator, agree upon and appoint
a third arbitrator who shall be qualified under the same criteria as set forth
hereinabove for qualification of the initial two (2) arbitrators.
2.2.3.3 The three (3) arbitrators shall, within thirty (30)
days after the appointment of the third arbitrator, reach a decision as to
whether Landlord's or Tenant's submitted FMRR is the closest to the actual FMRR
and shall use the closest of Landlord's or Tenant's submitted FMRR as the FMRR
for purposes of calculating the Option Rent, and shall notify Landlord and
Tenant thereof.
2.2.3.4 The decision of the majority of the three (3)
arbitrators shall be binding upon Landlord and Tenant.
2.2.3.5 If either Landlord or Tenant fails to appoint an
arbitrator as described in Section 2.2.3.1 above, the arbitrator appointed by
one of them shall reach a decision, notify Landlord and Tenant thereof, and such
arbitrator's decision shall be binding upon Landlord and Tenant.
2.2.3.6 If the two (2) arbitrators fail to agree upon and
appoint a third arbitrator within the time period provided in Section 2.2.3.2
above, then the parties shall mutually select the third arbitrator. If Landlord
and Tenant are unable to agree upon the third arbitrator within ten (10) days,
then either party may, upon at least five (5) days' prior written notice to the
other party, request the Presiding Judge of the Ventura County Superior Court,
acting in his private and nonjudicial capacity, to appoint the third arbitrator.
Following the appointment of the third arbitrator, the panel of arbitrators
shall within thirty (30) days thereafter reach a decision as to whether
Landlord's or Tenant's submitted FMRR shall be used and shall notify Landlord
and Tenant thereof.
2.2.3.7 The costs and expenses associated with the arbitration
shall be paid by the party whose amount is not selected by the arbitrators.
2.2.4 Notwithstanding anything in this Lease to the contrary, the
time when Tenant is required to extend the Lease pursuant to an option(s) shall
not expire until the later of (i) the time set forth herein; or (ii) fifteen
(15) days after Landlord has given Tenant notice of when such time will expire
or shall have expired.
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ARTICLE 3
BASE RENT
Tenant shall pay, without notice or demand, to Landlord at the address set
forth in Section 3 of the Summary, or at such other place in the continental
United States as Landlord may from time to time designate in writing, by check
drawn upon a bank located in the United States of America, base rent ("Base
Rent") as set forth in Section 8 of the Summary, payable in equal monthly
installments as set forth in Section 8 of the Summary in advance on or before
the first day of each and every month during the Lease Term, without any setoff
or deduction whatsoever, except as otherwise expressly provided in this Lease.
The Base Rent shall be adjusted during the initial Lease Term as set forth in
EXHIBIT E. If any rental payment date (including the Rent Commencement Date)
falls on a day of the month other than the first day of such month or if any
rental payment is for a period which is shorter than one month, then the rental
for any such fractional month shall be a proportionate amount of a full calendar
month's rental based on the proportion that the number of days in such
fractional month bears to the number of days in the calendar month during which
such fractional month occurs. All other payments or adjustments required to be
made under the terms of this Lease that require proration on a time basis shall
be prorated on the same basis.
ARTICLE 4
ADDITIONAL RENT
4.1 ADDITIONAL RENT. All payments or charges (other than Base Rent) to
be made by Tenant to Landlord as provided in this Lease, including without
limitation late charges and interest, if any, shall be collectively referred to
as the "Additional Rent." The Base Rent and Additional Rent are herein
collectively referred to as the "Rent." All amounts payable to Landlord as
Additional Rent shall be payable for the same periods and in the same manner and
place as the Base Rent. Without limitation on other obligations which shall
survive the expiration of the Lease Term, the obligations of Tenant and Landlord
provided for in this Article 4 shall survive the expiration of the Lease Term.
Further, as Additional Rent, Tenant shall pay the cost of, or reimburse the cost
of, all insurance required to be provided pursuant to Section 10.3 of this
Lease.
4.2 TAX EXPENSES. "Tax Expenses" shall mean all federal, state, county,
or local governmental or municipal taxes, fees or other impositions of every
kind and nature, whether general, special, ordinary or extraordinary (including,
without limitation, real estate taxes, general and special assessments, transit
taxes, leasehold taxes or taxes based upon the receipt of rent, including gross
receipts or sales taxes applicable to the receipt of rent, unless required to be
paid by Tenant, personal property taxes imposed upon the fixtures, machinery,
equipment, apparatus, systems and equipment, appurtenances, furniture and other
personal property used in connection with the Building), which are allocable to
a particular year of the Lease Term (without regard to any different fiscal year
used by such governmental or municipal authority) in connection with the
ownership, leasing and operation of the Real Property or Landlord's interest
therein. Upon written request from Tenant, or as Landlord otherwise so
determines, Landlord shall apply for a reduction
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in Tax Expenses by filing for a Proposition 8 reduction unless, in Landlord's
reasonable judgment, such application would be likely to result in an
increase in Tax Expenses.
4.2.1 Tax Expenses shall include, without limitation:
(a) Any governmental tax on Landlord's rent, right to rent or
other income from the Real Property or as against Landlord's business of leasing
any of the Real Property;
(b) Any levies or charges for such services as fire
protection, street, sidewalk and road maintenance, refuse removal and for other
governmental services formerly provided without charge to property owners or
occupants;
(c) Any assessment, tax, fee, levy or charge in addition to,
or in substitution, partially or totally, of any assessment, tax, fee, levy or
charge previously included as of the date hereof within the definition of real
property tax;
(d) Any governmental assessment, tax, fee, levy, or charge
allocable to or measured by the area of the Premises or the rent payable
hereunder, including, without limitation, any gross income tax with respect to
the receipt of such rent, provided that the proceeds of such taxes remain local
in their application; i.e., for the use of city, county or local agencies and
not for the use and benefit of the state or federal government; and
(e) Any assessment, tax, fee, levy or charge, upon this
transaction or any document to which Tenant is a party, creating or transferring
an interest or an estate in the Premises, subject to the "Proposition 13"
limitations set forth in Section 4.5 below.
4.2.2 With respect to any assessment otherwise includable within Tax
Expenses that may be levied against or upon the Real Property and that under the
laws then in force may be evidenced by improvement or other bonds, or may be
paid in annual installments, there shall be included within the definition of
Tax Expenses with respect to any tax fiscal year only the amount currently
payable on such bonds, including interest, for such tax fiscal year, or the
current annual installment for such tax fiscal year, in each case utilizing the
payment or installment method which will minimize the amount of Tax Expenses.
4.2.3 If the method of taxation of real estate prevailing at the
time of execution hereof shall be, or has been, altered so as to cause the whole
or any part of the taxes now, hereafter or heretofore levied, assessed or
imposed on real estate to be levied, assessed, or imposed upon Landlord, wholly
or partially, as a capital levy or otherwise, or on or measured by the rents
received therefrom, then such new or altered taxes attributable to the Real
Property shall be included within the term "Tax Expenses" except that the same
shall not include any enhancement of said tax attributable to other income of
Landlord.
4.2.4 Subject to the provisions of this Lease any reasonable
expenses reasonably incurred by Landlord in attempting to protest, reduce or
minimize Tax Expenses shall be included, to the extent Tax Expenses are reduced,
in Tax Expenses in the year in which such expenses are paid.
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4.2.5 Tax refunds shall be deducted from Tax Expenses in the year to
which the same are attributable.
4.2.6 Subject to the terms of Section 4.5, below, if Tax Expenses
for any period during the Lease Term or any extension thereof are increased
after payment thereof by Landlord for any reason, including, without limitation,
error or reassessment by applicable governmental or municipal authorities, such
increase shall be included in Tax Expenses in the year to which such increase is
attributable, and Tenant shall pay Landlord Tenant's Share of such increased Tax
Expenses to the extent there exists an excess for such year.
4.2.7 Notwithstanding anything to the contrary contained in this
Lease, there shall be excluded from Tax Expenses all excess profits taxes, real
estate transfer taxes, franchise taxes, gift taxes, capital stock taxes,
inheritance and succession taxes, estate taxes, federal and state income taxes,
and other taxes to the extent applicable to Landlord's general or net income (as
opposed to rents, receipts or income attributable to operations at the
Building).
4.3 TAXES AND OTHER CHARGES FOR WHICH TENANT IS DIRECTLY RESPONSIBLE.
Tenant shall reimburse Landlord, as Additional Rent, within thirty (30) days of
Tenant's receipt of a reasonably detailed written demand accompanied by
appropriate supporting evidence (but in any case at least ten (10) days prior to
delinquency), for any and all taxes or assessments required to be paid by
Landlord (except to the extent included in Tax Expenses by Landlord), excluding
state, local and federal personal or corporate income taxes measured by the net
income of Landlord from all sources and estate and inheritance taxes, whether or
not now customary or within the contemplation of the parties hereto, when said
taxes are required to be paid by Tenant and said taxes are measured by or
reasonably attributable to the cost of Tenant's equipment, furniture, fixtures
and other personal property located in the Premises, or by the cost of all
leasehold improvements made in or to the Premises by or for Tenant.
4.4 LANDLORD'S DIRECT OBLIGATIONS. In addition to Landlord Repair Items,
described in Section 7.2 below, Landlord shall be solely responsible for, and
pay without reimbursement from Tenant, the expenses of any financing, principal
and interest, late charges and penalties on any loans, ground lease costs and
the capital costs of any improvements to the foundation, exterior walls and
structural integrity of the Building and any other improvements not mandated by
governmental authorities which Landlord elects to make to the Building in
Landlord's sole discretion, unless such improvements are necessitated by
Tenant's acts or omissions.
4.5 PROPOSITION 13; LANDLORD'S IMPROVEMENTS. Notwithstanding anything to
the contrary contained in this Lease, in the event that (a) any sale or change
in ownership of the Real Property and/or the Building or any part thereof or
interest therein, is consummated, or (b) Landlord makes any improvements to the
Building or Premises, and as a direct or indirect result of either events, the
Real Property and/or the Building or any part thereof or interest therein is
reassessed for real estate tax purposes by the appropriate governmental
authority, including pursuant to the terms of Proposition 13, Tenant shall not
be responsible for any resulting increase in Tax Expenses. As used above, the
term "change of ownership" shall include all transfers of interests in the
Building or the
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Real Property or in any entity having a direct or indirect interest in the
Real Property and/or the Building.
4.6 PURSUIT OF CLAIM FOR REDUCTION OF TAX EXPENSES. After written
request (the "Tax Notice") by Tenant, at Landlord's option, either (a) Landlord
shall diligently pursue claims for reductions in the Tax Expenses of the
Building or any part thereof, in which event Landlord shall provide Tenant with
detailed information as to how Landlord will pursue such claims, (b) Tenant may
pursue such claims with Landlord's concurrence, in the name of Landlord, or
(c) Tenant may pursue such claims in the name of Landlord without Landlord's
concurrence. In the event that Landlord does not elect either item (a) or (b),
above, within thirty (30) days of receipt of the Tax Notice, Tenant shall
thereafter have the right to pursue such claims under item (c), above. If
Landlord either agrees to pursue such claims or concurs in the decision to
pursue such claims but elects to have them pursued by Tenant, the reasonable
cost of such proceedings shall be paid by Landlord and included in Tax Expenses
in the year such expenses are paid. If Tenant pursues such claims without
obtaining Landlord's concurrence and such contest is successful, then the cost
of such proceedings, but in no event more than the cumulative tax savings
achieved, shall be considered Additional Rent in the year such expenses are
paid, and Landlord shall pay or reimburse to Tenant such cost or Tenant may
deduct such costs from the next installment of Additional Rent. Tenant may give
a Tax Notice prior to the issuance of the actual tax bill by the taxing
authority or receipt by Tenant of a billing from Landlord for Tenant's share
thereof.
4.7 TRIPLE NET LEASE. This Lease shall constitute a "triple net" lease,
it being understood and agreed that except as otherwise expressly provided
herein, Tenant shall pay all costs and expenses incurred in the operation,
management, repair, and maintenance of the Premises from and after the Rent
Commencement Date until the expiration or earlier termination of this Lease,
except as specifically provided herein.
ARTICLE 5
USE OF PREMISES
5.1 PERMITTED USE. Tenant shall use the Premises for general office
purposes, food service for Tenant's employees and for other purposes ancillary
thereto and consistent therewith and for any other legally permitted purpose.
5.2 PROHIBITED USES. Tenant shall not use the Premises or any part
thereof for any use or purpose contrary to the provisions of that certain
Declaration of the Covenants, Conditions and Restrictions, of Westlake
Industrial Park, Los Angeles County, California, recorded on June 1, 1967 as
Instrument No. 4072, Official Records of Los Angeles County, California (also
recorded on November 8, 1967 as Instrument No. 50813, Official Records of
Ventura County, California); that certain First Amendment of Declaration of the
Covenants, Conditions and Restrictions of Westlake Industrial Park recorded on
June 26, 1968 as Instrument No. 3057, Official Records of Ventura County,
California; and, that certain Notice of Addition of Real Property to Declaration
of the Covenants, Conditions and Restrictions of Westlake Industrial Park
recorded on February 5, 1969 as Instrument No. 6188, Official Records of Ventura
County, California (collectively, the "CC&Rs").
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Tenant shall comply with all other recorded covenants, conditions and
restrictions now or (so long as no negative impact affects the Premises or
Tenant's occupancy of the Premises) hereafter affecting the Premises. Tenant
shall not use or allow another person or entity to use any part of the
Premises for the storage, treatment, manufacture or sale of "Hazardous
Material" as that term is defined in Section 29.22 of this Lease, other than
as may be permitted by, and used in accordance with, all applicable laws,
regulations and ordinances pertaining to the Premises.
ARTICLE 6
SERVICES AND UTILITIES
6.1 IN GENERAL. Tenant will be responsible, at its sole cost and
expense, for the furnishing of all services and utilities to the Premises,
including, but not limited to heating, ventilation and air conditioning,
electricity, water, telephone, janitorial, landscaping, refuse collection and
security services. Tenant shall either (a) contract with a first-class
management entity with experience managing similar properties to manage the Real
Property, and Tenant shall pay for all such expenses on a direct basis, or
(b) manage the Premises directly.
6.2 INTERRUPTION OF USE. Except as provided in Section 6.4, below,
Tenant agrees that Landlord shall not be liable for damages, by abatement of
Rent or otherwise, for failure of Tenant to receive any service (including
telephone and telecommunication services) or utility for any reason whatsoever,
or for any diminution in the quality or quantity thereof, and such failures or
delays or diminution shall never be deemed to constitute an eviction or
disturbance of Tenant's use and possession of the Premises or relieve Tenant
from paying Rent or performing any of its obligations under this Lease, except
if Landlord is responsible for such failure or except as provided in this Lease
to the contrary. Furthermore, Landlord shall not be liable under any
circumstances for a loss of, or injury to, property or for injury to, or
interference with, Tenant's business, including, without limitation, loss of
profits, however occurring, through or in connection with or incidental or any
such failure of Tenant to receive any services or utilities except if Landlord
is responsible for such failure.
6.3 NO OBLIGATION. Landlord shall have no obligation to provide any
services or utilities to the Premises including, but not limited to heating,
ventilation and air conditioning, electricity, water, telephone, janitorial and
security services.
6.4 MANDATORY GOVERNMENTAL CONTROLS. If any governmental entity
promulgates or revises any statute, ordinance, building code, fire code or other
code and imposes mandatory controls on Landlord or the Real Property or any part
thereof, relating to the use or conservation of energy, water, gas, light or
electricity or the provision of any other utility or service provided with
respect to this Lease or if Landlord is required to make alterations to the
Building or any other part in order to comply with such mandatory controls or
guidelines (which compliance shall be subject to the terms of Article 7 of this
Lease), then Landlord shall comply with such mandatory controls or make such
alterations to the Building or any other part of the Real Property related
thereto without creating any liability of Landlord to Tenant under this Lease,
provided that Tenant shall promptly reimburse Landlord for "Tenant's Portion"
(as defined in Section 7.1.1 below) of the costs of such
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compliance or alterations, unless such compliance or alterations are required
as a result of a change in Tenant's use of the Premises (in which case Tenant
shall reimburse Landlord for the entire cost thereof), so long as Tenant's
use and occupancy of the Premises are not adversely impacted and provided
further that Landlord shall use reasonable efforts to minimize the impact of
such compliance and alterations on Tenant's use and occupancy of the
Premises, unless such alterations are required as a result of Tenant's use of
the Premises (in which case Tenant shall bear the cost thereof). Such
compliance and the making of such permitted alterations shall not entitle
Tenant to any damages, relieve Tenant of the obligation to pay the Rent
reserved hereunder or constitute or be construed as a constructive or other
eviction of Tenant; provided, however, that if the Premises are not
reasonably suitable for the normal conduct of Tenant's business, then there
shall be an equitable adjustment to the Rent. Tenant agrees to pay "Tenant's
Portion" (as defined in Section 7.1.1 below) of Landlord's costs of complying
with such mandatory controls and the cost of any alterations constructed by
Landlord as a result thereof.
ARTICLE 7
REPAIRS
7.1 TENANT'S OBLIGATIONS.
7.1.1 TENANT REQUIRED ACTIONS. Subject to the provisions of
Section 7.2 and Articles 11 and 13 of this Lease, Tenant shall, at all times
during the Lease Term and at Tenant's sole cost and expense, operate, keep and
maintain the Premises in good order and repair and in good working order and
condition, and as necessary, repair, restore, replace, and make any capital
improvements to the Premises (collectively, the "Tenant Required Actions"),
including, but not limited to (a) the structural portions of the Building
(excluding the structural skeleton of the Building described as "Landlord Repair
Items" in Section 7.2 below), including the ceilings, floor surface, interior
walls and wall covering, shafts, stairs, parking areas, stairwells, elevator
cabs, washrooms, and Building mechanical, electrical and telephone closets
(collectively, "Building Structure"), and (b) the Building mechanical,
electrical, life safety, plumbing, sprinkler systems, and heating, ventilation
and air conditioning systems (the "Building Systems"), including any items of
the Building Structure or Building Systems included in the "Tenant Improvements"
or "Alterations", as those terms are defined in Article 8 below (collectively,
the "Tenant Maintenance Items"). All repairs and maintenance of the Premises by
Tenant as required under the Lease shall be performed in a good and safe manner
by contractors and other personnel reasonably approved by Landlord, and in
compliance with the provisions of Article 8 below. Tenant shall also be
obligated to pay "Tenant's Portion" of the following costs: the cost of any
capital improvements (i) made by Landlord, subject to Tenant's consent not to be
unreasonably withheld or delayed, which are intended as a labor saving device or
to effect other economies in the operation or maintenance of the Real Property,
or any portion thereof, but "Tenant's Portion" shall be limited to the actual
savings derived therefrom; or (ii) made to all or any portion of the Premises,
after the Rent Commencement Date which are required under any governmental law
or regulation which was not applicable as of the date of the execution of this
Lease; provided, however that "Tenant's Portion" shall be that percentage of the
cost thereof which is determined by dividing the number of months remaining in
the Lease Term (excluding the Option Term(s) unless such option(s) have been
exercised) by the
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number of months in the useful life of such capital repair or improvement, as
such useful life is specified pursuant to federal income tax regulations or
guidelines for depreciation thereof. The percentage of Tenant's Portion
determined by dividing the number of months remaining in the initial Lease
Term or, if applicable, any Option Term (if exercised), by the number of
months in the useful life of such capital repair or improvement shall be
reimbursed by Tenant immediately upon determination of the cost in question.
If Tenant subsequently exercises an Option Term, Tenant shall immediately
reimburse Landlord the percentage of Tenant's Portion pertaining to the
duration of such Option Term and so forth for any additional Option Term. Any
amounts for which Tenant is responsible hereunder will be paid by Tenant when
incurred or, in Landlord's sole discretion, amortized, together with interest
on such amount at the Interest Rate, over the remainder of the initial Lease
Term or the applicable Option Term, as the case may be, and added to Base
Rent otherwise due Landlord hereunder.
7.1.2 MAINTENANCE CONTRACTS. As a part of Tenant's Required Actions,
Tenant shall, at Tenant's sole cost and expense, maintain contracts for the
inspection, maintenance and service of the (a) heating, air conditioning and
ventilation equipment, (b) boiler, fired or unfired pressure vessels, (c) fire
sprinkler and/or standpipe and hose or other automatic fire extinguishing
systems, including fire alarm and/or smoke detection, and (d) electrical
systems.
7.2 LANDLORD'S OBLIGATIONS. It is intended by the parties that Landlord
have no obligation, in any manner whatsoever, to take any of the Tenant Required
Actions with respect to the Premises, except as set forth in this Section 7.2.
It is the intention of the parties that the terms of this Lease govern the
respective obligations of the parties as to maintenance and repair of the
Premises. Notwithstanding the foregoing, from and after the Rent Commencement
Date, Landlord shall, at Landlord's sole cost and expense, repair and maintain
the structural skeleton of the Building consisting of the foundation, exterior
walls and roof structure (excluding the roof membrane) ("Landlord Repair
Items").
7.3 TENANT'S RIGHT TO MAKE REPAIRS. If Tenant provides written notice to
Landlord of an event or circumstance which requires the action of Landlord with
respect to the Landlord Repair Items, and Landlord fails to provide or commence
to provide (and thereafter diligently proceed with such efforts to completion),
such action as required by the terms of this Lease within ten (10) days after
receipt of such written notice (or such lesser period of time as may be
applicable in the event of an emergency), Tenant may proceed to take the
required action upon delivery of an additional five (5) business day notice to
Landlord (or within the applicable and appropriate time period based on an
emergency) specifying that Tenant is taking such required action, and if such
action was required under the terms of this Lease to be taken by Landlord, then
Tenant shall be entitled to either (a) prompt reimbursement by Landlord of
Tenant's reasonable costs and expenses in taking such action plus interest at
the Interest Rate, as defined in Article 25 below, during the period from the
date Tenant incurs such costs and expenses until such time as payment is made by
Landlord, or (b) deduct the reasonable costs and expenses incurred by Tenant in
taking such action from the next installment of Base Rent thereafter due.
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ARTICLE 8
CONDITIONS AND ALTERATIONS
8.1 CONSTRUCTION OF TENANT IMPROVEMENTS. Tenant shall have the
obligation to construct the Building (collectively, "Tenant Improvements") in
accordance with plans developed by Tenant (and reasonably approved by Landlord)
and the terms and conditions set forth in the work letter ("Work Letter")
attached hereto as EXHIBIT B. The Work Letter shall set forth the preparation,
review and approval mechanisms for conceptual engineering plans, site work plans
and construction drawings.
8.2 LANDLORD'S CONSENT TO ALTERATIONS. Tenant may, without the need to
obtain the consent or approval of Landlord, make any improvements, alterations,
additions or changes to the Premises (collectively, the "Alterations") desired
by Tenant which do not create a Design Problem, and which do not result in an
expenditure by Tenant for Alterations in excess of $300,000, cumulatively, for
any six (6) month period of the Lease Term, by providing Landlord with written
notice not less than ten (10) business days prior to the commencement thereof.
For purposes of this Lease, "Design Problem" shall mean any alteration, repair,
modification, or improvement by Tenant which (a) materially and adversely
affects the Building Systems or Building Structure, including the structural
skeleton of the Building described in Section 7.2, (b) is not in compliance with
applicable laws, (c) affects the exterior appearance of the Building or (d) will
materially decrease the value of the Building or materially diminish the ability
of Landlord to relet the Premises. Tenant may not make any Alteration which
would create a Design Problem or which exceeds such $300,000 in six (6) month
limitation (collectively, "Consent Alterations"), without first procuring the
prior written consent of Landlord to such Alterations, which consent shall be
requested by Tenant not less than ten (10) business days prior to the
commencement thereof, and which consent shall not be unreasonably withheld or
delayed by Landlord and shall state whether the Consent Alterations must be
removed on termination of the Lease. In the event Tenant proposes to make a
Consent Alteration, Tenant's notice regarding the proposed Alteration shall
include a set of the field-grade plans and specifications for the Consent
Alterations. Landlord shall grant or withhold its consent to any Consent
Alterations within ten (10) business days of receipt of Tenant's notice;
Landlord's failure to respond within three (3) business days of a second notice
given after such ten (10) business day period shall be deemed to evidence
Landlord's approval with respect to the same. The construction of the Tenant
Improvements shall be governed by the terms of the Work Letter, not by the terms
of this Section 8.2. Tenant shall pay for all of Landlord's reasonable,
competitive out-of-pocket costs incurred in the evaluation of the plans and
specifications, including, but not limited to, Landlord's general contractor's,
architect's and engineer's fees. Minor change orders to Alterations shall not
require Landlord's consent thereto.
8.3 MANNER OF CONSTRUCTION. In connection with the making of
Alterations, except for minor or purely cosmetic Alterations such as painting or
replacement of wall covering ("Finish Work"), Tenant shall utilize only
contractors and subcontractors who normally and regularly perform similar work
in Comparable Buildings, or which have been otherwise approved by Landlord,
which approval shall not be unreasonably withheld or delayed. Subject to the
terms of Article 24, below, Tenant shall construct all Alterations in
conformance with any and all applicable
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rules and regulations of any federal, state, county or municipal code or
ordinance and, when required pursuant to applicable law, pursuant to a valid
building permit issued by the City of Thousand Oaks. Landlord's approval of
the plans, specifications and working drawings for Tenant's Alterations shall
create no responsibility or liability on the part of Landlord for their
completeness, design sufficiency, or compliance with all laws, rules and
regulations of governmental agencies or authorities. All work with respect to
any Alterations must be done in a good and workmanlike manner. Upon
completion of any Alterations, Tenant agrees to cause a Notice of Completion
to be recorded in the office of the Recorder of Ventura County in accordance
with Section 3093 of the Civil Code of the State of California or any
successor statute, and, except as to Finish Work, Tenant shall deliver to
Landlord a reproducible copy of the construction set of drawings of the
Alterations (or, at Tenant's election, a copy of the final working drawings
for such Alterations, with field changes shown thereon) within thirty (30)
days following completion thereof.
8.4 CONSTRUCTION INSURANCE. Prior to the commencement of any Alteration,
Tenant shall provide Landlord with reasonable evidence that Tenant carries
"Builder's All Risk" insurance in a commercially reasonable amount given the
scope of such Alterations, covering the construction of such Alterations, it
being understood and agreed that all of such Alterations shall be insured by
Tenant pursuant to Article 10 of this Lease immediately upon completion thereof.
In addition, Landlord may, in its discretion, require Tenant to obtain a lien
and completion bond or some alternate form of security satisfactory to Landlord
in an amount sufficient to ensure the lien-free completion of such Alterations
and naming Landlord as a co-obligee, unless the contractor is regionally
recognized for performing work of the highest quality, is considered "bondable"
by reputable bonding companies acceptable to Landlord and is adequately insured,
as determined by Landlord.
8.5 LANDLORD'S PROPERTY. Subject to the terms of this Lease, all
Alterations, improvements, fixtures and/or equipment which may be installed or
placed in or about the Premises, from time to time, shall be at the sole cost of
Tenant and shall be and become the property of Landlord, except that Tenant
shall have the right to remove all trade fixtures and any such Alterations,
improvements, fixtures and/or equipment, together with any non-affixed
equipment, machinery and personal property in the Premises, provided Tenant
repairs any damage to the Premises and Building caused by such removal. Upon the
expiration or early termination of the Lease Term, Landlord may, by written
notice to Tenant, require Tenant at Tenant's expense to remove any alterations
with respect to which Landlord designated, in its approval of the Alterations,
that the same are to be removed at the end of the Lease Term, and repair any
damage to the Premises and Building caused by such removal, and leave the
Premises in a broom-clean condition. If Tenant fails to complete such removal
and/or to repair any damage caused by the removal of any Alteration, after
notice to Tenant from Landlord, and a reasonable opportunity (based on the then
current circumstances) for Tenant to complete such removal and/or repair,
Landlord may do so and may charge the cost thereof to Tenant.
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ARTICLE 9
COVENANT AGAINST LIENS
Tenant has no authority or power to cause or permit any lien or encumbrance
of any kind whatsoever, whether created by act of Tenant, operation of law or
otherwise, to attach to or be placed upon the Real Property, Building or
Premises, and any and all liens and encumbrances created by Tenant shall attach
to Tenant's interest only. Landlord shall have the right at all times to post
and keep posted on the Premises customary notices of non-responsibility which it
deems necessary for protection from such liens. Tenant covenants and agrees not
to suffer or permit any lien of mechanics or materialmen or others to be placed
against the Real Property, the Building or the Premises with respect to work or
services claimed to have been performed for or materials claimed to have been
furnished to Tenant or the Premises, and, in case of any such lien attaching or
notice of any such lien, Tenant covenants and agrees to cause it to be
immediately released and removed of record by bond or otherwise within twenty
(20) business days after notice by Landlord, and if Tenant shall fail to do so
Landlord, at its sole option, may, after an additional five (5) business days
notice to Tenant, take all action necessary to release and remove such lien,
without any duty to investigate the validity thereof, and all sums, costs and
expenses, including reasonable attorneys' fees and costs, incurred by Landlord
in connection with such lien, shall be deemed Additional Rent under this Lease
and shall be due and payable by Tenant within thirty (30) days of receipt of an
invoice therefor.
ARTICLE 10
INSURANCE
10.1 INDEMNIFICATION AND WAIVER.
10.1.1 TENANT'S INDEMNITY. Tenant shall indemnify, defend, protect
and hold harmless Landlord and Landlord Parties (as defined in Section 29.22.5)
from any and all claims, loss, cost, damage, expense and liability (including
without limitation court costs and reasonable attorneys' fees) (collectively,
"Claims") incurred in connection with or arising from (a) any cause in or on the
Premises during the Lease Term or any holdover period and (b) subject to the
terms of Section 10.1.3 below, any acts or omissions or willful misconduct of
Tenant or any person claiming by, through or under Tenant, its partners, and
their respective officers, agents, servants or employees of Tenant or any such
person (collectively, "Tenant Parties"), in or on or about the Premises or the
Real Property during the Lease Term, provided the terms of the foregoing
indemnity shall not apply to the extent such Claims arise from the negligence or
willful misconduct of the Landlord Parties in connection with the Landlord
Parties' activities in, on or about the Real Property, including the Premises.
10.1.2 LANDLORD'S INDEMNITY. Landlord shall indemnify, defend,
protect, and hold harmless Tenant and Tenant Parties from any Claims incurred in
connection with or arising from (a) any breach of the terms of this Lease, and
(b) subject to the terms of Section 10.1.3 below, any acts or omissions or
willful misconduct of any of the Landlord or Landlord Parties in, on, or about
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the Premises (subject to the terms of Section 10.1.1, above) or the Real
Property during the Lease Term, provided that the terms of the foregoing
indemnity shall not apply to the extent such Claims arise from the negligence or
willful misconduct of the Tenant Parties in connection with the Tenant Parties'
activities in, on, or about the Real Property.
10.1.3 WAIVER OF CONSEQUENTIAL DAMAGES. Notwithstanding any contrary
provision of this Lease, neither Landlord nor Tenant shall be liable to the
other party for any special, indirect or consequential damages, including, but
not limited to, claims for loss of use, anticipated or lost profits or business
opportunity, market-based stigma damages or business interruption or mental or
emotional distress or fear of injury or disease (collectively, "Consequential
Damages") for a breach or default under this Lease.
10.1.4 GENERAL TERMS. The provisions of this Section 10.1 shall
survive the expiration or sooner termination of this Lease with respect to any
claims or liability occurring prior to such expiration or termination.
10.2 LANDLORD'S INSURANCE. At all times throughout the Lease Term,
Landlord shall maintain, at its sole cost and expense, the coverage described in
Section 10.2.1 below.
10.2.1 Commercial General Liability Insurance covering the insured
against claims of bodily injury, personal injury and property damage covering
the Real Property, including a Broad Form Commercial General Liability
endorsement covering the insuring provisions of this Lease and covering the
performance by Landlord of the indemnity agreements set forth in Section 10.1 of
this Lease, with a minimum combined single limit of Five Million and no/100
Dollars ($5,000,000.00) per occurrence and in the aggregate.
10.3 OTHER INSURANCE. Tenant shall have the option from time to time to
determine whether Tenant, Landlord or another third party entity (the "Insuring
Party") will acquire at all times through the Lease Term the following insurance
coverages in the following amounts at Tenant's sole cost and expense either paid
directly by Tenant or through reimbursement pursuant to Section 4.3 above.
10.3.1 "All-Risk" insurance insuring the Building against loss or
damage due to fire and other casualties covered within the classification of
fire and extended coverage, vandalism coverage and malicious mischief, sprinkler
leakage, water damage, earthquake damage, and flood damage (if reasonably
required by Lender). Such coverage shall be written for one hundred percent
(100%) of the replacement cost value of the Building. Such insurance coverage
shall name Landlord as the additional insured, and shall name the holders of any
mortgages or deeds of trust encumbering the interest of Landlord in the Real
Property and/or the ground or underlying lessors of the Real Property, or any
portion thereof as loss payees thereunder. Upon inquiry by Landlord, from time
to time, Tenant shall inform Landlord of all such insurance carried by Tenant.
Tenant shall, at Tenant's expense, comply as to the Premises with all customary
insurance company requirements pertaining to the use of the Premises to the
extent consistent with the insurance company requirements imposed at the
Comparable Buildings. If Tenant's conduct or use of the Premises causes any
increase in the premium for such insurance policies, then Tenant shall cease
such conduct or use. Tenant, at Tenant's expense, shall comply with all rules,
orders, regulations or
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requirements of the American Insurance Association (formerly the National
Board of Fire Underwriters) and with any similar body to the extent
consistent with the rules, orders, regulations or requirements imposed at the
Comparable Buildings.
10.3.2 Commercial General Liability Insurance covering the insured
against claims of bodily injury, personal injury and property damage arising out
of Tenant's operations or use of the Real Property, including a Broad Form
Commercial General Liability endorsement covering the insuring provisions of
this Lease and covering the performance by Tenant of the indemnity agreements
set forth in Section 10.1 of this Lease, with a minimum combined single limit of
Five Million and no/100 Dollars ($5,000,000.00) per occurrence and in the
aggregate.
10.3.3 Rental reimbursement coverage insuring Landlord against the
loss of a minimum of one (1) year's Base Rent, Tax Expenses and insurance
premiums. Landlord may require Tenant to increase such coverage by an additional
year, provided Landlord pays Tenant for the cost of such excess coverage.
10.4 TENANT'S INSURANCE. At all times throughout the Lease Term, Tenant
shall maintain, at its sole cost and expense, the following coverages in the
following amounts.
10.4.1 "All-Risk" Insurance, with commercially reasonable
deductibles, covering (i) all office furniture, trade fixtures, office
equipment, merchandise and all other items of Tenant's property on the Premises
installed by, for, or at the expense of Tenant, excluding the Tenant
Improvements, and (ii) all other improvements, alterations and additions to the
Premises, including any improvements, alterations or additions installed at
Tenant's request above the ceiling of the Premises or below the floor of the
Premises. Such insurance shall be written for the full replacement cost value of
the covered items and in amounts that meet any co-insurance clauses of the
policies of insurance and may include, at Tenant's sole option, a vandalism and
malicious mischief endorsement, and sprinkler leakage coverage.
10.4.2 Worker's compensation for the benefit of Tenant's employees,
to the extent required by law.
10.5 FORM OF POLICIES. The minimum limits of policies of insurance
required of Tenant and Landlord under this Lease shall in no event limit the
liability of Tenant and Landlord under this Lease. Each party's insurance shall
(a) name the other party (including, as to Landlord, the "Lender," as described
in Article 18 below), as an additional insured; (b) specifically cover the
indemnity obligations set forth in Section 10.1 of this Lease; (c) be issued by
an insurance company having a rating of not less than A-/VIII in Best's
Insurance Guide; (d) be primary insurance as to all claims thereunder, not
excess and non-contributory; (e) contain a cross-liability endorsement or
severability of interest clause acceptable to the named party; and (f) be
written on an occurrence basis. Each party shall cause its insurance carrier to
provide that said insurance carrier shall give thirty (30) days prior written
notice to the other party and any mortgagee or ground or underlying lessor of
Landlord prior to the date said insurance is canceled. The parties agree that
they may satisfy their insurance requirements herein with a "blanket" or
"umbrella" insurance policy covering the Premises and other premises of such
party. Each party shall deliver to the other party policies or certificates
thereof reflecting the required insurance coverages on or before the Lease
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Commencement Date and at least thirty (30) days before the expiration dates
thereof. In the event either party shall fail to procure such insurance, or to
deliver such policies or certificate at least thirty (30) days before the
expiration dates thereof, the other party may at its option, if such failure
continues for ten (10) business days following written notice to the other
party, procure such policies for account of the party delivering notice, and the
cost thereof shall be paid to Landlord as Additional Rent, if the defaulting
party is Tenant, or paid to Tenant within thirty (30) days after delivery to
Landlord of bills therefor, if the defaulting party if Landlord.
10.6 SUBROGATION. Landlord and Tenant hereby waive any right that either
may have against the other and against Tenant Parties and Landlord Parties,
respectively, on account of any loss or damage to their respective property to
the extent such loss or damage is insurable under the types of policies of
insurance set forth in Sections 10.2 and 10.3 above. Landlord and Tenant agree
to have their respective insurance companies issuing insurance waive any rights
of subrogation to the extent the insured has waived rights pursuant to this
Section.
10.7 SELF-INSURANCE. Tenant shall have the right to self-insure the
insurance described in Sections 10.3.1, 10.3.3, 10.4.1 and 10.4.2, only during
the period that Tenant maintains at least a Standard & Poor BBB-rating. If
Tenant's Standard & Poor rating falls below a BBB- rating, Tenant shall, within
ten (10) days from its having been notified of such change in its rating, notify
Landlord and the then current holder of the first deed of trust, if any,
encumbering the Premises, of such rating adjustment. If Tenant self-insures,
then Tenant shall (a) be responsible for, assume all liability for, and release
and waive all right of recovery against Landlord and the Landlord's Indemnitees
for, the cost of any loss or claim to the extent that such loss or claim would
have been covered by the insurance that Tenant would otherwise be required to
maintain hereunder, and (b) pay all amounts on behalf of Landlord and the
Landlord's Indemnitees (and waive, release, protect, indemnify, defend and hold
harmless Landlord and the Landlord's Indemnitees from and against) all costs,
expenses, damages, claims and law suits incurred by Landlord (and the Landlord's
Indemnitees) which would have been payable or insured against by a hypothetical
third-party insurer for the benefit of Tenant and/or Landlord (and the
Landlord's Indemnitees) had Tenant maintained the insurance required under such
Sections 10.3.1, 10.3.3, 10.4.1 and 10.4.2, and had Landlord (and/or the
Landlord's Indemnitees) been named as an additional insured, as applicable, with
deemed full waiver of subrogation in favor of Landlord (and the Landlord's
Indemnitees); and with no deductible amount applicable to such policy.
ARTICLE 11
DAMAGE AND DESTRUCTION
11.1 DEFINITIONS.
11.1.1 "Premises Partial Damage" shall herein mean damage or
destruction to the Premises to the extent that the cost of repair is less than
fifty percent (50%) of the fair market value of the Premises immediately prior
to such damage or destruction.
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11.1.2 "Premises Total Destruction" shall herein mean damage or
destruction to the Premises to the extent that the cost of repair is fifty
percent (50%) or more of the fair market value of the Premises immediately prior
to such damage or destruction.
11.1.3 "Insured Loss" shall herein mean damage or destruction which
was caused by an event required to be covered by the insurance described in
Article 10.
11.2 PARTIAL DAMAGE--INSURED LOSS. Subject to the provisions of Sections
11.4, 11.5 and 11.6, if at any time during the Lease Term there is damage which
is an Insured Loss and which falls into the classification of Premises Partial
Damage, then Landlord shall, at Landlord's sole cost, repair such damage, and
restore the Premises and improvements to the condition existing prior to the
damage or destruction, as soon as reasonably possible and this Lease shall
continue in full force and effect.
11.3 PARTIAL DAMAGE--UNINSURED LOSS. Subject to the provisions of
Section 11.4 and 11.5 and 11.6, if at any time during the Lease Term there is
damage which is not an Insured Loss and which falls within the classification of
Premises Partial Damage, unless caused by a negligent or willful act of Tenant
(in which event Tenant shall make the repairs at Tenant's expense to the extent
such repairs are not covered by insurance to be provided under this Lease),
Landlord may at Landlord's option either (i) repair such damage as soon as
reasonably possible at Landlord's expense, in which event this Lease shall
continue in full force and effect, or (ii) give written notice to Tenant within
thirty (30) days after the date of the occurrence of such damage of Landlord's
intention to cancel and terminate this Lease. Tenant shall have the right
within ten (10) days after the receipt of such notice to give written notice to
Landlord of Tenant's intention to repair such damage at Tenant's expense,
without reimbursement from Landlord, in which event this Lease shall continue in
full force and effect, and Tenant shall proceed to make such repairs as soon as
reasonably possible. If Tenant does not give such notice with such 10 day
period this Lease shall be canceled and terminated as of the date of the
occurrence of such damage.
11.4 TOTAL DESTRUCTION. If at any time during the Lease Term, there is
damage, whether or not an Insured Loss (including the destruction required by an
authorized public authority) which falls into the classification of Premises
Total Destruction, this Lease shall automatically terminate as of the date of
such total destruction.
11.5 DAMAGE NEAR END OF TERM.
11.5.1 If at any time during the last twelve (12) months of the Lease
Term there is damage, whether or not an Insured Loss, which falls within the
classification of Premises Partial Damage, Landlord may, at Landlord's option,
cancel and terminate this Lease as of the date of occurrence of such damage by
giving written notice to Tenant of Landlord's election to do so within 30 days
after the date of occurrence of such damage.
11.5.2 Notwithstanding Section 11.5.1, in the event that Tenant has
an option to extend this Lease and the time within which said option may be
exercised has not yet expired, Tenant shall exercise such option, if it is to be
exercised at all not later than 20 days after the occurrence of an Insured Loss
falling within the classification of Premises Partial Damage during
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the last twelve (12) months of the Lease Term. If Tenant duly exercises such
option within such 20 day period, Landlord shall, at Landlord's expense,
repair such damage as soon as reasonably possible and this Lease shall
continue in full force and effect. If Tenant fails to exercise such option
within such 20 day period, the Landlord may at Landlord's option terminate
and cancel this Lease as of the expiration of said 20 day period by giving
written notice to Tenant of Landlord's election to do so within 10 days after
the expiration of such 20 day period, notwithstanding any term or provision
in the grant of option to the contrary.
11.6 ABATEMENT OR RENT; TENANT'S REMEDIES.
11.6.1 In the event of damage described in Section 11.2 or 11.3, and
Landlord or Tenant repairs or restores the Premises pursuant to the provisions
of this Article 11, the Rent payable hereunder for the period during which such
damage, repair or restoration continues shall be abated in proportion to the
degree to which Tenant's use of the Premises is impaired. Except for abatement
of Rent, if any, Tenant shall have no claim against Landlord for any damage
suffered by reason of any such damage, destruction, repair or restoration.
11.6.2 If Lessor is obligated to repair or restore the Premises under
the provisions of this Article and shall not commence such repair or restoration
within 90 days after such obligations shall accrue, Tenant may at Tenant's
option cancel and terminate this Lease by giving Landlord written notice of
Tenant's election to do so at any time prior to the commencement of such repair
or restoration. In such event this Lease shall terminate as of the date of such
notice.
11.7 TERMINATION--ADVANCE PAYMENTS. Upon termination of the Lease
pursuant to this Article, an equitable adjustment shall be made concerning
advance rent and any advance payments made by Tenant to Landlord.
11.8 WAIVER OF STATUTORY PROVISIONS. Tenant and Landlord waive the
provision of any statutes which relate to termination of leases when leased
property is destroyed and agree that such event shall be governed by the terms
of this Lease.
ARTICLE 12
NONWAIVER
No waiver of any provision of this Lease shall be implied by any failure of
either party to enforce any remedy on account of the violation of such
provision, even if such violation shall continue or be repeated subsequently,
any waiver by either party of any provision of this Lease may only be in
writing, and no express waiver shall affect any provision other than the one
specified in such waiver and that one only for the time and in the manner
specifically stated. No receipt of monies by Landlord from Tenant after the
termination of this Lease shall in any way alter the length of the Lease Term.
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ARTICLE 13
CONDEMNATION
13.1 PERMANENT TAKING. If the whole or substantially all of the Premises
shall be permanently taken by power of eminent domain or condemned by any
competent authority for any public or quasi-public use or purpose, or if
Landlord shall grant a deed or other instrument in lieu of such taking by
eminent domain or condemnation (collectively, a "Taking"), this Lease shall
automatically terminate as of the date of Taking with respect to the Premises.
If a portion of the Premises shall be subject to a permanent Taking, such that
it is economically impractical for Tenant to reasonably conduct its business
within the remainder of such Premises, or the Premises or a portion thereof
shall be subject to a temporary Taking such that it is economically impractical
for Tenant to reasonably conduct its business within the remainder of such
Premises, for a period greater than ninety (90) consecutive days, Tenant may
elect to terminate this Lease with respect to the Premises by giving Landlord
notice of the exercise of such election within thirty (30) days after Tenant
shall receive notice of such Taking. If Tenant exercises such termination right,
this Lease and the Lease Term shall cease and terminate as of the date of such
Taking with respect to the Premises. If a partial Taking occurs with respect to
the Premises, and Tenant does not elect to terminate this Lease, this Lease
shall continue in full force and effect and Landlord, at Landlord's sole cost,
shall promptly proceed to restore the remaining portions of the Premises to an
architectural whole in the same condition that the same were in prior to such
Taking. Base Rent and any other charges payable by Tenant hereunder shall be
reduced in proportion to the number of square feet of the Premises taken as
related to the number of square feet of the Premises prior to the Taking.
Landlord shall be entitled to receive the entire award or payment in connection
therewith, except that Tenant shall have the right to receive from the award a
sum attributable to the value of any alteration or improvements made to the
Premises by or for Tenant, its relocation expenses, damages to Tenant's personal
property, and trade fixtures. All Rent shall be apportioned as of the date of
such termination, or the date of such Taking, whichever shall first occur.
Tenant hereby waives any and all rights it might otherwise have pursuant to
Section 1265.130 of the California Code of Civil Procedure.
13.2 TEMPORARY TAKING. Notwithstanding anything to the contrary contained
in this Article 13, in the event of a temporary taking of all or any portion of
the Premises for a period of ninety (90) consecutive days or less, then this
Lease shall not terminate and, at Landlord's election, either (a) the Base Rent
and the Additional Rent shall not be abated for the period of such Taking and
Tenant, with Landlord's participation if it so elects, shall be entitled to be
the lead negotiator with the condemning authority with respect to the payment of
any award for such temporary Taking, and Tenant shall be entitled to receive the
entire award and shall be responsible for any damage caused by the condemning
authority during such temporary Taking, or the Base Rent and the Additional
Rent shall fully abate for the period of such Taking and Landlord, with Tenant's
participation if it so elects, shall be entitled to be the lead negotiator with
the condemning authority with respect to the payment of any award for such
temporary Taking, and Landlord shall be entitled to receive the entire award and
shall be responsible for any damage caused by the condemning authority during
such temporary Taking.
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ARTICLE 14
ASSIGNMENT AND SUBLETTING
14.1 TRANSFERS. Subject to the provisions of this Article 14, Tenant
shall not, without the prior written consent of Landlord, assign, mortgage,
pledge, hypothecate, encumber, or permit any lien to attach to or otherwise
transfer this Lease or any interest hereunder, permit any assignment or other
transfer of this Lease or any interest hereunder by operation of law, sublet the
Premises or any part thereof, or otherwise permit the occupancy or use of the
Premises by any persons other than Tenant, its Affiliates and their employees
(all of the foregoing are hereinafter sometimes referred to collectively as
"Transfers" and any person to whom any Transfer is made or sought to be made is
hereinafter sometimes referred to as a "Transferee"). Any Transfer with respect
to which Landlord's consent is required under this Article 14 and with respect
to which such consent requirement is not exempted under this Article 14 is
referred to herein as a "Consent Transfer." If Tenant desires Landlord's consent
to any Consent Transfer, Tenant shall notify Landlord in writing, which notice
(the "Transfer Notice") shall include (a) the proposed effective date of the
Transfer, which shall not be less than (i) in the case of a sublease of less
than 8,000 rentable square feet, ten (10) business days, (ii) in the case of a
sublease of 8,000 square feet or more, fifteen (15) business days, and (iii) in
the case of an assignment of this Lease or any other Transfer, twenty (20)
business days after the date of delivery of the Transfer Notice, (b) a
description of the portion of the Premises to be transferred (the "Subject
Space"), (c) the proposed sublease or instrument of assignment containing all of
the principal terms of the proposed Transfer and the consideration therefor in
connection with such Transfer, the name and address of the proposed Transferee,
and a copy of all existing and/or proposed documentation penning to the proposed
Transfer, including all then existing material, executed operative documents to
evidence such Transfer or the agreements incidental or related to such Transfer,
(d) current certified financial statements of the proposed Transferee (or
whatever financial such entity submits to its bank upon request) and (e) to the
extent reasonably available, any other reasonable information reasonably and
customarily required by landlords of Comparable Buildings in connection with the
review of similar Transfers. Subject to the terms of this Article 14, any
Consent Transfer made without Landlord's prior written consent shall, at
Landlord's option, be null, void and of no effect. Whether or not Landlord
consents to any Consent Transfer, Tenant shall pay Landlord's reasonable review
and processing fees, as well as any reasonable legal fees incurred by Landlord,
within thirty (30) days after written request by Landlord, all of which costs
shall not exceed, as to any specific request for Landlord approval, the sum of
$1,000.
14.2 LANDLORD'S CONSENT. Landlord shall not unreasonably withhold, delay
or condition its consent to any proposed Consent Transfer. Subject to the
provisions of this Section 14.2, the parties hereby agree that it shall be
reasonable under this Lease and under any applicable law for Landlord to
withhold consent to any proposed Consent Transfer where one or more of the
following apply, without limitation as to other reasonable grounds for
withholding consent:
14.2.1 The Transferee is of a character or reputation or engaged in a
business which is materially inconsistent with the quality of the Building; or
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14.2.2 The Transferee intends to use the Subject Space for purposes
which are materially inconsistent with those permitted under this Lease; or
14.2.3 The Transferee is not a party of reasonable financial worth
and/or financial stability in light of the responsibilities to be undertaken in
connection with the Transfer on the date consent is requested.
If Landlord consents to any Consent Transfer pursuant to the terms of this
Section 14.2, Tenant may within six (6) months after Landlord's consent, but not
later than the expiration of said six-month period, enter into such Transfer of
the Premises or portion thereof, provided that if there are any material changes
in the terms and conditions from those specified in the Transfer Notice such
that Landlord would initially have been entitled to refuse its consent to such
Transfer under this Section 14.2, Tenant shall again submit the Transfer to
Landlord for its consent under this Article 14.
14.3 TRANSFER PREMIUM. If Landlord consents to a Consent Transfer, Tenant
may retain all rent, additional rent or other consideration payable by such
Transferee in connection with the Transfer in excess of the Rent and Additional
Rent payable by Tenant under this Lease during the term of the Transfer.
14.4 EFFECT OF TRANSFER. Subject to the terms of this Article 14, if
Landlord consents to a Consent Transfer, (a) the terms and conditions of this
Lease shall in no way be deemed to have been waived or modified, (b) such
consent shall not be deemed consent to any further Consent Transfer by either
Tenant or a Transferee, and (c) Tenant shall deliver to Landlord, promptly after
execution, an original executed copy of all assignment and assumption
documentation pertaining to the Transfer. No Transfer relating to this Lease or
agreement entered into with respect thereto, whether with or without Landlord's
consent, shall relieve Tenant from liability under this Lease, including,
without limitation, in connection with the Subject Space. All of Tenant's rights
under this Lease are assignable to its permitted subtenants or assignees.
14.5 NON-TRANSFERS. Notwithstanding anything to the contrary contained
in this Article 14, an assignment of this Lease or subletting of all or a
portion of the Premises to, or permitting the occupancy of the Premises by,
an entity (an "Affiliate") which is controlled by, controls, or is under
common control with, Tenant or Tenant's parent or any subsidiary of Tenant or
Tenant's parent, or to a resulting entity from a merger or consolidation of
Tenant with another entity, shall not be deemed a Transfer under this Article
14, and Landlord's consent shall not be required in connection therewith,
provided that such Affiliate or resulting entity shall assume the obligations
and liabilities of Tenant under this Lease. "Control," as used in this
Section 14.5, shall mean the possession, direct or indirect, of the power to
direct or cause the direction of the management and policies of a person or
entity, whether through the ownership of voting securities, by contract or
otherwise. For purposes hereof, if Tenant is a partnership, a withdrawal or
change of the managing partner, or partners owning more than a fifty percent
(50%) interest in the partnership in one or more transfers, or if Tenant is a
corporation, any
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transfer of fifty percent (50%) of its stock in one or more transfers, or the
transfer by the controlling shareholder of so much of its stock that it is no
longer the controlling shareholder, shall not constitute a voluntary assignment
and shall not be subject to the provisions of this Section 14.5. As used in
this Section 14.5, "Affiliate" shall also include any vendor, subcontractor or
client which is subleasing from Tenant less than 6,000 square feet of rentable
area of the Premises and on a consolidated basis no more than 18,000 square feet
and with respect to which no demising wall is to be erected, and with the only
identification of such subtenant appearing on the door or doors to the offices,
if any, in that portion or portions of the Premises being occupied by such
sublessee.
ARTICLE 15
SURRENDER OF PREMISES; OWNERSHIP
AND REMOVAL OF TRADE FIXTURES
15.1 SURRENDER OF PREMISES. No act or thing done by Landlord or any agent
or employee of Landlord during the Lease Term shall be deemed to constitute an
acceptance by Landlord of a surrender of the Premises unless such intent is
specifically acknowledged in a writing signed by Landlord. The delivery of keys
to the Premises to Landlord or any agent or employee of Landlord shall not
constitute a surrender of the Premises or effect a termination of this Lease,
whether or not the keys are thereafter retained by Landlord, and notwithstanding
such delivery Tenant shall be entitled to the return of such keys at any
reasonable time upon request until this Lease shall have been properly
terminated. The voluntary or other surrender of this Lease by Tenant, whether
accepted by Landlord or not, or a mutual termination hereof, shall not work a
merger.
15.2 REMOVAL OF TENANT PROPERTY BY TENANT. Upon the expiration of the
Lease Term, or upon any earlier termination of this Lease, Tenant shall, subject
to the provisions of this Article 15, quit and surrender possession of the
Premises to Landlord in good order and condition, reasonable wear and tear,
casualty events, damage resulting from the negligence or misconduct of the
Landlord Parties, and repairs which are specifically made the responsibility of
Landlord hereunder excepted. Upon such expiration or termination, Tenant shall,
without expense to Landlord, remove or cause to be removed from the Premises all
debris and rubbish, and such items of free-standing furniture, equipment,
cabinet work, and other personal property owned by Tenant or installed or placed
by Tenant at its expense in the Premises, and such similar articles of any other
persons claiming under Tenant, subject to the terms of this Lease, Tenant shall
repair at its own expense all damage to the Premises and Building resulting from
any such removal. The disposition of any of Tenant's personal property remaining
at the Premises following the expiration or earlier termination of this Lease
shall be subject to the provisions of California Civil Code Sections 1980 ET
SEQ.
ARTICLE 16
HOLDING OVER
If Tenant holds over after the expiration of the Lease Term hereof, with or
without the express or implied consent of Landlord, such tenancy shall be from
month-to-month only, and shall
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not constitute a renewal hereof or an extension for any further term, and in
such case Base Rent shall be payable at a monthly rate equal to one hundred
twenty-five percent (125%) of the Base Rent applicable during the last rental
period of the Lease Term under this Lease. Such month-to-month tenancy shall
be subject to every other term, covenant and agreement contained herein.
Nothing contained in this Article 16 shall be construed as consent by
Landlord to any holding over by Tenant, and Landlord expressly reserves the
right to require Tenant to surrender possession of the Premises to Landlord
as provided in this Lease upon the expiration or other termination of this
Lease.
ARTICLE 17
ESTOPPEL CERTIFICATES
Within twenty (20) business days following a request in writing by either
party, the non-requesting party shall execute and deliver an estoppel
certificate, which shall be substantially in the form of EXHIBIT D, attached
hereto, indicating therein any exceptions thereto that may exist at that time,
and shall also contain any other customary factual information certified to the
non-requesting party's knowledge, without a duty of investigation or inquiry. If
the non-requesting party fails to deliver such statement within such twenty (20)
business day period and such failure is not cured within ten (10) days following
a second notice from the requesting party, such failure shall be conclusive upon
the non-requesting party that (a) this Lease is in full force and effect,
without modification except as may be represented by the requesting party, (b)
there are no uncured defaults in the requesting party's performance, and (d) not
more than one (1) monthly installment of Rent has been paid in advance.
ARTICLE 18
SUBORDINATION
Subject to the terms of this Article 18, at Landlord's election, this Lease
shall be subject and subordinate to all future ground or underlying leases of
the Real Property and to the lien of any "Lender," which in this Lease shall
mean any mortgagee under a mortgage or beneficiaries under any trust deeds
hereafter in force against the Real Property and the Building, if any, and to
all renewals. extensions, modifications, consolidations and replacements
thereof, and to all advances made or hereafter to be made upon the security of
such mortgages or trust deeds, unless the Lenders or the lessors under such
ground lease or underlying leases, require in writing that this Lease be
superior thereto. Landlord's delivery to Tenant of a commercially reasonable
form of non-disturbance agreement(s) in favor of Tenant from any ground lessors
or Lender, or ground lessors or Lenders who come into existence at any time
prior to the expiration of the Lease Term shall be in consideration of, and a
condition precedent to, Tenant's agreement to be bound by the terms of this
Article 18. Such commercially reasonable non-disturbance agreements shall
include the obligation of any such successor ground lessor, or Lender to
recognize Tenant's rights specifically set forth in this Lease to offset certain
amounts against Rent due hereunder, or to otherwise receive certain credits
against Rent as set forth herein. Subject to the non-disturbance agreements
described above, Tenant covenants and agrees in the event any proceedings are
brought
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for the foreclosure (or deed lieu thereof) of any such mortgage, or if any
ground or underlying lease is terminated, to attorn, to the lien holder or
purchaser or any successors thereto upon any such foreclosure sale (or deed
in lieu thereof), or to the lessor of such ground or underlying lease, as the
case may be, if so requested to do so by such purchaser or lessor, and to
recognize such purchaser or lessor as the lessor under this Lease. Tenant
shall, within fifteen (15) business days of request by Landlord, execute such
further instruments or assurances as Landlord may reasonably deem necessary
to evidence or confirm the subordination or superiority of this Lease to any
such mortgages, trust deeds, ground leases or underlying leases, subject to
the terms of this Article 18.
ARTICLE 19
DEFAULTS; REMEDIES
19.1 EVENTS OF DEFAULT. The occurrence of any of the following shall
constitute an event of default ("Event of Default'') under this Lease by Tenant:
19.1.1 Any failure by Tenant to pay any Rent or any other charge
required to be paid under this Lease as and when due, where such failure
continues for a period of ten (10) business days after delivery of written
notice to Tenant that such sum is past due; or
19.1.2 Any failure by Tenant to observe or perform any other
provision, covenant or condition of this Lease to be observed or performed by
Tenant where such failure continues for thirty (30) days after written notice
thereof from Landlord to Tenant; provided that if the nature of such default is
such that the same cannot reasonably be cured within a thirty (30) day period,
Tenant shall not be deemed to be in default if it commences such cure within
such period and thereafter proceeds to rectify and cure said default with
reasonable diligence; or
19.1.3 The failure by Tenant to observe or perform according to the
provisions of Article 17 of this Lease where such failure continues for more
than fifteen (15) business days after notice from Landlord; or
19.1.4 The making by Tenant of any general assignment for the benefit
of creditors; the filing by or against Tenant of a petition to have Tenant
adjudged a bankrupt or a petition for reorganization or arrangement under any
law relating to bankruptcy (unless, in the case of a petition filed against
Tenant, the same is dismissed within sixty (60) days); the appointment of a
trustee or receiver to take possession of substantially all of Tenant's assets
located at the Premises or of Tenant's interest in this Lease, where possession
is not restored to Tenant within sixty (60) days; the attachment, execution or
other judicial seizure of substantially all of Tenant's assets located at the
Premises or of Tenant's interest in this Lease where such seizure is not
discharged within sixty (60) days; or if this Lease shall, by operation of law
or otherwise, pass to any person or persons other than Tenant.
19.1.5 All notices to be given pursuant to Sections 19.1.2, 19.1.3
and 19.1.4 above shall be in lieu of and not in addition to the notice
requirements of the California Code of Civil Procedure Section 1161 ET SEQ.
Notices to be given pursuant to Sections 19.1.1 above shall be in addition to
and not in lieu of the notice requirements of the California Code of Civil
Procedure Section 1161 ET SEQ.
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19.2 REMEDIES UPON DEFAULT. Upon the occurrence of any Event of Default
by Tenant, Landlord shall have, in addition to any other remedies available to
Landlord at law or in equity, the option to pursue any one or more of the
following remedies, each and all of which shall be cumulative and nonexclusive,
without any notice or demand whatsoever:
19.2.1 Terminate this Lease, in which event Tenant shall immediately
surrender the Premises to Landlord, and if Tenant fails to do so, Landlord may,
subject to due process of law and without prejudice to any other remedy which it
may have for possession or arrearages in rent, enter upon and take possession of
the Premises and expel or remove Tenant and any other person who may be
occupying the Premises or any part thereof; and Landlord may recover from Tenant
the following:
(a) The worth at the time of award of any unpaid rent at the time
of such termination; plus
(b) The worth at the time of award of the amount by which the
unpaid rent which would have been due after termination until the time of
award exceeds the amount of such rental loss that Tenant proves could have
been reasonably avoided; plus
(c) The worth at the time of award of the amount by which the
unpaid rent for the balance of the Lease Term after the time of award
exceeds the amount of such rental loss that Tenant proves could have been
reasonably avoided; plus
(d) Any other amount reasonably necessary to compensate Landlord
for all the detriment proximately caused by Tenant's failure to perform its
obligations under this Lease, specifically including but not limited to,
brokerage commissions and advertising incurred, expenses of remodeling the
Premises or any portion thereof for a new tenant, whether for the same or a
different use, and any special concessions made to obtain a new tenant.
As used in Paragraphs 19.2.1(a) and (b), above, the "worth at the time of
award" shall be computed by allowing interest at the rate set forth in Article
25 of this Lease, but in no case greater than the maximum amount of such
interest permitted by law. As used in Paragraph 19.2.1(c) above, the "worth at
the time of award" shall be computed by discounting such amount at the discount
rate of the Federal Reserve Bank of San Francisco at the time of award plus one
percent (1%).
19.2.2 Landlord shall have the remedy described in California Civil
Code Section 1951.4 (Landlord may continue lease in effect after Tenant's breach
and abandonment and recover rent as it becomes due, if Tenant has the right to
sublet or assign, subject only to reasonable limitations). Accordingly, if
Landlord does not elect to terminate this Lease on account of any default by
Tenant, Landlord may, from time to time, without terminating this Lease, enforce
all of its rights and remedies under this Lease, including the right to recover
all rent as it becomes due.
19.3 SUBLESSEES OF TENANT. In the event Landlord elects to terminate this
Lease on account of any Event of Default by Tenant, Landlord shall have the
right to terminate any and all subleases, licenses, concessions or other
consensual arrangements for possession entered into by Tenant and affecting the
Premises or may, in Landlord's sole discretion, succeed to Tenant's interest in
such
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subleases, licenses, concessions or arrangements. In the event of Landlord's
election to succeed to Tenant's interest in any such subleases, licenses,
concessions or arrangements, Tenant shall, as of the date of notice by
Landlord of such election, have no further right to or interest in the rent
or other consideration receivable thereunder.
19.4 LANDLORD DEFAULT. Notwithstanding anything to the contrary set forth
in this Lease Landlord shall be in default in the performance of any obligation
required to be performed by Landlord pursuant to this Lease if (a) Landlord is
obligated to make a payment of money to Tenant, and Landlord fails to pay such
unpaid amounts within ten (10) days of written notice from Tenant that the same
was not paid when due, or (b) such failure is other than the obligation to pay
money, and Landlord fails to perform such obligation within thirty (30) days
after the receipt of notice from Tenant specifying in detail Landlord's failure
to perform; provided, however, if the nature of Landlord's obligation is such
that more than thirty (30) days are required for its performance, then Landlord
shall not be in default under this Lease if it shall commence such performance
within such thirty (30) day period and thereafter diligently pursue the same to
completion. Upon any such default by Landlord under this Lease which requires
payment by Landlord and such payment is not paid by Landlord within the time
period allowed, Tenant may offset from Base Rent and Additional Rent under this
Lease such amount required to be paid by Landlord. In the event of any default
on the part of Landlord, Tenant will give notice by registered or certified mail
to any Lender or ground lessor of Landlord whose name and address have
previously been furnished to Tenant in writing and shall offer such Lender or
ground lessor the same opportunity to cure the default as Landlord has pursuant
to this Section.
ARTICLE 20
COVENANT OF QUIET ENJOYMENT
Subject to Landlord's rights following an Event of Default, Landlord
covenants that during the Lease Term Tenant shall peaceably and quietly have,
hold and enjoy the Premises subject to the terms, covenants, conditions,
provisions and agreements hereof without interference by any persons lawfully
claiming by or through Landlord. The foregoing covenant is in lieu of any other
covenant express or implied, except as otherwise expressly provided in this
Lease.
ARTICLE 21
FORCE MAJEURE
Subject to the notification requirement set forth in the last clause of
this Article 21, any prevention, delay or stoppage (collectively. "Force Majeure
Delays'') due to strikes, lockouts, labor disputes, acts of God (including
inclement weather), inability to obtain essential services, labor, or primary
materials or reasonable substitutes therefor, after reasonable efforts to do so,
governmental actions, civil commotions, fire or other casualty, and other causes
beyond the reasonable control of the party obligated to perform, except with
respect to the obligations imposed with regard to Rent and other monetary
charges to be paid pursuant to this Lease, notwithstanding anything to the
contrary contained in this Lease, shall excuse the performance of such party for
a period equal to
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any such prevention, delay or stoppage and therefore, if this Lease specifies
a time period for performance of an obligation of either party, that time
period shall be extended by the period of any delay in such party's
performance caused by a Force Majeure Delays; provided, however, that no
Force Majeure Delays may be claimed by either party under this Lease until
written notice describing such delay is delivered by the claiming party to
the other party.
ARTICLE 22
ATTORNEYS' FEES
If either party commences an action against the other for the specific
performance of this Lease, for damages for the breach hereof or otherwise for
enforcement of any remedy hereunder, the parties agree that the prevailing party
shall be entitled to recover from the other party such costs and reasonable
attorneys' fees as may have been incurred, including any and all costs incurred
in enforcing, perfecting and executing such judgment.
ARTICLE 23
SIGNS
23.1 MONUMENT SIGNAGE.
23.1.1 DESIGN AND APPROVAL. Subject to the provisions of this
Section 23.1, and subject to approval as to design and location by the City of
Thousand Oaks, Landlord's approval, not to be unreasonably withheld or delayed,
and any applicable governmental requirements, Tenant shall have the exclusive
right to have a "Tenant Name" as that term is defined below, placed upon any new
or existing monument sign (the "Monument Sign") located in front of the
Building.
23.1.2 TENANT NAME. Tenant shall have the right at Tenant's expense,
to designate from time to time during the Lease Term, including any Option Term,
as the "Tenant Name", either (a) the name of Tenant, or (b) the name of a
Transferee of Tenant, provided that such Tenant Name shall not be an
"Objectionable Name." The term "Objectionable Name" shall mean any name which
relates to an entity which is of a character or reputation, or is associated
with a political orientation or faction, which is inconsistent with the quality
of the Real Property, or which would otherwise reasonably offend a landlord of a
Comparable Building.
23.1.3 REPAIR AND MAINTENANCE; GOVERNMENT APPROVAL. Tenant shall be
responsible for the cost of the design, permitting, construction and
installation of any Monument Sign and Tenant Name (the "Sign Cost"), and shall
also be responsible for the repair and maintenance during the Lease Term of any
Monument Sign. Tenant shall also be responsible for the cost and expense of the
removal of its name from and restoration of the Building, if affected by any
Monument Sign (or from the sign itself, but without restoration obligations) as
of the expiration or earlier termination of the Lease. Tenant acknowledges and
agrees that any Monument Sign shall be subject to all necessary approvals and
permits from governmental agencies.
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23.2 BUILDING SIGNAGE. Tenant shall have the exclusive right,
during the Lease Term, at Tenant's sole cost and expense, to install signage
on the exterior of the Building containing the Tenant Name (the "Building
Signage"), provided that such Building Signage shall be subject to all of the
terms of any applicable governmental requirements. Except as provided in this
Lease, Tenant shall be responsible, at Tenant's sole cost and expense, to
repair and maintain the Building Signage in good condition during the Lease
Term. In addition Tenant shall be responsible for the cost and expense of the
removal of the Building Signage as of the termination or earlier expiration
of the Lease Term, and for the cost of repair of any damage to the Building
resulting from such removal. Further, Tenant's rights in this Section 23.2
may be assigned by Tenant to a Transferee, subject to the conditions of
Section 23.1.2 above.
23.3 BUILDING NAME. Tenant shall have the exclusive naming rights
for the Premises, subject to Landlord's prior approval, which shall not be
unreasonably withheld or delayed. Further, Tenant's rights in this Section
23.4 may be assigned by Tenant to a Transferee, subject to the conditions of
Section 23.1.2 above.
ARTICLE 24
COMPLIANCE WITH LAW
Neither Landlord nor Tenant shall do anything in or about the Premises
which will in any way conflict with any law, statute, ordinance or other
governmental rule, regulation or requirement now in force or which may
hereafter be enacted or promulgated (collectively, "Laws"). Landlord
represents and warrants that the Building and the Premises comply with all
applicable Laws.
ARTICLE 25
LATE CHARGES
Each party hereby acknowledges that late payment by the other of Rent or
other sums due hereunder will cause such party to incur costs not contemplated
by this Lease, the exact amount of which is extremely difficult to ascertain.
Such costs include, but are not limited to, processing and accounting charges,
and late charges which may be imposed upon Landlord by the terms of any
mortgage, deed of trust, or ground or underlying lease covering the Premises.
Accordingly, if any installment of Rent or any other sum due from either party
shall not be received by the other within ten (10) business days after notice
that said amount is overdue, then the defaulting party shall pay to the other a
late charge equal to five percent (5.0%) of the amount due. The parties hereby
agree that such late charge represents a fair and reasonable estimate of the
costs that will be incurred by reason of such late payment. Acceptance of such
late charge shall in no event constitute a waiver of any default with respect to
such overdue amount, nor prevent the non-defaulting party from exercising any of
the other rights and remedies granted hereunder. Any late charge owed by Tenant
shall be deemed Additional Rent and the right to require it shall be in addition
to all of Landlord's other rights and remedies hereunder or at law other than
for damages for the late payment of Rent. In addition to the late charge
described above, any Rent or other amounts owing hereunder which are not paid
within ten (10) business days after notice the same are overdue shall thereafter
bear interest
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until paid at a rate (the "Interest Rate") per annum equal to the Wells Fargo
Bank (or other "money center" national bank reasonably selected by Landlord)
"reference rate" or "base rate" publicly announced from time to time, plus
one percent (1%), provided that in no case shall such rate be higher than the
highest rate permitted by applicable law.
ARTICLE 26
LANDLORD'S RIGHT TO CURE DEFAULT; PAYMENTS BY TENANT
26.1 LANDLORD'S CURE. Except as otherwise specifically set forth in this
Lease, all covenants and agreements to be kept or performed by Tenant under this
Lease shall be performed by Tenant at Tenant's sole cost and expense and without
any reduction of Rent. If Tenant shall fail to perform any of its obligations
under this Lease within a reasonable time after such performance is required by
the terms of this Lease, Landlord may, but shall not be obligated to, after
thirty (30) days prior notice to Tenant (or in the case of an emergency, after
such notice as is reasonable under the circumstances), make any such payment or
perform any such act on Tenant's part without waiving its right based upon any
default of Tenant and without releasing Tenant from any obligations hereunder.
26.2 TENANT'S REIMBURSEMENT. Except as may be specifically provided to
the contrary in this Lease, Tenant shall pay to Landlord, within fifteen (15)
days after delivery by Landlord to Tenant of statements therefor, sums equal to
expenditures reasonably made and obligations reasonably incurred by Landlord in
connection with the remedying by Landlord of Tenant's defaults pursuant to the
provisions of Section 26.1, together with interest thereon at the Interest Rate.
Tenant's obligations under this Section 26.2 shall survive the expiration or
sooner termination of the Lease Term.
ARTICLE 27
ENTRY BY LANDLORD
Subject to the provisions of this Lease, and provided Landlord uses
commercially reasonable efforts to minimize any interference with Tenant's
business, Landlord reserves the right at all reasonable times and upon at least
forty-eight (48) hours prior notice to the Tenant (or in the case of an
emergency upon such notice as is reasonable under the circumstances) to enter
the Premises to (a) inspect them; (b) show the Premises to prospective
purchasers, mortgagees or tenants, ground or underling lessors or insurers
(provided that such right shall not extend to prospective tenants until twelve
(12) months prior to the Lease Expiration Date); (c) post notices of
nonresponsibility; or (d) alter, improve or repair the Premises or the Building
if necessary to comply with Laws, or for alterations, repairs or improvements to
the Landlord Repair Items. Notwithstanding anything to the contrary contained in
this Article 27, and subject to the notice requirements set forth in
Section 19.1.2, above, and Landlord's compliance with the terms of Section 26.1,
Landlord may enter the Premises at any time to perform any covenants of Tenant
which Tenant fails to perform. Except as otherwise expressly provided in this
Lease, any such entries shall be without the abatement of Rent and shall include
the right to take such reasonable steps as required to
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accomplish the stated purposes. Tenant hereby waives any claims (not
including claims for physical property damages or personal injury damages)
for any injuries or inconvenience to or interference with Tenant's business
or lost profits, occasioned thereby. In an emergency, Landlord shall have the
right to use any means that Landlord may reasonably deem proper to open the
doors in and to the Premises. Subject to the provisions of this Lease, any
entry into the Premises by Landlord in the manner hereinbefore described
shall not be deemed to be a forcible or unlawful entry into, or a detainer
of, the Premises, or an actual or constructive eviction of Tenant from any
portion of the Premises. Notwithstanding the foregoing, as reasonably
necessary in connection with Tenant's business use of the Premises, Tenant
may designate certain secure areas, and on prior written notice to Landlord
of these areas, Tenant may deny Landlord access to such areas except in an
emergency or when Landlord is accompanied by Tenant. Subject to the
provisions of this Lease, no provision of this Lease shall be construed as
obligating Landlord to perform any repairs, alterations or decorations except
as otherwise expressly agreed to be performed by Landlord herein.
ARTICLE 28
TENANT PARKING AND HELISTOP
28.1 PARKING. As part of the Tenant Improvements, Tenant shall construct
parking areas pursuant to the requirements of the City of Thousand Oaks and
shall use its best commercially reasonable efforts to obtain permission from the
City of Thousand Oaks to maximize (but without being required by this Lease to
provide more than four (4) parking spaces per 1,000 rentable square feet of area
in the Premises) the amount of parking on the Real Property. During the Lease
Term, Tenant shall have the exclusive right to use, without charge, such parking
areas.
28.2 HELISTOP. Tenant shall have the right to install a helistop on the
Real Property, if so permitted by the appropriate governing agencies.
ARTICLE 29
MISCELLANEOUS PROVISIONS
29.1 TERMS. The necessary grammatical changes required to make the
provisions hereof apply either to corporations or partnerships or individuals,
men or women, as the case may require, shall in all cases be assumed as though
in each case fully expressed.
29.2 BINDING EFFECT. Each of the provisions of this Lease shall extend to
and shall, as the case may require, bind or inure to the benefit not only of
Landlord and of Tenant, but also of their respective successors or assigns,
provided this clause shall not permit any assignment by Tenant contrary to the
provisions of Article 14 of this Lease.
29.3 NO AIR RIGHTS. No rights to any view or to light or air over any
property, whether belonging to Landlord or any other person, are granted to
Tenant by this Lease.
29.4 MODIFICATION OF LEASE. Should any prospective mortgagee or ground
lessor for the Building or Real Property require a modification or modifications
of this Lease, which modification
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or modifications will not directly or indirectly cause an increased cost or
expense to Tenant under this Lease or in connection with Tenant's business
operations, or have any negative economic impact, or any other material
negative impact, on the Premises or Tenant's occupancy of the Premises or in
any other way adversely change the rights and obligations of Tenant hereunder
including, without limitation, all rights and obligations of Tenant with
respect to renewal, assignment and subletting, insurance proceeds and
Tenant's rights to terminate this Lease, or receive abatement of Rent, then
and in such event, Tenant agrees that this Lease may be so modified at
Landlord's sole cost and expense (including Tenant's reasonable attorneys'
fees for review of the same), and agrees to execute whatever reasonable
documents are required therefor and deliver the same to Landlord within
thirty (30) days following the request therefor. Should Landlord or any such
prospective mortgagee or ground lessor require execution of a short form of
Lease for recording, containing, among other customary provisions, the names
of the parties, a description of the Premises and the Lease Term, Tenant
agrees to execute such short form of Lease and to deliver the same to
Landlord within fifteen (15) business days following Tenant's receipt of
written request therefor.
29.5 TRANSFER OF LANDLORD'S INTEREST. Tenant acknowledges that Landlord
has the right to transfer all or any portion of its interest in the Real
Property and Building and in this Lease. Tenant agrees that in the event of a
transfer of fee title and provided that such transferee is a bona fide purchaser
and agrees in writing to assume all of Landlord's obligations thereafter
accruing, Landlord shall automatically be released from all liability under this
Lease thereafter accruing and Tenant agrees to look solely to such transferee
for the performance of Landlord's obligations hereunder arising or accruing
after the date of transfer upon agreement by such transferee to fully assume and
be liable for all obligations of this Lease to be performed by Landlord which
first accrue or arise after the date of the conveyance, and Tenant shall attorn
to such transferee. Tenant further acknowledges that Landlord may assign its
interest in this Lease to a mortgage lender as additional security and agrees
that such an assignment shall not release Landlord from its obligations
hereunder and that unless and until such mortgage lender succeeds to Landlord's
interest and obligations hereunder, Tenant shall continue to look to Landlord
for the performance of its obligations hereunder.
29.6 RECORDATION OF MEMORANDUM. A memorandum of this Lease may be
recorded by Tenant provided Landlord may first require Tenant's agreement to
deliver to Landlord an executed, recordable, memorandum of termination of the
same, which Landlord agrees not to record until the expiration or earlier
termination of this Lease.
29.7 LANDLORD'S TITLE. Subject to and except for the rights of Tenant
expressly set forth in this Lease, Landlord's title is and always shall be
paramount to the title of Tenant, and nothing herein contained shall empower
Tenant to do any act which can, shall or may encumber the title of Landlord.
29.8 CAPTIONS. The captions of Articles and Sections are for convenience
only and shall not be deemed to limit, construe, affect or alter the meaning of
such Articles and Sections.
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29.9 RELATIONSHIP OF PARTIES. Nothing contained in this Lease shall be
deemed or construed by the parties or by any third party to create the
relationship of principal and agent, partnership, joint venture or any
association between Landlord and Tenant.
29.10 TIME OF ESSENCE. Time is of the essence of this Lease and each of
its provisions.
29.11 PARTIAL INVALIDITY. Any term, provision or condition contained
in this Lease shall, to any extent, be invalid or unenforceable, the remainder
of this Lease, or the application of such term, provision or condition to
persons or circumstances other than those with respect to which it is invalid or
unenforceable, shall not be affected thereby, and each and every other term,
provision and condition of this Lease shall be valid and enforceable to the
fullest extent possible permitted by law.
29.12 NO WARRANTY. Except as otherwise expressly set forth in this Lease,
in executing and delivering this Lease, Tenant has not relied on any
representation, including, but not limited to, any representation whatsoever as
to the amount of any item comprising Additional Rent or the amount of the
Additional Rent in the aggregate, or any warranty or any statement of Landlord
which is not set forth herein or in one or more of the exhibits attached hereto.
29.13 ENTIRE AGREEMENT. It is understood and acknowledged that there are
no oral agreements between the parties affecting this Lease and this Lease
supersedes and cancels any and all previous negotiations, arrangements,
brochures, agreements and understandings, if any, between the parties or
displayed by Landlord to Tenant with respect to the subject matter thereof, and
none thereof shall be used to interpret or construe this Lease; provided,
however, the parties agree that the terms of the Existing Lease shall govern up
until the Vacation Date. This Lease (including all exhibits attached hereto),
contains all of the terms, covenants, conditions, warranties and agreements of
the parties relating in any manner to the rental, use and occupancy of the
Premises, shall be considered to be the only agreement between the parties and
their representatives and agents, and none of the terms, covenants, conditions
or provisions of this Lease can be modified, deleted or added to except in
writing signed by the parties. All negotiations and oral agreements acceptable
to both parties have been merged into and are included herein. There are no
other representations or warranties between the parties, and all reliance with
respect to representations is based totally upon the representations and
agreements contained in this Lease.
29.14 RIGHTS OF OFFSET. Wherever in this Lease Tenant is granted a right
to offset against Rent, such as with respect to a judgment under Section 7.3 of
this Lease such offset right shall only be permitted to the extent that the
failure creating the offset right was a failure of performance by Landlord
pursuant to its obligations under this Lease.
29.15 NOTICES. All notices, demands, consents, statements, designations,
approvals or other communications (collectively, "Notices") given or required to
be given by either party to the other hereunder or by law shall be in writing,
and shall be delivered personally or by nationally recognized overnight courier
service (i) to Tenant at the appropriate addresses set forth in Section 5 of the
Summary, or to such other place in the continental United States as Tenant may
from time to time designate in a Notice to Landlord; or (ii) to Landlord at the
addresses set forth in Section 3 of the Summary, or to such other firm or to
such other place in the continental United States as
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Landlord may from time to time designate in a Notice to Tenant. Any Notice
will be deemed given on the date delivery is made.
29.16 AUTHORITY. If either party is a corporation or partnership, each
individual executing this Lease on behalf of such party hereby represents and
warrants that such party is a duly formed and existing entity and that such
party has full right and authority to execute and deliver this Lease and that
each person signing on behalf of such party is authorized to do so.
29.17 GOVERNING LAW. This Lease shall be construed and enforced in
accordance with the laws of the State of California.
29.18 SUBMISSION OF LEASE. Submission of this instrument for examination
or signature by Tenant does not constitute a reservation of or an option for
lease, and it is not effective as a lease or otherwise until execution and
delivery by both Landlord and Tenant.
29.19 BROKERS. Landlord and Tenant hereby warrant to each other that they
have had no dealings with any real estate broker or agent in connection with the
negotiation of this Lease, excepting only the real estate brokers or agents
specified in Section 9 of the Summary (the "Brokers"), and that they know of no
other real estate broker or agent who is entitled to a commission in connection
with this Lease. Each party agrees to indemnify and defend the other party
against and hold the other party harmless from any and all claims, demands,
losses, liabilities, lawsuits, judgments, and costs and expenses (including
without limitation reasonable attorneys' fees) with respect to any leasing
commission or equivalent compensation alleged to be owing on account of the
indemnifying party's dealings with any real estate broker or agent other than
the Brokers. Landlord agrees to pay the Brokers a real estate commission
pursuant to a separate agreement ("Commission Agreement") between such parties.
29.20 INDEPENDENT COVENANTS. If Landlord fails to perform its obligations
set forth herein, Tenant shall not, except as expressly provided in this Lease
to the contrary, be entitled (i) to make any repairs or perform any acts
hereunder at Landlord's expense or (ii) to any setoff of the Rent or other
amounts owing hereunder against Landlord; provided, however, that the foregoing
shall in no way impair the right of Tenant to commence a separate action against
Landlord for any violation by Landlord of the provisions hereof so long as, to
the extent required in this Lease, notice is first given to Landlord and an
opportunity is granted to Landlord to correct such violations as provided in
Section 19.4 above.
29.21 LANDLORD SIGNAGE. Landlord shall have the right at any time to
install, affix and maintain a sign on the Building not to exceed 6" x 12"
identifying Landlord's interest in the Building, with graphics which are
consistent with Tenant's identification signage on the Building.
29.22 HAZARDOUS MATERIAL.
29.22.1 DEFINITION. As used herein, the term "Hazardous Material"
means any hazardous or toxic substance, material or waste which is or becomes
regulated by any local governmental authority, the State of California or the
United States Government. The term "Hazardous Material" includes, without
limitation, any material or substance which is (i) defined as
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a "hazardous waste," "extremely hazardous waste" or "restricted hazardous
waste" under Sections 25115, 25117 or 25122.7, or listed pursuant to Section
25140 of the California Health and Safety Code, Division 20, Chapter 6.5
(Hazardous Waste Control Law), (ii) defined as a "hazardous substance" under
Section 25316 of the California Health and Safety Code, Division 20, Chapter
6.95 (Hazardous Materials Release Response Plans and Inventory), (iii)
defined as a "hazardous substance" under Section 25281 of the California
Health and Safety Code, Division 20, Chapter 6.7 (Underground Storage of
Hazardous Substances), (iv) petroleum, (v) asbestos or asbestos containing
materials, (vi) listed under Article 9 or defined as hazardous or extremely
hazardous pursuant to Article 11 of Title 22 of the California Administrative
Code, division 4, Chapter 20, (vii) designated as a "hazardous substance"
pursuant to Section 311 of the Federal Water Pollution Control Act (33 U.S.C.
Section 1317), (viii) defined as a "hazardous waste" pursuant to Section 1004
of the Federal Resource Conservation and Recovery Act, 42 U.S.C. Section 6902
et seq. (42 U.S.C. Section 6903), or (ix) defined as a "hazardous substance"
pursuant to Section 101 of the Compensation and Liability Act, 42 U.S.C.
Section 9601 et seq. (42 U.S.C. Section 9601) (collectively, "Hazardous
Material Laws").
29.22.2 LANDLORD'S REPRESENTATION. Landlord hereby represents to
Tenant that (i) to the best knowledge of Binder Realty Company and Landlord,
there are no Hazardous Materials located in, on or under the Real Property, (ii)
there has been no violation thereon of any law governing Hazardous Materials,
(iii) Landlord has not received any notice or other communication concerning any
alleged violation of a Hazardous Materials Law, and (iv) to the best knowledge
of Binder Realty Company and Landlord, there exists no writ, injunction, decree,
order, judgment, lawsuit, claim, citation, or investigation, either threatened
or pending, relating to the presence of Hazardous Materials on the Real
Property. Landlord has delivered to Tenant a Negative Declaration with respect
to the Real Property. Subject to Tenant's indemnification obligations set forth
in Section 29.22.5 below, and except as otherwise provided in Section 29.22.2
above, Landlord shall cause the Premises, the Building and the Real Property to
be in full compliance with any Hazardous Material Laws affecting the Premises,
the Building or the Real Property.
29.22.3 TENANT'S COVENANT. Tenant shall not generate, possess,
store, use, transport or dispose of any Hazardous Material on, under or about
the Premises nor permit anyone to do so during the Lease Term. Notwithstanding
the foregoing, Tenant may, in compliance with all applicable laws, rules and
regulations, use or sell any ordinary and customary materials reasonably
required to be used or sold by Tenant in the normal course of Tenant's business
("Permitted Substance"). If Tenant knows, or has received information sufficient
to provide reasonable cause to believe, that a Hazardous Material, or a
condition involving or resulting from same, has come to be located on or under
or about the Premises, other than a Permitted Substance, Tenant shall
immediately give written notice of such fact to Landlord. Tenant shall also
immediately give Landlord a copy of any statement, report, notice, registration,
application, permit, business plan, license, claim, action or proceeding given
to, or received from, any governmental authority or private party, or persons
entering or occupying the Premises, concerning the presence, spill, release,
discharge of, or exposure to any Hazardous Material (other than a Permitted
Substance) or contamination from, on or about the Premises.
29.22.4 TENANT INDEMNITY. Tenant shall defend, indemnify and hold
Landlord and its members, partners, officers, directors, shareholders,
employees, attorneys and agents
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(collectively, "Landlord's Parties") harmless from and against any and all
losses, liabilities, actual damages, injuries, costs, expenses and claims of
any and every kind whatsoever (including, without limitation, court costs,
reasonable attorneys' fees, damages to any person, the Real Property or any
other property or loss of rents) which at any time or from time to time may
be reasonably paid, incurred or suffered by or asserted against Landlord as a
result of: (a) breach by Tenant of any or the covenants set forth in Section
5.2 above and this Section 29.22, and/or (b) the presence on, under or the
escape, seepage, leakage, spillage, discharge, emission, release from, onto
or into the Real Property of any Hazardous Material, other than a Permitted
Substance or any Hazardous Materials that were present on the Real Property
prior to the Lease Commencement Date, and other than any contamination that
may have been caused by Landlord or Landlord's Parties or by underground
migration [including, without limitation, any losses, liabilities, damages,
injuries, costs, expenses or claims asserted or arising under and Hazardous
Material Law].
29.23 RIGHT OF FIRST OFFER TO PURCHASE. If Landlord receives an
unsolicited offer from a third party to purchase the Building (the "Transfer
Property") and, if Landlord desires to accept such unsolicited offer, Landlord
shall give notice to Tenant of its intention and will state the sales price and
the financial terms ("Sales Notice") on which Landlord is willing to sell the
Transfer Property. Tenant shall have fifteen (15) days after receipt of such
Sales Notice to advise Landlord in writing of its intention to acquire the
Transfer Property to be sold by Landlord under the terms of such offer. If
Tenant declines to exercise its right of first offer to purchase, or if Tenant
counter-offers at less than the financial terms set forth in the Sales Notice,
Landlord shall be free to sell the Transfer Property under such terms or under
terms resulting in greater proceeds to Landlord than the proceeds offered by
Tenant if Tenant makes a counter-proposal. If Landlord desires to sell the
Transfer Property for proceeds which will be less than Tenant's counter-offer,
if any, Landlord shall provide notice of such intention to Tenant and shall
state the sales price and financial terms on which Landlord is willing to sell
the Transfer Property. Tenant shall have five (5) business days thereafter to
advise Landlord of Tenant's intention for purchasing the Transfer Property upon
such terms. If Tenant declines to exercise such option, Landlord shall
thereafter be entitled to sell the Transfer Property under such terms. This
right of first offer shall terminate upon the closure of the sale of the
Transfer Property to any third party.
29.24 REASONABLE CONSENT. Unless the Lease provides for a contrary
standard, whenever in this Lease the consent or approval of the Landlord or
Tenant is required, such consent or approval shall not be unreasonably withheld
or delayed. Furthermore, unless a contrary standard or right is set forth in the
Lease, whenever the Landlord or Tenant is granted a right to take action,
exercise discretion, or make an allocation, judgment or other determination,
Landlord or Tenant shall act reasonably and in good faith and take no action
which might result in the frustration of the reasonable expectations of a
sophisticated tenant and a sophisticated Landlord concerning the benefits to be
enjoyed under this Lease.
29.25 COUNTERPARTS. This Lease may be executed in counterparts, each of
which shall be deemed an original, but such counterparts, when taken together
shall constitute one agreement.
29.26 CONFIDENTIALITY. Landlord and Tenant hereby agree that any and all
information to be conveyed to the media and/or the business community, whether
in the form of informal or formal
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discussions, press releases, direct mail or broadly distributed announcements
regarding discussions, negotiations, Lease execution, occupancy by Tenant or
subsequent discussions or agreements, shall be approved in advance by both
parties. The terms of this Lease are hereby agreed to be confidential and,
without the written consent of both parties, neither Landlord nor Tenant will
disclose any of its terms to any third party; provided, however, that
Landlord may disclose the terms of this Lease to third parties to the extent
necessary with respect to purposes of appraisal, audit review, regulatory
review, financing, or sale.
29.27 TELECOMMUNICATIONS EQUIPMENT.
29.27.1 INSTALLATION. At any time during the Lease Term, Tenant
shall have the exclusive right to install at Tenant's sole cost and expense,
antenna, satellite, microwave dish or any other type of telecommunications or
communications device ("Communications Equipment") upon the roof of the Building
at a location designated by Tenant, which location as well as Tenant's plans and
specifications relating to the installation of Tenant's Communications Equipment
shall be subject to Landlord's reasonable approval; provided, however, Tenant
shall pay all cost of such Communications Equipment, including, without
limitation, the utilities and maintenance necessary to Tenant's operation of the
Communications Equipment and liability insurance for such Communications
Equipment, and Landlord may require Tenant to install screening around such
Communications Equipment, at Tenant's sole cost and expense, as reasonably
designated by the Landlord. The Communications Equipment shall comply with all
governmental laws and ordinances.
29.27.2 MAINTENANCE AND REPAIR. Tenant shall maintain, repair
or replace Communications Equipment, at Tenant's sole cost and expense. During
the Lease Term, Tenant shall have the obligation to repair all damage to the
Building rooftop caused by the installation, repair, maintenance and use of the
Communications Equipment. Further, Tenant shall have the obligation to repair
any damage to the Building rooftop caused by Tenant's Communications Equipment,
reasonable wear and tear, casualty and repairs which are specifically made the
responsibility of Landlord hereunder excepted.
29.27.3 TERMINATION. Notwithstanding any other provision in
this Lease to the contrary, the Communications Equipment shall remain the
property of Tenant, and Tenant shall remove such equipment upon the termination
of this Lease. Upon Tenant's removal of its Communications Equipment from the
Building rooftop, Tenant shall have the obligation to repair all damage to the
Building rooftop caused by such removal of the Communications Equipment,
reasonable wear and tear, casualty and repairs which are specifically made the
responsibility of Landlord under this Lease excepted.
29.28 LANDLORD'S AUTHORITY. Landlord represents and warrants to Tenant
that Landlord has due authority to enter into this Lease and to perform its
obligations hereunder, and the party executing this Lease on behalf of Tenant is
duly authorized by Tenant so to do.
IN WITNESS WHEREOF, Landlord and Tenant have caused this Lease to be
executed the day and date first above written.
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"Landlord:"
WESTLAKE BUSINESS PARK, LTD.,
a California limited partnership
By: /s/ RONALD BINDER
-----------------------------
Its: General Partner
-----------------------------
By:
-----------------------------
Its:
-----------------------------
"Tenant"
WELLPOINT HEALTH NETWORKS INC.,
a Delaware corporation
By: /s/ JOHN F. SIEMON
-----------------------------
John F. Siemon
Vice President
Facilities Services and Property Management
By: /s/ DAVID C. COLBY
-----------------------------
Its: Executive Vice President/
Chief Financial Officer
-----------------------------
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EXHIBIT A
LEGAL DESCRIPTION OF LAND
Parcel C in the City of Thousand Oaks, County of Ventura, State of
California, as shown on Parcel Map LD 563 filed in Book 45, Pages 82
and 83 of Parcel Maps, in the office of the County Recorder of said
County.
EXCEPT from all of said land all the oil, gas and other hydrocarbon
substances lying within and under said land, below a depth of 500
feet, measured vertically, from the surface of said land, without,
however, any right to enter upon the surface of said land nor into
that portion of the subsurface thereof lying above a depth of 500
feet, measured vertically from said surface.
EXHIBIT A
Page 1
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EXHIBIT B
TENANT WORK LETTER
This Tenant Work Letter shall set forth the terms and conditions relating
to the construction of the tenant improvements in the Premises. This Tenant
Work Letter is essentially organized chronologically and addresses the issues of
the construction of the Premises, in sequence, as such issues will arise during
the actual construction of the Premises. All references in this Tenant Work
Letter to Articles or Sections of "this Lease" shall mean the relevant portion
of Articles 1 through 29 of the Office Lease to which this Tenant Work Letter is
attached as Exhibit B and of which this Tenant Work Letter forms a part, and all
references in this Tenant Work Letter to Sections of "this Tenant Work Letter"
shall mean the relevant portion of Sections 1 through 4 of this Tenant Work
Letter.
SECTION 1
TENANT IMPROVEMENTS
1. CONSTRUCTION OF BUILDING. Tenant shall construct the Building,
which shall be a two-story office building containing approximately 88,000
rentable square feet of floor space, the parking areas and other common areas,
and other improvements (the "Tenant Improvements") as may be approved pursuant
to the "Approved Plans", as defined below.
1.1 APPROVED PLANS. Tenant shall prepare full and detailed
architectural and engineering plans and specifications covering the Tenant
Improvements (including, without limitation, architectural, structural,
mechanical and electrical working drawings, outline specifications, and finishes
and materials for the Tenant Improvements) (the "Plans). The Plans shall be
subject to Landlord's approval and the approval of all governmental authorities
requiring approval of the Tenant Improvements and the Plans. Landlord shall
give its approval or disapproval (giving general reasons in case of disapproval)
of the Plans within ten (10) business days after the delivery of the Plans to
Landlord, which approval shall not be unreasonably withheld or delayed. If
Landlord disapproves the Plans, Tenant shall have ten (10) business days to
resubmit the Plans to Landlord. If Landlord and Tenant fail to agree on the
Plans as provided herein, the matter shall be mediated or arbitrated pursuant to
Section 29.27 of the Lease. As used in this Tenant Work Letter, the Plans as
and when approved in writing by Landlord shall be referred to as the "Approved
Plans".
1.2 CONFORMITY. The Tenant Improvements will be constructed in
conformity with all applicable rules, regulations and zoning ordinances. No
Hazardous Materials will be utilized in violation of applicable laws and no
asbestos containing materials will be utilized in construction of the Tenant
Improvements.
1.3 PERMITS. Tenant shall submit the Approved Plans to the
appropriate municipal authorities for all applicable building permits necessary
to allow the Contractor, as that term is defined in Section 1.5, below, to
commence and fully complete the construction of the
EXHIBIT B
Page 1
<PAGE>
Tenant Improvements. Landlord shall cooperate with Tenant in executing permit
applications and performing other ministerial acts reasonably necessary to
enable Tenant to obtain any such permit.
1.4 CHANGE ORDERS. In the event Tenant desires to change the
Approved Plans, Tenant shall deliver notice (the "Drawing Change Notice") of the
same to Landlord, setting forth in detail the changes (the "Tenant Change")
Tenant desires to make to the Approved Plans. Landlord shall, within five (5)
business days of receipt of the Drawing Change Notice, either (i) approve the
Tenant Change, which approval shall not be unreasonably withheld, or
(ii) disapprove the Tenant Change and deliver a notice to Tenant specifying in
detail the reasons for Landlord's disapproval, which reasons shall be limited to
material design problems. In the event of an approval, Landlord shall provide
Tenant with a good faith, non-binding estimate of the costs necessitated by the
Tenant Change. Thereafter, Tenant shall, within five (5) business days of
receipt of Landlord's approval, deliver notice to Landlord stating whether or
not Tenant elects to cause Landlord to make such Tenant Change.
1.5 CONTRACTOR. Tenant shall retain, in its sole discretion, a
"Contractor" for the construction of the Tenant Improvements. The Contractor
shall construct the Tenant Improvements in accordance with the Approved Plans
under the supervision of Tenant, and shall cause their "Substantial Completion,"
as defined in Section 3 below, as soon as reasonably possible.
1.6 LANDLORD SUPERVISION. Landlord shall have the right to have
its consultant monitor the construction of the Tenant Improvements, including
the right to (i) receive copies of all third party inspection reports,
(ii) receive construction drawings and other plans on an interim basis prior to
being finalized and (iii) be a third party beneficiary as to all completion
guarantees from contractors or other third parties. Landlord shall receive no
profit, overhead, general conditions or supervisory fee in connection with these
rights or for any supervision of the construction of the Tenant Improvements.
SECTION 2
TENANT IMPROVEMENT ALLOWANCE
2.1 TENANT IMPROVEMENT ALLOWANCE. Tenant shall be entitled to a
one-time Tenant Improvement Allowance (the "Tenant Improvement Allowance") in
the amount of Nine Million Dollars ($9,000,000.00), less "Landlord's
Deductibles," which shall mean subtracting the sum of Landlord's hard and
soft, direct and indirect costs relating to the initial construction of the
Tenant Improvements incurred up to the Rent Commencement Date with respect to
the entitlement, design (including architectural fees), financing (including
points and mortgage brokerage fees) and leasing (including brokerage fees) of
the Real Property, including reasonable attorney fees and other professional
fees which such fees have been reviewed, audited and approved by Tenant. Two
components of Landlord's Deductibles are hereby stipulated by the parties to
be, and shall not exceed, brokerage fees of Six Hundred Eighty-Eight Thousand
Dollars ($688,000.00), and direct development costs, up to and including the
Lease Commencement Date, of Three Hundred Forty-Six Thousand Four Hundred
Forty-Eight and 54/100 Dollars ($346,448.54). The Tenant
EXHIBIT B
Page 2
<PAGE>
Improvement Allowance shall be funded by Landlord's lender into the escrow
account described in Section 2.2 below. Costs of Tenant Improvements above
the Tenant Improvement Allowance shall be borne entirely by Tenant. If and
to the extent Landlord fails to timely deliver to the escrow account the
payments required by this provision, Tenant shall have the right to deduct
from Base Rent and Additional Rent next occurring, Tenant's cost of money
plus two percent (2%) per annum, until the date of delivery of such payments.
If Tenant reasonably determines that Landlord shall be unable to deliver to
the escrow account the Tenant Improvement Allowance by the date so required
in Section 2.2 below, then, following thirty (30) days' written notice to
Landlord, Tenant shall have the right to deduct from Base Rent and Additional
Rent next accruing the amount of the Tenant Improvement Allowance, including
interest thereon at Tenant's then current cost of money plus two percent (2%)
per annum, until the unfunded sums have been fully credited to Base Rent and
Additional Rent, unless within such thirty (30) day period Landlord funds the
Tenant Improvement Allowance into the escrow account.
2.2 DISBURSEMENT OF THE TENANT IMPROVEMENT ALLOWANCE. Landlord shall
pay the Tenant Improvement Allowance into an escrow account approved by Landlord
and Tenant, with instructions to the escrow holder to disburse the net proceeds
(after deducting Landlord's Deductibles) to Tenant upon the earlier of (i) ten
(10) business days after the loan proceeds have been placed in the escrow
account or (ii) the Rent Commencement Date. If any sub-contractor files a lien
with respect to the Tenant Improvements, the matter shall be handled by Tenant.
SECTION 3
SUBSTANTIAL COMPLETION OF THE PREMISES
The term "Substantially Complete" or "Substantial Completion" as used in
the Lease and this Tenant Work Letter shall mean: (i) the Tenant
Improvements are substantially complete, subject only to Tenant's completion
of the punch-list items, and in compliance with all applicable laws,
statutes, codes, rules and regulations and all of the Building's systems as
set forth in the Approved Plans, including, but not limited to heating,
ventilating, air-conditioning, and plumbing, life safety, mechanical and/or
electrical systems are operational to the extent necessary to service the
Building; and (ii) Tenant has obtained a final certificate of occupancy, or
its equivalent, for the Building.
SECTION 4
MISCELLANEOUS
4.1 TENANT'S REPRESENTATIVE. Tenant has designated John Siemon or his
designated representative ("Tenant's Representative") as its sole
representative with respect to the matters set forth in this Tenant Work
Letter, who, until further notice to Landlord, shall have full authority and
responsibility to act on behalf of the Tenant as required in this Tenant Work
Letter.
EXHIBIT B
Page 3
<PAGE>
4.2 LANDLORD'S REPRESENTATIVE. Landlord has designated Ronald Binder or
Michael Binder as its sole representative with respect to the matters set forth
in this Tenant Work Letter, who, until further notice to Tenant, shall have full
authority and responsibility to act on behalf of the Landlord as required in
this Tenant Work Letter.
EXHIBIT B
Page 4
<PAGE>
EXHIBIT C
FORM OF NOTICE OF LEASE TERMS
To:
Re: Office Lease dated November 26, 1997, between Westlake Business Park,
Ltd., a California Limited Partnership ("Landlord"), and WellPoint Health
Networks Inc., a Delaware corporation ("Tenant"), concerning the Building
located at ______ La Tienda Drive, Thousand Oaks, California.
Gentlemen:
In accordance with the Office Lease (the "Lease"), we wish to advise you
and/or confirm as follows:
1. The Lease Commencement Date is _______________ and the Lease Expiration
Date is ________________.
2. Rent commenced to accrue on ___________________.
3. The rentable square footage of the Building is ________________.
4. The Base Rent for the Premises shall be follows:
<TABLE>
<CAPTION>
Months of Lease Term Annual Rent
-------------------- -----------
<S> <C>
(a) Months 1 through 30: $1,214,400.00;
(b) Months 31 through 60: $1,276,096.00;
(c) Months 61 through 90: $1,340,927.00;
(d) Months 91 through 120: $1,409,052.00;
(e) Months 121 through 150: $1,480,637.00;
(f) Months 151 through 180: $1,555,859.00;
(g) Months 181 through 210: $1,634,903.00;
(h) Months 211 through 240: $1,717,963.00; and
(i) Months 241 through Expiration Date: $1,805,242.00.
</TABLE>
"Tenant"
WELLPOINT HEALTH NETWORKS INC.,
a Delaware corporation
By:
--------------------------------
Its:
--------------------------------
EXHIBIT C
Page 1
<PAGE>
EXHIBIT D
FORM OF ESTOPPEL CERTIFICATE
To:
- ------------------------------
- ------------------------------
- ------------------------------
Re: Tenant:
-------------------
Landlord:
----------------
Date of Lease:
------------
Amended:
-----------------
Premises:
-----------------
The undersigned hereby certifies the following information with respect to
the Lease:
1. The undersigned is the "Tenant"/"Landlord" under the
above-referenced lease ("Lease") covering the above-referenced premises
("Premises").
2. The Lease constitutes the entire agreement between Landlord and
Tenant with respect to the Premises and the Lease has not been modified,
changed, altered, or amended in any respect except as set forth above.
3. The term of the Lease commenced on ____________ and including any
presently exercised option or renewal term, will expire on ______________.
Tenant is the actual and sole occupant in possession and has not sublet,
assigned or hypothecated its leasehold interest.
4. As of this date, there exists no breach or default, nor state of
facts which, with notice, the passage of time, or both would result in a breach
or default on the part of either Tenant or Landlord. To the best of the
undersigned's knowledge, no claim, controversy, dispute, quarrel or disagreement
exists between Tenant and Landlord.
5. Tenant is currently obligated to pay annual rent in monthly
installments of $_____ and monthly installments of annual rental have been paid
through _____________.
EXHIBIT D
Page 1
<PAGE>
6. Tenant has no right to renew or extend the terms of the Lease, nor
any option or preferential right to lease or occupy additional space within the
property of which the Premises are a part, except as follows:
________________________________.
7. The person executing this Certificate is a duly authorized agent of
Tenant/Landlord.
This Certificate may be relied upon you or any party who acquires an interest in
the Premises.
Dated this ______ day of __________________.
---------------------------------
By:
-----------------------------
Name:
---------------------------
Title:
--------------------------
EXHIBIT D
Page 2
<PAGE>
EXHIBIT E
BASE RENT
<TABLE>
<CAPTION>
Months of Lease Term Annual Rent
-------------------- -----------
<S> <C>
(a) Months 1 through 30: $1,214,400.00;
(b) Months 31 through 60: $1,276,096.00;
(c) Months 61 through 90: $1,340,927.00;
(d) Months 91 through 120: $1,409,052.00;
(e) Months 121 through 150: $1,480,637.00;
(f) Months 151 through 180: $1,555,859.00;
(g) Months 181 through 210: $1,634,903.00;
(h) Months 211 through 240: $1,717,963.00; and
(i) Months 241 through Expiration Date: $1,805,242.00.
</TABLE>
EXHIBIT B
Page 1
<PAGE>
EXHIBIT 10.49
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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<PAGE>
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
2
<PAGE>
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.
3
<PAGE>
(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)
4
<PAGE>
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.
5
<PAGE>
(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.
6
<PAGE>
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.
7
<PAGE>
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.
8
<PAGE>
EXHIBIT 21
WELLPOINT HEALTH NETWORKS INC.
LIST OF SUBSIDIARIES
STATE OF
CORPORATION INCORPORATION
BC Life & Health Insurance Company California
Blue Cross of California California
Comprehensive Integrated Marketing Services California
Cost Care, Inc. Massachusetts
National Capital Health Plan, Inc. Virginia
National Capital Preferred Provider Organization Maryland
Professional Claim Services, Inc. New York
UNICARE Insurance Company California
UNICARE Life & Health Insurance Company Delaware
UNICARE National Services, Inc. Delaware
UNICARE of Texas Health Plans, Inc. Texas
UNICARE Specialty Services, Inc. California
WellPoint Behavioral Health, Inc. Delaware
WellPoint California Services, Inc. Delaware
WellPoint Pharmacy Management, Inc. California
<PAGE>
EXHIBIT 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the incorporation by reference in the registration statements
of WellPoint Health Networks Inc. on Form S-8 (File Nos. 333-05111, 333-33013
and 333-42073) and Form S-3 (File Nos. 333-08519 and 333-31599) of our report
dated February 2, 1998, on our audits of the consolidated financial statements
of WellPoint Health Networks Inc. as of December 31, 1997 and 1996 and for each
of the years ended December 31, 1997, 1996 and 1995, which report is included in
this Annual Report on Form 10-K.
COOPERS & LYBRAND L.L.P.
Los Angeles, California
March 30, 1998
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
COMPANY'S CONSOLIDATED BALANCE SHEETS AND CONSOLIDATED INCOME STATEMENTS FROM
FORM 10-K FOR THE YEAR ENDED DECEMBER 31, 1997.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<CASH> 283,851
<SECURITIES> 2,552,775
<RECEIVABLES> 537,454<F1>
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 3,505,817
<PP&E> 115,193<F2>
<DEPRECIATION> 0
<TOTAL-ASSETS> 4,533,415
<CURRENT-LIABILITIES> 2,344,305
<BONDS> 388,000
0
0
<COMMON> 698
<OTHER-SE> 1,222,471
<TOTAL-LIABILITY-AND-EQUITY> 4,533,415
<SALES> 0
<TOTAL-REVENUES> 5,826,444
<CGS> 0
<TOTAL-COSTS> 4,245,281
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 36,658
<INCOME-PRETAX> 382,200
<INCOME-TAX> 154,791
<INCOME-CONTINUING> 227,409
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 227,409
<EPS-PRIMARY> 3.30
<EPS-DILUTED> 3.27
<FN>
<F1>RECEIVABLES ARE NET OF $32,587 ALLOWANCE FOR DOUBTFUL ACCOUNTS.
<F2>PP&E IS NET OF $120,627 ACCUMULATED DEPRECIATION AND AMORTIZATION.
</FN>
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
COMPANY'S CONSOLIDATED STATEMENTS OF EARNINGS AND CONSOLIDATED BALANCE SHEETS
AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS
PRESENTED IN THE FORM 10-Q FOR THE QUARTERLY PERIOD ENDED MARCH 31, 1996.
</LEGEND>
<RESTATED>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 2-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> MAR-31-1996
<CASH> 914,774
<SECURITIES> 1,424,694
<RECEIVABLES> 380,800
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 2,800,476
<PP&E> 44,953
<DEPRECIATION> 0
<TOTAL-ASSETS> 3,230,807
<CURRENT-LIABILITIES> 1,240,153
<BONDS> 84,372
0
0
<COMMON> 995
<OTHER-SE> 1,710,713
<TOTAL-LIABILITY-AND-EQUITY> 3,230,807
<SALES> 0
<TOTAL-REVENUES> 817,582
<CGS> 0
<TOTAL-COSTS> 571,785
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 101,045
<INCOME-TAX> 40,932
<INCOME-CONTINUING> 60,113
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 60,113
<EPS-PRIMARY> 0.91
<EPS-DILUTED> 0.91
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
COMPANY'S CONSOLIDATED STATEMENTS OF EARNINGS AND CONSOLIDATED BALANCE SHEETS
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 1997 AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<RESTATED>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> JUN-30-1997
<CASH> 381,685
<SECURITIES> 2,180,456
<RECEIVABLES> 548,774
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 3,219,348
<PP&E> 98,363
<DEPRECIATION> 0
<TOTAL-ASSETS> 4,259,048
<CURRENT-LIABILITIES> 2,028,437
<BONDS> 464,000
0
0
<COMMON> 696
<OTHER-SE> 1,084,975
<TOTAL-LIABILITY-AND-EQUITY> 4,259,048
<SALES> 0
<TOTAL-REVENUES> 2,757,241
<CGS> 0
<TOTAL-COSTS> 2,555,467
<OTHER-EXPENSES> 13,064
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 20,613
<INCOME-PRETAX> 168,097
<INCOME-TAX> 68,079
<INCOME-CONTINUING> 100,018
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 100,018
<EPS-PRIMARY> 1.47
<EPS-DILUTED> 1.46
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
COMPANY'S CONSOLIDATED STATEMENTS OF EARNINGS AND CONSOLIDATED BALANCE SHEETS
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1997.
</LEGEND>
<RESTATED>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> SEP-30-1997
<CASH> 284,397
<SECURITIES> 2,351,017
<RECEIVABLES> 602,495
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 3,353,778
<PP&E> 106,286
<DEPRECIATION> 0
<TOTAL-ASSETS> 4,403,966
<CURRENT-LIABILITIES> 2,211,151
<BONDS> 429,000
0
0
<COMMON> 697
<OTHER-SE> 1,161,702
<TOTAL-LIABILITY-AND-EQUITY> 4,403,966
<SALES> 0
<TOTAL-REVENUES> 4,268,821
<CGS> 0
<TOTAL-COSTS> 3,958,632
<OTHER-EXPENSES> 19,952
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 28,757
<INCOME-PRETAX> 261,480
<INCOME-TAX> 105,894
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 155,586
<EPS-PRIMARY> 2.27
<EPS-DILUTED> 2.25
</TABLE>
