<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ______ to _______
Commission File Number 001-13803
WELLPOINT HEALTH NETWORKS INC.
(Exact name of registrant as specified in its charter)
Delaware 95-4635504
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
21555 Oxnard Street, Woodland Hills, California 91367
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (8l8) 703-4000
Not Applicable
(Former name, former address and former fiscal year, if changed since last
report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
---- ----
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date:
Title of each class Outstanding at November 11, 1998
----------------------------- --------------------------------
Common Stock, $0.0l par value 66,949,912 shares
<PAGE>
WELLPOINT HEALTH NETWORKS INC.
THIRD QUARTER 1998 FORM 10-Q
TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION PAGE
ITEM 1. Financial Statements
Consolidated Balance Sheets as of September 30, 1998 and
December 31, 1997 . . . . . . . . . . . . . . . . . . . . . . 1
Consolidated Income Statements for the Three and Nine Months
Ended September 30, 1998 and 1997 . . . . . . . . . . . . . . 2
Consolidated Statement of Changes in Stockholders' Equity
for the Nine Months Ended September 30, 1998. . . . . . . . . 3
Consolidated Statements of Cash Flows for the
Nine Months Ended September 30, 1998 and 1997 . . . . . . . . 4
Notes to Consolidated Financial Statements . . . . . . . . . . . 5
ITEM 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations . . . . . . . .11
PART II. OTHER INFORMATION
ITEM 6. Exhibits and Reports on Form 8-K . . . . . . . . . . . . . . . .31
SIGNATURES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .33
2
<PAGE>
ITEM 1. FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
WELLPOINT HEALTH NETWORKS INC.
Consolidated Balance Sheets
(IN THOUSANDS, EXCEPT SHARE DATA) September 30, December 31,
1998 1997
------------- ------------
<S> <C> <C>
ASSETS (unaudited)
Current Assets:
Cash and cash equivalents $ 270,206 $ 269,067
Investment securities, at market value 2,227,192 2,188,651
Receivables, net 604,076 502,880
Deferred tax assets 63,845 68,279
Income taxes recoverable 183,203 -
Other current assets 50,616 50,262
------------ ------------
Total Current Assets 3,399,138 3,079,139
Property and equipment, net 120,567 112,526
Intangible assets 58,980 259,104
Goodwill 376,840 361,643
Long-term investments 103,883 102,819
Deferred tax assets 79,582 61,078
Other non-current assets 47,109 48,592
------------ ------------
Total Non-Current Assets 786,961 945,762
------------ ------------
Net assets of discontinued operations held for sale - 209,223
------------ ------------
Total Assets $ 4,186,099 $ 4,234,124
------------ ------------
------------ ------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Medical claims payable $ 960,059 $ 922,658
Reserves for future policy benefits 50,377 51,189
Unearned premiums 198,625 196,205
Accounts payable and accrued expenses 388,160 347,316
Experience rated and other refunds 258,836 255,495
Income taxes payable - 105,052
Other current liabilities 368,082 302,032
------------ ------------
Total Current Liabilities 2,224,139 2,179,947
Accrued postretirement benefits 64,537 63,891
Reserves for future policy benefits, non-current 327,783 332,033
Long-term debt 253,000 388,000
Other non-current liabilities 42,638 47,084
------------ ------------
Total Liabilities 2,912,097 3,010,955
Stockholders' Equity:
Preferred Stock - $0.01 par value, 50,000,000 shares
authorized, none issued and outstanding - -
Common Stock - $0.01 par value, 300,000,000 shares
authorized, 70,339,977 and 69,778,086 issued
at September 30, 1998 and December 31, 1997, respectively 703 698
Treasury stock, at cost, 2,650,856 and 4,571 shares at
September 30, 1998 and December 31, 1997, respectively (146,329) (103)
Additional paid-in capital 906,286 882,312
Retained earnings 509,202 345,318
Accumulated other comprehensive income 4,140 (5,056)
------------ ------------
Total Stockholders' Equity 1,274,002 1,223,169
------------ ------------
Total Liabilities and Stockholders' Equity $ 4,186,099 $ 4,234,124
------------ ------------
------------ ------------
</TABLE>
See the accompanying notes to the consolidated financial statements.
1
<PAGE>
<TABLE>
<CAPTION>
WELLPOINT HEALTH NETWORKS INC.
Consolidated Income Statements
(Unaudited)
(IN THOUSANDS, EXCEPT EARNINGS PER SHARE) Three Months Ended September 30, Nine Months Ended September 30,
-------------------------------- -------------------------------
1998 1997 1998 1997
-------------- --------------- ------------- ---------------
<S> <C> <C> <C> <C>
Revenues:
Premium revenue $ 1,480,058 $ 1,310,323 $ 4,375,261 $ 3,730,064
Management services revenue 109,587 108,311 329,002 274,730
Investment income 39,094 47,287 70,511 123,463
-------------- --------------- ------------- ---------------
1,628,739 1,465,921 4,774,774 4,128,257
Operating Expenses:
Health care services and other benefits 1,191,848 1,078,158 3,518,793 3,003,254
Selling expense 71,255 64,745 207,039 183,886
General and administrative expense 240,985 214,994 729,831 619,198
Nonrecurring costs - - - 14,535
-------------- --------------- ------------- ---------------
1,504,088 1,357,897 4,455,663 3,820,873
-------------- --------------- ------------- ---------------
Operating Income 124,651 108,024 319,111 307,384
Interest expense 5,817 8,144 20,425 28,757
Other expense, net 6,530 6,169 19,971 17,834
-------------- --------------- ------------- ---------------
Income from Continuing Operations before
Provision for Income Taxes 112,304 93,711 278,715 260,793
Provision (benefit) for income taxes (39,904) 38,029 26,563 106,544
-------------- --------------- ------------- ---------------
Income from Continuing Operations 152,208 55,682 252,152 154,249
Discontinued Operations:
Income (Loss) from Workers' Compensation
Segment, net of tax benefit of $0,
$215, $6,959 and $651, respectively - (114) (12,592) 1,337
Loss on disposal of Workers' Compensation
Segment, net of tax benefit of $33,022 - - (75,676) -
-------------- --------------- ------------- ---------------
Income (Loss) from Discontinued Operations - (114) (88,268) 1,337
-------------- --------------- ------------- ---------------
Net Income $ 152,208 $ 55,568 $ 163,884 $ 155,586
-------------- --------------- ------------- ---------------
-------------- --------------- ------------- ---------------
Earnings Per Share:
Income from continuing operations $ 2.20 $ 0.80 $ 3.61 $ 2.25
Income (loss) from discontinued operations - - (1.26) 0.02
-------------- --------------- ------------- ---------------
Net income $ 2.20 $ 0.80 $ 2.35 $ 2.27
-------------- --------------- ------------- ---------------
-------------- --------------- ------------- ---------------
Earnings Per Share Assuming Full Dilution:
Income from continuing operations $ 2.16 $ 0.79 $ 3.56 $ 2.23
Income (loss) from discontinued operations - - (1.25) 0.02
-------------- --------------- ------------- ---------------
Net income $ 2.16 $ 0.79 $ 2.31 $ 2.25
-------------- --------------- ------------- ---------------
-------------- --------------- ------------- ---------------
</TABLE>
See the accompanying notes to the consolidated financial statements.
2
<PAGE>
<TABLE>
<CAPTION>
WELLPOINT HEALTH NETWORKS INC.
Consolidated Statement of Changes in Stockholders' Equity
(Unaudited)
(IN THOUSANDS)
Common Stock
------------------------------
Issued In Treasury
Preferred ------------------------------
Stock Shares Amount Amount
--------- ------ ------ ---------
<S> <C> <C> <C> <C>
Balance as of December 31, 1997 $ - 69,778 $ 698 $ (103)
Comprehensive income
Net income
Other comprehensive income, net of tax
Change in unrealized valuation
adjustment on investment securities,
net of reclassification adjustment (see Note 4)
Total comprehensive income
Stock repurchased, 2,646,285 shares at cost (146,226)
Stock issued under Company's stock option / award plan 562 5
---- ------ ----- ---------
Balance as of September 30, 1998 $ - 70,340 $ 703 $(146,329)
---- ------ ----- ---------
---- ------ ----- ---------
</TABLE>
<TABLE>
<CAPTION>
(IN THOUSANDS) Accumulated
Additional Other
Paid - in Retained Comprehensive
Capital Earnings Income Total
---------- --------- ------------- ----------
<S> <C> <C> <C> <C>
Balance as of December 31, 1997 $ 882,312 $ 345,318 $ (5,056) $1,223,169
Comprehensive income
Net income 163,884 163,884
Other comprehensive income, net of tax
Change in unrealized valuation
adjustment on investment securities,
net of reclassification adjustment (see Note 4) 9,196 9,196
--------- ---------- ---------
Total comprehensive income 163,884 9,196 173,080
--------- ---------- ---------
Stock repurchased, 2,646,285 shares at cost (146,226)
Stock issued under Company's stock option / award plan 23,974 23,979
---------- --------- ---------- ---------
Balance as of September 30, 1998 $ 906,286 $ 509,202 $ 4,140 $1,274,002
---------- --------- ---------- ---------
---------- --------- ---------- ---------
</TABLE>
3
<PAGE>
WELLPOINT HEALTH NETWORKS INC.
Consolidated Statements of Cash Flows
(Unaudited)
<TABLE>
<CAPTION>
(IN THOUSANDS) Nine Months Ended September 30,
-------------------------------
1998 1997
----------- -----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Income from continuing operations $ 252,152 $ 154,249
Adjustments to reconcile income from continuing operations to net cash
provided by continuing operating activities:
Depreciation and amortization, net of accretion 39,152 36,191
(Gains) losses on sales of assets, net 37,605 (22,119)
Benefit for deferred income taxes (19,119) (6,112)
Amortization of deferred gain on sale of building (3,319) (3,319)
(Increase) decrease in certain assets:
Receivables, net (101,196) (72,860)
Income taxes recoverable (71,794) 8,682
Other current assets (354) (19,255)
Other non-current assets 1,483 456
Increase (decrease) in certain liabilities:
Medical claims payable 37,401 107,263
Reserves for future policy benefits (5,062) (1,689)
Unearned premiums 2,420 (2,124)
Accounts payable and accrued expenses 18,744 59,557
Experience rated and other refunds 3,341 11,593
Other current liabilities 28,195 24,889
Accrued postretirement benefits 646 2,439
Other non-current liabilities (1,127) 9,361
----------- -----------
Net cash provided by continuing operating activities 219,168 287,202
----------- -----------
Income (loss) from discontinued operations (12,592) 1,337
Adjustment to derive cash flows from discontinued operating activities:
Change in net operating assets 8,233 25,367
----------- -----------
Net cash provided by (used in) discontinued operating activities (4,359) 26,704
----------- -----------
Net cash provided by operating activities 214,809 313,906
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Investments purchased (2,243,179) (1,996,919)
Proceeds from investments sold and matured 2,181,268 1,474,804
Property and equipment purchased (58,473) (32,244)
Proceeds from property and equipment sold 24,571 341
Proceeds from sale of Workers' Compensation business 101,413 -
Additional investment in subsidiaries - (17,276)
Purchase of subsidiaries, net of cash acquired - 361,977
----------- -----------
Net cash provided by (used in) continuing investing activities 5,600 (209,317)
----------- -----------
Net cash provided by (used in) investing activities of discontinued operations 15,877 (51,904)
----------- -----------
Net cash provided by (used in) investing activities 21,477 (261,221)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayment of long-term debt (135,000) (196,000)
Proceeds from issuance of common stock - 110,340
Proceeds from issuance of stock under option/award plan 23,979 7,188
Common stock repurchased (124,126) -
----------- -----------
Net cash used in financing activities (235,147) (78,472)
----------- -----------
Net increase (decrease) in cash and cash equivalents 1,139 (25,787)
Cash and cash equivalents at beginning of period 269,067 285,222
----------- -----------
Cash and cash equivalents at end of period $ 270,206 $ 259,435
----------- -----------
----------- -----------
</TABLE>
See the accompanying notes to the consolidated financial statements.
4
<PAGE>
WELLPOINT HEALTH NETWORKS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. ORGANIZATION
WellPoint Health Networks Inc. (the "Company" or "WellPoint"), one of the
nation's largest publicly traded managed health care companies, is
organized under the laws of Delaware and holds the exclusive license for
the right to use the Blue Cross name and related service marks in
California. The Company has medical members in all 50 states and the
District of Columbia.
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
services, 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, including pharmacy, dental, utilization management, life,
preventive care, disability, behavioral health, COBRA and flexible benefits
account administration.
2. BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements of
WellPoint, in the opinion of management, reflect all material
adjustments (which are of a normal recurring nature) necessary for the
fair presentation of its financial position as of September 30, 1998,
the results of its operations for the quarter and nine months ended
September 30, 1998 and 1997, cash flows for the nine months ended
September 30, 1998 and 1997, and its changes in stockholders' equity for
the nine months ended September 30, 1998. The results of operations for
the interim periods presented are not necessarily indicative of the
operating results for the full year.
Effective January 1, 1998, the Company adopted the provisions of Statement
of Financial Accounting Standards No. 130, "Comprehensive Income" ("SFAS
No. 130"). Comprehensive income encompasses all changes in stockholders'
equity (except those arising from transactions with shareholders) and
includes net income and net unrealized gains or losses on available-for-
sale securities. Comprehensive income is net of reclassification
adjustments to adjust for items previously included in net income, such as
realized gains on investment securities.
RECLASSIFICATIONS
Certain amounts in the prior year consolidated financial statements have
been reclassified to conform to the 1998 presentation. Prior year
amounts have been restated to exclude the discontinued Workers'
Compensation segment.
5
<PAGE>
WELLPOINT HEALTH NETWORKS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
3. EARNINGS PER SHARE
The following summarizes the dilutive effect of the Company's common stock
equivalents on earnings per share. There were no antidilutive securities
in all periods presented.
<TABLE>
<CAPTION>
(In thousands, except earnings per share) Quarter Ended Nine Months Ended
September 30, September 30,
------------------------- --------------------------
1998 1997 1998 1997
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Income from continuing operations $ 152,208 $ 55,682 $ 252,152 $ 154,249
Income (Loss) from discontinued operations - (114) (88,268) 1,337
---------- ---------- ---------- ----------
Net Income $ 152,208 $ 55,568 $ 163,884 $ 155,586
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
Weighted average shares outstanding 69,328 69,666 69,778 68,507
Net effect of dilutive stock options 993 1,081 1,111 592
---------- ---------- ---------- ----------
Fully diluted weighted average shares outstanding 70,321 70,747 70,889 69,099
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
EARNINGS PER SHARE:
Income from continuing operations $ 2.20 $ 0.80 $ 3.61 $ 2.25
Income (Loss) from discontinued operations - - (1.26) 0.02
---------- ---------- ---------- ----------
Net Income $ 2.20 $ 0.80 $ 2.35 $ 2.27
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
EARNINGS PER SHARE ASSUMING FULL DILUTION:
Income from continuing operations $ 2.16 $ 0.79 $ 3.56 $ 2.23
Income (Loss) from discontinued operations - - (1.25) 0.02
---------- ---------- ---------- ----------
Net Income $ 2.16 $ 0.79 $ 2.31 $ 2.25
---------- ---------- ---------- ----------
</TABLE>
Subsequent to September 30, 1998 and through November 12, 1998, the
Company repurchased approximately 0.9 million shares of its common
stock.
4. COMPREHENSIVE INCOME
The following summarizes comprehensive income reclassification adjustments
required under SFAS No. 130.
<TABLE>
<CAPTION>
Nine Months Ended
(In thousands) September 30, 1998
------------------
<S> <C>
Holding gain on investment securities arising during the period (net
of tax of $21,681) $ 31,852
Add: reclassification adjustment for realized losses on investment
securities (net of tax of $15,421) (22,656)
---------
Net gain recognized in other comprehensive income (net of tax of $4,523) $ 9,196
---------
---------
</TABLE>
6
<PAGE>
WELLPOINT HEALTH NETWORKS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
5. NEW PRONOUNCEMENTS
In September 1997, the Financial Accounting Standards Board (the "FASB")
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, "Employer's 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.
In September 1998, the FASB issued Statement of Financial Accounting
Standards No. 133, "Accounting for Derivative Instruments and Hedging
Activities" ("SFAS No. 133"). SFAS No. 133 establishes the accounting and
reporting standards for derivative instruments and for hedging activities.
Upon adoption of the standard, all derivatives must be recognized on the
balance sheet at their fair value. Any stand-alone deferred gains and
losses remaining on the balance sheet under previous hedge-accounting
rules must be removed from the balance sheet and all hedging
relationships must be designated anew and documented pursuant to the new
accounting rules. The new standard will be effective in the first quarter
of the year 2000.
The Company is presently assessing the presentation and effect of SFAS Nos.
131, 132 and 133 on the financial statements of the Company.
6. 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 health
insurers and HMOs generally, excludes certain health care services from
coverage under its PPO, HMO and other plans. The Company is, in its
ordinary course of business, subject to the claims of its members arising
out of decisions to restrict treatment or reimbursement for certain
services. 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.
7
<PAGE>
WELLPOINT HEALTH NETWORKS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
6. CONTINGENCIES, CONTINUED
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.
7. DISCONTINUED OPERATIONS
During the quarter ended June 30, 1998, the Company discontinued its
workers' compensation business segment. On July 29, 1998, the Company
entered into an agreement to sell the segment to Fremont Indemnity Company
for approximately $110.0 million. The Company received proceeds of $101.4
million as of the close date, representing the initial purchase price as
defined in the agreement. The transaction closed on September 1, 1998.
Revenues for the workers' compensation segment totaled $24.0 million for
the period beginning July 1, 1998 through the date of sale, and $94.6
million for the period beginning January 1, 1998 through the date of sale.
Revenues for the prior year totaled $40.5 million and $100.8 million for
the three months and nine months ended September 30, 1997, respectively.
The loss from the measurement date to the disposal date was $17.8 million,
net of tax benefit of $11.5 million.
8. PENDING TRANSACTION
On July 9, 1998, the Company entered into an Agreement and Plan of Merger
(the "Merger Agreement") by and among the Company, Cerulean Companies, Inc.
("Cerulean") and Water Polo Acquisition Corp., a wholly owned subsidiary of
the Company (the "Merger Sub"). Pursuant to the Merger Agreement, Cerulean
will merge with and into Merger Sub (the "Merger"). Cerulean is the parent
company of Blue Cross and Blue Shield of Georgia, Inc., which serves
approximately 1.7 million persons in the State of Georgia. At the effective
time of the Merger, the shareholders of Cerulean will receive WellPoint
Common Stock with a market value of $500 million (subject to certain
adjustments). Certain shareholders of Cerulean will have the option to
receive cash in lieu of WellPoint Common Stock in the Merger, subject to a
maximum aggregate limit of $225 million. The transaction is intended to
qualify as a tax-free reorganization for Cerulean shareholders that elect
to receive WellPoint Common Stock. The closing of the transaction is
subject to a number of regulatory and other approvals. The Merger is
currently expected to close in the fourth quarter of 1998 or the first
quarter of 1999. The purchase method of accounting will be used to account
for the transaction.
8
<PAGE>
WELLPOINT HEALTH NETWORKS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
9. HEDGING ACTIVITIES
The Company utilizes interest rate swap agreements and foreign currency
contracts to manage interest rate and foreign currency exposures. The
principal objective of such contracts is to minimize the risks and/or costs
associated with financial and investing activities. The Company does not
utilize financial instruments for trading or speculative purposes. The
counterparties to these contractual arrangements are a diverse group of
major financial institutions with which the Company also has other
financial relationships. These counterparties expose the Company to credit
loss in the event of non-performance. However, the Company does not
anticipate non-performance by the other parties.
Interest Rate Swap Agreements: The Company entered into interest rate
swap agreements to reduce the impact of changes in interest rates on its
floating rate debt under its revolving credit facility. The swap
agreements are contracts to exchange floating rate for fixed interest
payments periodically over the life of the agreements without the
exchange of the underlying notional amounts. The notional amounts of
the interest rate swap agreements are used to measure interest to be
paid and do not represent the amount of exposure to credit loss. For
interest rate instruments that effectively hedge interest rate
exposures, the net cash amounts paid on the agreements are accrued and
recognized as an adjustment to interest expense. If an agreement no
longer qualifies as a hedge instrument, then it is marked to market and
carried on the balance sheet at fair value. As of September 30, 1998,
the Company recognized a charge of $5.5 million in its income from
continuing operations for the market value decrease on the interest rate
swap agreements not serving as a hedge. As of September 30, 1998, the
notional amount of such contracts amounted to $147 million.
As of September 30, 1998 the Company had the following interest rate swap
agreements in effect (notional amount in thousands):
<TABLE>
<CAPTION>
Notional Amount Strike Rate Expiration Date
--------------- ----------- ---------------
<S> <C> <C>
$100,000 6.45% 8/99
$150,000 6.99% 10/03
$150,000 7.05% 10/06
</TABLE>
Foreign Exchange Contracts: As part of the Company's investment strategy
to diversify and obtain a higher rate of return on its investment
portfolio, the Company has invested in certain fixed maturity securities
denominated in foreign currencies. In order to mitigate the foreign
currency risk, the Company has entered into two types of foreign currency
derivative instruments. The first type of instrument is a forward
exchange contract which is entered into to hedge the foreign currency
risk between the
9
<PAGE>
WELLPOINT HEALTH NETWORKS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
9. HEDGING ACTIVITIES, CONTINUED
trade date and the settlement date of a foreign currency investment
transaction. Gains and losses related to such instruments are
recognized in the Company's income statement. As of September 30,
1998, the Company had no such hedges outstanding and for the three and nine
months ended September 30, 1998, recognized a loss from such hedging
activities of $1.7 million.
Secondly, the Company has entered into foreign currency contracts for each
of the fixed maturity securities owned as of September 30, 1998 to hedge
asset positions denominated in other currencies. As of September 30,
1998, the Company had the following foreign currency contracts in effect
(notional amount in thousands of U.S. dollars):
<TABLE>
<CAPTION>
Notional Amount Settlement Date
---------------- -------------------
Currency Buy Sell Buy Sell
----------------- ------ ------- -------- --------
<S> <C> <C> <C> <C>
British pound $3,615 10/28/98
German mark $3,673 $39,878 10/20/98 10/20/98
Australian dollar $6,279 $6,393 10/23/98 10/23/98
Danish kroner $7,906 11/24/98
French franc $15,716 10/19/98
</TABLE>
The unrealized gains and losses from such forward exchange contracts
are reflected in other comprehensive income. As of September 30,
1998 the unrealized losses arising from the above forward exchange
contracts amounts to $2 million.
10. INTANGIBLE ASSETS
The intangible asset balance consists of the following components (in
thousands):
<TABLE>
<CAPTION>
September 30, December 31,
1998 1997
------------- ------------
<S> <C> <C>
Trade name and service mark $ - $ 206,683
Customer lists 49,152 49,152
Provider contracts 9,208 9,208
Miscellaneous intangible assets 3,950 3,950
------------- ------------
Total Intangible Assets 62,310 268,993
Less: Accumulated Amortization (3,330) (9,889)
------------- ------------
Net Intangible Assets $ 58,980 $ 259,104
------------- ------------
------------- ------------
</TABLE>
10
<PAGE>
WELLPOINT HEALTH NETWORKS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
11. INCOME TAXES
In September 1998, the Company received a private letter ruling from the
Internal Revenue Service with respect to the treatment of certain
payments in conjunction with WellPoint's 1996 Recapitalization and
acquisition of the commercial operations of Blue Cross of California,
the Company's former parent company ("BCC Commercial Operations"). The
ruling allows the Company to deduct as an ordinary and necessary
business expense an $800 million cash payment made by Blue Cross of
California in May 1996 made to one of two newly formed charitable
foundations. In accordance with SFAS No. 109, paragraph 30, as of
September 30, 1998 the Company reduced the remaining goodwill of $194.5
million arising from the acquisition of certain assets and liabilities
of BCC Commercial Operations at the time of the Recapitalization and
recognized a reduction in its income tax benefit for the three months
ended September 30, 1998 of $85.5 million. As a result of the ruling,
the Company intends to file amended tax returns for prior years requesting
a refund of approximately $200 million and anticipates that future income
taxes will be reduced by approximately $80 million and has accordingly
recognized an income tax recoverable and a deferred tax asset,
respectively.
11
<PAGE>
WELLPOINT HEALTH NETWORKS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
This discussion contains forward-looking statements which involve risks and
uncertainties. The Company's actual results may differ materially from those
anticipated in these forward-looking statements as a result of certain factors
including, but not limited to, those set forth under "Factors That May Affect
Future Results of Operations."
GENERAL
The Company is one of the nation's largest publicly traded managed health care
companies with approximately 6.8 million medical members and over 24 million
specialty members as of September 30, 1998. The Company offers a broad spectrum
of quality network-based managed care plans, including health maintenance
organizations ("HMOs"), preferred provider organizations ("PPOs"), point-of-
service ("POS") plans, other hybrid plans and traditional indemnity plans to the
large and small employer, individual and senior markets. 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
provides a broad array of specialty and other products, including pharmacy,
dental, utilization management, life, preventive care, disability, behavioral
health, COBRA and flexible benefits account administration.
As discussed in Note 7, during the quarter ended June 30, 1998, the Company
discontinued its Workers' Compensation segment. All financial information
presented herein has been restated in both current and prior periods to exclude
the Workers' Compensation segment and the discussion and analysis that follows
has been modified accordingly.
NATIONAL EXPANSION AND OTHER RECENT DEVELOPMENTS
On July 29, 1998, WellPoint entered into a Stock Purchase Agreement (the "Stock
Purchase Agreement") by and between WellPoint and Fremont Indemnity Company
("Fremont"). Pursuant to the Stock Purchase Agreement, Fremont acquired all of
the outstanding capital stock of UNICARE Specialty Services, Inc., a wholly
owned subsidiary of WellPoint ("UNICARE Specialty"). The transaction was
completed on September 1, 1998. The principal asset of UNICARE Specialty was
the capital stock of UNICARE Workers' Compensation Insurance Company ("UNICARE
Workers' Compensation"). The purchase price for the acquisition was the
statutory surplus (adjusted in accordance with the terms of the Purchase
Agreement) of UNICARE Workers' Compensation as of the date of the closing. The
purchase price based upon adjusted statutory surplus of UNICARE Workers'
Compensation as of September 1, 1998, the closing date of the transaction, was
approximately $110.0 million. The purchase price is subject to adjustment
based upon the results of a post closing audit; which is currently being
conducted.
12
<PAGE>
NATIONAL EXPANSION AND OTHER RECENT DEVELOPMENTS, CONTINUED
Subsequent to September 1, 1998, the Company and Fremont are jointly marketing
integrated workers' compensation and medical insurance products in the small
employer group market.
On July 9, 1998, the Company entered into an Agreement and Plan of Merger with
Cerulean Companies Inc. ("Cerulean") (See Note 8). Cerulean, principally
through its Blue Cross and Blue Shield of Georgia subsidiary, offers insured and
administrative services products primarily in the State of Georgia. Cerulean
has historically experienced a higher administrative expense ratio than the
Company's core businesses due to its higher concentration of administrative
services business. Cerulean has also historically experienced a higher loss
ratio than the Company's core businesses due to its higher percentage of large
group business, which generally reduces the Company's overall risk and also
underwriting margins. Accordingly, it is expected that Cerulean's higher loss
and administrative expense ratios will ultimately contribute to an increase in
those ratios for the Company after the transaction is completed.
On March 1, 1997, the Company completed its acquisition of certain portions of
the Group Benefits Operations (the "GBO") of John Hancock Mutual Life Insurance
Company. The purchase price was $89.7 million, subject to the resolution of
certain items related to the post- closing audit. 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 Company expects to incur approximately $8 to $10 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. These costs deal primarily
with systems integration and site consolidations. As of September 30, 1998, the
Company has incurred approximately $6.4 million of these costs. In addition,
the Company expects to incur approximately $3 to $5 million of these and related
costs during 1999.
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
since the time of the acquisition have not resulted in the expected membership
attrition. To date, the Company has experienced approximately 10% 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.
13
<PAGE>
NATIONAL EXPANSION AND OTHER RECENT DEVELOPMENTS, CONTINUED
The Company has acquired certain businesses over the last two and one-half
years which historically experienced a higher overall loss ratio than the
Company. These acquired businesses have 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 significant premium increases and
changes in product design. Such businesses have historically also
experienced a higher administrative expense ratio than the Company's
traditional California business due to the higher percentage of management
services business. These higher administrative expense ratios have
contributed to an increase in the Company's overall administrative expense
ratio since the respective dates of acquisition.
In order to integrate its acquired businesses and implement its regional
expansion strategy, the Company will need to complete building its provider
and sales networks and successfully convert some or all of these books of
business to the Company's existing information systems, which will require
additional expenditures by the Company.
In response to higher than anticipated utilization with respect to certain co-
payment products offered to the Company's individual and small group customers
in California, the Company has implemented premium increases with respect to
such products. The Company will continue to evaluate the need for further
premium increases, plan design changes and other appropriate actions in the
future in order to maintain profit margins. 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. Federal legislation
enacted during the last two years 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"). Among other things, this
legislation purports to make managed care organizations ("MCOs") such as the
Company liable for the failure by the MCO, its employees or agents to exercise
ordinary care when making "health care treatment decisions" (as defined in SB
386). The legislation was effective as of September 1, 1997. In September
1998, the United States District Court for the Southern District of Texas ruled,
in part, that the MCO liability provisions of SB 386 are not preempted by the
Federal Employee Retirement Income Security Act of 1974 ("ERISA"). To date,
this legislation has not
14
<PAGE>
LEGISLATION, CONTINUED
adversely affected the Company's results of operations. However, though the
Company maintains insurance covering such liabilities, 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. Even if the Company
is not held to be liable under any litigation, the existence of potential MCO
liability may cause the Company to incur greater costs in defending such
litigation.
YEAR 2000
The Company is substantially dependent on its computer systems, business
applications and other information technology systems ("IT systems"), due to the
nature of its managed health care business and the increasing number of
electronic transactions in the industry. Historically, many IT systems 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. Given the Company's reliance on its computer systems, the Company's
results of operations could be materially adversely affected by any significant
errors or failures. Additionally, the year 2000 presents potential problems for
other systems and applications containing date-dependent embedded
microprocessors ("non-IT systems"), such as elevators and heating and
ventilation equipment.
The Company has developed and is in the midst of executing a comprehensive plan
designed to address the "year 2000" issue for its IT and non-IT systems and
applications. With respect to IT systems, during 1997 the Company completed a
detailed risk assessment of its various computer systems, business applications
and other affected systems, 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. By
the second quarter of 1999, the Company expects to undergo third-party review of
its year 2000 remediation efforts. This third party review will include an
assessment of the procedures undertaken by the Company as well as a computer
software test of selected portions of the Company's computer code. With respect
to non-IT systems, the Company is currently in the process of completing the
replacement or renovation of Company-owned systems to address year 2000 issues.
The Company is also obtaining certifications from property owners that non-IT
systems in leased facilities will be remediated or replaced on a timely basis.
The Company currently expects that its year 2000 remediation efforts and third-
party review with respect to non-IT systems will be completed by the second
quarter of 1999.
The Company currently estimates that its costs related to year 2000
compliance remediation for Company-owned IT systems and applications will be
approximately $20 million in 1997 and 1998 and approximately $6 to 7 million
in 1999. The amounts expected to be expended during 1998 represent
approximately 25% of the Company's IT systems budget. As of September 30,
15
<PAGE>
YEAR 2000, CONTINUED
1998, the Company had expended approximately $13.1 million for remediation of
its IT software systems and applications and approximately $1 million for
renovation or replacement of its telecommunications equipment. The Company
currently estimates that its total costs in 1998 and 1999 with respect to
non-IT systems and applications will be approximately $1 million. The
Company's expenditures with respect to non-IT systems will include the
acquisition of back-up power supplies for the Company's headquarters and data
center facilities. The Company expenses year 2000 remediation costs as
incurred and expects to fund these costs through cash flow from operations.
While the immediacy of year 2000 compliance measures has caused the Company
to defer or cancel certain IT projects, the Company does not expect such
actions to have a material effect on the Company's results of operations or
financial condition. Assuming the Company's pending acquisition of Cerulean
is consummated (See Note 8), similar remediation and testing efforts with
respect to Cerulean-owned IT and non-IT systems and applications may increase
the Company's total expenditures.
The Company is currently formulating detailed contingency plans for its
individual business units in the event that its various systems and applications
do not achieve year 2000 compliance in a timely fashion. The contingency plans
are focused on identifying potential failure scenarios for the Company's IT and
non-IT systems and those of third parties with which the Company interacts and
on ensuring the continuation of critical business operations. The Company
currently expects that this contingency planning by each business unit will be
completed by the end of 1998. During the first half of 1999, the Company
expects to integrate each of these contingency plans into a Company-wide
contingency plan.
The Company is in the process of assembling survey data from health care
providers, health care transaction clearing houses, third party vendors and
certain other parties with which the Company communicates electronically to
determine the compliance efforts being undertaken by these parties and to assess
the Company's potential business exposure to any non-compliant systems operated
by these parties. Based on the survey data and other information compiled by
the Company to date, the Company has not identified any third parties that
Company expects will suffer year 2000-related problems likely to have a
significant adverse effect on the Company's operations. However, many of these
third parties are currently in the process of implementing the critical portions
of their own year 2000 compliance measures. As a result, at the current time
the Company does not have sufficient information to determine whether its
external relationships will be materially adversely affected by year 2000
compliance problems.
If the Company's year 2000 issues were not completely resolved prior to the end
of 1999, the Company could be subject to a number of potential consequences,
including, among others, an inability to timely and accurately process health
care claims, collect customers' premiums or administrative fees, verify
subscriber eligibility, assess utilization trends or compile accurate financial
data for use by management. In particular, the Company may experience a
decrease in electronic health claims submission, which could cause the Company's
claims inventory to
16
<PAGE>
YEAR 2000, CONTINUED
increase on a temporary basis. An increase in claims inventory could prevent
the Company from identifying emerging utilization trends quickly and taking
appropriate actions to counteract such trends. The Company is attempting to
limit its exposure to year 2000 issues by closely monitoring its own year
2000 remediation efforts, assessing the year 2000 compliance efforts of
various third parties with which it interacts and developing contingency
plans addressing potential problems that could have a material adverse effect
on the Company's results of operations. Although the Company intends to put
into place programs and procedures designed to mitigate the aforementioned
risks, there can be no assurances that all potential problems may be
mitigated by these procedures.
17
<PAGE>
RESULTS OF OPERATIONS
The Company'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. 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 results of operations for each of the quarters ended September 30,
1998 and 1997 include a full quarter of earnings for the acquired operations of
the GBO. The Company's results of operations for the nine months ended
September 30, 1998 also include a full period of earnings related to the
acquired operations of the GBO. For the nine months ended September 30, 1997,
the results of operations include earnings from March 1, the effective date of
acquisition.
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. Prior year ratios have been restated to
exclude the operations of the discontinued Workers' Compensation segment.
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
------------------ -----------------
1998 1997 1998 1997
------ ------ ------ ------
<S> <C> <C> <C> <C>
Operating Revenues:
Premium revenue 93.1% 92.4% 93.0% 93.1%
Management services revenue 6.9% 7.6% 7.0% 6.9%
------ ------ ------ ------
100.0% 100.0% 100.0% 100.0%
Operating Expenses:
Health care services and other
benefits (loss ratio) 80.5% 82.3% 80.4% 80.5%
Selling expense 4.5% 4.6% 4.4% 4.6%
General and administrative expense 15.2% 15.2% 15.5% 15.5%
</TABLE>
18
<PAGE>
MEMBERSHIP
The following table sets forth membership data and the percent change in
membership:
<TABLE>
<CAPTION>
MEDICAL MEMBERSHIP(a): As of September 30,
-------------------- Percent
1998 1997 Change
--------- --------- ------
<S> <C> <C> <C>
CALIFORNIA (b)
Group Services:
HMO 930,574 787,125 18.2%
PPO and Other 1,553,482 1,457,052 6.6%
--------- ---------
Total 2,484,056 2,244,177 10.7%
--------- ---------
Individual, Small Group and Senior:
HMO 338,730 302,867 11.8%
PPO and Other 1,327,899 1,269,714 4.6%
--------- ---------
Total 1,666,629 1,572,581 6.0%
--------- ---------
Medi-Cal 444,403 264,218 68.2%
--------- ---------
Total California Medical Membership 4,595,088 4,080,976 12.6%
--------- ---------
TEXAS
Group Services 160,295 170,727 (6.1%)
Individual, Small Group and Senior 97,951 62,914 55.7%
--------- ---------
Total 258,246 233,641 10.5%
--------- ---------
GEORGIA
Group Services 91,607 92,651 (1.1%)
Individual, Small Group and Senior 13,863 7,177 93.2%
--------- ---------
Total 105,470 99,828 5.7%
--------- ---------
OTHER STATES
Group Services 1,850,303 2,054,217 (9.9%)
Individual, Small Group and Senior 19,405 4,805 303.9%
--------- ---------
Total 1,869,708 2,059,022 (9.2%)
--------- ---------
TOTAL NATIONAL MEDICAL MEMBERSHIP (b) 2,233,424 2,392,491 (6.6%)
--------- ---------
TOTAL MEDICAL MEMBERSHIP (c) 6,828,512 6,473,467 5.5%
--------- ---------
--------- ---------
NETWORKS (d)
Proprietary Networks 4,451,048 3,906,529 13.9%
Other Networks 1,400,591 1,444,966 (3.1%)
Non-Network 976,873 1,121,972 (12.9%)
--------- ---------
TOTAL MEDICAL MEMBERSHIP 6,828,512 6,473,467 5.5%
--------- ---------
--------- ---------
</TABLE>
(a) 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 the contract.
(b) Classification between California and National membership for employer
groups is determined by the state of the employer's corporate office. The
state designation within National is determined by the zip code of the
subscriber.
(c) Medical membership includes 2,603,521 and 2,675,337 management services
members as of September 30, 1998 and 1997, respectively, of which those
management services members outside of California were 1,635,597 and
1,781,303 as of September 30, 1998 and 1997, respectively.
(d) 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.
19
<PAGE>
<TABLE>
As of September 30,
----------------------- Percent
1998 1997 Change
---------- ---------- ------
<S> <C> <C> <C>
Specialty Membership:
Pharmacy 14,625,859 12,150,533 20.4%
Dental 3,042,115 3,189,111 (4.6%)
Utilization Management 2,882,164 2,708,469 6.4%
Life 2,151,722 1,729,228 24.4%
Disability 867,117 1,140,422 (24.0%)
Behavioral Health 731,907 691,721 5.8%
</TABLE>
COMPARISON OF RESULTS FOR THE THIRD QUARTER 1998 TO THE THIRD QUARTER 1997
Premium revenue increased 13.0%, or $169.8 million, to $1,480.1 million for the
quarter ended September 30, 1998 from $1,310.3 million for the quarter ended
September 30, 1997. The increase is primarily attributable to an increase in
insured member months of 10.6% and the implementation of price increases
throughout the California market.
Management services revenue increased approximately $1.3 million to $109.6
million for the quarter ended September 30, 1998 from $108.3 million for the
quarter ended September 30, 1997. The increase is primarily due to rate
increases offset by related membership lapses in the Company's National
business.
Investment income was $39.1 million for the quarter ended September 30, 1998
compared to investment income of $47.3 million for the quarter ended
September 30, 1997, a decrease of $8.2 million. Net realized gains on
investment securities decreased $2.2 million totaling $5.4 million for the
quarter ended September 30, 1998 in comparison to $7.6 million net gain for
the quarter ended September 30, 1997. Included in the aforementioned net
gain was a loss of $5.5 million related to the Company's interest rate swaps
(See Note 9). Income for the quarter ended September 30, 1998 also includes
$1.7 million of foreign currency losses related to hedging activity (See
Note 9). Net interest and dividend income increased $0.6 million to
$35.4 million for the quarter ended September 30, 1998 in comparison to
$34.8 million for the quarter ended September 30, 1997. This increase was
primarily due to increased average investment balances in 1998 versus 1997,
partially offset by lower yields in 1998.
Health care services and other benefits expense increased 10.5%, or $113.6
million, to $1,191.8 million for the quarter ended September 30, 1998 from
$1,078.2 million for the quarter ended September 30, 1997. The increase is
primarily attributable to the previously mentioned increase in insured member
months of 10.6%.
20
<PAGE>
COMPARISON OF RESULTS FOR THE THIRD QUARTER 1998 TO THE THIRD
QUARTER 1997, CONTINUED
The loss ratio attributable to managed care and related products for the
quarter ended September 30, 1998 decreased to 80.5% compared to 82.3% for the
quarter ended September 30, 1997. The decline is primarily due to the
implementation of price increases throughout the California market.
Selling expense consists of commissions paid to outside brokers and agents
representing the Company. Selling expense for the quarter ended September 30,
1998 increased 10.2% to $71.3 million compared to $64.7 million for the quarter
ended September 30, 1997, corresponding with continued overall premium revenue
growth. The selling expense ratio was 4.5% and 4.6% for the quarter
ended September 30, 1998 and 1997, respectively. The decline in the Company's
selling expense ratio is primarily due to the increase in the mix of Medi-Cal
business which has no associated selling expense.
General and administrative expense for the quarter ended September 30, 1998
increased 12.1%, or $26.0 million, to $241.0 million for the quarter ended
September 30, 1998 from $215.0 million for the quarter ended September 30, 1997.
The increase resulted primarily from increased member months of 10.6% and, to
a lesser extent, from costs associated with the Company's national expansion,
particularly related to the integration of the acquired businesses to the
Company's information systems, which have been enhanced to accommodate the more
complex products offered by those businesses, and costs associated with Year
2000 compliance efforts.
The administrative expense ratio remained unchanged, totaling 15.2% for each of
the quarters ended September 30, 1998, and 1997, respectively. The effect of
the additional costs described above were offset by the aforementioned price
increases.
Interest expense was $5.8 million for the quarter ended September 30, 1998 and
$8.1 million for the quarter ended September 30, 1997. The decrease in interest
expense is related to repayment of indebtedness. As a result of the Company's
interest rate swaps, the effective interest rate paid by the Company remained
relatively unchanged between periods. The Company's long-term indebtedness at
September 30, 1998 was $253.0 million compared to $429.0 million at September
30, 1997. The weighted average interest rate for all debt for the quarter ended
September 30, 1998, including the fees associated with the borrowings and
interest rate swaps, was 7.6%.
The provision for income taxes decreased $77.9 million or 204.9%, resulting in a
tax benefit of $39.9 million for the quarter ended September 30, 1998. The
decline was primarily due to the effect of a private letter ruling received from
the IRS in September 1998, which resulted in a decrease in income tax expense of
$85.5 million (See Note 11). Excluding the ruling, the
21
<PAGE>
COMPARISON OF RESULTS FOR THE THIRD QUARTER 1998 TO THE THIRD
QUARTER 1997, CONTINUED
provision for income taxes would have been $45.6 million, representing an
overall tax rate consistent with the prior period.
The Company's income from continuing operations for the quarter ended
September 30, 1998 was $152.2 million, compared to $55.7 million for the
quarter ended September 30, 1997. Earnings per share from continuing
operations totaled $2.20 and $0.80 for the quarters ended September 30, 1998
and 1997, respectively. Earnings per share from continuing operations
assuming full dilution totaled $2.16 and $0.79 for the quarters ended
September 30, 1998 and 1997, respectively. 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 quarter ended September 30, 1998 is based upon
weighted average shares outstanding of 69.3 million, excluding common stock
equivalents, and 70.3 million shares, assuming full dilution. Earnings per share
for the quarter ended September 30, 1997 has been calculated using 69.7 million
shares excluding common stock equivalents, and 70.7 million shares, assuming
full dilution. For the quarter ended September 30, 1998, the increase in
weighted average shares outstanding primarily relates to the issuance of common
stock through a public offering on April 10, 1997 for the sale of 3 million
shares in addition to common stock issued through the Company's stock option
plans, offset by the repurchase of 2.6 million shares during the quarter ended
September 30, 1998.
COMPARISON OF RESULTS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998 TO THE NINE
MONTHS ENDED SEPTEMBER 30, 1997
Premium revenue increased 17.3%, or $645.2 million, to $4,375.3 million for the
nine months ended September 30, 1998 from $3,730.1 million for the nine months
ended September 30, 1997. Excluding the additional two months of premium
revenue from the GBO operations in 1998 compared to 1997 of $80.1 million,
premium revenue during 1998 increased 15.1% due to an increase in insured member
months of 11.3% and the implementation of price increases throughout the
California market.
Management services revenue increased 19.8%, or $54.3 million, to $329.0 million
for the nine months ended September 30, 1998 from $274.7 million for the nine
months ended September 30, 1997. The increase was primarily due to $22.3
million of incremental management services revenue related to the GBO
acquisition, representing 46.6% of the increase. Also contributing to increased
management services revenue was a rate increase in management services fees
related to the Company's mid-sized employer (250 to 3,000 employee) business
outside of California, and the addition of revenues related to the Company's
administrative services contract with the state of Illinois.
22
<PAGE>
COMPARISON OF RESULTS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998 TO THE NINE
MONTHS ENDED SEPTEMBER 30, 1997, CONTINUED
Investment income decreased $53.0 million to $70.5 million for the nine
months ended September 30, 1998 compared to $123.5 million for the nine
months ended September 30, 1997. The decline was primarily attributable to
the recognition of an "other than temporary" decline in the value in
accordance with SFAS No. 115 of $48.7 million relating to the Company's
equity holdings in FPA Medical Management, Inc. ("FPA"), which subsequently
filed for bankruptcy during the second quarter of 1998. Including the loss
on FPA, the net realized loss on investment securities for the nine months
ended September 30, 1998 was $34.5 million, compared to a net realized gain
of $22.0 million for the nine months ended September 30, 1997. Also included
in the aforementioned loss was a loss of approximately $5.5 million related
to the Company's interest rate swaps (See Note 9). Investment income for the
nine months ended September 30, 1998 also includes $1.7 million of foreign
currency losses related to hedging activity (See Note 9). Net interest and
dividend income increased $10.3 million to $107.7 million for the nine months
ended September 30, 1998, in comparison to $97.4 million for the nine months
ended September 30, 1997. This increase was primarily due to increased
interest income on the investment portfolio of the acquired GBO business
partially offset by lower yields in 1998 versus 1997.
Health care services and other benefits expense increased 17.2%, or $515.5
million, to $3,518.8 million for the nine months ended September 30, 1998 from
$3,003.3 million for the nine months ended September 30, 1997. The additional
two months of the GBO operations in 1998 compared to 1997 contributed 17.7% of
the increase and accounted for $91.4 million. Additionally, the previously
mentioned increase in insured member months of 11.3% contributed to the
increased claims expense.
The loss ratio attributable to managed care and related products for the nine
months ended September 30, 1998 decreased to 80.4% compared to 80.5% for the
nine months ended September 30, 1997. The acquired GBO business has
traditionally experienced a higher loss ratio than the Company's managed care
products. Excluding the GBO on the same basis in both periods, the loss ratio
would have been 79.8% for the nine months ended September 30, 1998. The decline
is primarily due to the implementation of price increases throughout the
California market.
Selling expense for the nine months ended September 30, 1998 increased 12.6% to
$207.0 million compared to $183.9 million for the nine months ended September
30, 1997, corresponding with continued overall premium revenue growth. The
selling expense ratio for the nine months ended September 30, 1998 decreased to
4.4% from 4.6% for the nine months ended September 30, 1997, largely due to the
acquisition of the GBO, which has a lower selling expense ratio than the
Company's existing business due to use of an internal sales force. Excluding
the GBO for the period prior to its acquisition for the nine months ended
23
<PAGE>
COMPARISON OF RESULTS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998 TO THE NINE
MONTHS ENDED SEPTEMBER 30, 1997, CONTINUED
September 30, 1998, the selling expense ratio would have been 4.5%. The
Company's growth in Medi-Cal and large employer group medical products had an
impact on lowering the selling expense ratio as a result of the lower selling
costs associated with these products in comparison to the Company's other
products.
General and administrative expense for the nine months ended September 30, 1998
increased 17.9%, or $110.6 million, to $729.8 million for the nine months ended
September 30, 1998 from $619.2 million for the nine months ended September 30,
1997. The additional two months of the GBO operations in 1998 compared to 1997
accounted for 30.7%, or $34.0 million, of the increase. The remainder of the
increase was previously due to an increase in member months of 11.3% and, to a
lesser extent, from costs associated with the Company's national expansion,
related to the integration of the acquired businesses to the Company's
information systems, which have been enhanced to accommodate the more complex
products offered by those businesses, and costs associated with Year 2000
compliance efforts.
The administrative expense ratio remained relatively unchanged, at 15.5% for the
nine months ended September 30, 1998 and 1997. The GBO has historically had
higher administrative expense ratios than the Company's California-based
businesses, due to its higher percentage of management services business. The
administrative expense ratio, excluding the GBO for the period prior to its
acquisition for the nine months ended September 30, 1998, was 15.1% for the nine
months ended September 30, 1998. This decline is primarily due to savings from
the consolidation of various regional offices and the integration of information
system centers related to acquired businesses.
Interest expense was $20.4 million for the nine months ended September 30, 1998
and $28.8 million for the nine months ended September 30, 1997. The decrease in
interest expense was related to the repayment of indebtedness as the effective
interest rate paid by the Company remained relatively stable. The Company's
long-term indebtedness at September 30, 1998 was $253.0 million compared to
$429.0 million at September 30, 1997. The weighted average interest rate for all
debt for the nine months ended September 30, 1998, including the fees associated
with the borrowings and interest rate swaps, was 7.6%.
The provision for income taxes decreased $80.0 million or 75.1%, totaling $26.6
million for the nine months ended September 30, 1998. The decline was primarily
due to the effect of the private letter ruling received from the IRS in
September 1998, which resulted in a decrease in income tax expense of $85.5
million (See Note 11). Excluding the ruling, the provision for income taxes
would have been $112.1 million, representing an overall tax rate consistent with
the prior period.
The Company's income from continuing operations for the nine months ended
September 30, 1998 was $252.2 million, compared to $154.2 million for the nine
months ended September
24
<PAGE>
COMPARISON OF RESULTS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998 TO THE NINE
MONTHS ENDED SEPTEMBER 30, 1997, CONTINUED
30, 1997. Earnings per share from continuing operations totaled $3.61 and
$2.25 for the nine months ended September 30, 1998 and 1997, respectively.
Earnings per share from continuing operations assuming full dilution totaled
$3.56 and $2.23 for the nine months ended September 30, 1998 and 1997,
respectively. Earnings per share from continuing operations for the nine
months ended September 30, 1997 included nonrecurring costs of $0.13 per
share. Earnings per share for all periods presented has been calculated in
accordance with SFAS No. 128.
Earnings per share for the nine months ended September 30, 1998 is based upon
weighted average shares outstanding of 69.8 million, excluding common stock
equivalents, and 70.9 million shares, assuming full dilution. Earnings per
share for the nine months ended September 30, 1997 has been calculated using
68.5 million, excluding common stock equivalents, and 69.1 million shares,
assuming full dilution. For the nine months ended September 30, 1998, the
increase in weighted average shares outstanding primarily relates to the
issuance of common stock through a public offering on April 10, 1997 for the
sale of 3 million shares in addition to common stock issued through the
Company's stock option plans, offset by the repurchase of 2.6 million shares in
the quarter ended September 30, 1998.
FINANCIAL CONDITION
The Company's consolidated assets decreased by $48.0 million, or 1.1%, from
$4,234.1 million as of December 31, 1997 to $4,186.1 million as of September 30,
1998. Cash and investments were $2.6 billion as of September 30, 1998, or 62.1%
of total assets. The decrease in consolidated assets primarily results from the
disposal of the Company's workers' compensation segment and the repurchase of
the Company's common stock of $146.2 million, offset by net income for the
nine months ended September 30, 1998.
As of September 30, 1998, $253.0 million was outstanding under the Company's
long-term debt facility, compared to $388.0 million at December 31, 1997. Debt
repayments were principally funded from internally generated cash flow.
Stockholders' equity totaled $1,274.0 million as of September 30, 1998, an
increase of $50.8 million from $1,223.2 million as of December 31, 1997. The
increase resulted primarily from net income of $163.9 million for the nine
months ended September 30, 1998, $23.9 million of stock issuances under the
Company's stock option/award plan, and a $9.2 million change in net unrealized
valuation gain adjustments on investment securities, net of tax. The
aforementioned increases were partially offset by stock repurchases totaling
$146.2 million.
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
25
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES, CONTINUED
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 the Company are sufficient to meet
applicable regulatory financial stability and net worth requirements. As of
September 30, 1998, the Company's investment portfolio consisted primarily of
investment grade fixed maturity securities and equity securities.
Net cash flow provided by continuing operating activities was $219.2 million
for the nine months ended September 30, 1998, compared with $287.2 million
for the nine months ended September 30, 1997. Cash flow from continuing
operations for the nine months ended September 30, 1998 is due primarily to
net income of $163.9 million, adjusted for an increase in receivables of
$101.2 million, which is primarily related to the timing of the collection of
several large customer receivables in the normal course of business,
increases in liabilities related to growth of insured members and timing of
other operating liability payments. Cash flow for the nine months ended
September 30, 1997 was significantly affected by the timing of collection of
GBO acquired receivables and timing of certain income tax payments.
Net cash provided by continuing investing activities for the nine months
ended September 30, 1998 totaled $5.6 million, compared with net cash used in
continuing investing activities of $209.3 million for the nine months ended
September 30, 1997. The cash used in 1998 was attributable primarily to the
purchase of investments for $2.2 billion, offset by the proceeds from
investments sold and matured of $2.2 billion and $101.4 million of proceeds
from the sale of the workers' compensation business.
Net cash used in financing activities totaled $235.1 million for the nine
months ended September 30, 1998, compared to $78.5 million for the nine
months ended September 30, 1997. Repayments on long-term debt totaled $135.0
million for the nine months ended September 30, 1998. The Company received
proceeds of $24.0 million from the issuance of common stock related to its
stock option plans. In addition, the Company paid $124.1 million for stock
repurchased during the nine months ended September 30, 1998 financed
partially by the proceeds from the sale of the Company's workers'
compensation business.
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
26
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES, CONTINUED
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 $233.0 million and $368.0 million as of September 30, 1998 and December
31, 1997, respectively. The weighted average interest rate, including the
Company's interest rate swap agreements, for the nine months ended September
30, 1998 was 7.6%.
As part of a hedging strategy to limit its exposure to interest rate increases,
in August 1996 the Company entered into a swap agreement for a notional amount
of $100.0 million bearing a fixed interest rate of 6.45% and having a maturity
date of August 17, 1999. In September 1996, the Company entered into two
additional swap agreements for notional amounts of $150.0 million each, bearing
fixed interest rates of 6.99% and 7.05%, respectively, and having maturity dates
of October 17, 2003 and October 17, 2006, respectively. The total notional
amount of the outstanding swaps exceeds the Company's long-term debt balance at
September 30, 1998. The swaps that are considered hedges for currently
outstanding debt are the $150 million swap at 7.05% maturing October 17, 2006
and $103 million of the $150 million swap bearing a fixed interest rate of
6.99% which matures October 17, 2003.
As part of the Company's investment strategy to diversify and obtain a higher
rate of return on its investment portfolio, the Company has invested in
certain fixed maturity securities denominated in foreign currencies. In order
to mitigate the foreign currency risk, the Company has entered into two types
of foreign currency derivative instruments. The first type of instrument is a
forward exchange contract which is entered into to hedge the foreign currency
risk between the trade date and the settlement date of the purchase. Gains
and losses related to such instruments are recognized in the Company's income
statement. As of September 30, 1998, the Company had no such hedges
outstanding and for the nine months ended September 30, 1998, recognized a
loss from such hedging activities of $1.7 million.
Secondly, the Company has entered into foreign currency contracts for each of
the fixed maturity securities on hand as of September 30, 1998 to hedge asset
positions denominated in other currencies. The unrealized gains and losses
from such forward exchange contracts are reflected in other comprehensive
income.
During the quarter ended September 30, 1998, the Company received a private
letter ruling from the Internal Revenue Service. The Company expects its future
liquidity to be positively impacted by the anticipated receipt of a $200 million
tax refund and a decrease in future income tax payments of approximately $80
million (See Note 11).
Pursuant to the Merger Agreement with Cerulean, certain shareholders of Cerulean
will be able to receive either WellPoint Common Stock or cash in exchange for
their Cerulean shares. The cash component of the transaction is subject to a
maximum of $225 million. The Company's Board of Directors has also approved a
stock repurchase program with respect to up to 8 million shares of WellPoint
Common Stock. To date, the Company has acquired approximately 3,500,000 shares
under such stock repurchase program. In making such repurchases, the Company
will take into account, among other things, the number of shares expected to be
issued in connection with the Merger. The Company currently expects that the
cash component of the Merger, as well as any shares repurchased under the
Company's stock repurchase program, will be funded with cash flow from
operations or borrowings under the Company's existing revolving credit facility.
As a licensee of the Blue Cross Blue Shield Association (the "BCBSA"), the
Company and certain subsidiaries must maintain certain capital requirements. As
of September 30, 1998, the Company and its subsidiaries were in compliance with
these requirements.
27
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES, CONTINUED
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 Departments of Insurance in
various states. As of September 30, 1998, those subsidiaries of the Company
were in compliance with all minimum capital requirements. Cerulean has
multiple regulated entities which are subject to risk- based capital
requirements of the Georgia Department of Insurance and various requirements
of the BCBSA. As of September 30, 1998, Cerulean and its subsidiaries are 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 September 30, 1998, 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 public offering under its
debt registration statement will be sufficient to fund continuing operations and
expected capital requirements for the foreseeable future.
FACTORS THAT MAY AFFECT FUTURE RESULTS OF OPERATIONS
Certain statements contained herein, such as statements concerning potential or
future loss ratios, expected membership attrition as the Company continues to
integrate its recently acquired operations and other statements regarding
matters that are not historical facts, are forward-looking statements (as such
term is defined in the Securities Exchange Act of 1934). Such statements
involve a number of risks and uncertainties that may cause actual results to
differ from those projected. Factors that can cause actual results to differ
materially include, but are not limited to, those discussed below and those
discussed from time to time in the Company's various filings with the Securities
and Exchange Commission, including the Company's Annual Report on Form 10-K.
Completion of the Company's pending transaction with Cerulean is contingent
upon, among other things, receipt of necessary approvals from certain federal
and state agencies. Broad latitude in administering the applicable regulations
is given to the agencies from which WellPoint and Cerulean must seek these
approvals. There can be no assurance that these approvals will be obtained. As
a condition to approval of the transaction, regulatory agencies may impose
requirements or limitations or costs on the way that the combined company
conducts business after consummation of the transaction. If the Company or
Cerulean were to agree to any material requirements or limitations in order to
obtain any approvals required to consummate the transaction, such requirements
or limitations or additional costs associated therewith could adversely affect
WellPoint's ability to integrate the operations of Cerulean with those of
WellPoint. A material adverse effect on WellPoint's revenues and results of
operations following completion of the transaction could result.
28
<PAGE>
FACTORS THAT MAY AFFECT FUTURE RESULTS OF OPERATIONS, CONTINUED
The Company intends to incur debt to finance some or all of the cash payments
to be made to Cerulean shareholders in connection with the pending
acquisition. In addition, WellPoint has received authorization to, and is
currently in the process of, repurchasing shares of WellPoint stock in the
amount up to the number of shares expected to be issued in connection with
the transaction. The Company currently expects to fund some of such
repurchases with the incurrence of additional debt. Therefore, WellPoint
could incur up to $500 million of additional indebtedness in connection with
the Cerulean transaction and any repurchase of shares of WellPoint stock.
Such additional indebtedness may require that a significant amount of the
Company's cash flow be applied to the payment of interest, and there can be
no assurance that the Company's operations will generate sufficient cash flow
to service the indebtedness. Any additional indebtedness may adversely
affect the Company's ability to finance its operations and could limit its
ability to pursue business opportunities that may be in the best interests of
the Company and its stockholders.
As part of the Company's business strategy, the Company has recently acquired
substantial operations in new geographic markets. The Company has also recently
entered into a merger agreement with Cerulean, pursuant to which Cerulean will
become a wholly owned subsidiary of the Company. These businesses, which
include substantial indemnity-based insurance operations, have experienced
varying profitability or losses in recent periods. Since the relevant dates of
acquisition, the Company has continued to work extensively on the integration of
these businesses; 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 the businesses of
completed or pending transactions as the Company pursues its strategy of
motivating the acquired members to select managed care products. In order to
implement this business strategy, the Company has and will, among other things,
need to continue to incur considerable expenditures for provider networks,
distribution channels 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 that may negatively affect the
Company's relationship with its customers and contribute to increased attrition
of such customers. The Company's results of operations could be adversely
affected in the event that the Company experiences such problems or is otherwise
unable to implement fully its expansion strategy.
The Company's operations are subject to substantial regulation by Federal, state
and local agencies in all jurisdictions in which the Company operates. Many of
these agencies have increased their scrutiny of managed health care companies in
recent periods. The Company also provides insurance products to Medi-Cal
beneficiaries in various California counties under contracts with the California
Department of Health Services and provides administrative services to the Health
Care Finance Administration ("HCFA") in various capacities. 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 and that
profitability from this business will not be adversely impacted through
inadequate premium rate increases due to
29
<PAGE>
FACTORS THAT MAY AFFECT FUTURE RESULTS OF OPERATIONS, CONTINUED
governmental budgetary issues. Future actions by any regulatory agencies may
have a material adverse effect on the Company's business.
The Company and certain of its subsidiaries are subject to capital requirements
by the California Department of Corporations, various other state regulatory
agencies and the Blue Cross Blue Shield Association. Although the Company is
currently in compliance with all applicable requirements, there can be no
assurances that such requirements will not be increased in the future.
The Company's future results will depend in large part on accurately predicting
health care costs incurred on existing business and upon the Company's ability
to control future health care costs through product and benefit design,
underwriting criteria, utilization management and negotiation of favorable
provider contracts. Changes in mandated benefits, utilization rates,
demographic characteristics, health care practices, provider consolidation,
inflation, new pharmaceuticals/technologies, clusters of high-cost cases, the
regulatory environment and numerous other factors are beyond the control of any
health plan provider 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. Periodic renegotiation of hospital and
other provider contracts coupled with continued consolidation of physician,
hospital and other provider groups may result in increased health care costs,
limit the Company's ability to negotiate favorable rates or subject the Company
to increased credit risk related to provider groups. 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, select underwriting criteria or negotiate competitive provider
contracts 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
years 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.
30
<PAGE>
FACTORS THAT MAY AFFECT FUTURE RESULTS OF OPERATIONS, CONTINUED
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 management services products and those managed care products
where the Company is able to shift risks to employer groups. 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, product design, competitive pressure and greater regulatory
restrictions applicable to the small employer group market. In 1998, the
Company has implemented price increases in certain of its managed care
businesses. In response to higher than anticipated utilization with respect
to certain co-payment products offered to the Company's individual and small
group customers in California, the Company has recently implemented premium
increases with respect to such products. 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 interest-yielding
debt securities of varying maturities or equity securities. The value of fixed
income securities is 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. In addition, the value of equity securities can
fluctuate significantly with changes in market conditions. Changes in the value
of the Company's investment assets, as a result of interest rate fluctuations,
can affect the Company's results of operations and stockholders' equity. There
can be no assurances that interest rate fluctuations will not have a material
adverse affect on the results of operations or financial condition of the
Company.
The Company is dependent on retaining existing employees and attracting
additional qualified employees to meet its future needs. The Company faces
intense competition for qualified personnel, especially qualified computer
programmers, actuaries and other professional and technical employees. There
can be no assurances that an inability to retain existing employees or attract
additional employees will not have a material adverse effect on the Company's
results of operations.
31
<PAGE>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
<TABLE>
<CAPTION>
(a) Exhibits
<S> <C> <C>
2.01 Amended and Restated Recapitalization Agreement dated as of March
31, 1995 by and among the Registrant, Blue Cross of California,
Western Health Partnership and Western Foundation for Health
Improvement, incorporated by reference to Exhibit 2.1 of
Registrant's Registration Statement on 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
2.04 Agreement and Plan of Merger dated as of July 9, 1998, by and among
Cerulean Companies, Inc., WellPoint and Water Polo Acquisition Corp.,
incorporated by reference to Exhibit 24 of Registrant's Registration
Statement on Form S-4 (Registration No. 333-64955).
2.05 Stock Purchase Agreement dated as of July 29, 1998, by and between
the Registrant and Freemont Indemnity Company, incorporated by
reference to Exhibit 2.1 to Registrant's Current Report on Form 8-K
dated September 1, 1998.
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 the Proxy Statement on Schedule 14A of WellPoint California,
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)
10.01 Stock Option/Award Plan, as amended through October 27, 1998.
10.02 WellPoint Health Networks Inc. Officer Change-in-Control Plan (as
amended and restated through October 27, 1998).
10.03 WellPoint Health Networks Inc. Officer Severance Plan (as adopted
October 27, 1998).
</TABLE>
32
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C>
(a) Exhibits (continued)
Exhibit
10.04 Letter Agreement dated July 8, 1998 by and between the
Registrant and the California HealthCare Foundation.
10.05 WellPoint Health Networks Inc. Management Bonus Plan.
27.1 Financial Data Schedule
(b) Reports on Form 8-K
</TABLE>
On September 16, 1998, the Company filed a Current Report on Form 8-K which
reported that the Company had completed its sale of the outstanding capital
stock of UNICARE Specialty Services, Inc. to Fremont Indemnity Company. The
Current Report on Form 8-K included unaudited pro-forma financial statements for
the Company as of and for the year ended December 31, 1997 and the six months
ended June 30, 1998.
On October 13, 1998, the Company filed a Current Report on Form 8-K which
reported that the Company had received a private letter ruling from the Internal
Revenue Service with respect to the deduction as an ordinary and necessary
business expense of certain payments made by the Company's former parent
company, Blue Cross of California, at the time of the Company's May 1996
Recapitalization.
33
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
WELLPOINT HEALTH NETWORKS INC.
Registrant
Date: November 13, 1998 By:\s\ LEONARD D. SCHAEFFER
------------------------
Leonard D. Schaeffer
Chairman of the Board of Directors
and Chief Executive Officer
Date: November 13, 1998 By:\s\ DAVID C. COLBY
------------------
David C. Colby
Executive Vice President
and Chief Financial Officer
Date: November 13, 1998 By: \s\ S. LOUISE MCCRARY
---------------------
S. Louise McCrary
Senior Vice President and
Chief Accounting Officer
34
<PAGE>
WELLPOINT HEALTH NETWORKS INC. STOCK OPTION/AWARD PLAN
AS AMENDED THROUGH OCTOBER 27, 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
<PAGE>
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 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
<PAGE>
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
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
<PAGE>
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
<PAGE>
(ii) The option will not have a term in excess of 5 years from
the date of grant.
(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.
<PAGE>
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) 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.
<PAGE>
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
<PAGE>
to approval by the Corporation's stockholders of the amendment to the Plan first
providing for the grant of Automatic Options.
(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.
(4) CESSATION. In the event the optionee ceases to provide services
to the Corporation or its subsidiaries as a director, an employee, a consultant
or an independent contractor, for any reason other than death or disability or
the retirement of the optionee from the Board of Directors of the Corporation,
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
event the optionee ceases to provide services to the Corporation or its
subsidiaries as a director, an employee, a consultant or an independent
contractor by reason of the optionee's death or disability or retirement from
the Board of Directors of the Corporation, the Automatic Option may be exercised
within the term of the Automatic Option. For purposes of the Automatic Option,
"retirement" shall mean the optionee ceasing to serve as a director of the
Corporation, for any reason other than the optionee's removal for cause, after
having served as a director of the Corporation for an aggregate of at least five
(5) full years. 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
<PAGE>
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.
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.
<PAGE>
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.
C. APPROVALS. The Plan and subsequent amendments thereto were approved
by shareholders on May 10, 1994, June 10, 1997 and May 12, 1998. The Board
subsequently further amended the Plan, in the form set forth in this document.
<PAGE>
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
<PAGE>
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.
<PAGE>
WELLPOINT HEALTH NETWORKS INC.
OFFICER CHANGE-IN-CONTROL PLAN
(AS AMENDED AND RESTATED THROUGH OCTOBER 27, 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, which was originally adopted by the Board of Directors as of February 12,
1998, replaced any similar plan previously in effect as of such date of adoption
providing for monetary or other compensation to any officer in the event of a
change in control. This Plan has been further amended and restated as of
October 27, 1998 as provided herein.
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
3
<PAGE>
Termination Date unless such person's employment agreement otherwise provides;
and (ii) 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
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(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 Executive Vice Presidents (Band 2), two years;
(b) in the case of Executive Vice Presidents (Band 3), 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. EXCESS PARACHUTE PAYMENTS. If any employee of WellPoint or an
Affiliate (i) is, at the effective time of a Change-in-Control (or any other
corporate transaction) or the date of termination of such employee's employment,
an Executive Vice President or Senior Vice President and (ii) receives
compensation from WellPoint or an Affiliate (under this Plan or otherwise) that
subjects the employee to an excise tax under Section 4999 of the Code (relating
to excess parachute payments), WellPoint shall make an additional payment to
such employee that, net of all taxes thereon, fully reimburses or "grosses up"
the employee for the amount of such excise tax. If any other employee is a
Participant in this Plan and reasonably determines that (i) compensation payable
under this Plan, either alone or when aggregated with other compensation payable
to such Participant, would subject such Participant to an excise tax under
Section 4999 of the Code and (ii) the net amount that the Participant would
realize from
5
<PAGE>
such payments on an after-tax basis would be greater if the benefit payable
hereunder were limited, then the benefit payable hereunder shall be limited in
the manner reasonably determined by the Participant to maximize such
Participant's net payment received on an after-tax basis. Except to the extent
expressly provided in a written agreement between WellPoint and a Participant,
the foregoing provisions of this Section 3.4 shall be applicable only to
Participants that are also Participants in the WellPoint Health Networks Inc.
Officer Severance Plan (as adopted October 27, 1998). With respect to all other
Participants under this Plan, 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
only 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
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 (including WellPoint's Officer Severance
Plan) 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
6
<PAGE>
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.
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
7
<PAGE>
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. AMENDMENT OR TERMINATION OF PLAN. The Committee shall have the
authority to amend or terminate the Plan at any time; provided, however, that no
termination of the Plan or amendment thereto that adversely affects the rights
of the Participants shall be effective sooner than one year after the approval
of such amendment or termination by the Committee (or, if later, February 12,
2000).
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.
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.
WELLPOINT HEALTH NETWORKS INC.
BY: /s/ LEONARD D. SCHAEFFER DATE: October 27, 1998
----------------------------
LEONARD D. SCHAEFFER
8
<PAGE>
WELLPOINT HEALTH NETWORKS INC.
OFFICER SEVERANCE PLAN
(AS ADOPTED OCTOBER 27, 1998)
This WellPoint Health Networks Inc. Officer Severance Plan (the "Plan") is
designed to provide each officer of WellPoint Health Networks Inc. ("WellPoint"
or the "Company") and/or its affiliates with certain benefits in the event that
such officer is involuntarily terminated from employment from WellPoint or one
of its affiliates. Except to the extent provided herein, the Plan replaces any
similar plan previously in effect as of the date of adoption providing for
monetary or other compensation to any officer in the event that such officer is
involuntarily terminated from employment with WellPoint or one of its
affiliates.
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 annual rate of base salary paid
by a member of the Affiliated Group during the twelve calendar months
immediately preceding the Participant's Termination Date.
"CEO" means the Chief Executive Officer of WellPoint or such person's
delegate.
"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.
"Constructive Termination" means a change in the Participant's principal
place of employment such that the Participant's one-way commute will be
increased by more than 35 miles.
"Involuntary Termination" means actual termination of a Participant's
employment with a member of the Affiliated Group initiated by one or more
members of the Affiliated Group, other than (i) Termination for Cause, (ii)
termination due to the
<PAGE>
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. Involuntary Termination shall also
mean the resignation by a Participant in lieu of discharge from employment by
mutual agreement between such Participant and the member of the Affiliated
Group.
"Participant" means any person holding the title of Vice President or
higher with WellPoint or any member of the Affiliated Group; 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 Termination Date unless such
person's employment agreement provides otherwise; and (ii) 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
"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) a commission by a Participant of any act
of fraud, embezzlement or dishonesty against any member of the Affiliated Group;
(ii) the conviction of a Participant for any criminal offense involving fraud or
dishonesty or any similar conduct that is injurious to the reputation of
WellPoint or any member of the Affiliated Group; or (iii) willful engagement by
a Participant in gross misconduct injurious to WellPoint or any member of the
Affiliated Group.
ARTICLE II
ELIGIBILITY
A Participant who is subject to a Constructive Termination or an
Involuntary Termination from the Affiliated Group will be eligible for the Plan
Benefits provided in Article III hereof (subject to the terms and conditions of
this Plan).
ARTICLE III
PLAN BENEFITS
3.1. BASIC BENEFIT. (a) The Basic Benefit for each Participant will be as
provided in the Schedule attached hereto applicable to such Participant 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.
(b) For purposes of calculating the Basic Benefit, the term "Target Bonus"
referred to in the applicable Schedule is an amount equal to the target bonus
(if any) for the Participant for the fiscal year immediately preceding his or
her Termination Date
2
<PAGE>
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. OTHER BENEFITS. Each Participant shall receive health, vision, dental
and life insurance benefits comparable to those generally provided to employees
of WellPoint or its Affiliates 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 any
successor employer of the Participant; and
(ii) depending on the title of the Participant, the period set forth in
the applicable Schedule attached hereto.
In lieu of providing the benefits described in this Section 3.2, 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.
3.3. EXCESS PARACHUTE PAYMENTS. If any Participant determines that (i)
any benefit under this Plan, either alone or when aggregated with other
compensation payable to such Participant, would subject such Participant to an
excise tax under Section 4999 of the Code (relating to excess parachute
payments) and (ii) the net amount that the Participant would realize from such
payments on an after-tax basis would be greater if the benefit payable hereunder
were limited, then the benefit payable hereunder shall be limited in the manner
reasonably determined by such Participant to maximize such Participant's net
payments received on an after tax basis, UNLESS under a separate written
agreement, plan or program, such Participant is entitled to an additional
payment that, net of all taxes thereon, fully reimburses or "grosses up" the
Participant for the amount of such excise tax.
3.4. 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
any other amount that a member of the Affiliated Group is legally required to
pay to the Participant under such laws plus any compensation and any benefits
paid to the Participant following distribution of such a legally required notice
to the Participant. 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 for which Plan benefits are paid.
3.5. FORM OF PAYMENT. The Basic Benefit will be paid to the Participant in
a lump sum as soon as reasonably practicable after the later to occur of the
Participant's Termination Date and WellPoint's receipt of an executed general
release from the Participant provided pursuant to Section 3.10 hereof.
3
<PAGE>
3.6. WITHHOLDING. WellPoint and/or the appropriate member of the
Affiliated Group may withhold taxes and other payroll deductions from Plan
benefit payments.
3.7. 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.
3.8. COORDINATION WITH OTHER PLANS. Any person otherwise eligible as a
Participant under this Plan shall not be considered a Participant if such person
is then covered under any other severance plan or arrangement maintained by a
member of the Affiliated Group, under which benefits are payable as a result of
Participant's Constructive Termination or Involuntary Termination (a "Severance
Plan"), other than WellPoint's Officer Change-in-Control Plan. Such person
shall only be considered a Participant hereunder upon receipt by the Company of
a duly executed termination agreement, in a form acceptable to the Company, with
respect to such person under such Severance Plan or Plans. In any event, any
benefits otherwise payable to a Participant hereunder upon a Constructive
Termination or Involuntary Termination shall be reduced on a dollar-for-dollar
basis for any benefits received by the Participant from any other Severance Plan
or Plans (whether maintained by the Company, any member of the Affiliated Group
or any former or successor employers of the Participant), including WellPoint's
Officer Change-in-Control Plan.
3.9. EFFECT OF DIVESTITURES OR OTHER SIGNIFICANT CORPORATE TRANSACTIONS.
A Participant shall not be deemed to have suffered a Constructive Termination or
Involuntary Termination solely by virtue of the Company or any member of the
Affiliated Group consummating a divestiture, sale or other similar transaction
(whether by asset sale, stock sale or otherwise) (a "Divestiture") with respect
to a member of the Affiliated Group or business unit or division (a "Transferred
Unit") so long as the Participant shall continue in his or her employment with
the Transferred Unit or shall be offered a position having a substantially
similar title, responsibilities, compensation and benefits with the entity
acquiring such Transferred Unit. Notwithstanding the foregoing, in the event
that a Participant shall suffer an Involuntary Termination or Constructive
Termination from the Transferred Unit within the time period after completion of
the Divestiture specified in the applicable Schedule, such Participant shall be
entitled to receive the benefits specified in Sections 3.1 and 3.3 hereof
(subject to the terms and conditions of this Plan, including Sections 3.8 and
3.10 hereof).
3.10. EXECUTION OF GENERAL RELEASE. It shall be a condition to receipt of
any benefit under this Plan that Participant shall have executed a general
release of all claims that the Participant may have against WellPoint and all
members of the Affiliated Group and their respective employees and agents. Such
general release shall be in the form customarily used by WellPoint.
4
<PAGE>
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 that the
Participant has entered into with any member of the Affiliated Group.
4.3. CLAIMS PROCEDURE. If a Participant 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 Participant may submit a signed,
written application to the CEO within 60 days of the Participant's Termination
Date. The Participant 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 Participant is not so notified the Participant may, but
need not, treat the claim as denied. If the Participant's claim is denied, the
notification will state specific reasons for the denial and the Participant will
have 60 days from the date of such notification to file a signed, written
request for a review of the denial with the CEO. This request shall include the
reasons the Participant is requesting a review, facts supporting the
Participant's request and any other relevant comments. The CEO will generally
make a final, written determination of the Participant's eligibility for Plan
benefits within 60 days of receipt of the Participant's request for review.
4.4. ARBITRATION. If a Participant is denied part or all of a Plan benefit
pursuant to Section 4.3, the Participant'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 Participant is or was last employed by WellPoint or an
Affiliate controlled by WellPoint or in such other location as may be acceptable
to both the Participant and WellPoint. The arbitrator will not be allowed to
consider or include any claims of other Participants. 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.
5
<PAGE>
4.5. AMENDMENT OR TERMINATION OF PLAN. The Committee shall have the
authority to amend or terminate the Plan at any time; provided, however, that no
termination of the Plan or amendment thereto that adversely affects the rights
of Participants shall be effective sooner than the January 1 that next occurs
after the first anniversary of the approval of such amendment or termination by
the Committee.
4.6. NO RIGHT TO CONTINUED EMPLOYMENT. This Plan does not provide a
Participant with any right to continued 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 Participant at any time with or without cause or
notice, subject to the terms of any written employment agreement executed by
both parties thereto.
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 October 27, 1998.
WELLPOINT HEALTH NETWORKS INC.
BY: /s/ LEONARD D. SCHAEFFER DATE: October 27, 1998
--------------------------
LEONARD D. SCHAEFFER
6
<PAGE>
SCHEDULE OF BENEFITS
APPLICABLE TO EXECUTIVE VICE PRESIDENTS
BASIC BENEFIT. (Section 3.1)
12 months Base Salary and 100% of Target Bonus (or, if greater, the time
period and percentages set forth in any officer severance agreement in effect on
October 27, 1998)
OTHER BENEFITS. (Section 3.2)
12 Months (or, if greater, the time period set forth in any officer
severance agreement in effect on October 27, 1998)
EFFECTIVE OF DIVESTITURES OR OTHER SIGNIFICANT CORPORATE TRANSACTIONS.
(Section 3.9)
The period referred to in the final sentence of Section 3.9 shall be 12
months (or, if greater, the period referred to under "Other Benefits. (Section
3.2)" directly above).
7
<PAGE>
SCHEDULE OF BENEFITS
APPLICABLE TO SENIOR VICE PRESIDENTS
BASIC BENEFIT. (Section 3.1)
9 months Base Salary and 75% of Target Bonus
OTHER BENEFITS. (Section 3.2)
9 Months
EFFECTIVE OF DIVESTITURES OR OTHER SIGNIFICANT CORPORATE TRANSACTIONS.
(Section 3.9)
The period referred to in the final sentence of Section 3.9 shall be 9
months.
8
<PAGE>
SCHEDULE OF BENEFITS
APPLICABLE TO GENERAL MANAGERS / VICE PRESIDENTS
BASIC BENEFIT. (Section 3.1)
6 months Base Salary and 50% of Target Bonus
OTHER BENEFITS. (Section 3.2)
6 Months
EFFECTIVE OF DIVESTITURES OR OTHER SIGNIFICANT CORPORATE TRANSACTIONS.
(Section 3.9)
The period referred to in the final sentence of Section 3.9 shall be 6
months.
9
<PAGE>
[LETTERHEAD
OF CALIFORNIA HEALTHCARE
FOUNDATION]
July 8, 1998
Leonard D. Schaeffer
Chairman and Chief Executive Officer
WellPoint Health Networks Inc.
21555 Oxnard Street
Woodland Hills, California 91367
Re: AMENDED AND RESTATED REGISTRATION RIGHTS AGREEMENT DATED AS OF AUGUST 4,
1997 (THE "REGISTRATION RIGHTS AGREEMENT") BY AND BETWEEN WELLPOINT HEALTH
NETWORKS INC. ("WELLPOINT") AND THE CALIFORNIA HEALTHCARE FOUNDATION (THE
"FOUNDATION")
Dear Leonard:
You have informed us that in connection with the Agreement and Plan of Merger
dated as of July 8, 1998 (the "Merger Agreement") by and between WellPoint
and Cerulean Companies, Inc., and Water Polo Acquisition Corp., you intend to
enter into and execute a Registration Rights Agreement with Georgia Strategic
Healthcare LLC ("GSH"), substantially in the form attached to this letter,
with only such changes thereto as do not materially and adversely affect the
rights and obligations of the Foundation (the "GSH Registration Rights
Agreement"). You have advised us that GSH is the only entity which will be
provided the rights set forth in the GSH Registration Rights Agreement in
connection with the transactions set forth in, or contemplated by, the Merger
Agreement (the "Transactions"). In addition, although we understand that the
number of shares of WellPoint Common Stock to be issued to GSH pursuant to
the Merger Agreement (and which will have the registration rights set forth
in the GSH Registration Rights Agreement) is not currently known and will not
be fixed prior to the consummation of the Transactions, we further understand
the number of shares is likely to represent in the aggregate approximately
1.8% of the total outstanding shares of Common Stock after consummation of
the Transactions (based upon the current fair market value of the Common
Stock and the current number of shares outstanding).
In reliance upon the foregoing, and in consideration of the agreements set
forth below, this letter will confirm that the Foundation hereby consents to
the execution and delivery of the GSH
<PAGE>
Leonard D. Schaeffer
July 8, 1998
Page 2
Registration Rights Agreement by WellPoint upon the consummation of the
Transactions, notwithstanding that the GSH Registration Rights Agreement may
be deemed to grant rights that are senior to or take priority over those
granted to the Foundation pursuant to the Registration Rights Agreement.
In consideration of the Foundation's consent, WellPoint and the Foundation
have agreed to the following amendments to the Registration Rights Agreement,
effective on and contingent upon the Closing Date under the Merger Agreement:
(i) GSH will have the right to piggyback on a Foundation demand registration
statement, provided (a) in the event the inclusion of shares owned by GSH
will adversely affect the offering in the opinion of the managing underwriter
or facilitating broker/dealer, GSH's shares will be cut back first (provided
that GSH's rights in Section 3(b)(ii)(A) of the GSH Registration Rights
Agreement shall be preserved), and (b) GSH's rights to piggyback shall be
asserted, if at all, within one business day of WellPoint's notice to GSH of
the availability of the piggyback registration statement opportunity; (ii)
the Foundation shall have one business day after receiving notice of the
availability of a piggyback opportunity on a registration statement initiated
by GSH to assert its right to piggyback on such registration statement; (iii)
WellPoint will not amend the GSH Registration Rights Agreement in any manner
which would adversely affect the Foundation's rights thereunder or under the
Registration Rights Agreement; (iv) the Foundation may elect, at any time
during the remaining term of the Registration Rights Agreement, to have one
additional demand registration effected on its behalf (in addition to the
single annual demand registration right now provided for); and (v) the
Foundations's piggyback registration rights in a registration in which GSH
also exercises piggyback registration rights shall apply in the manner set
forth in Section 3(b) of the GSH Registration Rights Agreement. The
Foundation also understands that WellPoint agrees that the Registration
Rights Agreement currently provides, and will after the amendment continue to
provide, that a registration, statement initiated by GSH is not a "financing
plan" within the meaning of Section 2(c)(i) of the Registration Rights
Agreement which would bar the exercise of the Foundation's right to initiate
a demand registration statement, and that the Foundation shall have no
"holdback" obligation with respect to any GSH offering, other than with
respect to a registered offering in which the Foundation participates.
The parties hereto agree to negotiate in good faith a more formal written
amendment of the Registration Rights Agreement containing the terms and
conditions set forth above, with the
<PAGE>
Leonard D. Schaeffer
July 8, 1998
Page 2
intent of entering into such written amendment no later than the effective
date of the Merger Agreement. Unless and until we do so, however, this
Agreement shall be a binding agreement between the parties and may not be
modified or amended, except pursuant to a writing signed by both parties.
Very truly yours,
/s/ Mark D. Smith
Mark D. Smith
President and Chief Executive Officer
California HealthCare Foundation
ACKNOWLEDGED AND AGREED:
WellPoint Health Networks Inc.
By: /s/ Thomas C. Geiser, Esq.
--------------------------------
Date: July 9, 1998
<PAGE>
WELLPOINT HEALTH NETWORKS INC.
MANAGEMENT BONUS PLAN
(EFFECTIVE AS OF JANUARY 1, 1998)
A. PURPOSE AND OBJECTIVES
The WellPoint Health Networks Inc. Management Bonus Plan (the "Plan") is
intended to provide financial rewards to eligible employees
("Participants") for achieving performance expectations based upon a
combination of corporate measures. The Plan is designed to allow business
groups and business units to focus on and reward employees for the
appropriate financial and/or performance objectives. In this way, the Plan
is aligned with corporate, business group and business unit objectives, and
ultimately performance.
B. EFFECTIVE DATE
The Plan is effective as of January 1, 1998. This Plan supersedes all
prior WellPoint Corporate Incentive Plans or similar plans and shall remain
in effect until modified or terminated by WellPoint.
C. DEFINITIONS
1. ADMINISTRATOR means the Chief Executive Officer of WellPoint Health
Networks Inc., or the person(s) to whom the CEO has delegated
authority to administer 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 Sections 414(b) and 414(c) or as otherwise determined
from time to time by the Administrator.
3. BONUS means an award made under the Plan based on satisfaction during
the Plan Period of the applicable Performance Measures.
4. CEO means the Chief Executive Officer of WellPoint Health Networks
Inc.
5. COMPANY means WellPoint Health Networks Inc. and its Affiliates,
unless designated otherwise.
6. PARTICIPANT means eligible employees selected to participate in the
Plan.
7. PLAN means this WellPoint Health Networks Inc. Management Bonus Plan,
as amended from time to time.
8. PERFORMANCE MEASURES are the measures with respect to which the
performance of an eligible Participant is assessed, based on his or
her position and level of impact or influence on corporate
performance.
1
<PAGE>
9. PLAN PERIOD means the calendar year. Each 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. Unless otherwise determined by the Administrator, the
Plan Period is the period for which Bonuses under the Plan are paid.
10. SALARY means a Participant's base annual salary as of December 31. In
cases where a Participant's target bonus changes during the year due
to promotion or demotion, the qualifying individual will receive a
"split" bonus calculation using the target bonus and base salary prior
to the promotion and the target bonus and base salary on December 31,
each on a pro rata basis.
11. TARGET BONUS means a defined percentage of the Participant's base
salary.
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 shall be binding and
conclusive upon all persons.
2. ADMINISTRATOR'S AUTHORITY. The Administrator's authority includes,
but is not limited to, responsibility for determining the Bonus pool,
for Bonus payout calculations, for the establishment, interpretation,
amendment and revocation of rules relating to the Plan, and for the
resolution of questions and problems arising from 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 the Plan. The Company shall indemnify and hold
harmless the Administrator for and against any such losses or demands.
4. CEO AS PARTICIPANT. Notwithstanding anything to the contrary in this
Plan document, the determination of whether the CEO is a participant
in this Plan, all administrative decisions regarding the CEO's Plan
participation and the value of any Bonus paid to the CEO under this
Plan shall be made by the Compensation Committee of the Company's
Board of Directors.
E. ELIGIBILITY
Participants shall be selected by the Administrator, based on management
responsibilities and potential impact upon Company operations before or at
the beginning of the Plan Period or as otherwise indicated in Section F.
Participants will be notified of their eligibility and applicable
Performance Measures annually.
2
<PAGE>
F. PERSONNEL CHANGES DURING THE PLAN PERIOD
Employment status changes by a Participant during the Plan Period shall be
treated in the following manner:
1. NEW HIRE, TRANSFER WITHIN 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 by the Administrator as a
result of an acquisition or merger, 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) calendar quarter during the
Plan Period. Employees newly hired (including as a result of an
acquisition or merger) or newly promoted after October 1 of any Plan
Period shall not be eligible for a Bonus for the relevant Plan Period.
2. REINSTATEMENTS/REHIRES. An employee who terminates, either
voluntarily or involuntarily, and is subsequently rehired 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
thirteen weeks. To be eligible for a Bonus payout, the employee must
be an active employee 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.
3. 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 E. 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 time
set forth in Section H.
4. TERMINATION AS A RESULT OF DEATH, PERMANENT DISABILITY, RETIREMENT OR
4TH QUARTER REDUCTION IN FORCE. Participants who terminate employment
prior to the payment of a Bonus, as a result of death, permanent
disability or retirement, or as a result of a reduction in force
during the 4th quarter of the Plan Period may receive a pro rata Bonus
at the sole discretion of the Administrator. These awards, if any,
will be paid at the time set forth in Section H.
5. OTHER TERMINATIONS. A Participant or other employee who is
involuntarily terminated and/or voluntarily resigns from the Company
before the Bonus is paid for any Plan Period will not be eligible to
receive a Bonus for such Plan Period, unless he/she is eligible for an
award due to reinstatement/rehire.
6. 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
3
<PAGE>
for at least one (1) 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 absence 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 time set forth in
Section H.
G. DETERMINATION OF BONUS AND ELIGIBILITY FOR PAYMENT
After the completion 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 with the Company on the date the Bonuses are paid, whose overall
performance appraisal for the Plan Period is "Achieves Expectations" or
higher (or similar classification used by the Company in the assessment of
employee performance) are eligible for payment unless otherwise determined
by Section F.
H. PAYMENT OF INDIVIDUAL BONUSES
1. TIMING AND FORM. Unless otherwise determined by the Administrator,
Bonuses will be paid on or before the Company's normally occurring 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 such tax withholding, 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 may provide a
match of the 401(k) contribution to the extent then provided under the
terms of the WellPoint Salary Deferral Savings Plan.
3. PLAN FUNDING. Aggregate payouts under the Plan will be based upon the
Company achieving its internal projections for earnings per share.
Business group and business unit bonus pools will be allocated based
on performance against specific goals. Aggregate payouts under the
Plan will be funded based on the following performance scale:
<TABLE>
<CAPTION>
Aggregate Payout as a % of
EPS Achievement Target Bonus Opportunity
--------------- ---------------------------
<S> <C>
80% of Plan 70%
100% of Plan 100%
110% of Plan or greater 150%
</TABLE>
4. SOURCE. All payments under the Plan will be paid by the Company (on
behalf of itself and its Affiliates) from its general assets. No
person will have any right or interest under the Plan
4
<PAGE>
that is superior in any manner to the right of any other general and
unsecured creditor of the Company.
5
<PAGE>
I. IMPACT ON BENEFIT PLANS
To the extent permitted by law, and the terms of the Company's benefit
plans, Bonus payments under the Plan will be treated as compensation for
purpose of a Plan participant's benefit calculations. 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.
J. 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.
2. DISCRETIONARY NATURE OF THE PLAN. Notwithstanding anything else in
this Plan, Bonus awards are paid at the discretion of the
Administrator, and are not a part of a Participant's salary. The
Administrator retains the discretion to increase awards of the total
bonus opportunity of all participants, as well as to decrease or
eliminate awards to individuals if the Administrator deems such action
is appropriate.
3. 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 at any time to reflect
extraordinary transactions or occurrences affecting the Company (e.g.,
changes to the capital structure or other significant reorganization
of the Company, divestiture of a subsidiary, acquisition or
discontinuance of a material business or product line, changes 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.
K. 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.
6
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> SEP-30-1998
<CASH> 270,206
<SECURITIES> 2,331,075
<RECEIVABLES> 604,076
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 3,399,138
<PP&E> 120,567
<DEPRECIATION> 0
<TOTAL-ASSETS> 4,186,099
<CURRENT-LIABILITIES> 2,224,139
<BONDS> 0
0
0
<COMMON> 703
<OTHER-SE> 1,273,299
<TOTAL-LIABILITY-AND-EQUITY> 4,186,099
<SALES> 4,375,261
<TOTAL-REVENUES> 4,774,774
<CGS> 3,518,793
<TOTAL-COSTS> 4,455,663
<OTHER-EXPENSES> 19,971
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 20,425
<INCOME-PRETAX> 278,715
<INCOME-TAX> 26,563
<INCOME-CONTINUING> 252,152
<DISCONTINUED> (88,268)
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 252,152
<EPS-PRIMARY> 2.35
<EPS-DILUTED> 2.31
</TABLE>
