<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 MARCH 31, 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 MAY 13, 1998
------------------- ---------------------------
Common Stock, $0.0l par value 70,108,086 shares
---------------
1
<PAGE>
WELLPOINT HEALTH NETWORKS INC.
FIRST QUARTER 1998 FORM 10-Q
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PART I. FINANCIAL INFORMATION
PAGE
<S> <C>
ITEM 1. Financial Statements
Consolidated Balance Sheets as of March 31, 1998 and
December 31, 1997....................................... 1
Consolidated Income Statements for the Three Months
Ended March 31, 1998 and 1997........................... 2
Consolidated Statement of Changes in Stockholders' Equity
for the Three Months Ended March 31, 1998............... 3
Consolidated Statements of Cash Flows for the
Three Months Ended March 31, 1998 and 1997.............. 4
Notes to Consolidated Financial Statements................... 5
ITEM 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations........... 9
PART II. OTHER INFORMATION
ITEM 6. Exhibits and Reports on Form 8-K............................ 22
SIGNATURES .............................................................. 23
</TABLE>
2
<PAGE>
ITEM 1. FINANCIAL STATEMENTS
WELLPOINT HEALTH NETWORKS INC.
Consolidated Balance Sheets
<TABLE>
<CAPTION>
(IN THOUSANDS, EXCEPT SHARE DATA) March 31, December 31,
1998 1997
----------- ------------
(unaudited)
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents $ 230,946 $ 283,851
Investment securities, at market value 2,595,826 2,552,775
Receivables, net 634,529 537,454
Deferred tax assets 72,879 79,733
Other current assets 60,763 52,004
----------- ------------
Total Current Assets 3,594,943 3,505,817
Property and equipment, net 117,411 115,193
Intangible assets 716,897 698,507
Long-term investments 102,908 102,819
Deferred tax assets 62,472 62,487
Other non-current assets 47,727 48,592
----------- ------------
Total Assets $4,642,358 $4,533,415
----------- ------------
----------- ------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Medical claims payable $ 980,833 $ 922,658
Loss and loss adjustment expense reserves 121,373 115,325
Reserves for future policy benefits 52,487 51,189
Unearned premiums 217,076 210,337
Accounts payable and accrued expenses 341,846 372,441
Experience rated and other refunds 246,891 255,625
Income taxes payable 145,566 107,018
Other current liabilities 336,888 309,712
----------- ------------
Total Current Liabilities 2,442,960 2,344,305
Accrued postretirement benefits 65,177 63,891
Loss and loss adjustment expense reserves, non-current 136,641 134,933
Reserves for future policy benefits, non-current 334,297 332,033
Long-term debt 313,000 388,000
Other non-current liabilities 46,358 47,084
----------- ------------
Total Liabilities 3,338,433 3,310,246
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, 70,062,031 and 69,778,086 issued
at March 31, 1998 and December 31, 1997, respectively 701 698
Treasury stock, at cost, 5,927 and 4,571 shares at
March 31, 1998 and December 31, 1997, respectively (143) (103)
Additional paid-in capital 894,740 882,312
Retained earnings 403,832 345,318
Accumulated other comprehensive income 4,795 (5,056)
----------- ------------
Total Stockholders' Equity 1,303,925 1,223,169
----------- ------------
Total Liabilities and Stockholders' Equity $ 4,642,358 $ 4,533,415
----------- ------------
----------- ------------
</TABLE>
See the accompanying notes to the consolidated financial statements.
1
<PAGE>
WELLPOINT HEALTH NETWORKS INC.
Consolidated Income Statements
(unaudited)
<TABLE>
<CAPTION>
(IN THOUSANDS, EXCEPT EARNINGS PER SHARE) Three Months Ended March 31,
---------------------------
1998 1997
------------ ------------
<S> <C> <C>
Revenues:
Premium revenue $ 1,464,537 $ 1,168,838
Management services revenue 115,243 62,445
Investment income 44,713 40,349
------------ ------------
1,624,493 1,271,632
Operating Expenses:
Health care services and other benefits 1,191,458 920,872
Selling expense 70,190 59,770
General and administrative expense 250,139 180,567
Nonrecurring costs - 6,507
------------ ------------
1,511,787 1,167,716
------------ ------------
Operating Income 112,706 103,916
Interest expense 7,324 10,768
Other expense, net 7,017 7,869
------------ ------------
Income before Provision for Income Taxes 98,365 85,279
Provision for income taxes 39,851 34,524
------------ ------------
Net Income $ 58,514 $ 50,755
------------ ------------
------------ ------------
Earnings Per Share $ 0.84 $ 0.76
------------ ------------
------------ ------------
Earnings Per Share Assuming Full Dilution $ 0.83 $ 0.76
------------ ------------
------------ ------------
</TABLE>
See the accompanying notes to the consolidated financial statements.
2
<PAGE>
WELLPOINT HEALTH NETWORKS INC.
Consolidated Statement of Changes in Stockholders' Equity
(unaudited)
<TABLE>
<CAPTION>
(In thousands)
Common Stock
----------------------------- Accumulated
Issued In Treasury Additional Other
Preferred --------------- ----------- Paid - in Retained Comprehensive
Stock Shares Amount Amount Capital Earnings Income Total
--------- ------ ------ ----------- ---------- -------- ------------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance as of December 31, 1997 $ - 69,778 $ 698 $ (103) $ 882,312 $345,318 $ (5,056) $ 1,223,169
Comprehensive income
Net income 58,514 58,514
Other comprehensive income,
net of tax
Change in unrealized valuation
adjustment on investment
securities, net of
reclassification adjustment
(see Note 4) 9,851 9,851
-------- ------------- -----------
Total comprehensive income 58,514 9,851 68,365
-------- ------------- -----------
Stock repurchased, 1,356 shares at cost (40) (40)
Stock issued under Company's stock
option / award plan 284 3 12,428 12,431
----- ------ ------ ----------- ---------- -------- ------------- -----------
Balance as of March 31, 1998 $ - 70,062 $ 701 $ (143) $ 894,740 $403,832 $ 4,795 $ 1,303,925
----- ------ ------ ----------- ---------- -------- ------------- -----------
----- ------ ------ ----------- ---------- -------- ------------- -----------
</TABLE>
See the accompanying notes to the consolidated financial statements.
3
<PAGE>
WELLPOINT HEALTH NETWORKS INC.
Consolidated Statements of Cash Flows
(unaudited)
<TABLE>
<CAPTION>
(IN THOUSANDS) Three Months Ended March 31,
---------------------------
1998 1997
---------- ----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 58,514 $ 50,755
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization, net of accretion 16,158 12,805
Gains on sales of assets, net (4,128) (6,289)
Provision (benefit) for deferred income taxes 45 (566)
Amortization of deferred gain on sale of building (1,106) (1,106)
(Increase) decrease in certain assets:
Receivables, net (97,075) (16,072)
Other current assets (8,759) 1,007
Other non-current assets 865 (215)
Increase (decrease) in certain liabilities:
Medical claims payable 58,175 23,603
Loss and loss adjustment expense reserves 7,756 9,776
Reserves for future policy benefits 3,562 (12,106)
Unearned premiums 6,739 7,313
Accounts payable and accrued expenses (30,595) 17,039
Experience rated and other refunds (8,734) (2,018)
Income taxes payable and other current liabilities 41,676 108,303
Accrued postretirement benefits 1,286 1,103
Other non-current liabilities 380 9,045
---------- ----------
Net cash provided by operating activities 44,759 202,377
---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Investments purchased (556,069) (1,295,324)
Proceeds from investments sold and matured 532,730 1,051,912
Property and equipment purchased, net (11,716) (10,296)
Additional investment in subsidiaries - (18,683)
Purchase of subsidiaries, net of cash acquired - 361,977
---------- ----------
Net cash provided by (used in) investing
activities (35,055) 89,586
---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from long-term debt - 150,000
Repayment of long-term debt (75,000) (181,000)
Proceeds from issuance of common stock 12,431 3,065
Common stock repurchased (40) -
---------- ----------
Net cash used in financing activities (62,609) (27,935)
---------- ----------
Net increase (decrease) in cash and cash equivalents (52,905) 264,028
Cash and cash equivalents at beginning of period 283,851 313,256
---------- ----------
Cash and cash equivalents at end of period $ 230,946 $ 577,284
---------- ----------
---------- ----------
</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,
integrated workers' compensation, 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 March 31, 1998, the results of its operations
for the quarter ended March 31, 1998 and 1997, cash flows for the quarter
ended March 31, 1998 and 1997, and its changes in stockholders' equity for
the quarter ended March 31, 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.
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 either of the periods presented.
<TABLE>
<CAPTION>
(In thousands, except earnings per share) Three Months Ended March 31,
----------------------------
1998 1997
------------ ------------
<S> <C> <C>
Net Income $ 58,514 $ 50,755
------------ ------------
------------ ------------
Weighted average shares outstanding 69,875 66,544
Net effect of dilutive stock options 1,033 -
------------ ------------
Fully diluted weighted average shares outstanding 70,908 66,544
------------ ------------
------------ ------------
Earnings Per Share $ 0.84 $ 0.76
------------ ------------
------------ ------------
Earnings Per Share Assuming Full Dilution $ 0.83 $ 0.76
------------ ------------
------------ ------------
</TABLE>
4. COMPREHENSIVE INCOME
The following summarizes comprehensive income reclassification
adjustments required under SFAS No. 130.
<TABLE>
<CAPTION>
Three
Months Ended
March 31, 1998
(In thousands) --------------
<S> <C>
Holding gain on investment securities arising during the period
(net of tax of $8,366) $ 12,292
Less: reclassification adjustment for realized gains on
investment securities (net of tax of $1,661) 2,441
--------------
Net gain recognized in other comprehensive income (net of tax
of $6,705) $ 9,851
--------------
--------------
</TABLE>
5. NEW PRONOUNCEMENTS
In June 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
6
<PAGE>
WellPoint Health Networks Inc.
Notes to Consolidated Financial Statements
(unaudited)
5. NEW PRONOUNCEMENTS, CONTINUED
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.
The Company is presently assessing the presentation and effect of SFAS
Nos. 131 and 132 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.
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
<PAGE>
WellPoint Health Networks Inc.
Notes to Consolidated Financial Statements
(unaudited)
7. BUSINESS SEGMENT INFORMATION
Unique competitive pressures in the California workers' compensation
environment (particularly for the large group accounts) have continued to
inhibit the Company's ability to maintain adequate premium rates or
implement adequate premium increases in its workers' compensation products
similar to those implemented for its managed care and related products. For
the three months ended March 31, 1998, the Company experienced an unusual
level of losses in its workers' compensation business relative to the
profitability of its managed care and related products. Therefore, the
Company has determined that it operates in two industry segments: Managed
Care and Related Products and Property/Casualty -Workers' Compensation.
The following table depicts the financial results of each business segment.
<TABLE>
<CAPTION>
(In thousands) Three Months Ended
March 31,
1998 1997
---------- ----------
<S> <C> <C>
MANAGED CARE AND RELATED PRODUCTS
Operating revenue $1,544,176 $1,185,304
Income before provision for income taxes 112,129 84,671
Identifiable assets 4,135,293 3,746,966
PROPERTY/CASUALTY - WORKERS' COMPENSATION
Operating revenue $35,604 $45,979
Income (loss) before provision for income taxes (13,764) 608
Identifiable assets 507,065 456,890
CONSOLIDATED
Operating revenue $1,579,780 $1,231,283
Income before provision for income taxes 98,365 85,279
Identifiable assets 4,642,358 4,203,856
</TABLE>
8. SUBSEQUENT EVENTS
On April 21, 1998, the California HealthCare Foundation (the
"Foundation") completed its offering of 12 million shares of WellPoint
common stock in a registered public offering. The Company received no
proceeds from such sale. Upon completion of the sale, the Foundation
owned 17,910,000 shares or approximately 25.6% of the Company's total
outstanding shares.
8
<PAGE>
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 6.7 million medical members and over 22
million specialty members as of March 31, 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, integrated workers'
compensation, preventive care, disability, behavioral health, COBRA and
flexible benefits account administration.
NATIONAL EXPANSION AND OTHER RECENT DEVELOPMENTS
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 adjustment upon completion of a post-closing audit (which is
still pending). The purchase method of accounting has been used to
account for the acquisition of the GBO. The GBO, with an associated 1.3
million acquired members, targets large employers with 5,000 or more
employees and a majority of the medical members it serves are in health
plans that are self-funded by employers. The GBO offers indemnity and
PPO plans and also provides life, dental, pharmacy, utilization
management and disability coverage to a variety of employer groups. The
GBO has historically experienced a higher administrative expense ratio
than the Company's traditional California business due to the GBO's
higher percentage of management services business. The higher
administrative expense ratio of the GBO has contributed to an increase in
the Company's overall administrative expense ratio since the date of
acquisition.
The Company expects to incur approximately $21 to $25 million of costs
relating to the GBO acquisition during 1998, a portion of which is
expected to be reflected in the Company's results of operations. At the
time that the GBO acquisition was consummated, the Company expected that
it would experience material membership attrition of up to 30% as it
integrated the GBO operations and implemented its strategy of motivating
traditional indemnity insurance members to select managed care products
through, among other things, product
9
<PAGE>
GENERAL, CONTINUED
design and premium increases. Premium increases implemented since the
time of the acquisition have not resulted in the expected membership
attrition. The Company is currently unable to determine if and to what
extent the Company may experience membership attrition as it continues to
integrate this acquired business.
On March 31, 1996, the Company acquired the Life and Health Benefits
Management Division ("MMHD") of Massachusetts Mutual Life Insurance
Company (the "MMHD Acquisition"). The acquired MMHD operations focus on
employers with 250 to 5,000 employees and provide administrative
services, PPO and indemnity insurance products. The Company has
experienced membership attrition of approximately 30%, exclusive of new
account sales, through March 31, 1998 on acquired membership, a portion of
which is the result of recently instituted premium increases with respect
to certain accounts. The Company expects that it will experience some
level of further membership attrition of its acquired MMHD members as it
continues to evaluate the need for further price increases and pursues its
strategy of motivating members to select managed care products.
The Company has acquired certain businesses over the last two 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
ratio 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. The Company has also
implemented a series of price increases for certain of its California
managed care businesses in response to an increased loss ratio in the
second and third quarters of 1997. The Company will continue to evaluate
the need for further price increases, plan design changes and other
appropriate actions in the future. There can be no assurances, however,
that the Company will be able to take subsequent pricing or other actions
or that any actions previously taken or implemented in the future will be
successful in addressing any concerns that may arise with respect to the
performance of certain businesses.
Since 1996, the Company has significantly expanded its operations outside
of California. In order to integrate its acquired businesses and
implement its regional expansion strategy, the Company will need to
finish 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.
LEGISLATION
A variety of health care reform measures are currently pending or have
been recently enacted at the Federal, state and local levels. Recent
Federal legislation seeks, among other things, to insure the portability
of health coverage and mandates minimum maternity hospital stays. These
and other proposed measures may have the effect of dramatically altering
the regulation of health care and of increasing the Company's loss ratio
or decrease the affordability of the Company's products. In May 1997,
the Texas Legislature adopted Senate Bill No. 386 ("SB
10
<PAGE>
GENERAL, CONTINUED
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. It is too early to
determine what effect, if any, this legislation may have on the Company.
Although 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.
YEAR 2000
The Company is substantially dependent on its computer systems and
applications due to the nature of its managed health care business and
the increasing number of electronic transactions in the industry.
Historically, some computer systems and applications were developed to
recognize the year as a two-digit number, with the digits "00" being
recognized as the year 1900. The year 2000 presents a number of
potential problems for such systems, including potentially significant
processing errors or failure. In order to address these problems the
Company has developed and is in the midst of executing a comprehensive
plan designed to address the "year 2000" issue for its computer systems
and applications. During 1997, the Company completed a detailed risk
assessment of its various computer systems and applications, formulated a
plan for specific remediation efforts and began certain of such
remediation efforts. During 1998 and the first quarter of 1999, the
Company expects to continue and complete its remediation efforts and to
undertake internal testing of its systems and applications. By the
second quarter of 1999, the Company expects to undergo third-party
testing of its applications and systems. The Company currently estimates
that its costs related to year 2000 compliance remediation for
Company-owned systems and applications will be approximately $20 million
in 1998 and approximately $2.0 million in 1999. The Company expenses
these costs as incurred and funds these costs through cash flow from
operations.
The Company has begun to assemble survey data from health care providers,
health care transaction clearing houses, employers, agents and brokers
and other parties with which it communicates electronically to determine
the compliance efforts being undertaken by these parties and to assess
WellPoint's potential business exposure to any non-compliant systems
operated by these parties. Although the Company has 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.
11
<PAGE>
RESULTS OF OPERATIONS
WellPoint's revenues are primarily generated from premiums earned for
risk-based health care and specialty services provided to its members,
fees for administrative services, including claims processing and access
to provider networks for self-insured employers, and investment income.
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 the quarter ended March 31, 1998
include a full quarter of earnings for the acquired operations of the
GBO. For the quarter ended March 31, 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.
<TABLE>
<CAPTION>
Three Months Ended
March 31,
-----------------------
1998 1997
---------- ----------
<S> <C> <C>
Operating Revenues:
Premium revenue 92.7% 94.9%
Management services revenue 7.3% 5.1%
---------- ----------
100.0% 100.0%
Operating Expenses:
Health care services and other
benefits (loss ratio) 81.4% 78.8%
Selling expense 4.4% 4.9%
General and administrative expense 15.8% 14.7%
</TABLE>
12
<PAGE>
MEMBERSHIP
The following table sets forth membership data and the percent change in
membership:
<TABLE>
<CAPTION>
MEDICAL MEMBERSHIP(a): As of March 31,
------------------------
Percent
1998 1997 Change
--------- --------- --------
<S> <C> <C> <C>
CALIFORNIA
Group Services:
HMO 894,022 722,137 23.8%
PPO and Other 1,530,676 1,330,542 15.0%
--------- ---------
Total 2,424,698 2,052,679 18.1%
--------- ---------
Individual, Small Group and Senior:
HMO 324,364 280,528 15.6%
PPO and Other 1,289,988 1,204,322 7.1%
--------- ---------
Total 1,614,352 1,484,850 8.7%
--------- ---------
Medi-Cal HMO Programs 320,573 180,112 78.0%
--------- ---------
Total California Medical Membership 4,359,623 3,717,641 17.3%
--------- ---------
TEXAS
Group Services 175,668 207,650 (15.4%)
Individual, Small Group and Senior 80,441 37,610 113.9%
--------- ---------
Total 256,109 245,260 4.4%
--------- ---------
GEORGIA
Group Services 97,189 91,281 6.5%
Individual, Small Group and Senior 9,906 2,749 260.3%
--------- ---------
Total 107,095 94,030 13.9%
--------- ---------
OTHER STATES
Group Services 1,992,954 1,857,795 7.3%
Individual, Small Group and Senior 11,805 - N/A
--------- ---------
Total 2,004,759 1,857,795 7.9%
--------- ---------
Total National Medical Membership 2,367,963 2,197,085 7.8%
--------- ---------
TOTAL MEDICAL MEMBERSHIP (b) 6,727,586 5,914,726 13.7%
--------- ---------
--------- ---------
NETWORKS (c)
Proprietary Networks 4,172,563 3,551,467 17.5%
Other Networks 1,464,463 1,281,056 14.3%
Non-Network 1,090,560 1,082,203 0.8%
--------- ---------
TOTAL MEDICAL MEMBERSHIP 6,727,586 5,914,726 13.7%
--------- ---------
--------- ---------
</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) Medical membership includes 2,717,103 and 2,329,313 management services
members as of March 31, 1998 and 1997, respectively, of which those
management services members outside of California were 1,768,338 and
1,657,363 as of March 31, 1998 and 1997, respectively.
(c) Proprietary networks consist of California, Texas and other
WellPoint-developed networks. Other networks consist of third-party
networks and networks owned by the Company as a result of acquisitions
that incorporate provider discounts and some basic managed care elements.
Non-network consists of fee for service and percentage-of-billed charges
contracts with providers.
13
<PAGE>
MEMBERSHIP, CONTINUED
<TABLE>
<CAPTION>
As of March 31,
------------------------- Percent
1998 1997 Change
---------- ---------- -------
<S> <C> <C> <C>
SPECIALTY MEMBERSHIP:
Pharmacy 12,912,648 12,891,280 0.2%
Dental 3,178,866 3,040,748 4.5%
Utilization Management 2,942,120 2,777,788 5.9%
Life 1,720,577 1,633,586 5.3%
Disability 1,069,833 1,135,231 (5.8%)
Behavioral Health 740,111 642,467 15.2%
</TABLE>
COMPARISON OF RESULTS FOR THE FIRST QUARTER 1998 TO THE FIRST QUARTER 1997
Premium revenue increased 25.3%, or $295.7 million, to $1,464.5 million
for the quarter ended March 31, 1998 from $1,168.8 million for the
quarter ended March 31, 1997. The additional two months of the GBO
operations in 1998 versus 1997 contributed 31.7% or $93.8 million of the
premium revenue increase. Also contributing to increased premium revenue
in the first quarter was an increase in insured member months of 20.2%,
excluding the GBO. Additionally, there was an increase in the per member
per month premiums associated with many of the Company's insured medical
products.
Management services revenue increased 84.6%, or $52.8 million, to $115.2
million for the quarter ended March 31, 1998 from $62.4 million for the
quarter ended March 31, 1997. The increase was primarily due to $40.3
million of incremental management services revenue related to the GBO
acquisition, representing 76.3% of the increase. Also contributing to
increased management services revenue was a rate increase in management
services fees related to the MMHD acquired business.
Investment income increased $4.4 million to $44.7 million for the quarter
ended March 31, 1998 compared to $40.3 million for the quarter ended
March 31, 1997. Net realized gains on equity securities decreased $6.8
million to $0.4 million for the quarter ended March 31, 1998 in
comparison to $7.2 million for the quarter ended March 31, 1997. The
decline in net realized gains on equity securities was partially offset
by net realized gains from debt securities which increased $3.6 million
to $3.8 million for the quarter ended March 31, 1998. Net interest and
dividend income increased $6.5 million to $39.5 million for the quarter
ended March 31, 1998 in comparison to $33.0 million for the quarter ended
March 31, 1997. This increase was primarily due to increased interest
income on the investment portfolios of the acquired GBO business and
slightly higher yields in 1998 over 1997, partially offset by the cash
used for repayment of indebtedness under the Company's senior credit
facility.
Health care services and other benefits expense increased 29.4%, or
$270.6 million, to $1,191.5 million for the quarter ended March 31, 1998
from $920.9 million for the quarter ended March 31, 1997. The additional
two months of the GBO operations in 1998 versus 1997
14
<PAGE>
COMPARISON OF RESULTS FOR THE FIRST QUARTER 1998 TO THE FIRST QUARTER
1997, CONTINUED
contributed 35.1% of the increase and accounted for $94.9 million.
Additionally, the previously mentioned increase in insured member months
of 20.2% contributed to the increased claims expense.
The loss ratio attributable to managed care and related products for the
quarter ended March 31, 1998 increased to 80.2% compared to 78.3% for the
quarter ended March 31, 1997, due partially to the additional two months
of the GBO operations in 1998 versus 1997 on the Company's overall
results. 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 78.7%
for the quarter ended March 31, 1998. The increase in loss ratio
excluding the GBO is due to adverse development in the acquired MMHD
business.
The loss ratio attributable to Property/Casualty - Workers' Compensation
segment for the quarter ended March 31, 1998 increased to 129.7% compared
to 90.9% for the quarter ended March 31, 1997, due principally to the
adverse development of prior year losses, primarily in the Company's
standalone workers' compensation product.
Selling expense consists of commissions paid to outside brokers and
agents representing the Company. Selling expense for the quarter ended
March 31, 1998 increased 17.4% to $70.2 million compared to $59.8 million
for the quarter ended March 31, 1997, corresponding with continued
overall premium revenue growth. The selling expense ratio for the quarter
ended March 31, 1998 decreased to 4.4% from 4.9% for the quarter ended
March 31, 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 quarter ended March 31, 1998, the selling
expense ratio would have been 4.8%. 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 quarter ended March 31, 1998
increased 38.5%, or $69.5 million, to $250.1 million for the quarter
ended March 31, 1998 from $180.6 million for the quarter ended March 31,
1997. The additional two months of the GBO operations in 1998 versus
1997 accounted for 32.5% or $22.6 million of the increase. Additional
increases resulted from costs associated with increased membership
growth, primarily related to medical products, including Medi-Cal
business, and the Company's continuing national expansion efforts. In
connection with the Company's national expansion efforts, the Company
also incurred additional information systems and service costs which are
anticipated to continue as the Company expands its national business.
The administrative expense ratio increased to 15.8% for the quarter ended
March 31, 1998, compared to 14.7% for the quarter ended March 31, 1997,
primarily due to the increased
15
<PAGE>
COMPARISON OF RESULTS FOR THE FIRST QUARTER 1998 TO THE FIRST QUARTER
1997, CONTINUED
administrative expense associated with the GBO acquisition. 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 quarter ended March 31,
1998, was 14.2% for the quarter ended March 31, 1998.
Interest expense was $7.3 million for the quarter ended March 31, 1998
and $10.8 million for the quarter ended March 31, 1997. The decrease in
interest expense related to repayment of indebtedness as the effective
interest rate paid by the Company remained relatively stable. The
Company's long-term indebtedness at March 31, 1998 was $313.0 million
compared to $594.0 million at March 31, 1997. The weighted average
interest rate for all debt for the quarter ended March 31, 1998,
including the fees associated with the borrowings and interest rate
swaps, was 7.6%.
The Company's net income for the quarter ended March 31, 1998 was $58.5
million, compared to $50.8 million for the quarter ended March 31, 1997.
Earnings per share totaled $0.84 and $0.76 for the quarters ended March
31, 1998 and 1997, respectively. Earnings per share assuming full
dilution totaled $0.83 and $0.76 for the quarters ended March 31, 1998
and 1997, respectively. Earnings per share for the quarter ended March
31, 1997 included nonrecurring costs of $0.06 per share. Earnings per
share for all periods presented has been calculated in accordance with
Statement of Financial Accounting Standards No. 128, "Earnings Per Share"
("SFAS No. 128").
Earnings per share for the quarter ended March 31, 1998 is based upon
weighted average shares outstanding of 69.9 million, excluding common
stock equivalents, and 70.9 million shares, assuming full dilution.
Earnings per share for the quarter ended March 31, 1997 has been
calculated using 66.5 million shares for both measures. Common stock
equivalents did not have a dilutive effect during the first quarter of
1997. For the quarter ended March 31, 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.
FINANCIAL CONDITION
The Company's consolidated assets increased by $109.0 million, or 2.4%,
from $4,533.4 million as of December 31, 1997 to $4,642.4 million as of
March 31, 1998. Cash and investments were $2.9 billion as of March 31,
1998, or 63.1% of total assets.
As of March 31, 1998, $313.0 million was outstanding under the Company's
long-term debt facilities, compared to $388.0 million at December 31
1997. Debt repayments were funded from internally generated cash flow.
16
<PAGE>
FINANCIAL CONDITION, CONTINUED
Stockholders' equity totaled $1,303.9 million as of March 31, 1998, an
increase of $80.7 million from $1,223.2 million as of December 31, 1997.
The increase resulted primarily from net income of $58.5 million for the
quarter ended March 31, 1998, $12.4 million of stock issuances under the
Company's stock option/award plan and $9.9 million change in net
unrealized valuation gain adjustments on investment securities, net of
tax.
LIQUIDITY AND CAPITAL RESOURCES
The Company's primary sources of cash are premium and management services
revenues received and investment income. The primary uses of cash
include health care claims and other benefits, capitation payments,
income taxes, repayment of long-term debt, interest expense, broker and
agent commissions, administrative expenses and capital expenditures. In
addition to the foregoing, other uses of cash include costs of provider
networks and systems development, and costs associated with acquisitions
and the integration of acquired businesses. The Company receives premium
revenue in advance of anticipated claims for related health care services
and other benefits. The Company's investment policies are designed to
provide liquidity, preserve capital and maximize yield. Cash and
investment balances maintained by the Company are sufficient to meet
applicable regulatory financial stability and net worth requirements. As
of March 31, 1998, the Company's investment portfolio consisted primarily
of investment grade fixed maturity securities and equity securities.
Net cash flow provided by operating activities was $44.8 million for the
quarter ended March 31, 1998, compared with $202.4 million for the
quarter ended March 31, 1997. Cash flow from operations for the quarter
ended March 31, 1998 is due primarily to net income of $58.5 million,
adjusted for an increase in receivables of $97.1 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 quarter ended March 31,
1997 was significantly affected by the timing of collection of GBO
acquired receivables and timing of certain income tax payments.
Net cash used in investing activities for the quarter ended March 31,
1998 totaled $35.1 million, compared with net cash provided by investing
activities of $89.6 million for the quarter ended March 31, 1997. The
cash used in 1998 was attributable primarily to the purchase of
investments for $556.1 million, partially offset by the proceeds from
investments sold and matured of $532.7 million.
Net cash used in financing activities totaled $62.6 million for the
quarter ended March 31, 1998, compared to net cash used in financing
activities of $27.9 million for the quarter ended March 31, 1997.
Repayments on long-term debt totaled $75.0 million for the quarter ended
March 31, 1998. The Company received proceeds of $12.4 million from the
issuance of common stock related to its stock option plans.
17
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES, CONTINUED
The Company has a $1.0 billion unsecured revolving credit facility.
Borrowings under the credit facility bear interest at rates determined by
reference to the bank's base rate or to the London Interbank Offered Rate
("LIBOR") plus a margin determined by reference to the Company's leverage
ratio (as defined in the credit agreement) or the then-current rating of
the Company's unsecured long-term debt by specified rating agencies.
Borrowings under the credit facility are made on a committed basis or
pursuant to an auction-bid process. The credit facility expires as of
May 15, 2002, although it may be extended for an additional one-year
period under certain circumstances. The credit agreement requires the
Company to maintain certain financial ratios and contains restrictive
covenants, including restrictions on the occurrence of additional
indebtedness and the granting of certain liens, limitations on
acquisitions and investments and limitations on changes in control. The
total amount outstanding under the credit facility was $293.0 million and
$368.0 million as of March 31, 1998 and December 31, 1997, respectively.
The weighted average interest rate, including the Company's interest rate
swap agreements, for the quarter ended March 31, 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.
As a licensee of the Blue Cross Blue Shield Association (the "BCBSA"),
the Company and certain subsidiaries must maintain certain capital
requirements. As of March 31, 1998, the Company and its subsidiaries were
in compliance with these requirements.
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 March 31, 1998, those subsidiaries of
the Company were in compliance with all minimum capital requirements.
In July 1996, the Company filed a registration statement relating to the
issuance of $1.0 billion of senior or subordinated unsecured
indebtedness. As of March 31, 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.
18
<PAGE>
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.
As part of the Company's business strategy, the Company has recently
acquired substantial operations in new geographic markets. These
businesses, which include substantial indemnity- based insurance
operations, have experienced varying profitability or losses in recent
periods. 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 these businesses as the
Company pursues its strategy of motivating the acquired members to select
managed care products. In order to implement this strategy, the Company
has and will, among other things, need to continue to incur considerable
expenditures for provider networks, 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. The Company's results of operations
could be adversely affected in the event that the Company experiences
such problems or is otherwise unable to implement fully its expansion
strategy.
The Company's operations are subject to substantial regulation by
Federal, state and local agencies in all jurisdictions in which the
Company now operates. Many of these agencies have increased their
scrutiny of managed health care companies in recent periods. The Company
also provides administrative services to the California Department of
Health Services for Medi-Cal in various California counties and provides
similar 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. Future regulatory
actions by any regulatory agencies may have a material adverse affect 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.
19
<PAGE>
FACTORS THAT MAY AFFECT FUTURE RESULTS OF OPERATIONS, CONTINUED
The Company's future results will depend in large part on accurately
predicting health care costs and upon the Company's ability to control
future health care costs through underwriting criteria, utilization
management and negotiation of favorable provider contracts. Changes in
utilization rates, demographic characteristics, health care practices,
provider consolidation, inflation, new technologies, clusters of
high-cost, the regulatory environment and numerous other factors are
beyond the control of any health plan and may adversely affect the
Company's ability to predict and control health care costs and claims, as
well as the Company's financial condition or results of operations.
Periodic renegotiation of hospital 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 control
such costs 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 or select underwriting criteria may adversely
affect the Company's financial condition or results of operations.
Managed care organizations, both inside and outside California, operate
in a highly competitive environment that has undergone significant change
in recent periods as a result of business consolidations, new strategic
alliances, aggressive marketing practices by competitors and other market
pressures. Additional increases in competition could adversely affect the
Company's financial condition or results of operations.
As a result of the Company's recent acquisitions, the Company now
operates on a national basis and offers a spectrum of health care and
specialty products through various risk sharing arrangements. The
Company's health care products include a variety of managed care
offerings as well as traditional fee-for-service coverage. With respect
to product type, fee-for-service products are generally less profitable
than managed care products. A critical component of the Company's
expansion strategy is to transition over time the traditional insurance
members of the Company's acquired businesses to more managed care
products. With respect to the risk-sharing nature of products, managed
care products that involve greater potential risk to the Company
generally tend to be more profitable than 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,
competitive pressure and greater regulatory restrictions applicable to
the small employer group market. During the last three fiscal quarters,
the
20
<PAGE>
FACTORS THAT MAY AFFECT FUTURE RESULTS OF OPERATIONS, CONTINUED
Company has implemented price increases in certain of its managed care
businesses. While these price increases are intended to improve
profitability, there can be no assurance that this will occur.
Subsequent unfavorable changes in the relative profitability between the
Company's various products could have a material adverse effect on the
Company's results of operations and on the continued feasibility of the
Company's geographic expansion strategy.
Substantially all of the Company's investment assets are in yielding
securities of varying maturities. The value of such securities are
highly sensitive to fluctuations in short-and long-term interest rates,
with the value decreasing as such rates increase or increasing as such
rates decrease. Changes in the value of the Company's investment assets,
as a result of interest rate fluctuations, can impact the Company's
results of operations. There can be no assurances that interest rate
fluctuations will not have a material adverse affect on the results of
operations of 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 and other information technology 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.
21
<PAGE>
PART II OTHER INFORMATION
<TABLE>
<CAPTION>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
<S> <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
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 Fifth Amendment dated as of May 1, 1998 to the Registrant's
Credit Agreement dated as of May 15, 1996.
10.02 Amendment No. 2 dated May 1, 1998 to the Employment
Agreement by and between the Registrant and Leonard D.
Schaeffer.
10.03 Amendment No. 1 to the Salary Deferral Savings Program of
WellPoint Health Networks Inc.
27.1 Financial Data Schedule
(b) Reports on Form 8-K
</TABLE>
The Company did not file any Current Reports on Form 8-K during the
quarter ended March 31, 1998.
22
<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: May 15, 1998 By: \s\ LEONARD D. SCHAEFFER
-------------------------
Leonard D. Schaeffer
Chairman of the Board of Directors
and Chief Executive Officer
Date: May 15, 1998 By: \s\ DAVID C. COLBY
-------------------
David C. Colby
Executive Vice President
and Chief Financial Officer
Date: May 15, 1998 By: \s\ S. LOUISE MCCRARY
----------------------
S. Louise McCrary
Senior Vice President and
Chief Accounting Officer
23
<PAGE>
FIFTH AMENDMENT TO
CREDIT AGREEMENT
THIS FIFTH AMENDMENT TO CREDIT AGREEMENT (this "Fifth Amendment") dated as
of May 1, 1998 is entered into by and among WELLPOINT HEALTH NETWORKS INC., a
Delaware corporation ("COMPANY"), each of the financial institutions that is a
signatory hereto (the "BANKS"), BANK OF AMERICA NATIONAL TRUST AND SAVINGS
ASSOCIATION, as administrative and bid agent for the Banks (in such capacity,
the "ADMINISTRATIVE AGENT"), NATIONSBANK OF TEXAS, N.A., as syndication agent
for the Banks (in such capacity, the "SYNDICATION AGENT"), and THE CHASE
MANHATTAN BANK, as documentation agent for the Banks (in such capacity the
"DOCUMENTATION AGENT"), and amends that certain Credit Agreement dated as of May
15, 1996 among the Company, the Banks, the Administrative Agent, Syndication
Agent and the Documentation Agent, as amended by a First Amendment to Credit
Agreement dated as of June 28, 1996, a Second Amendment to Credit Agreement
dated as of April 21, 1997. a Third Amendment to Credit Agreement dated as of
April 21, 1997 and a Fourth Amendment to Credit Agreement and Consent dated as
of July 21, 1997 as so amended, the "Agreement").
RECITAL
The Company has requested several amendments to the Agreement, and the
Banks and the Agents are willing to amend the Agreement on the terms and
conditions set forth herein.
NOW, THEREFORE, for good and valuable consideration, the receipt and
adequacy of which are hereby acknowledged, the parties hereby agree as follows:
1. TERMS. All terms used herein shall have the same meanings as in the
Agreement unless otherwise defined herein. All references to the Agreement
shall mean the Agreement as hereby amended.
2. AMENDMENTS TO AGREEMENT. The Agents and the Banks hereby agree that
the Agreement is amended as follows:
2.1 The following new definitions are inserted in Section 1.01 of the
Agreement in proper alphabetical order as follows:
"'Acquired EBITDA' means, with respect to any acquisition permitted
under this Agreement, for any period, for the Company and its Subsidiaries
(determined in accordance with GAAP), the sum of (a) consolidated pre-tax
net income (exclusive of extraordinary gains and losses); PLUS, to the
extent deducted in determining consolidated pre-tax net income, (b)
Interest Expense, (c) amortization and (d) depreciation, all for such
period, as each of the items specified above are reasonably allocable to
the assets, capital stock, division or business group acquired in such
acquisition."
"'EBITDA' means, for the Company and its Subsidiaries (determined on a
consolidated basis without duplication in accordance with GAAP), the sum of
-1-
<PAGE>
consolidated pre-tax net income (exclusive of extraordinary gains and
losses) of the Company and its Subsidiaries for the four-quarter period
ending on the date of determination plus (to the extent deducted in
determining consolidated pre-tax net income) (a) Interest Expense for such
period, (b) amortization for such period, (c) depreciation for such period,
(d) up to $65,000,000 of restructuring charges or expenses incurred in
connection with the Recapitalization and the Mirus Acquisition (determined
on a pre-tax basis) and (e) up to $50,000,000 of non-cash restructuring
charges or expenses (with any reserve constituting a cash charge) incurred
in such period in connection with acquisitions permitted by the terms and
conditions of this Agreement (determined on a pre-tax basis)."
"'Pricing Funded Debt' means, as of any date of determination, for the
Company and its Subsidiaries on a consolidated basis in accordance with
GAAP, an amount equal to the sum of, without duplication, (a) all
Indebtedness of such Persons plus (b) an amount equal to eight times the
annual expense of such Persons in respect of any Operating Lease for the
four-quarter period commencing on the date of determination plus (c) all
Contingent Obligations of such Persons with respect to Funded Debt of
others."
"'Pricing Leverage Ratio' means the ratio of Pricing Funded Debt TO
the sum of (a) EBITDAR plus (b) with respect to each acquisition permitted
by this Agreement made during the four consecutive fiscal quarters
immediately preceding any date of determination, the aggregate amount of
Acquired EBITDAR for the period commencing on the first day of such four
fiscal quarter period and ending on the date each such acquisition was
made."
2.2 The following definitions in Section 1.01 of the Agreement are amended
and restated in their entirety as follows:
"'Fixed Charges' means, for any period, for the Company and its
Subsidiaries on a consolidated basis in accordance with GAAP, an amount
equal to the sum of, without duplication, (a) Interest Expense during the
preceding four-quarter period ending on the date of determination PLUS
(b) scheduled principal payments of Indebtedness for the succeeding
four-quarter period commencing on the date of determination, other than
payments in connection with the Mass Mutual Notes (unless renewable or
extendible at the option of the obligor beyond such period)."
"'Fixed Charge Coverage Ratio' means the ratio of (a) EBITDA to (b)
Fixed Charges."
"'Funded Debt' means, as of any date of determination, for the Company
and its Subsidiaries on a consolidated basis in accordance with GAAP, an
amount equal to the sum of, without duplication, (a) all Indebtedness of
such Person plus (b) all Contingent Obligations of such Person with respect
to Funded Debt of others."
"'Leverage Ratio' means the ratio of Funded Debt TO the sum of (a)
EBITDA plus (b) with respect to each acquisition permitted by this
Agreement made during the four
-2-
<PAGE>
consecutive fiscal quarters immediately preceding any date of
determination, the aggregate amount of Acquired EBITDA for the period
commencing on the first day of such four fiscal quarter period and ending
on the date each such acquisition was made."
2.3 The definition of "Applicable Amount" in Section 1.01 of the Agreement
is amended by deleting "Leverage Ratio" and inserting "Pricing Leverage Ratio"
in lieu thereof.
2.4 Section 7.01(b) of the Agreement (annual consolidating financial
statements) is amended and restated in its entirety as follows:
"(b) Intentionally left blank; and"
2.5 Section 7.02(b) of the Agreement (investment portfolio reporting) is
amended and restated in its entirety as follows:
"(b) Intentionally left blank; and"
2.6 Section 8.02(f) of the Agreement is amended and restated in its
entirety as follows:
"(f) additional Indebtedness of the Company incurred subsequent to
the Closing Date; provided that at the time any such Indebtedness is
incurred, no Default or Event of Default has occurred and is continuing or
would result from the incurrence of such Indebtedness; and"
2.7 Section 8.08 of the Agreement is amended and restated in its entirety
as follows:
"8.08 LEVERAGE RATIO. The Company shall not permit its Leverage
Ratio to exceed 3.00 to 1 at any time."
2.8 Section 8.12 of the Agreement is further amended by deleting "and" at
the end of subsection (j), deleting the period at the end of subsection (k) and
inserting "; and" in lieu thereof, and inserting a new subsection (l)
immediately after subsection (k) as follows:
"(l) Investments pursuant to guaranties or similar instruments of
Subsidiary obligations required by HMO Regulators."
2.9 Annex I to the Agreement is amended by deleting "Leverage Ratio"
wherever it appears and inserting "Pricing Leverage Ratio" in lieu thereof.
2.10 Exhibit F to the Agreement is amended and restated in its entirety as
set forth in Exhibit F hereto.
3. REPRESENTATIONS AND WARRANTIES. The Company represents and warrants
to the Banks and the Agents that, on and as of the date hereof, and after giving
effect to this Fifth Amendment:
3.1 AUTHORIZATION. The execution, delivery and performance of this Fifth
-3-
<PAGE>
Amendment have been duly authorized by all necessary corporate action by the
Company and this Fifth Amendment has been duly executed and delivered by the
Company.
3.2 BINDING OBLIGATION. This Fifth Amendment is the legal, valid and
binding obligation of the Company enforceable against the Company, in accordance
with its terms, except as may be limited by bankruptcy, insolvency,
reorganization, moratorium or other similar laws relating to or limiting
creditors' rights generally or by equitable principles relating to
enforceability.
3.3 NO LEGAL OBSTACLE TO AMENDMENT. The execution, delivery and
performance of this Fifth Amendment will not (a) contravene the terms of the
Company's articles or certificate of incorporation, by-laws or other
organization document; (b) conflict with or result in any breach or
contravention of, or the creation of any Lien under, any document evidencing any
Contractual Obligation to which the Company is a party or any order, injunction,
writ or decree of any Governmental Authority to which the Company or its
Property is subject; or (c) violate any Governmental Rules where such violation
would reasonably be expected to have a Material Adverse Effect.
3.4 INCORPORATION OF CERTAIN REPRESENTATIONS. The representations and
warranties of the Company set forth in Article VI of the Agreement are true and
correct in all respects on and as of the date hereof as though made on and as of
the date hereof, except (a) to the extent such representations and warranties
expressly refer to an earlier date, in which case they shall be true and correct
as of such earlier date, and (b) that the Recapitalization itself shall not be
deemed to have a Material Adverse Effect for purposes of the representations and
warranties in Sections 6.11(b) and (c) of the Agreement.
3.5 DEFAULT. After giving effect to this Fifth Amendment, no Default or
Event of Default under the Agreement shall have occurred and be continuing.
4. CONDITIONS, EFFECTIVENESS. The effectiveness of this Fifth Amendment
shall be subject to the compliance by the Company with its agreements herein
contained, and to the delivery of the following to the Administrative Agent in
form and substance satisfactory to the Administrative Agent:
4.1 AUTHORIZED SIGNATORIES. A certificate, signed by the Secretary or an
Assistant Secretary of the Company dated as of the date hereof, as to the
incumbency of the person or persons authorized to execute and deliver this Fifth
Amendment and any instrument or agreement required hereunder on behalf of the
Company.
4.2 OTHER EVIDENCE. Such other evidence with respect to the Company or
any other person as any Bank may reasonably request in connection with this
Fifth Amendment and the compliance with the conditions set forth herein.
-4-
<PAGE>
5. MISCELLANEOUS.
5.1 EFFECTIVENESS OF AGREEMENT. Except as hereby expressly amended, the
Agreement and each other Loan Document shall each remain in full force and
effect, and are hereby ratified and confirmed in all respects on and as of the
date hereof.
5.2 NO WAIVER. This Fifth Amendment is specific in time and in intent and
does not constitute, nor should it be construed as, a waiver of any other right,
power or privilege under the Loan Documents, or under any agreement, contract,
indenture, document or instrument mentioned in the Loan Documents; nor does it
preclude any exercise thereof or the exercise of any other right, power or
privilege, nor shall any future waiver of any right, power, privilege or default
hereunder, or under any agreement, contract, indenture, document or instrument
mentioned in the Loan Documents, constitute a waiver of any other default of the
same or of any other term or provision.
5.3 COUNTERPARTS; ALL BANKS. This Fifth Amendment may be executed in any
number of counterparts and all of such counterparts taken together shall be
deemed to constitute one and the same instrument. This Fifth Amendment shall
become as of the date hereof upon the Company, the Majority Banks and the Agents
having signed a copy hereof, whether the same or counterparts, and the same
shall have been delivered to the Administrative Agent.
5.4 JURISDICTION. This Fifth Amendment shall be governed by and construed
under the laws of the State of California.
IN WITNESS WHEREOF, the parties hereto have caused this Fifth Amendment to
be duly executed and delivered as of the date first written above.
[Signatures omitted]
(Signatures continue)
-5-
<PAGE>
EXHIBIT F
FORM OF COMPLIANCE CERTIFICATE
[DATE]
TO: Bank of America National Trust
and Savings Association, as Administrative Agent
Re: Compliance Certificate
Ladies and Gentlemen:
This Certificate is given in accordance with Section 7.02(a) of that
certain Credit Agreement dated as of May 15, 1996 (as from time to time amended,
extended, restated, modified or supplemented, the "Credit Agreement";
capitalized terms used herein shall have the meanings assigned to them in the
Credit Agreement), among WellPoint Health Networks Inc., the Banks party
thereto, Bank of America National Trust and Savings Association, as
Administrative Agent, NationsBank of Texas, N.A., as Syndication Agent, and
Chemical Bank, as Documentation Agent. I the undersigned Responsible Officer
hereby certify that:
(a) I am the _______ ________ of the Company;
(b) The Company hereby selects the [PRICING LEVERAGE RATIO] [DEBT
RATING] as the method for determining the Applicable Amount;
(c) The enclosed consolidated balance sheet, related consolidated
statement of income, shareholders' equity and cash flows and the enclosed
consolidating balance sheets and the related statements of income are
complete and correct and fairly present, in accordance with GAAP, the
financial position and the results of operations of the Company and the
Subsidiaries for the periods indicated;
(d) We have reviewed the terms of the Credit Agreement and have
made or caused to be made under our supervision, a review in reasonable
detail of the transactions and financial condition of the Company during
the accounting period covered by the enclosed financial statements;
(e) No event or condition exists which constitutes an Event of
Default or Default as of the date of this certificate except as set forth
below;
(f) The representations and warranties set forth in Article VI of
the Credit Agreement are true, correct and complete in all material
respects on and as of the date of this Certificate to the same extent as
though made on and as of the date hereof; and
F-1
<PAGE>
(g) The Company is in compliance with all of the terms and
conditions of the Credit Agreement except as set forth below.
(h) The calculations in Attachment No. 1 to this Certificate are
true, correct and complete.
(i) Pursuant to Section 7.03(f) of the Credit Agreement, the
Company's Debt Ratings as of the date of this certificate are ____, in the
case of Moody's, and ____, in the case of S&P.
(j) Pursuant to Section 8.01(i) of the Credit
Agreement, the aggregate principal amount of Indebtedness
secured by any and all purchase money security interests
on any Property acquired or held by the Company or its
Subsidiaries in the Ordinary Course of Business is $
-------
(k) Pursuant to Section 8.01(j) of the Credit
Agreement, the aggregate amount of Indebtedness secured
by Liens in respect of Capital Leases on Property subject
to such Capital Leases is $
---------
(l) Pursuant to Section 8.02(d) of the Credit
Agreement, the aggregate amount of Indebtedness of
Subsidiaries of the Company (exclusive of Indebtedness
permitted under Section 8.02(e) and Contingent Obligations
of the Company and Subsidiaries of the Company in respect
of such Indebtedness) is $
---------
(m) Pursuant to Section 8.04(h) of the Credit Agreement, the
net book value in the aggregate of all dispositions of Property during
the current fiscal year is ______% of the Company's Total Assets as
shown on its consolidated balance sheet for the previous fiscal year.
(n) Pursuant to Section 8.08 of the Credit
Agreement, the Company's Leverage Ratio is $
---------
(o) Pursuant to Section 8.09 of the Credit Agreement,
the Company's Fixed Charge Ratio is $
---------
(p) Pursuant to Section 8.10 of the Credit Agreement,
the Company's Net Worth is $
---------
(q) Pursuant to Section 8.12(j) of the Credit
Agreement, the aggregate outstanding amount of Investments
is $
---------
F-2
<PAGE>
Described below (or in a separate attachment hereto) are the
exceptions, if any, to paragraphs (d) and (f), listing in detail, the
nature of the conditions or event, the period during which it has existed
and the action which the Company has taken, is taking or proposes to take
with respect to each such condition or event:
----------------------------------------------------------
----------------------------------------------------------
----------------------------------------------------------
----------------------------------------------------------
----------------------------------------------------------
The foregoing certifications are made and delivered this ____ day of
_________, ____.
WELLPOINT HEALTH NETWORKS INC.,
A DELAWARE CORPORATION
By:
------------------------------
Name:
----------------------------
Title:
----------------------------
F-3
<PAGE>
ATTACHMENT NO. 1
TO COMPLIANCE CERTIFICATE
This attachment is as of ______________ and, in the case of the Fixed
Charge Coverage Ratio, the Leverage Ratio and the Pricing Leverage Ratio set
forth below, pertains to the four-quarter period from ________ ________ to
_______ __________ (the "Period"; the last day of the Period is referred to
herein as the "Period End Date"). Financial covenant information is provided
for only those covenants which are required to be tested as of the Period End
Date. All amounts are as of the Period End Date except as noted and are
calculated on a consolidated basis for the Company and its Subsidiaries..
Capitalized terms used herein without definition shall have the meanings
set forth in the Credit Agreement dated as of May 15, 1996 (such agreement, as
it may be amended, supplemented, restated or otherwise modified from time to
time, the "Credit Agreement") by and among WellPoint Health Networks Inc., the
Banks party thereto, Bank of America National Trust and Savings Association, as
Administrative Agent, NationsBank of Texas, N.A., as Syndication Agent, and The
Chase Manhattan Bank, as Documentation Agent. Section references are to the
sections of the Credit Agreement.
I. DISPOSITIONS OF ASSETS (Section 8.04(h))
A. Total Assets for previous fiscal year: $
---------
B. 10% of Line I.A: $
---------
C. Net book value of dispositions of Property during
current fiscal year: $
---------
MAXIMUM PERMITTED DISPOSITIONS: LINE I.C NOT TO EXCEED LINE I.B
II. LEVERAGE RATIO (Section 8.08)
A. Funded Debt:
1. Indebtedness: $
---------
2. Contingent Obligations re Funded Debt of Others: $
---------
3. Funded Debt (Lines: A1 + A2): $
---------
F-1-1
<PAGE>
B. EBITDA
1. Consolidated pre-tax net income (exclusive of
extraordinary gains and losses): $
---------
2. Interest Expense:
a. Related to Indebtedness: $
---------
b. Related to Swap Contracts: $
---------
c. Total Interest Expense (Lines B2.a+B2.b): $
---------
3. Depreciation: $
---------
4. Amortization: $
---------
5. Up to $65,000,000 of restructuring charges or
expenses in connection with the Recapitalization
and the Mirus Acquisition (determined on a
pre-tax basis): $
---------
6. Up to $50,000,000 of non-cash restructuring
charges or expenses (with any reserve
constituting a cash charge) incurred in such
period in connection with acquisitions permitted
by the terms and conditions of this Agreement
(determined on apre-tax basis): $
---------
7. EBITDA (Lines B1+B2.c+B3+B4+B5+B6): $
---------
---------
C. Acquired EBITDA with respect to acquired Persons:
1. Consolidated pre-tax net income (exclusive of
extraordinary gains and losses): $
---------
2 Interest Expense:
a. Related to Indebtedness: $
---------
b. Related to Swap Contracts: $
---------
c. Total Interest Expense (Lines C2.a+C2.b): $
---------
3. Depreciation: $
---------
4. Amortization: $
---------
F-1-2
<PAGE>
5. Acquired EBITDA (Lines C1+C2.c+C3+C4): $
---------
---------
C. Leverage Ratio (Line II.A3 DIVIDED BY [Line II.B7 +
Line II.C5]): to 1.00
MAXIMUM PERMITTED LEVERAGE RATIO: 3.00 TO 1.00
III. FIXED CHARGE COVERAGE RATIO (Section 8.09)
A Fixed Charges:
1. Interest Expense (Line II.B2.c): $
---------
2. Schedule principal payments on Indebtedness
during succeeding four quarters: $
---------
3. Fixed Charges (Lines A1 + A2): $
---------
B. Fixed Charge Coverage: Ratio (Line II.B7 DIVIDED BY
Line III.A3) = ____ to 1.00
MINIMUM PERMITTED FIXED CHARGE COVERAGE: 3:00 TO 1.00
IV. MINIMUM NET WORTH (Section 8.10)
A. Net Worth
1. Capital Stock: $
---------
2. Treasury Shares: $
---------
3. Additional Paid In Capital: $
---------
4. Surplus and Retained Earnings: $
---------
5. Actual Net Worth (Lines A1 - A2 + A3 +A 4): $
---------
B. Minimum Net Worth at Final Recapitalization Date
(the greater of (i) 75% of the Company's Net Worth as
of the Final Recapitalization Date and (ii)
$500,000,000): $
---------
C. Fifty Percent of Net Income from and after January 1,
1996: $
---------
D. Total Required Minimum Net Worth (Lines IV.B + IV.C): $
---------
MINIMUM PERMITTED NET WORTH: LINE IV.A.5 TO BE GREATER THAN LINE IV.D
F-1-3
<PAGE>
III. PRICING LEVERAGE RATIO
A. Pricing Funded Debt
1. Indebtedness: $
---------
2. Operating Lease expense, multiplied by eight: $
---------
3. Contingent Obligations re Funded Debt of Others: $
---------
4. Funded Debt (Lines: A1 +A 2+A3): $
---------
B. EBITDAR
1. Consolidated pre-tax net income (exclusive of
extraordinary gains and losses) (Line II.B.1): $
---------
2 Interest Expense (Line II.B.2.c): $
---------
3. Depreciation (Line II.B.3): $
---------
4. Amortization (Line II.B.4): $
---------
5. Operating Lease expense: $
---------
6. Recapitalization and Mirus Acquisition
restructuring charges or expenses (Line II.B.5): $
---------
7. Other non-cash restructuring charges or expenses
incurred in such period in connection with
permitted acquisitions (Line II.B.6): $
---------
8. EBITDAR (Lines B1+B2.c+B3+B4+B5+B6+B7): $
---------
---------
C. Acquired EBITDAR with respect to acquired Persons:
1. Consolidated pre-tax net income (exclusive of
extraordinary gains and losses) (Line II.C.1): $
---------
2 Interest Expense (Line II.C.2.c): $
---------
3. Depreciation (Line II.C.3): $
---------
4. Amortization(Line II.C.4): $
---------
5. Operating Lease expense: $
---------
F-1-4
<PAGE>
6. Acquired EBITDAR (Lines C1+C2.c+C3+C4+C5): $
---------
---------
D. Pricing Leverage Ratio (Line III.A4 DIVIDED BY
[Line III.B.8 + Line III.C6]): _____ to 1.00
F-1-5
<PAGE>
AMENDMENT NO. 2 TO
EMPLOYMENT AGREEMENT
The Employment Agreement entered into by and between WellPoint Health
Networks Inc. (the "Company") and Leonard D. Schaeffer ("Executive") effective
as of January 22, 1997, as amended by that certain Amendment No. 1 effective as
of September 1, 1997 (as amended, the "Employment Agreement"), is hereby further
amended as of May 1, 1998 as follows:
1. The first sentence appearing in Section 8.a is hereby deleted in its
entirety and replaced with the following language:
"In the event of a change of control of the Company, including a
'Change-in-Control' as defined in the WellPoint Health Networks Inc.
Officer Change-in-Control Plan effective as of February 12, 1998 or
any subsequently adopted similar plan, Executive shall not lose any of
the rights, privileges or guarantees provided to Executive by this
Agreement."
2. Except as set forth herein, terms used in this Amendment and not
defined herein shall have the same meaning as they do in the Employment
Agreement.
3. Except as amended above, the terms and conditions of the Employment
Agreement shall continue in full force and effect.
WELLPOINT HEALTH NETWORKS INC.
By: /s/ Stephen L. Davenport
-----------------------------------
Stephen L. Davenport,
Chairperson, Compensation Committee
/s/ Leonard D. Schaeffer
----------------------------------------
EXECUTIVE
<PAGE>
AMENDMENT NO. 1
TO
SALARY DEFERRAL SAVINGS PROGRAM OF WELLPOINT HEALTH NETWORKS INC.
(AS AMENDED AND RESTATED JANUARY 1, 1997)
(As Amended through October 1, 1997)
The Salary Deferral Savings Program of WellPoint Health Networks Inc.
("Plan") is amended as follows, as of the dates indicated below:
1. The following clarifying provision is added at the end of Section 2.10
("Eligible Employee") of the Plan:
Notwithstanding anything to the contrary in any Plan document, the
collective bargaining agreement between Blue Cross of California and the
Office and Professional Employees International Union Local 29, AFL-CIO
that became effective November 16, 1994 governs the terms of Plan
participation of all individuals covered by that agreement for the
period beginning November 16, 1994 and ending on the date that the terms
of that agreement expire.
2. Effective as of the effective date of the Plan, the reference to
Section "6.04" in Section 1.03(b) of Appendix V of the Plan is changed to a
reference to Section "1.04."
3. Effective as of the effective date of the Plan, WellPoint Health
Networks Inc. is added to the list of Participating Companies in Appendix VII
of the Plan.
IN WITNESS WHEREOF, WellPoint Health Networks Inc. has caused this
Amendment to be executed this 30th day of December, 1997.
WELLPOINT HEALTH NETWORKS INC.
By: /s/ THOMAS C. GEISER
-------------------------
Thomas C. Geiser
1.
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
COMPANY'S CONSOLIDATED STATEMENTS OF EARNINGS AND CONSOLIDATED BALANCE SHEETS
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 1998.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> MAR-31-1998
<CASH> 230,946
<SECURITIES> 2,595,826
<RECEIVABLES> 634,529
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 3,594,943
<PP&E> 117,411
<DEPRECIATION> 0
<TOTAL-ASSETS> 4,642,358
<CURRENT-LIABILITIES> 2,442,960
<BONDS> 313,000
0
0
<COMMON> 701
<OTHER-SE> 1,303,224
<TOTAL-LIABILITY-AND-EQUITY> 4,642,358
<SALES> 0
<TOTAL-REVENUES> 1,624,493
<CGS> 0
<TOTAL-COSTS> 1,511,787
<OTHER-EXPENSES> 7,017
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 7,324
<INCOME-PRETAX> 98,365
<INCOME-TAX> 39,851
<INCOME-CONTINUING> 58,514
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 58,514
<EPS-PRIMARY> 0.84
<EPS-DILUTED> 0.83
</TABLE>
