<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 JUNE 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 (818) 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 AUGUST 13, 1998
------------------- ----------------------------
Common Stock, $0.0l par value 69,296,713 shares
<PAGE>
WELLPOINT HEALTH NETWORKS INC.
SECOND QUARTER 1998 FORM 10-Q
TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
ITEM 1. Financial Statements
Consolidated Balance Sheets as of June 30, 1998 and
December 31, 1997.......................................... 1
Consolidated Income Statements for the Three and Six Months
Ended June 30, 1998 and 1997............................... 2
Consolidated Statement of Changes in Stockholders' Equity
for the Six Months Ended June 30, 1998..................... 3
Consolidated Statements of Cash Flows for the
Six Months Ended June 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.............. 10
PART II. OTHER INFORMATION
ITEM 4. Submission of Matters to a Vote of Securityholders............ 26
ITEM 6. Exhibits and Reports on Form 8-K.............................. 28
SIGNATURES................................................................. 29
</TABLE>
2
<PAGE>
WELLPOINT HEALTH NETWORKS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
WELLPOINT HEALTH NETWORKS INC.
Consolidated Balance Sheets
<TABLE>
<CAPTION>
(IN THOUSANDS, EXCEPT SHARE DATA) June 30, December 31,
1998 1997
------------ ------------
<S> <C> <C>
ASSETS (unaudited)
Current Assets:
Cash and cash equivalents $ 208,644 $ 269,067
Investment securities, at market value 2,241,231 2,188,651
Receivables, net 582,608 502,880
Deferred tax assets 56,792 68,279
Other current assets 60,145 50,262
------------ ------------
Total Current Assets 3,149,420 3,079,139
Property and equipment, net 109,690 112,526
Intangible assets 635,121 620,747
Long-term investments 100,530 102,819
Deferred tax assets 60,949 61,078
Other non-current assets 47,418 48,592
------------ ------------
Total Non-Current Assets 953,708 945,762
------------ ------------
Net assets of discontinued operations held for sale 100,408 209,223
------------ ------------
Total Assets $ 4,203,536 $ 4,234,124
------------ ------------
------------ ------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Medical claims payable $ 972,148 $ 922,658
Reserves for future policy benefits 52,087 51,189
Unearned premiums 191,282 196,205
Accounts payable and accrued expenses 317,081 347,316
Experience rated and other refunds 231,742 255,495
Income taxes payable 57,990 105,052
Other current liabilities 356,205 302,032
------------ ------------
Total Current Liabilities 2,178,535 2,179,947
Accrued postretirement benefits 66,462 63,891
Reserves for future policy benefits, non-current 335,675 332,033
Long-term debt 298,000 388,000
Other non-current liabilities 43,595 47,084
------------ ------------
Total Liabilities 2,922,267 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, 70,258,707 and 69,778,086 issued
at June 30, 1998 and December 31, 1997, respectively 703 698
Treasury stock, at cost, 9,266 and 4,571 shares at
June 30, 1998 and December 31, 1997, respectively (240) (103)
Additional paid-in capital 903,181 882,312
Retained earnings 356,994 345,318
Accumulated other comprehensive income 20,631 (5,056)
------------ ------------
Total Stockholders' Equity 1,281,269 1,223,169
------------ ------------
Total Liabilities and Stockholders' Equity $ 4,203,536 $ 4,234,124
------------ ------------
------------ ------------
</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 June 30, Six Months Ended June 30,
--------------------------- ---------------------------
1998 1997 1998 1997
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Revenues:
Premium revenue $ 1,465,289 $ 1,296,065 $ 2,895,203 $ 2,419,741
Management services revenue 104,571 103,974 219,415 166,419
Investment income (loss) (8,041) 40,677 31,417 76,176
----------- ----------- ----------- -----------
1,561,819 1,440,716 3,146,035 2,662,336
Operating Expenses:
Health care services and other benefits 1,180,389 1,045,273 2,326,945 1,925,096
Selling expense 68,442 61,913 135,784 119,141
General and administrative expense 244,271 229,038 488,846 404,204
Nonrecurring costs - 8,028 - 14,535
----------- ----------- ----------- -----------
1,493,102 1,344,252 2,951,575 2,462,976
----------- ----------- ----------- -----------
Operating Income 68,717 96,464 194,460 199,360
Interest expense 7,284 9,845 14,608 20,613
Other expense, net 7,080 4,424 13,441 11,665
----------- ----------- ----------- -----------
Income from Continuing Operations before
Provision for Income Taxes 54,353 82,195 166,411 167,082
Provision for income taxes 21,601 33,620 66,467 68,515
----------- ----------- ----------- -----------
Income from Continuing Operations 32,752 48,575 99,944 98,567
Discontinued Operations:
Income (loss) from Workers' Compensation
Segment, net of tax benefit of $1,944,
$65, $6,959 and $436, respectively (3,914) 688 (12,592) 1,451
Loss on disposal of Workers' Compensation
Segment, net of tax benefit of $33,022 (75,676) - (75,676) -
----------- ----------- ----------- -----------
Income (Loss) from Discontinued Operations (79,590) 688 (88,268) 1,451
----------- ----------- ----------- -----------
Net Income (Loss) (46,838) 49,263 11,676 $ 100,018
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
Earnings Per Share:
Income from continuing operations 0.47 0.70 1.43 $ 1.45
Income (loss) from discontinued operations -1.14 0.01 -1.26 0.02
----------- ----------- ----------- -----------
Net income (loss) (0.67) 0.71 0.17 $ 1.47
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
Earnings Per Share Assuming Full Dilution:
Income from continuing operations 0.45 0.69 1.40 $ 1.44
Income (loss) from discontinued operations -1.11 0.01 -1.24 0.02
----------- ----------- ----------- -----------
Net income (loss) (0.66) 0.70 0.16 $ 1.46
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
</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 11,676 11,676
Other comprehensive income, net of
tax Change in unrealized valuation
adjustment on investment securities,
net of reclassification adjustment
(see Note 4) 25,687 25,687
--------- ------------- ----------
Total comprehensive income 11,676 25,687 37,363
--------- ------------- ----------
Stock repurchased, 4,695 shares at cost (137) (137)
Stock issued under Company's stock
option / award plan 481 5 20,869 20,874
--------- ------ ------ ----------- ---------- --------- ------------- ----------
Balance as of June 30, 1998 $ - 70,259 703 (240) 903,181 $ 356,994 $ 20,631 $1,281,269
--------- ------ ------ ----------- ---------- --------- ------------- ----------
--------- ------ ------ ----------- ---------- --------- ------------- ----------
</TABLE>
See the accompanying notes to the consolidated financial statements.
3
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WELLPOINT HEALTH NETWORKS INC.
Consolidated Statements of Cash Flows
(Unaudited)
<TABLE>
<CAPTION>
Six Months Ended June 30,
-------------------------------
1998 1997
------------ ------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Income from continuing operations $ 99,944 $ 98,567
Adjustments to reconcile income from continuing operations to net cash
provided by continuing operating activities:
Depreciation and amortization, net of accretion 30,081 26,509
(Gains) losses on sales of assets, net 42,445 (14,170)
Benefit for deferred income taxes (5,188) (4,198)
Amortization of deferred gain on sale of building (2,212) (2,213)
(Increase) decrease in certain assets:
Receivables, net (79,728) (29,648)
Other current assets (9,883) (6,000)
Other non-current assets 1,174 120
Increase (decrease) in certain liabilities:
Medical claims payable 49,490 (20,765)
Reserves for future policy benefits 4,540 66,435
Unearned premiums (4,923) (11,003)
Accounts payable and accrued expenses (30,235) 65,445
Experience rated and other refunds (23,753) 4,772
Income taxes payable and other current liabilities 4,406 23,200
Accrued postretirement benefits 2,571 1,714
Other non-current liabilities (1,277) 9,378
------------ ------------
Net cash provided by continuing operating activities 77,452 208,143
------------ ------------
Income (loss) from discontinued operations (12,592) 1,451
Adjustment to derive cash flows from discontinued operating activities:
Change in net operating assets 13,527 19,611
------------ ------------
Net cash provided by discontinued operating activities 935 21,062
------------ ------------
Net cash provided by operating activities 78,387 229,205
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Investments purchased (1,474,861) (1,229,024)
Proceeds from investments sold and matured 1,422,209 814,457
Property and equipment purchased, net (15,931) (17,245)
Additional investment in subsidiaries - (17,584)
Purchase of subsidiaries, net of cash acquired - 361,977
------------ ------------
Net cash used in continuing investing activities (68,583) (87,419)
------------ ------------
Net cash used in investing activities of discontinued operations (964) (21,192)
------------ ------------
Net cash used in investing activities (69,547) (108,611)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from long-term debt - 150,000
Repayment of long-term debt (90,000) (311,000)
Proceeds from issuance of common stock - 110,340
Proceeds from issuance of stock under option/award plan 20,874 3,785
Common stock repurchased (137) -
------------ ------------
Net cash used in financing activities (69,263) (46,875)
------------ ------------
Net increase (decrease) in cash and cash equivalents (60,423) 73,719
Cash and cash equivalents at beginning of period 269,067 285,222
------------ ------------
Cash and cash equivalents at end of period $ 208,644 $ 358,941
------------ ------------
------------ ------------
</TABLE>
See the accompanying notes to the consolidated financial statements.
4
<PAGE>
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 June 30, 1998, the results of its operations for
the quarter and six months ended June 30, 1998 and 1997, cash flows for the
six months ended June 30, 1998 and 1997, and its changes in stockholders'
equity for the six months ended June 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.
5
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
2. BASIS OF PRESENTATION, CONTINUED
RECLASSIFICATIONS
Certain amounts in the prior year consolidated financial statements have
been reclassified to conform to the 1998 presentation. All amounts have
been restated to exclude the discontinued Workers' Compensation segment.
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 June 30, Six Months Ended June 30,
---------------------- -------------------------
1998 1997 1998 1997
--------- ---------- --------- ---------
<S> <C> <C> <C> <C>
Income from continuing operations $ 32,752 $48,575 $99,944 $ 98,567
Income (Loss) from discontinued operations (79,590) 688 (88,268) 1,451
-------- ------- ------- --------
Net Income (Loss) $(46,838) $49,263 $11,676 $100,018
-------- ------- ------- --------
-------- ------- ------- --------
Weighted average shares outstanding 70,129 69,311 70,003 67,928
Net effect of dilutive stock options 1,309 696 1,171 348
-------- ------- ------- --------
Fully diluted weighted average shares outstanding 71,438 70,007 71,174 68,276
-------- ------- ------- --------
-------- ------- ------- --------
EARNINGS PER SHARE:
Income from continuing operations $ 0.47 $ 0.70 $ 1.43 $ 1.45
Income (Loss) from discontinued operations (1.14) 0.01 (1.26) 0.02
-------- ------- ------- --------
Net Income (Loss) $ (0.67) $ 0.71 $ 0.17 $ 1.47
-------- ------- ------- --------
-------- ------- ------- --------
EARNINGS PER SHARE ASSUMING FULL DILUTION:
Income from continuing operations $ 0.45 0.69 $ 1.40 $ 1.44
Income (Loss) from discontinued operations (1.11) 0.01 (1.24) 0.02
-------- ------- ------- --------
Net Income (Loss) $ (0.66) 0.70 $ 0.16 $ 1.46
-------- ------- ------- --------
-------- ------- ------- --------
</TABLE>
Subsequent to June 30, 1998, and through August 14, 1998, the Company
repurchased approximately 1 million shares of its common stock.
6
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
4. COMPREHENSIVE INCOME
The following summarizes comprehensive income reclassification adjustments
required under SFAS No. 130.
<TABLE>
<CAPTION>
Six Months Ended
(In thousands) June 30, 1998
----------------
<S> <C>
Holding gain on investment securities arising during
the period (net of tax of $33,610) $ 49,377
Add: reclassification adjustment for realized losses
on investment securities (net of tax of $16,125) (23,690)
Net gain recognized in other comprehensive income ----------------
(net of tax of $17,353) $ 25,687
----------------
----------------
</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
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 June 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. The new
standard will be effective in the first quarter of the year 2000 and
requires that an entity recognize all derivatives as either assets or
liabilities in the statement of financial position and measure those
instruments at fair value.
7
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
5. NEW PRONOUNCEMENTS, CONTINUED
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.
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 $100 million. The transaction is subject to
regulatory approval and is expected to close in September 1998.
Revenues for the Workers' Compensation segment totaled $25.2 million for
the three months and $60.3 million for the six months ended June 30, 1998.
Revenues for the prior year totaled $39.9 million and $85.1 million for the
three months and six months ended June 30, 1997, respectively. The
estimated loss from the measurement date to the disposal date is $25.6
million, net of tax benefit of $13.5 million.
Summarized balance sheet data for the discontinued workers' compensation
segment were classified as net assets of discontinued operations held for
sale at June 30, 1998. These consist of the following (in thousands):
8
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
7. DISCONTINUED OPERATIONS, CONTINUED
<TABLE>
<S> <C>
Cash and investments $ 367,361
Intangible assets 76,269
Other assets 61,522
Loss reserves (258,205)
Other liabilities (49,276)
Reserves for estimated losses (97,263)
---------
Net assets of discontinued operations $ 100,408
---------
---------
</TABLE>
8. SUBSEQUENT EVENTS
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 and will be
accounted for as a purchase.
9
<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 6.8 million medical members and over 23
million specialty members as of June 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 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
During the quarter ended June 30, 1998, the Company discontinued its Workers'
Compensation business segment. WellPoint recorded a charge of $75.7 million,
net of a tax benefit of $33.0 million as the estimated loss on the disposal
of the discontinued workers' compensation segment. In addition, loss from
operations for the discontinued segment through the measurement date was $3.9
million and $12.6 million for the three and six months ended June 30, 1998,
respectively, compared to income of $0.7 million and $1.5 million for the
three and six months ended June 30, 1997. The decrease in operating results
for the 1998 periods is due primarily to continuing adverse loss development
on policies written in prior years. See further disclosure in Note 7.
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 will
acquire all of the outstanding capital stock of UNICARE Specialty Services,
Inc., a wholly owned subsidiary of WellPoint ("UNICARE Specialty"). The
principal asset of UNICARE Specialty is the capital stock of UNICARE Workers'
Compensation Insurance Company ("UNICARE Workers' Compensation"). The
purchase price for the acquisition will be 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 statutory surplus of UNICARE
Workers' Compensation as of June 30, 1998 was approximately $98.2 million.
The transaction is subject to various closing conditions, including the
receipt of all necessary regulatory approvals and the termination of the
waiting period under the Hart-Scott-Rodino Antitrust Improvements Act. The
parties currently expect the transaction to be completed in September 1998,
although no assurances can be given regarding the timing or receipt of
necessary regulatory approvals. The Company and Fremont will jointly market
integrated workers' compensation and medical insurance products in the small
employer group market.
10
<PAGE>
NATIONAL EXPANSION AND OTHER RECENT DEVELOPMENTS, CONTINUED
On July 9, 1998, the Company entered into an Agreement and Plan of Merger
with Cerulean Companies Inc. (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 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 costs ratios will ultimately contribute to an increase in those ratios
for the Company when consolidated.
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 $10 to $15 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. To date, the Company
has incurred approximately $5.0 million of these costs.
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 less
than 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.
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 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 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.
11
<PAGE>
NATIONAL EXPANSION AND OTHER RECENT DEVELOPMENTS, CONTINUED
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 or intends to
implement premium increases with respect to such products. The Company will
continue to evaluate the need for further price 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. To date, this legislation has not 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.
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. Given the
Company's reliance on its computer systems, the Company's results of
operations could be materially adversely affeted by any such error or
failures. 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 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
12
<PAGE>
YEAR 2000, CONTINUED
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. As of June 30, 1998, the Company has
expended approximately $8.5 million for its year 2000 remediation efforts.
Assuming the Company's pending acquisition of Cerulean is consummated (See
Note 8), similar remediation and testing efforts with respect to
Cerulean-owned systems and applications may increase the Company's total
expenditures. The Company expenses these costs as incurred and funds these
costs through cash flow from operations. The Company is currently formulating
detailed contingency plans for its specific business units in the event that
its various systems and applications do not achieve year 2000 compliance in a
timely fashion. The Company currently expects that this contingency planning
will be completed by the end of 1998.
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.
13
<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 each of the quarters ended June 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 six months ended June
30, 1998 also include a full period of earnings related to the acquired
operations of the GBO. For the six months ended June 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 Six Months Ended
June 30, June 30,
------------------ ----------------
1998 1997 1998 1997
------- ------- -------- -------
<S> <C> <C> <C> <C>
Operating Revenues:
Premium revenue 93.3% 92.6% 93.0% 93.6%
Management services revenue 6.7% 7.4% 7.0% 6.4%
----- ----- ----- -----
100.0% 100.0% 100.0% 100.0%
Operating Expenses:
Health care services and other
benefits (loss ratio) 80.6% 80.7% 80.4% 79.6%
Selling expense 4.4% 4.4% 4.4% 4.6%
General and administrative expense 15.6% 16.4% 15.7% 15.6%
</TABLE>
14
<PAGE>
MEMBERSHIP
The following table sets forth membership data and the percent change in
membership:
MEDICAL MEMBERSHIP(a):
<TABLE>
<CAPTION>
As of June 30,
--------------------------
Percent
1998 1997 Change
---------- ---------- -------
<S> <C> <C> <C>
CALIFORNIA (d)
Group Services:
HMO 911,271 738,656 23.4%
PPO and Other 1,537,211 1,336,703 15.0%
--------- ---------
Total 2,448,482 2,075,359 18.0%
--------- ---------
Individual, Small Group and Senior:
HMO 332,413 290,694 14.4%
PPO and Other 1,310,961 1,234,549 6.2%
--------- ---------
Total 1,643,374 1,525,243 7.7%
--------- ---------
Medi-Cal HMO Programs 395,627 267,939 47.7%
--------- ---------
Total California Medical Membership 4,487,483 3,868,541 16.0%
--------- ---------
TEXAS
Group Services 162,770 164,802 -1.2%
Individual, Small Group and Senior 88,840 50,423 76.2%
--------- ---------
Total 251,610 215,225 16.9%
--------- ---------
GEORGIA
Group Services 92,083 92,960 -0.9%
Individual, Small Group and Senior 12,217 5,437 124.7%
--------- ---------
Total 104,300 98,397 6.0%
--------- ---------
OTHER STATES
Group Services 1,924,428 1,884,281 2.1%
Individual, Small Group and Senior 15,403 1,522 912.0%
--------- ---------
Total 1,939,831 1,885,803 2.9%
--------- ---------
Total National Medical Membership 2,295,741 2,199,425 4.4%
--------- ---------
TOTAL MEDICAL MEMBERSHIP (b) 6,783,224 6,067,966 11.8%
--------- ---------
--------- ---------
NETWORKS (c)
Proprietary Networks 4,317,923 3,674,522 17.5%
Other Networks 1,441,500 1,315,147 9.6%
Non-Network 1,023,801 1,078,297 -5.1%
--------- ---------
TOTAL MEDICAL MEMBERSHIP 6,783,224 6,067,966 11.8%
--------- ---------
--------- ---------
</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 2,654,230 and 2,352,000 management services
members as of June 30, 1998 and 1997, respectively, of which those
management services members outside of California were 1,697,125 and
1,582,000 as of June 30, 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.
(d) Classification of California membership versus other states based upon zip
code of the covered employer or individual subscriber company. Outside
California, state membership is based upon subscriber zip code.
15
<PAGE>
MEMBERSHIP, CONTINUED
<TABLE>
<CAPTION>
As of June 30,
--------------------------- Percent
1998 1997 Change
------------ ------------ -------
<S> <C> <C> <C>
SPECIALTY MEMBERSHIP:
Pharmacy 13,589,994 13,418,747 1.3%
Dental 3,128,899 3,083,854 1.5%
Utilization Management 2,825,686 2,839,228 -0.5%
Life 2,125,357 1,629,087 30.5%
Disability 954,210 1,147,704 -16.9%
Behavioral Health 727,675 664,228 9.6%
</TABLE>
COMPARISON OF RESULTS FOR THE SECOND QUARTER 1998 TO THE SECOND QUARTER 1997
Premium revenue increased 13.1%, or $169.2 million, to $1,465.3 million for
the quarter ended June 30, 1998 from $1,296.1 million for the quarter ended
June 30, 1997. The increase is primarily attributable to an increase in
insured member months of 10.5. Also contributing to the increased premium
revenue was an increase in the per member per month premiums due to price
increases in the Company's insured medical products and more growth in its
large employer group business which has higher premium rates than the
Company's other businesses.
Management services revenue increased approximately $0.6 million to $104.6
million for the quarter ended June 30, 1998 from $104.0 million for the
quarter ended June 30, 1997.
Investment loss was $8.0 million for the quarter ended June 30, 1998 compared
to investment income of $40.7 million for the quarter ended June 30, 1997, a
decrease of $48.7 million. The decline was 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 has subsequently filed for bankruptcy. Net
realized gains on equity securities decreased $4.9 million to $2.9 million
for the quarter ended June 30, 1998 in comparison to $7.8 million for the
quarter ended June 30, 1997, excluding the loss on FPA. The decline in net
realized gains on equity securities was partially offset by net realized
gains from debt securities which increased $1.6 million to $1.9 million for
the quarter ended June 30, 1998. Net interest and dividend income increased
$2.6 million to $36.4 million for the quarter ended June 30, 1998 in
comparison to $33.8 million for the quarter ended June 30, 1997. This
increase was primarily due to 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 12.9%, or $135.1
million, to $1,180.4 million for the quarter ended June 30, 1998 from
$1,045.3 million for the quarter ended June 30, 1997. The previously
mentioned increase in insured member months of 10.5% contributed to the
increased claims expense.
16
<PAGE>
COMPARISON OF RESULTS FOR THE SECOND QUARTER 1998 TO THE SECOND QUARTER 1997,
CONTINUED
The loss ratio attributable to managed care and related products for the
quarter ended June 30, 1998 slightly decreased to 80.6% compared to 80.7% for
the quarter ended June 30, 1997.
Selling expense consists of commissions paid to outside brokers and agents
representing the Company. Selling expense for the quarter ended June 30, 1998
increased 10.5% to $68.4 million compared to $61.9 million for the quarter
ended June 30, 1997, corresponding with continued overall premium revenue
growth. The selling expense ratio was 4.4% for each of the quarters ended
June 30, 1998 and 1997.
General and administrative expense for the quarter ended June 30, 1998
increased 6.7%, or $15.3 million, to $244.3 million for the quarter ended
June 30, 1998 from $229.0 million for the quarter ended June 30, 1997. The
increase resulted 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 the increase in its
Medi-Cal business.
The administrative expense ratio decreased to 15.6% for the quarter ended
June 30, 1998, compared to 16.4% for the quarter ended June 30, 1997,
primarily due to synergy savings from the consolidation of various regional
offices and the integration of information system centers related to acquired
businesses.
Interest expense was $7.3 million for the quarter ended June 30, 1998 and
$9.8 million for the quarter ended June 30, 1997. The decrease in interest
expense is related to repayment of indebtedness with the effective interest
rate paid by the Company remaining relatively stable. The Company's long-term
indebtedness at June 30, 1998 was $298.0 million compared to $388.0 million
at June 30, 1997. The weighted average interest rate for all debt for the
quarter ended June 30, 1998, including the fees associated with the
borrowings and interest rate swaps, was 7.6%.
The Company's income from continuing operations for the quarter ended June
30, 1998 was $32.8 million, compared to $48.6 million for the quarter ended
June 30, 1997. Earnings per share from continuing operations totaled $0.47
and $0.70 for the quarters ended June 30, 1998 and 1997, respectively.
Earnings per share from continuing operations assuming full dilution totaled
$0.45 and $0.69 for the quarters ended June 30, 1998 and 1997, respectively.
Earnings per share from continuing operations for the quarter ended June 30,
1997 included nonrecurring costs of $0.07 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 June 30, 1998 is based upon weighted
average shares outstanding of 70.1 million, excluding common stock
equivalents, and 71.4 million shares, assuming full dilution. Earnings per
share for the quarter ended June 30, 1997 has been calculated using 69.3
million shares excluding common stock equivalents, and 70.0 million
17
<PAGE>
COMPARISON OF RESULTS FOR THE SECOND QUARTER 1998 TO THE SECOND QUARTER 1997,
CONTINUED
shares, assuming full dilution. For the quarter ended June 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.
COMPARISON OF RESULTS FOR THE SIX MONTHS ENDED JUNE 30, 1998 TO THE SIX
MONTHS ENDED JUNE 30, 1997
Premium revenue increased 19.7%, or $475.5 million, to $2,895.2 million for
the six months ended June 30, 1998 from $2,419.7 million for the six months
ended June 30, 1997. The additional two months of the GBO operations in 1998
compared to 1997 contributed 16.8% or $80.1 million of the premium revenue
increase. Also contributing to increased premium revenue in the second
quarter was an increase in insured member months of 11.7%, excluding the GBO.
Additionally, there was an increase in the per member per month premiums due
to price increases in the Company's insured medical products and more growth
in its large employer group business which has higher premium rates than the
Company's other businesses.
Management services revenue increased 31.9%, or $53.0 million, to $219.4
million for the six months ended June 30, 1998 from $166.4 million for the
six months ended June 30, 1997. The increase was primarily due to $25.3
million of incremental management services revenue related to the GBO
acquisition, representing 47.7% of the increase. Also contributing to
increased management services revenue was a rate increase in management
services fees related to the Life and Health Benefits Management Division of
Massachusetts Mutual Life Insurance Company ("MMHD") acquired business.
Investment income decreased $44.8 million to $31.4 million for the six months
ended June 30, 1998 compared to $76.2 million for the six months ended June
30, 1997. The decline was primarily due to FPA. Net realized gains on equity
securities decreased $11.8 million to $3.2 million for the six months ended
June 30, 1998 in comparison to $15.0 million for the six months ended June
30, 1997, excluding FPA. The decline in net realized gains on equity
securities was partially offset by net realized gains from debt securities
which increased $3.2 million to $5.6 million for the six months ended June
30, 1998. Net interest and dividend income increased $9.7 million to $72.3
million for the six months ended June 30, 1998, in comparison to $62.6
million for the six months ended June 30, 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 20.9%, or $401.8
million, to $2,326.9 million for the six months ended June 30, 1998 from
$1,925.1 million for the six months ended June 30, 1997. The additional two
months of the GBO operations in 1998 compared to 1997 contributed 22.7% of
the increase and accounted for $91.4 million. Additionally, the previously
mentioned increase in insured member months of 11.7% contributed to the
increased claims expense.
18
<PAGE>
COMPARISON OF RESULTS FOR THE SIX MONTHS ENDED JUNE 30, 1998 TO THE SIX
MONTHS ENDED JUNE 30, 1997, CONTINUED
The loss ratio attributable to managed care and related products for the six
months ended June 30, 1998 increased to 80.4% compared to 79.6% for the six
months ended June 30, 1997, due partially to the additional two months of the
GBO operations in 1998 compared to 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 79.4% for the six months ended
June 30, 1998. The slight decline is due, in part, to continuing efforts to
control costs.
Selling expense for the six months ended June 30, 1998 increased 14.0% to
$135.8 million compared to $119.1 million for the six months ended June 30,
1997, corresponding with continued overall premium revenue growth. The
selling expense ratio for the six months ended June 30, 1998 decreased to
4.4% from 4.6% for the six months ended June 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 six months ended June
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 six months ended June 30, 1998
increased 20.9%, or $84.6 million, to $488.8 million for the six months ended
June 30, 1998 from $404.2 million for the six months ended June 30, 1997. The
additional two months of the GBO operations in 1998 compared to 1997
accounted for 40.2% or $34.0 million of the increase. Additional increases
resulted from costs associated with increased membership growth, primarily
related to medical products, including Medi-Cal business.
The administrative expense ratio increased to 15.7% for the six months ended
June 30, 1998, compared to 15.6% for the six months ended June 30, 1997,
primarily due to the increased 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 six months
ended June 30, 1998, was 15.1% for the six months ended June 30, 1998. This
decline is primarily due to synergy savings from the consolidation of various
regional offices and the integration of information system centers related to
acquired businesses.
Interest expense was $14.6 million for the six months ended June 30, 1998 and
$20.6 million for the six months ended June 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 June 30, 1998 was $298.0 million compared
to $388.0 million at June 30, 1997. The weighted average interest rate for all
19
<PAGE>
COMPARISON OF RESULTS FOR THE SIX MONTHS ENDED JUNE 30, 1998 TO THE SIX
MONTHS ENDED JUNE 30, 1997, CONTINUED
debt for the six months ended June 30, 1998, including the fees associated
with the borrowings and interest rate swaps, was 7.6%.
The Company's income from continuing operations for the six months ended June
30, 1998 was $99.9 million, compared to $98.6 million for the six months
ended June 30, 1997. Earnings per share from continuing operations totaled
$1.43 and $1.45 for the six months ended June 30, 1998 and 1997,
respectively. Earnings per share from continuing operations assuming full
dilution totaled $1.40 and $1.44 for the six months ended June 30, 1998 and
1997, respectively. Earnings per share from continuing operations for the six
months ended June 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 six months ended June 30, 1998 is based upon
weighted average shares outstanding of 70.0 million, excluding common stock
equivalents, and 71.2 million shares, assuming full dilution. Earnings per
share for the six months ended June 30, 1997 has been calculated using 67.9
million, excluding common stock equivalents, and 68.3 million shares,
assuming full dilution. For the six months ended June 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.
FINANCIAL CONDITION
The Company's consolidated assets decreased by $30.6 million, or 0.7%, from
$4,234.1 million as of December 31, 1997 to $4,203.5 million as of June 30,
1998. Cash and investments were $2.6 billion as of June 30, 1998, or 60.7% of
total assets.
As of June 30, 1998, $298.0 million was outstanding under the Company's
long-term debt facilities, compared to $388.0 million at December 31, 1997.
Debt repayments were principally funded from internally generated cash flow.
Stockholders' equity totaled $1,281.3 million as of June 30, 1998, an
increase of $58.1 million from $1,223.2 million as of December 31, 1997. The
increase resulted primarily from net income of $11.7 million for the six
months ended June 30, 1998, $20.9 million of stock issuances under the
Company's stock option/award plan and $25.7 million change in net unrealized
valuation gain adjustments on investment securities, net of tax.
LIQUIDITY AND CAPITAL RESOURCES
20
<PAGE>
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 June 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 $77.5 million
for the six months ended June 30, 1998, compared with $208.1 million for the
six months ended June 30, 1997. Cash flow from continuing operations for the
six months ended June 30, 1998 is due primarily to net income of $11.7
million, adjusted for an increase in receivables of $79.7 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 six months ended June 30, 1997 was significantly
affected by the timing of collection of GBO acquired receivables and timing
of certain income tax payments.
Net cash used in continuing investing activities for the six months ended
June 30, 1998 totaled $68.6 million, compared with net cash provided by
continuing investing activities of $87.4 million for the six months ended
June 30, 1997. The cash used in 1998 was attributable primarily to the
purchase of investments for $1.5 billion, partially offset by the proceeds
from investments sold and matured of $1.4 billion.
Net cash used in financing activities totaled $69.3 million for the six
months ended June 30, 1998, compared to net cash used in financing activities
of $46.9 million for the six months ended June 30, 1997. Repayments on
long-term debt totaled $90.0 million for the six months ended June 30, 1998.
The Company received proceeds of $20.9 million from the issuance of common
stock related to its stock option plans.
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
LIQUIDITY AND CAPITAL RESOURCES, CONTINUED
21
<PAGE>
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 $274.0 million and $368.0 million as of June 30, 1998 and
December 31, 1997, respectively. The weighted average interest rate,
including the Company's interest rate swap agreements, for the six months
ended June 30, 1998 was 7.60%.
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.
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 1,000,000
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. 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 a licensee of the Blue Cross Blue Shield Association (the "BCBSA"), the
Company and certain subsidiaries must maintain certain capital requirements.
As of June 30, 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 June 30, 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 June 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.
22
<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. 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 now
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 governmental budgetary issues. Future actions by any
regulatory agencies may have a material adverse effect on the Company's
business.
FACTORS THAT MAY AFFECT FUTURE RESULTS OF OPERATIONS, CONTINUED
23
<PAGE>
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. 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
FACTORS THAT MAY AFFECT FUTURE RESULTS OF OPERATIONS, CONTINUED
24
<PAGE>
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. During the last
three fiscal quarters, 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 or intends to implement 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. The value of such 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. 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.
25
<PAGE>
PART II. OTHER INFORMATION
ITEM 4 SUBMISSION OF MATTERS TO A VOTE OF SECURITYHOLDERS
On May 12, 1998, the annual meeting of stockholders of the Company was
held. The agenda items for such meeting are shown below along with the vote
of the Company's Common Stock with respect to such agenda items.
1. Election of two Class II Directors to serve until the 2001 Annual
Meeting of Stockholders or the election of their successors.
Nominee: David R. Banks
Votes FOR: 64,861,449
Votes WITHHELD AUTHORITY: 58,049
Nominee: Stephen L. Davenport
Votes FOR: 64,707,279
Votes WITHHELD AUTHORITY: 212,219
The terms of Leonard D. Schaeffer, W. Toliver Besson, Roger E. Birk,
Sheila P. Burke, Julie A. Hill and Elizabeth A. Sanders continued after
the meeting.
2. Proposal to approve an amendment to the Company's 1994 Stock
Option/Award Plan.
Votes FOR: 45,864,568
Votes AGAINST: 18,995,993
Votes ABSTAIN: 37,003
Broker non-votes: 21,934
3. Ratification of the selection of PricewaterhouseCoopers LLP
(formerly known as Coopers & Lybrand L.L.P.) as the Company's
independent public accountants for the fiscal year ending December 31,
1998.
Votes FOR: 64,884,791
Votes AGAINST: 12,712
Votes ABSTAIN: 21,703
Broker non-votes: 115
Stockholder proposals submitted pursuant to Rule 14a-8 of the
Securities Exchange Act of 1934 must be received by the Company on or
before November 27, 1998 to be considered for inclusion in the proxy
statement for the 1999 Annual Meeting of Stockholders, which is
currently expected to be held on May 11, 1999. Management of the
Company may exercise discretionary voting authority with respect to
any stockholder proposal which is not submitted for inclusion
pursuant to Rule 14a-8 in the proxy statement for the 1999 Annual
Meeting of Stockholders if such proposal is received by the Company
after February 14, 1999.
26
<PAGE>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
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 California Blue Cross License Addendum (Amended and Restated
as of June 12, 1998) by and among the Registrant, Blue Cross
of California and the Blue Cross Blue Shield Association,
incorporated by reference to Exhibit 99.1 of Registrant's
Current Report on Form 8-K filed on June 15, 1998.
10.02 Amendment No. 1 dated as of June 12, 1998 to the Amended and
Restated Voting Trust Agreement by and among the Registrant,
the California Health Care Foundation and Wilmington Trust
Company, incorporated by reference to Exhibit 99.2 of the
Registrant's Current Report on Form 8-K filed on June 15,
1998.
10.03 Amendment No. 1 dated as of June 12, 1998 to the Share Escrow
Agent Agreement by and between the Registrant and U.S. Trust
Company of California, N.A., incorporated by reference to
Exhibit 99.3 of the Registrant's Current Report on Form 8-K
filed on June 15, 1998.
27
<PAGE>
(a) Exhibits (continued)
Exhibit
10.04 Promissory Note dated as of June 23, 1998 made by Joan Herman
in favor of registrant.
27.1 Financial Data Schedule
(b) Reports on Form 8-K
On June 15, 1998, the company filed a Current Report on Form 8-K which
reported that the Company and the Blue Cross Blue Shield Association (the
"BCBSA") had entered into an amended and restated California Blue Cross
License Addendum (the "Addendum"). The restated Addendum modified the
requirements of the BCBSA imposed on the composition of the Board of
Directors of the California Health Care Foundation (the "Foundation") and the
requirements on the Foundation under certain circumstances to place its
holdings of WellPoint Common Stock into a voting trust.
28
<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: August 14, 1998 By: \s\ LEONARD D. SCHAEFFER
-----------------------------------
Leonard D. Schaeffer
Chairman of the Board of Directors
and Chief Executive Officer
Date: August 14, 1998 By: \s\ DAVID C. COLBY
-----------------------------------
David C. Colby
Executive Vice President
and Chief Financial Officer
Date: August 14, 1998 By: \s\ S. LOUISE MCCRARY
-----------------------------------
S. Louise McCrary
Senior Vice President and
Chief Accounting Officer
29
<PAGE>
PROMISSORY NOTE
SECURED BY DEED OF TRUST
$100,000.00 June 23, 1998
In consideration of value received, Joan E. Herman and Richard M. Rasiej
(hereinafter collectively referred to as "PROMISOR") jointly and severally agree
to pay to WellPoint Health Networks Inc. and/or one of its affiliates or
subsidiaries (hereinafter collectively referred to as "WELLPOINT") the principal
sum of One Hundred Thousand Dollars ($100,000) in lawful money of the United
States, in accordance with the terms hereinafter set forth:
I. RECITALS
1.1 WELLPOINT is a Delaware corporation having its principal office in the
City of Woodland Hills, County of Los Angeles, California.
1.2 Joan E. Herman ("Herman") is an employee of WELLPOINT.
1.3 WELLPOINT has made the loan evidenced by this Note to PROMISOR as an
inducement to Herman to accept employment with WELLPOINT and to assist
in the purchase of a new principal residence.
II. REPAYMENT TERMS
2.1 WELLPOINT will forgive the indebtedness evidenced by this Note over a
four (4) year period, subject to Herman's continued employment with
WELLPOINT, in accordance with the following schedule: Twenty-Five
Thousand Dollars ($25,000) at the end of each of the first four (4)
years of employment.
2.2 The first portion of the debt to be forgiven shall be forgiven as of
June 1, 1999, which date is the first anniversary of Herman's
employment with WELLPOINT. Each further amount to be forgiven shall
be forgiven as of each successive anniversary of employment.
2.3 Should Herman terminate her employment with WELLPOINT voluntarily, or
should WELLPOINT terminate the employment of Herman for cause, on any
date other than an anniversary of employment date, WELLPOINT will
forgive, as of the date of termination of employment, only the prorata
portion of the amount otherwise scheduled to be forgiven at the end of
that employment year.
2.4 Should Herman terminate her employment with WELLPOINT voluntarily or
should WELLPOINT terminate Herman's employment for cause, any amount
of this indebtedness not yet forgiven by WELLPOINT shall become
immediately
<PAGE>
due and owing and must be repaid to WELLPOINT no later than ninety
(90) days following the date which Herman's employment is terminated.
2.5 In the event of the death of Herman, WELLPOINT will forgive the
balance of the indebtedness.
III. SECURITY
3.1 The indebtedness evidenced hereby shall be secured by a Deed of Trust,
in favor of WELLPOINT as beneficiary, on Herman's principal residence
commonly known as 23224 Park Corniche, Calabasas, CA 91302
("Property").
3.2 Said Deed of Trust shall be and shall remain senior to any and all
other liens or encumbrances on the Property, except for any existing
deed of trust, mortgage, lien or encumbrance. PROMISOR shall take any
and all steps necessary to provide and maintain the priority of
WELLPOINT's security interest as set out herein. PROMISOR shall not
permit or suffer the subordination of the Deed of Trust in favor of
WELLPOINT in any way or by any means.
IV. ACCELERATION CLAUSE
4.1 Should PROMISOR sell, transfer or in any way alienate or further
encumber the Property, or otherwise impair WELLPOINT's security or
permit or suffer WELLPOINT's security to be impaired, unless PROMISOR
shall provide WELLPOINT with substitute security acceptable to
WELLPOINT, or should PROMISOR otherwise default under the terms of
this Note or the related Deed of Trust, any indebtedness not yet
forgiven by WELLPOINT shall become immediately due and owing and must
be paid to WELLPOINT upon demand.
V. INSURANCE
5.1 PROMISOR shall carry insurance covering the Property securing this
Note in an amount at least sufficient to discharge all liens and/or
encumbrances on said property in the event of the destruction of said
property by any means other than earthquake. Failure to procure such
coverage or the lapse of such coverage shall be considered impairment
of the security interest of WELLPOINT.
2
<PAGE>
VI. GENERAL PROVISIONS
6.1 This Note shall be binding on the heirs and assigns of PROMISOR.
6.2 Should any portion of this Note be found invalid or unenforceable by a
court, the remaining provisions shall remain in full force and effect.
6.3 Titles are for convenience only and shall not be construed as part of
this Note.
6.4 The proceeds of the loan evidenced by this Note shall be used by
PROMISOR only to purchase a new principal residence. Use of the
proceeds for any other purpose shall be an event of default hereunder.
6.5 PROMISOR agrees to pay the costs of collection and reasonable
attorneys' fees if there is a default under this Note. If any suit or
action is instituted to enforce this Note, PROMISOR promises to pay,
in addition to costs and disbursements otherwise allowed by law,
reasonable attorneys' fees.
6.6 PROMISOR waives presentment, diligence, protest and demand, notice of
protest, dishonor and nonpayment of this Note; expressly agrees that
this Note or any payment hereunder may be extended from time to time.
The right of PROMISOR to plead any and all statutes of limitation as a
defense to any demand on this Note is expressly waived to the full
extent permissible by law. This Note has been executed and delivered
in the State of California and is to be governed by and construed
according to the laws thereof.
------------------------------ ----------------
JOAN E. HERMAN DATE
ATTORNEY-IN-FACT FOR
RICHARD M. RASIEJ
------------------------------ ----------------
JOAN E. HERMAN DATE
3
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
COMPANY'S CONSOLIDATED STATEMENT OF EARNINGS AND CONSOLIDATED BALANCE SHEETS FOR
THE QUARTERLY PERIOD ENDED JUNE 30, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> JUN-30-1998
<CASH> 208,644
<SECURITIES> 2,241,231
<RECEIVABLES> 582,608
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 3,149,420
<PP&E> 109,690
<DEPRECIATION> 0
<TOTAL-ASSETS> 4,203,536
<CURRENT-LIABILITIES> 2,178,535
<BONDS> 298,000
0
0
<COMMON> 703
<OTHER-SE> 1,280,566
<TOTAL-LIABILITY-AND-EQUITY> 4,203,536
<SALES> 0
<TOTAL-REVENUES> 3,146,035
<CGS> 0
<TOTAL-COSTS> 2,951,575
<OTHER-EXPENSES> 13,441
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 14,608
<INCOME-PRETAX> 166,411
<INCOME-TAX> 66,467
<INCOME-CONTINUING> 99,944
<DISCONTINUED> (88,268)
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 11,676
<EPS-PRIMARY> 0.17
<EPS-DILUTED> 0.16
</TABLE>
