<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, 1999
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)
1 WELLPOINT WAY, THOUSAND OAKS, CALIFORNIA 91362
(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 MAY 12, 1999
------------------- ---------------------------
Common Stock, $0.01 par value 67,493,878 shares
<PAGE>
WELLPOINT HEALTH NETWORKS INC.
FIRST QUARTER 1999 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, 1999 and
December 31, 1998 . . . . . . . . . . . . . . . . . . . . . . . . . 1
Consolidated Income Statements for the Three Months
Ended March 31, 1999 and 1998 . . . . . . . . . . . . . . . . . . . 2
Consolidated Statement of Changes in Stockholders' Equity
for the Three Months Ended March 31, 1999 . . . . . . . . . . . . . 3
Consolidated Statements of Cash Flows for the
Three Months Ended March 31, 1999 and 1998 . . . . . . . . . . . . . 4
Notes to Consolidated Financial Statements . . . . . . . . . . . . . . . 5
ITEM 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations . . . . . . . . . . . . .13
PART II. OTHER INFORMATION
ITEM 6. Exhibits and Reports on Form 8-K . . . . . . . . . . . . . . . . . . . .28
SIGNATURES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .30
</TABLE>
<PAGE>
ITEM 1. FINANCIAL STATEMENTS
WELLPOINT HEALTH NETWORKS INC.
Consolidated Balance Sheets
<TABLE>
<CAPTION>
(IN THOUSANDS, EXCEPT SHARE DATA) March 31, December 31,
1999 1998
----------------- -----------------
ASSETS (Unaudited)
<S> <C> <C>
Current Assets:
Cash and cash equivalents $ 365,185 $ 410,875
Investment securities, at market value 2,343,691 2,250,174
Receivables, net 576,455 485,259
Deferred tax assets 138,303 121,881
Income taxes recoverable 71,986 95,902
Other current assets 44,763 70,349
--------------- ---------------
Total Current Assets 3,540,383 3,434,440
Property and equipment, net 133,158 131,459
Intangible assets, net 92,684 93,937
Goodwill, net 331,383 336,155
Long-term investments, at market value 105,071 103,253
Deferred tax assets 79,976 79,976
Other non-current assets 46,306 46,614
--------------- ---------------
Total Assets $ 4,328,961 $ 4,225,834
=============== ===============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Medical claims payable $ 999,312 $ 946,502
Reserves for future policy benefits 59,122 55,024
Unearned premiums 214,994 215,058
Accounts payable and accrued expenses 352,326 342,713
Experience rated and other refunds 230,442 249,685
Other current liabilities 400,231 373,882
--------------- ---------------
Total Current Liabilities 2,256,427 2,182,864
Accrued postretirement benefits 68,333 67,058
Reserves for future policy benefits, non-current 307,501 319,056
Long-term debt 300,000 300,000
Other non-current liabilities 40,076 41,633
--------------- ---------------
Total Liabilities 2,972,337 2,910,611
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, 71,008,772 and 70,620,657 issued
at March 31, 1999 and December 31, 1998, respectively 710 706
Treasury stock, at cost, 3,501,556 shares at March 31, 1999
and December 31, 1998 (193,435) (193,435)
Additional paid-in capital 938,083 921,747
Retained earnings 627,150 576,598
Accumulated other comprehensive income (15,884) 9,607
--------------- ---------------
Total Stockholders' Equity 1,356,624 1,315,223
--------------- ---------------
Total Liabilities and Stockholders' Equity $ 4,328,961 $ 4,225,834
=============== ===============
</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,
-----------------------------------------
1999 1998
----------------- -----------------
<S> <C> <C>
Revenues:
Premium revenue $ 1,616,729 $ 1,429,914
Management services revenue 114,438 114,844
Investment income 40,078 39,458
----------------- -----------------
1,771,245 1,584,216
Operating Expenses:
Health care services and other benefits 1,308,580 1,146,556
Selling expense 76,767 67,342
General and administrative expense 255,142 244,575
Nonrecurring costs - -
----------------- -----------------
1,640,489 1,458,473
----------------- -----------------
Operating Income 130,756 125,743
Interest expense 6,100 7,324
Other expense, net 8,085 6,361
----------------- -----------------
Income from Continuing Operations before Provision for
Income Taxes and Cumulative Effect of Accounting Change 116,571 112,058
Provision for income taxes 45,461 44,866
----------------- -----------------
Income from Continuing Operations before Cumulative
Effect of Accounting Change 71,110 67,192
Loss from Workers' Compensation Segment, net of tax - (8,678)
Loss on disposal of Workers' Compensation Segment - -
----------------- -----------------
Loss from Discontinued Operations - (8,678)
Cumulative Effect of Accounting Change, net of tax (20,558) -
----------------- -----------------
Net Income $ 50,552 $ 58,514
================= =================
Earnings Per Share
Income from continuing operations before cumulative
effect of accounting change $ 1.06 $ 0.96
Loss from discontinued operations - (0.12)
Cumulative effect of accounting change (0.31) -
----------------- -----------------
Net Income $ 0.75 $ 0.84
================= =================
Earnings Per Share Assuming Full Dilution
Income from continuing operations before cumulative
effect of accounting change $ 1.04 $ 0.95
Loss from discontinued operations - (0.12)
Cumulative effect of accounting change (0.30) -
----------------- -----------------
Net Income $ 0.74 $ 0.83
================= =================
</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
-------------------------------------------------
Issued In Treasury
Preferred --------------------------------- ---------------
Stock Shares Amount Amount
-------------- ---------------- ---------------- ---------------
<S> <C> <C> <C> <C>
Balance as of December 31, 1998 $ - 70,621 $ 706 $ (193,435)
Comprehensive income
Net income
Other comprehensive income, net of tax
Change in unrealized valuation
adjustment on investment securities,
net of reclassification adjustment (see Note 4)
Foreign currency adjustments, net of deferred tax of $
Total comprehensive income
Stock issued under Company's stock option / award plan 388 4
-------------- ---------------- ---------------- ---------------
Balance as of March 31, 1999 $ - 71,009 $ 710 $ (193,435)
============== ================ ================ ===============
<CAPTION>
(IN THOUSANDS)
Accumulated
Additional Other
Paid - in Retained Comprehensive
Capital Earnings Income Total
--------------- -------------- ---------------- ---------------
<S> <C> <C> <C> <C>
Balance as of December 31, 1998 $ 921,747 $ 576,598 $ 9,607 $ 1,315,223
Comprehensive income
Net income 50,552 50,552
Other comprehensive income, net of tax
Change in unrealized valuation
adjustment on investment securities,
net of reclassification adjustment (see Note 4) (28,817) (28,817)
Foreign currency adjustments, net of deferred tax of $2,092 3,326 3,326
-------------- ---------------- ---------------
Total comprehensive income 50,552 (25,491) 25,061
-------------- ---------------- ---------------
Stock issued under Company's stock option / award plan 16,336 16,340
--------------- -------------- ---------------- ---------------
Balance as of March 31, 1999 $ 938,083 $ 627,150 $ (15,884) $ 1,356,624
=============== ============== ================ ===============
</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,
---------------------------------------------
1999 1998
--------------------- --------------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Income from continuing operations $ 71,110 $ 67,192
Adjustments to reconcile income from continuing operations to net cash
provided by continuing operating activities:
Depreciation and amortization, net of accretion 21,862 14,756
(Gains) losses on sales of assets, net 2,192 (4,027)
Provision for deferred income taxes - 46
Amortization of deferred gain on sale of building (1,107) (1,106)
(Increase) decrease in certain assets:
Receivables, net (91,196) (96,757)
Income taxes recoverable 38,573 -
Other current assets (9,629) (8,223)
Other non-current assets 308 865
Increase (decrease) in certain liabilities:
Medical claims payable 52,810 58,175
Reserves for future policy benefits (7,457) 3,562
Unearned premiums (64) 4,012
Accounts payable and accrued expenses 9,613 (31,355)
Experience rated and other refunds (19,243) (8,871)
Income taxes payable - 43,589
Other current liabilities 34,656 1,360
Accrued postretirement benefits 1,275 1,286
Other non-current liabilities (450) 380
----------------- --------------------
Net cash provided by continuing operating activities 103,253 44,884
----------------- --------------------
Loss from discontinued operations - (8,678)
Adjustment to derive cash flows from discontinued operating activities:
Change in net operating assets - 15,172
----------------- --------------------
Net cash provided by discontinued operating activities - 6,494
----------------- --------------------
Net cash provided by operating activities 103,253 51,378
----------------- --------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Investments purchased (762,259) (523,925)
Proceeds from investments sold and matured 616,280 506,797
Property and equipment purchased (11,025) (11,611)
Proceeds from property and equipment sold 258 32
Settlement of sales price for sale of Workers' Compensation business (8,537) -
----------------- --------------------
Net cash used in continuing investing activities (165,283) (28,707)
----------------- --------------------
Net cash used in discontinued investing activities - (6,347)
----------------- --------------------
Net cash used in investing activities (165,283) (35,054)
----------------- --------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayment of long-term debt - (75,000)
Proceeds from issuance of common stock 16,340 12,431
Common stock repurchased - (40)
----------------- --------------------
Net cash provided by (used in) financing activities 16,340 (62,609)
----------------- --------------------
Net decrease in cash and cash equivalents (45,690) (46,285)
Cash and cash equivalents at beginning of period 410,875 269,067
----------------- --------------------
Cash and cash equivalents at end of period $ 365,185 $ 222,782
================= ====================
</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") is one of the
nation's largest publicly traded managed health care companies. As of
March 31, 1999, WellPoint had approximately 6.9 million medical members and
approximately 30 million specialty members. The Company offers a broad
spectrum of network-based managed care plans. WellPoint provides these
plans to the large and small employer, individual and senior markets. The
Company's managed care plans include preferred provider organizations
("PPOs"), health maintenance organizations ("HMOs"), point-of-service
("POS") plans, other hybrid plans and traditional indemnity plans. In
addition, the Company offers managed care services, including underwriting,
actuarial services, network access, medical cost management and claims
processing. The Company offers a continuum of managed health care plans
while providing incentives to members and employers to select more
intensively managed plans. The Company typically offers such plans at a
lower cost in exchange for additional cost-control measures, such as
limited flexibility in choosing physicians and hospitals that are not
included in the Company's provider networks. The Company believes that it
is better able to predict and control its health care costs as its members
select more intensively managed health care plans. The Company also
provides a broad array of specialty and other products and services,
including pharmacy, dental, utilization management, life insurance,
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, 1999, the results of its operations for
the quarter ended March 31, 1999 and 1998, cash flows for the quarter
ended March 31, 1999 and 1998 and its changes in stockholders' equity for
the quarter ended March 31, 1999. The results of operations for the
interim periods presented are not necessarily indicative of the operating
results for the full year.
RECLASSIFICATIONS
Certain amounts in the prior year consolidated financial statements have
been reclassified to conform to the 1999 presentation. Prior year amounts
have been restated to exclude the discontinued Workers' Compensation
business.
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 any of the periods presented.
<TABLE>
<CAPTION>
(In thousands, except earnings per share) Quarter Ended
March 31,
--------------------------
1999 1998
------------ ------------
<S> <C> <C>
Income from continuing operations before cumulative
effect of accounting change $ 71,110 $ 67,192
Loss from discontinued operations - (8,678)
Cumulative effect of accounting change (20,558) -
------------ ------------
Net Income $ 50,552 $ 58,514
============ ============
Weighted average shares outstanding 67,259 69,875
Net effect of dilutive stock options 1,302 1,033
------------ ------------
Fully diluted weighted average shares outstanding 68,561 70,908
============ ============
EARNINGS PER SHARE:
Income from continuing operations before cumulative
effect of accounting change $ 1.06 $ 0.96
Loss from discontinued operations - (0.12)
Cumulative effect of accounting change (0.31) -
------------ ------------
Net Income $ 0.75 $ 0.84
============ ============
EARNINGS PER SHARE ASSUMING FULL DILUTION:
Income from continuing operations before cumulative
effect of accounting change $ 1.04 $ 0.95
Loss from discontinued operations - (0.12)
Cumulative effect of accounting change (0.30) -
------------ ------------
Net Income $ 0.74 $ 0.83
============ ============
</TABLE>
6
<PAGE>
WELLPOINT HEALTH NETWORKS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
4. COMPREHENSIVE INCOME
The following summarizes comprehensive income reclassification adjustments
required under SFAS No. 130.
<TABLE>
<CAPTION>
Quarter Ended
(In thousands) March 31, 1999
-------------------
<S> <C>
Holding losses arising during the period (net of tax benefit of $15,476) $ (24,205)
Add:
Reclassification adjustment related to foreign exchange gains
(net of tax expense of $85) 132
Reclassification adjustment for realized losses on investment
securities (net of tax benefit of $906) (1,418)
---------------
Net loss recognized in other comprehensive income (net of tax benefit of
$16,297) $ (25,491)
---------------
---------------
</TABLE>
5. NEW PRONOUNCEMENTS
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. Upon
adoption of the Standard, all derivatives must be recognized on the balance
sheet at their then fair value. Any stand-alone deferred gains and losses
remaining on the balance sheet under previous hedge-accounting rules must
be removed from the balance sheet and all hedging relationships must be
designated anew and documented pursuant to the new accounting rules. The
new standard will be effective in the first quarter of the year 2000. The
Company is presently assessing the presentation and effect of SFAS No. 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 HMOs and
health insurers generally, excludes certain health care services from
coverage under its HMO, PPO and other plans. The Company is, in its
ordinary course of business, subject to the claims of its enrollees arising
out of decisions to restrict treatment or reimbursement for certain
services. The loss of even one such claim, if it results in a significant
punitive damage award, could have a material adverse effect on the Company.
In addition, the risk of potential liability under punitive damage theories
may increase significantly the difficulty of obtaining reasonable
settlements of coverage claims. However, the financial and operational
impact that such evolving theories of recovery will have on the managed
care industry generally, or the Company in particular, is at present
unknown.
7
<PAGE>
WELLPOINT HEALTH NETWORKS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
6. CONTINGENCIES, CONTINUED
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, cash flows or financial condition.
7. BUSINESS SEGMENT INFORMATION
The Company has two reportable segments: the California business segment
and the National business segment. The California and National business
segments both provide a broad spectrum of network-based health plans,
including HMOs, PPOs, POS plans, other hybrid plans and traditional
indemnity products to large and small employers, individuals and seniors.
The following tables present segment information for the California and
National Divisions for the quarters ended March 31, 1999, and 1998,
respectively:
QUARTER ENDED MARCH 31, 1999
<TABLE>
<CAPTION>
Corporate &
California National Other Consolidated
-------------- ------------ ------------- ---------------
<S> <C> <C> <C> <C>
(IN THOUSANDS)
Premium revenue $ 1,344,299 $ 272,430 $ - $ 1,616,729
Management services revenue 35,332 69,016 10,090 114,438
-------------- ------------ ------------- ---------------
Total revenue from external customers 1,379,631 341,446 10,090 1,731,167
Intercompany revenues 3,704 3,169 (6,873) -
Segment income from continuing
operations $ 87,833 $ 1,483 $ (18,206) $ 71,110
-------------- ------------ ------------- ---------------
-------------- ------------ ------------- ---------------
</TABLE>
QUARTER ENDED MARCH 31, 1998
<TABLE>
<CAPTION>
Corporate &
California National Other Consolidated
-------------- ------------ ------------- ---------------
<S> <C> <C> <C> <C>
(IN THOUSANDS)
Premium revenue $ 1,137,866 $ 292,048 $ - $ 1,429,914
Management services revenue 26,844 81,845 6,155 114,844
-------------- ------------ ------------- ---------------
Total revenue from external customers 1,164,710 373,893 6,155 1,544,758
Intercompany revenues 3,596 - (3,596) -
Segment income from continuing
operations $ 81,887 $ (3,663) $ (11,032) $ 67,192
-------------- ------------ ------------- ---------------
-------------- ------------ ------------- ---------------
</TABLE>
8
<PAGE>
WELLPOINT HEALTH NETWORKS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
7. BUSINESS SEGMENT INFORMATION, CONTINUED
Effective April 1, 1999, the Company effected a modification of its
internal business operations. It is anticipated that this modification
will change the disclosures of the Company's segments from that presented
above. The Company currently anticipates that future filings under the
Securities Exchange Act of 1934 will reflect the following reportable
segments: large employer group business ("large group") and individual
and small employer group business ("individual and small group"). The
following tables depict the Company's new reportable segments as though
such modification had occurred during each of the quarters ended March 31,
1999 and 1998 and the years ended December 31, 1998 and 1997.
QUARTER ENDED MARCH 31, 1999
<TABLE>
<CAPTION>
Large Individual & Corporate &
Group Small Group Other Consolidated
----------------- ----------------- ----------------- -----------------
<S> <C> <C> <C> <C>
(IN THOUSANDS)
Premium revenue $ 926,439 $ 586,958 $ 103,332 $ 1,616,729
Management services revenue 99,339 1,873 13,226 114,438
----------------- ----------------- ----------------- -----------------
Total revenue from external customers 1,025,778 588,831 116,558 1,731,167
Intercompany revenues 3,703 3,169 (6,872) -
Segment income from continuing
operations $ 55,653 $ 30,869 $ (15,412) $ 71,110
================= ================= ================= =================
</TABLE>
QUARTER ENDED MARCH 31, 1998
<TABLE>
<CAPTION>
Large Individual & Corporate &
Group Small Group Other Consolidated
----------------- ----------------- ----------------- -----------------
<S> <C> <C> <C> <C>
(IN THOUSANDS)
Premium revenue $ 848,380 $ 499,304 $ 82,230 $ 1,429,914
Management services revenue 103,700 1,092 10,052 114,844
----------------- ----------------- ----------------- -----------------
Total revenue from external customers 952,080 500,396 92,282 1,544,758
Intercompany revenues 3,596 - (3,596) -
Segment income from continuing
operations $ 27,338 $ 44,821 $ (4,967) $ 67,192
================= ================= ================= =================
</TABLE>
9
<PAGE>
WELLPOINT HEALTH NETWORKS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
7. BUSINESS SEGMENT INFORMATION, CONTINUED
FOR THE YEAR ENDED DECEMBER 31, 1998
<TABLE>
<CAPTION>
Large Individual & Corporate &
Group Small Group Other Consolidated
------------------ ------------------- ------------------- -----------------
<S> <C> <C> <C> <C>
(IN THOUSANDS)
Premium revenue $ 3,467,742 $ 2,114,094 $ 352,976 $ 5,934,812
Management services revenue 388,301 4,627 41,032 433,960
------------------ ------------------- ------------------- -----------------
Total revenue from external customers 3,856,043 2,118,721 394,008 6,368,772
Intercompany revenues 13,922 - (13,922) -
Segment income from continuing operations $ 183,040 $ 131,076 $ 5,432 $ 319,548
================== =================== =================== =================
</TABLE>
FOR THE YEAR ENDED DECEMBER 31, 1997
<TABLE>
<CAPTION>
Large Individual & Corporate &
Group Small Group Other Consolidated
------------------ ------------------- --------------- -----------------
<S> <C> <C> <C> <C>
(IN THOUSANDS)
Premium revenue $ 2,999,422 $ 1,785,096 $ 284,429 $ 5,068,947
Management services revenue 327,753 3,613 45,772 377,138
------------------ ------------------- --------------- -----------------
Total revenue from external customers 3,327,175 1,788,709 330,201 5,446,085
Intercompany revenues 39,510 - (39,510) -
Segment income (loss) from continuing operations $ 144,684 $ 105,185 $ (20,432) $ 229,437
================= =================== ================ =================
</TABLE>
10
<PAGE>
WELLPOINT HEALTH NETWORKS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
8. PENDING TRANSACTION
On July 9, 1998, the Company entered into an Agreement and Plan of Merger
(the "Merger Agreement") by and among the Company, Cerulean Companies, Inc.
("Cerulean") and Water Polo Acquisition Corp., a wholly owned subsidiary of
the Company (the "Merger Sub"). Pursuant to the Merger Agreement, Cerulean
will merge with and into Merger Sub (the "Merger"). Cerulean is the parent
company of Blue Cross and Blue Shield of Georgia, Inc., which served
approximately 1.6 million persons in the State of Georgia as of December
31, 1998. 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.
11
<PAGE>
WELLPOINT HEALTH NETWORKS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
9. ACCOUNTING CHANGE
Effective January 1, 1999, the Company changed its method of accounting for
start-up costs related to the Company's provider and sales network
development to comply with AICPA Statement of Position No. 98-5, "Reporting
on the Costs of Start-Up Activities." The change involved expensing these
costs as incurred, rather than capitalizing and subsequently amortizing
such costs.
The change in accounting principle resulted in the write-off of the costs
capitalized as of January 1, 1999. The cumulative effect of the write-off,
which totals $20.6 million, net of tax, has been expensed and reflected in
the included results of operations.
12
<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. As of March 31, 1999, WellPoint had approximately 6.9 million
medical members and approximately 30 million specialty members. The Company
offers a broad spectrum of network-based managed care plans. WellPoint provides
these plans to the large and small employer, individual and senior markets. The
Company's managed care plans include HMOs, PPOs, POS plans, other hybrid plans
and traditional indemnity plans. In addition, WellPoint offers managed care
services, including underwriting, claims processing, actuarial services, network
access, and medical cost management. The Company also provides a broad array of
specialty and other products, including pharmacy, dental, utilization
management, life insurance, preventive care, disability insurance, behavioral
health, COBRA and flexible benefits account administration.
During the quarter ended June 30, 1998, the Company discontinued its workers'
compensation segment. All prior period financial information presented herein
has been restated to exclude the workers' compensation segment and the
discussion and analysis that follows has been modified accordingly.
During the quarters ended March 31, 1999 and 1998, the Company was organized
into two primary segments, the California and National business segments.
Effective April 1, 1999, the Company modified its internal business
operations. The impact of this internal reorganization will change the
disclosures of the Company's segments, beginning in the second quarter of
1999. (See Note 7 to the Consolidated Financial Statements)
NATIONAL EXPANSION AND OTHER RECENT DEVELOPMENTS
In an effort to pursue the expansion of the Company's National business
segment, the Company previously acquired two businesses outside the state of
California, the Life and Health Benefits Management Division ("MMHD") of
Massachusetts Mutual Life Insurance Company and the Group Benefits Operations
(the "GBO") of John Hancock Mutual Life Insurance Company. The Company's
pending transaction with Cerulean is also a component of this expansion.
As a result of the GBO and MMHD acquisitions, the Company has significantly
expanded its operations outside of California. In order to integrate its
acquired businesses and implement the Company's regional expansion strategy, the
Company will need to develop satisfactory
13
<PAGE>
NATIONAL EXPANSION AND OTHER RECENT DEVELOPMENTS, CONTINUED
provider and sales networks and successfully convert acquired books of business
to the Company's existing information systems, which will require additional
expenditures by the Company.
PENDING ACQUISITION OF CERULEAN
On July 9, 1998, the Company entered into an Agreement and Plan of Merger with
Cerulean (See Note 8 to the Consolidated Financial Statements). Cerulean,
principally through its Blue Cross and Blue Shield of Georgia subsidiary, offers
insured and administrative services products primarily in the State of Georgia.
Cerulean has historically experienced a higher administrative expense ratio than
the Company's core businesses due to its higher concentration of administrative
services business. Cerulean has also historically experienced a higher loss
ratio than the Company's core businesses due to its higher percentage of large
group business, which generally reduces the Company's overall risk and also
underwriting margins. Accordingly, it is expected that Cerulean's higher loss
and administrative expense ratios will ultimately contribute to an increase in
those ratios for the Company after the transaction is completed. This
transaction is expected to be completed in the second half of 1999.
In September 1998, a class action lawsuit was filed in Richmond County,
Georgia on behalf of certain current and former policyholders of Blue Cross
Blue Shield of Georgia (the "Conversion Litigation"). The claims brought in
the Conversion Litigation relate to the conversion of Blue Cross Blue Shield
of Georgia from a non-profit entity to a for-profit entity in October 1996
(the "Conversion"). At the time of the Conversion, each eligible Blue Cross
Blue Shield of Georgia subscriber was offered five shares of Cerulean Class A
stock. In order to receive such shares, each eligible subscriber had to
return certain election forms prepared by Cerulean. At the time of the
Conversion, approximately 90,000 of the 160,000 eligible subscribers did not
return their election forms. The litigation sought to compel Cerulean to
issue five additional shares of its Class A Common Stock to each of the
90,000 subscribers. On December 17, 1998, the Superior Court judge in the
Conversion Litigation issued an order in favor of the plaintiffs. Cerulean
filed an appeal with the Georgia Supreme Court, which accepted jurisdiction
and granted expedited treatment to the appeal. On May 3, 1999, the Georgia
Supreme Court reversed the ruling of the Superior Court, holding that the
Superior Court erred in considering and ruling upon the plaintiffs' claims.
The ruling confirms that only those eligible subscribers who returned the
necessary election form in connection with the Conversion are properly
holders of Cerulean Class A Stock. The Georgia Supreme Court's ruling does not
affect pending derivative and fraud claims brought by the plaintiffs, as to
which Cerulean has filed a motion to dismiss.
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 decreasing the affordability of the Company's products. In May
1997, the Texas Legislature adopted Senate Bill No. 386 ("SB 386"). Among
other things, this legislation purports to make managed care organizations
("MCOs") such as the Company liable for the failure by the MCO, its employees
or agents to exercise ordinary care when making "health care treatment
decisions" (as defined in SB 386). The legislation was effective as of
September 1, 1997. In September 1998, the United States District Court for
the Southern District of Texas ruled, in part, that the MCO liability
provisions of SB 386 are not preempted by the Federal Employee Retirement
Income Security Act of 1974 ("ERISA"). To date, this legislation has not
adversely affected the Company's results of operations. Similar legislation
was recently enacted in Georgia and is currently pending in the California
legislature. 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, financial
condition or cash flows. Even if the Company is not held to be liable under
any litigation, the existence of potential MCO liability may cause the
Company to incur greater costs in defending such litigation.
14
<PAGE>
YEAR 2000
The Company is substantially dependent on its computer systems, business
applications and other information technology systems ("IT systems"), due to
the nature of its managed health care business and the increasing number of
electronic transactions in the industry. Historically, many IT systems were
developed to recognize the year as a two-digit number, with the digits "00"
being recognized as the year 1900. The year 2000 presents a number of
potential problems for such systems, including potentially significant
processing errors or failure. Given the Company's reliance on its computer
systems, the Company's results of operations could be materially adversely
affected by any significant errors or failures. Additionally, the year 2000
presents potential problems for other systems and applications containing
date-dependent embedded microprocessors ("non-IT systems"), such as elevators
and heating and ventilation equipment.
The Company has developed and is in the midst of executing a comprehensive
plan designed to address the "year 2000" issue for its IT and non-IT systems
and applications. With respect to IT systems, during 1997 the Company
completed a detailed risk assessment of its various computer systems,
business applications and other affected systems, formulated a plan for
specific remediation efforts and began certain of such remediation efforts.
During the quarter ended March 31, 1999, the Company completed its
remediation efforts and began internal testing of its systems and
applications. During the second quarter of 1999, the Company expects to
undergo third-party review of certain of its year 2000 remediation efforts.
This third party review will include an assessment of the procedures
undertaken by the Company as well as a computer software test of selected
portions of the Company's computer code. With respect to non-IT systems, the
Company is currently in the process of completing the replacement or
renovation of Company-owned systems to address year 2000 issues. The Company
is also obtaining certifications from property owners that non-IT systems in
leased facilities will be remediated or replaced on a timely basis. The
Company currently expects that its year 2000 remediation efforts and
third-party review with respect to non-IT systems will be completed by the
second quarter of 1999.
The Company currently estimates that its costs related to year 2000
compliance remediation for Company-owned IT systems and applications will be
approximately $6 to $7 million in 1999. As of March 31, 1999, the Company
had expended approximately $2.9 million for remediation of its IT software
systems and applications and approximately $0.4 million for renovation or
replacement of its telecommunications equipment. The Company currently
estimates that its total costs in 1999 with respect to non-IT systems and
applications will be approximately $1 million. The Company's expenditures
with respect to non-IT systems will include the acquisition of back-up power
supplies for the Company's headquarters and data center facilities. The
Company expenses year 2000 remediation costs as incurred and expects to fund
these costs through cash flow from operations. While the immediacy of year
2000 compliance measures has caused the Company to defer or cancel certain IT
projects, the Company does not expect such actions to have a material effect
on the Company's results of operations or financial condition. Assuming the
Company's pending acquisition of Cerulean is
15
<PAGE>
YEAR 2000, CONTINUED
consummated (See Note 8 to the Consolidated Financial Statements), similar
remediation and testing efforts with respect to Cerulean-owned IT and non-IT
systems and applications may increase the Company's total expenditures.
The Company is currently formulating detailed contingency plans in the event
that its various systems and applications do not achieve year 2000 compliance
in a timely fashion. The contingency plans are focused on identifying
potential failure scenarios for the Company's IT and non-IT systems and those
of third parties with which the Company interacts and on ensuring the
continuation of critical business operations. During the first half of 1999,
the Company expects to integrate each of these contingency plans into a
Company-wide contingency plan.
The Company continues to assemble survey data from health care transaction
clearing houses, third party vendors and certain other parties with which the
Company communicates electronically to determine the compliance efforts being
undertaken by these parties and to assess the Company's potential business
exposure to any non-compliant systems operated by these parties. Health care
claims submitted electronically to the Company are usually submitted through
clearing houses on behalf of health care providers. Based on the survey data
and other information compiled by the Company to date, the Company has not
identified any third parties that Company expects will suffer year
2000-related problems likely to have a significant adverse effect on the
Company's operations. However, many of these third parties are currently in
the process of implementing the critical portions of their own year 2000
compliance measures. As a result, at the current time the Company does not
have sufficient information to determine whether its external relationships
will be materially adversely affected by year 2000 compliance problems.
If the Company's year 2000 issues were not completely resolved prior to the
end of 1999, the Company could be subject to a number of potential
consequences, including, among others, an inability to timely and accurately
process health care claims, collect customers' premiums or administrative
fees, verify subscriber eligibility, assess utilization trends or compile
accurate financial data for use by management. In particular, the Company
may experience a decrease in electronic health claims submission, which could
cause the Company's claims inventory to increase on a temporary basis. An
increase in claims inventory could prevent the Company from identifying
emerging utilization trends quickly and taking appropriate actions to
mitigate such trends through pricing actions, benefit redesign or other
actions. The Company is attempting to limit its exposure to year 2000 issues
by closely monitoring its own year 2000 remediation efforts, assessing the
year 2000 compliance efforts of various third parties with which it interacts
and developing contingency plans addressing potential problems that could
have a material adverse effect on the Company's results of operations.
Although the Company intends to put into place programs and procedures
designed to mitigate the aforementioned risks, there can be no assurances
that all potential problems may be mitigated by these procedures.
16
<PAGE>
RESULTS OF OPERATIONS
The Company's revenues are primarily generated from premiums earned for
risk-based health care and specialty services provided to its members, fees
for administrative services, including claims processing and access to
provider networks for self-insured employers, and investment income.
Operating expenses include health care services and other benefits expenses,
consisting primarily of payments for physicians, hospitals and other
providers for health care and specialty products claims; selling expenses for
broker and agent commissions; general and administrative expenses; interest
expense; depreciation and amortization expense; and income taxes.
The 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
March 31,
--------------------------
1999 1998
----------- -----------
<S> <C> <C>
Operating Revenues:
Premium revenue 93.4% 92.6%
Management services revenue 6.6% 7.4%
--------- ---------
100.0% 100.0%
Operating Expenses:
Health care services and other
benefits (loss ratio) 80.9% 80.2%
Selling expense 4.4% 4.4%
General and administrative expense 14.7% 15.8%
</TABLE>
<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
1999 1998 Change
----------- ----------- ---------
<S> <C> <C> <C>
CALIFORNIA (b)
Group Services:
HMO 979,295 894,022 9.5%
PPO and Other 1,783,723 1,530,676 16.5%
----------- -----------
Total 2,763,018 2,424,698 14.0%
----------- -----------
Individual, Small Group and Senior:
HMO 373,025 324,364 15.0%
PPO and Other 1,349,489 1,289,988 4.6%
----------- -----------
Total 1,722,514 1,614,352 6.7%
----------- -----------
Medi-Cal 510,239 320,573 59.2%
----------- -----------
Total California Medical Membership 4,995,771 4,359,623 14.6%
----------- -----------
TEXAS
Group Services 159,787 175,668 -9.0%
Individual, Small Group and Senior 131,578 80,441 63.6%
----------- -----------
Total 291,365 256,109 13.8%
----------- -----------
GEORGIA
Group Services 56,346 97,189 -42.0%
Individual, Small Group and Senior 20,270 9,906 104.6%
----------- -----------
Total 76,616 107,095 -28.5%
----------- -----------
OTHER STATES
Group Services 1,519,705 1,992,954 -23.7%
Individual, Small Group and Senior 29,650 11,805 151.2%
----------- -----------
Total 1,549,355 2,004,759 -22.7%
----------- -----------
Total National Medical Membership (b) 1,917,336 2,367,963 -19.0%
----------- -----------
TOTAL MEDICAL MEMBERSHIP (c) 6,913,107 6,727,586 2.8%
=========== ===========
MEMBERSHIP BY NETWORK (d)
Proprietary Networks 4,835,633 4,172,563 15.9%
Other Networks 1,248,350 1,464,463 -14.8%
Non-Network 829,124 1,090,560 -24.0%
----------- -----------
TOTAL MEDICAL MEMBERSHIP 6,913,107 6,727,586 2.8%
=========== ===========
</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) Classification between California and National membership for employer
groups is determined by the state of the employer's corporate office. The
state designation within National is determined by the zip code of the
subscriber.
(c) Medical membership includes 2,498,674 and 2,717,103 management services
members as of March 31, 1999 and 1998, respectively, of which those
management services members outside of California were 1,335,544 and
1,768,338 as of March 31, 1999 and 1998, respectively.
(d) Proprietary networks consist of California, Texas and other
WellPoint-developed networks. Other networks consist of third-party networks
and networks owned by the Company as a result of acquisitions that
incorporate provider discounts and some basic managed care elements.
Non-network consists of fee for service and percentage-of-billed charges
contracts with providers.
18
<PAGE>
<TABLE>
<CAPTION>
As of March 31,
----------------------------------- Percent
1999 1998 Change
--------------- --------------- --------------
SPECIALTY MEMBERSHIP:
<S> <C> <C> <C>
Pharmacy (a) 19,838,226 12,912,648 53.6%
Dental 2,542,917 3,178,866 -20.0%
Utilization Management 2,715,234 2,942,120 -7.7%
Life 1,937,495 1,720,577 12.6%
Disability 679,582 1,069,833 -36.5%
Behavioral Health (b) 2,027,698 740,111 174.0%
</TABLE>
(a) Effective January 1, 1999, WellPoint revised its methodology of counting
pharmacy members. As a result of this revision, pharmacy members for whom
WellPoint provides claims processing services are now counted separately from
pharmacy members for whom WellPoint provides clinical management services. As
of March 31, 1999, WellPoint provided both claims processing services and
clinical management services to approximately 4.0 million members.
(b) The increase in behavioral health membership is primarily due to
approximately 1.3 million additional California large employer group and
certain state-sponsored program medical members whose behavioral health
benefits were formerly not counted separately from medical benefits.
COMPARISON OF RESULTS FOR THE FIRST QUARTER 1999, TO THE FIRST QUARTER 1998
Premium revenue increased 13.1%, or $186.8 million, to $1,616.7 million for
the quarter ended March 31, 1999 from $1,429.9 million for the quarter ended
March 31, 1998. The overall increase was primarily due to the implementation
of price increases throughout the California and National markets in addition
to an increase in insured member months of 2.6%, primarily in the Company's
California business segment. The National business segment experienced a
decline in overall insured member months due to attrition on acquired MMHD
membership, and to a lesser extent, the GBO membership. A portion of the
aforementioned attrition was the result of recently instituted premium
increases with respect to certain under-priced accounts. The Company expects
that it will experience some level of further membership attrition of its
acquired MMHD and GBO members during the remainder of 1999 as it continues to
increase prices and pursues its strategy of motivating members to select more
managed care products.
Management services revenue decreased approximately $0.4 million to $114.4
million for the quarter ended March 31, 1999 from $114.8 million for the
quarter ended March 31, 1998. The decline is primarily due to an 8.4%
decrease in management services member months, primarily in the National
business segment, offset by rate increases in both the California and
National business segments. The decrease in management services member months
was primarily related to attrition on acquired MMHD membership and, to a
lesser extent, the GBO membership.
Investment income was $40.1 million for the quarter ended March 31, 1999
compared to $39.5 million for the quarter ended March 31, 1998, an increase
of $0.6 million. Net realized gains on investment securities decreased $2.9
million totaling $1.1 million for the quarter ended March 31, 1999 in
comparison to $4.0 million for the quarter ended March 31, 1998. Net
interest and dividend income increased $4.4 million to $40.5 million for the
quarter ended March 31, 1999 in comparison to $36.1 million for the quarter
ended March 31, 1998. This increase was primarily due to increased average
investment balances in 1999 versus 1998, partially offset by lower yields in
1999.
19
<PAGE>
COMPARISON OF RESULTS FOR THE FIRST QUARTER 1999, TO THE FIRST QUARTER 1998,
CONTINUED
Health care services and other benefits expense increased 14.1%, or $162.0
million, to $1,308.6 million for the quarter ended March 31, 1999 from
$1,146.6 million for the quarter ended March 31, 1998. The increase is due to
an increase in insured member months of 2.6% as well as several other factors
related to rising medical and pharmacy costs in the Company's individual and
small employer group business. Price increases with respect to certain of the
Company's products in this business have been implemented subsequent to March
31, 1999. Also contributing to the increase were certain one-time payments
made during the quarter ended March 31, 1999 related to the MedPartners
Provider Network's bankruptcy filing.
The loss ratio attributable to managed care and related products for the
quarter ended March 31, 1999 increased to 80.9% compared to 80.2% for the
quarter ended March 31, 1998. The increase is due to: the timing of price
increases in the Company's individual and small employer group business for
the quarter ended March 31, 1999 versus the same period in 1998 in response
to rising medical and pharmacy costs; the one-time payments noted above
related to Med Partners; higher proportional growth in small employer group
business which has traditionally experienced a higher loss ratio than
individual business; and a shift from deductible plans to copayment plans
which impacts the seasonality of claim costs.
Selling expense consists of commissions paid to outside brokers and agents
representing the Company. Selling expense for the quarter ended March 31,
1999 increased 14.1% to $76.8 million compared to $67.3 million for the
quarter ended March 31, 1998, corresponding with continued overall premium
revenue growth primarily in the Company's California business segment. The
selling expense ratio was 4.4% for each of the quarters ended March 31, 1999
and 1998.
General and administrative expense for the quarter ended March 31, 1999
increased 4.3%, or $10.5 million, to $255.1 million from $244.6 million for
the quarter ended March 31, 1998. The increase resulted primarily from
increased member months of 2.6%, primarily in the Company's California
business and, to a lesser extent, from costs associated with the Company's
national expansion, particularly related to the integration of the acquired
businesses to the Company's information systems, which have been enhanced to
accommodate the more complex products offered by those businesses, and costs
associated with Year 2000 compliance efforts.
The administrative expense ratio decreased to 14.7% for the quarter ended
March 31, 1999 from 15.8% for the quarter ended March 31, 1998. The overall
decline is primarily attributable to savings from the consolidation of
various National regional offices and the integration of information systems
centers related to acquired businesses on the Company's information system
platform, in addition to economies of scale associated with premium revenue
growth in relation to fixed corporate administrative expenses.
Interest expense was $6.1 million for the quarter ended March 31, 1999 and
$7.3 million for the quarter ended March 31, 1998. The decrease in interest
expense is related to the lower average debt balance in 1999 compared to 1998
as the effective interest rate paid by the Company remained relatively
unchanged between periods. The Company's long-term indebtedness at March
31, 1999 was $300.0 million compared to $313.0 million at March 31,
20
<PAGE>
COMPARISON OF RESULTS FOR THE FIRST QUARTER 1999, TO THE FIRST QUARTER 1998,
CONTINUED
1998. The weighted average interest rate for all debt for the quarter ended
March 31, 1999, including the fees associated with the borrowings and
interest rate swaps, was 7.6%.
Effective January 1, 1999, the Company changed its method of accounting for
start-up costs related to the Company's provider network development. The
cumulative effect of this change of $20.6 million, after tax, is reflected in
the results of operations for the quarter ended March 31, 1999. (See Note 10
to the Consolidated Financial Statements) The Company's income from
continuing operations excluding the cumulative effect for the quarter ended
March 31, 1999 was $71.1 million, compared to $67.2 million for the quarter
ended March 31, 1998. Earnings per share from continuing operations
excluding the cumulative effect of accounting change totaled $1.06 and $0.96
for the quarters ended March 31, 1999 and 1998, respectively. Earnings per
share from continuing operations assuming full dilution totaled $1.04 and
$0.95 for the quarters ended March 31, 1999 and 1998, respectively.
Earnings per share for the quarter ended March 31, 1999 is based upon
weighted average shares outstanding of 67.3 million, excluding common stock
equivalents, and 68.6 million shares, assuming full dilution. Earnings per
share for the quarter ended March 31, 1998 is based on 69.9 million shares
excluding common stock equivalents, and 70.9 million shares, assuming full
dilution. For the quarter ended March 31, 1999, the decrease in weighted
average shares outstanding primarily relates to the effect of the repurchase
of 3.5 million treasury shares during the year ended December 31, 1998.
FINANCIAL CONDITION
The Company's consolidated assets increased by $103.2 million, or 2.4%, from
$4,225.8 million as of December 31, 1998 to $4,329.0 million as of March 31,
1999. Cash and investments were $2.8 billion as of March 31, 1999, or 65.0%
of total assets. Receivables net increased $91.2 million, from $485.3
million at December 31, 1998 to $576 million at March 31, 1999. This
seasonal increase is due to certain large employer groups that accelerate the
timing of first quarter payments for tax purposes.
Overall claims liabilities increased $45.3 million, or 3.4%, from $1,320.6
million as December 31, 1998 to $1,365.9 million as of March 31, 1999. This
increase is due to the increase in insured membership from December 31, 1998
to March 31, 1999 of approximately 3% primarily in the Company's California
business segment in addition to the timing of pharmacy and capitation
payments.
Stockholders' equity totaled $1,356.6 million as of March 31, 1999, an
increase of $41.4 million from $1,315.2 million as of December 31, 1998. The
increase resulted primarily from net income of $50.5 million for the quarter
ended March 31, 1999 and $16.3 million of stock issuances under the Company's
stock option plans, offset by a $25.5 million decrease in net unrealized
valuation adjustment on investment securities, net of tax.
21
<PAGE>
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,
repayments 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 the Company are sufficient to meet
applicable regulatory financial stability and net worth requirements. As
of March 31, 1999, 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 $103.3 million
for the quarter ended March 31, 1999, compared with $44.9 million for the
quarter ended March 31, 1998. Cash flow from continuing operations for the
quarter ended March 31, 1999 is due primarily to net income of $50.5 million,
adjusted for an increase in receivables of $91.2 million, which is primarily
related to the timing of the collection of large customer receivables in the
normal course of business, increases in medical claims payable of $52.8
million, and increases in other current liabilities of $34.7 million related
to the growth of insured members and the timing of other operating liability
payments.
Net cash used in continuing investing activities for the quarter ended March
31, 1999 totaled $165.3 million, compared with net cash used in continuing
investing activities of $28.7 million for the quarter ended March 31, 1998.
The cash used in 1999 was attributable primarily to the purchase of
investments and property, plant and equipment, net for $762.3 million and
$10.8 million, respectively, in addition to the settlement of the sales price
of $8.5 million for the sale of the Company's workers' compensation business
in 1998, offset by the proceeds from investments sold and matured of $616.3
million.
Net cash provided by financing activities totaled $16.3 million for the
quarter ended March 31, 1999, compared to net cash used in financing
activities of $62.6 million for the quarter ended March 31, 1998. The Company
received proceeds of $16.3 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
22
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES, CONTINUED
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 $300 million as of March 31, 1999
and $280 million as of December 31, 1998, respectively. The weighted average
interest rate, including associated fees and the Company's interest rate swap
agreements, for the quarter ended March 31, 1999 was 7.6%.
As part of a hedging strategy to limit its exposure to interest rate
increases, in August 1996 the Company entered into a swap agreement for a
notional amount of $100.0 million bearing a fixed interest rate of 6.45% and
having a maturity date of August 17, 1999. In September 1996, the Company
entered into two additional swap agreements for notional amounts of $150.0
million each, bearing fixed interest rates of 6.99% and 7.05%, respectively,
and having maturity dates of October 17, 2003 and October 17, 2006,
respectively. The total notional amount of the outstanding swaps exceeded
the Company's long-term debt balance at March 31, 1999. The swaps that are
considered hedges for currently outstanding debt are the $150 million swap at
7.05% maturing October 17, 2006, the $150 million swap bearing a fixed
interest rate of 6.99% which matures October 17, 2003.
The Company has entered into foreign currency forward exchange contracts for
each of the fixed maturity securities on hand as of March 31, 1999
denominated in foreign currencies in order to hedge asset positions with
respect to these securities. The unrealized gains and losses from such
forward exchange contracts are reflected in other comprehensive income. In
addition, the Company has entered into forward exchange contracts to hedge the
foreign currency risk between the trade date and the settlement date. Gains
and losses from these contracts are recognized in income.
During the quarter ended September 30, 1998, the Company received a private
letter ruling from the Internal Revenue Service with respect to the treatment
of certain payments made at the time of WellPoint's 1996 Recapitalization and
the acquisition of the commercial operations of its former majority
stockholder. The ruling allows the Company to deduct as an ordinary and
necessary business expense the $800 million cash payment made by such
stockholder in May 1996 to one of two newly formed charitable foundations.
The Company expects its future liquidity to be positively impacted by the
anticipated receipt of a $200 million tax refund and a decrease in future
income tax payments of approximately $80 million.
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, 1999, 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, 1999, no indebtedness had been issued pursuant to this
registration statement.
23
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES CONTINUED
The Company believes that cash flow generated by operations, its cash and
investment balances, supplemented by the Company's ability to borrow under
its existing revolving credit facility or to conduct a public offering under
its debt registration statement will be sufficient to fund continuing
operations and expected capital requirements for the foreseeable future.
FACTORS THAT MAY AFFECT FUTURE RESULTS OF OPERATIONS
Certain statements contained herein, such as statements concerning potential
or future loss ratios, expected membership attrition as the Company continues
to integrate its recently acquired operations, pending acquisitions and other
statements regarding matters that are not historical facts, are
forward-looking statements (as such term is defined in the Securities
Exchange Act of 1934). Such statements involve a number of risks and
uncertainties that may cause actual results to differ from those projected.
Factors that can cause actual results to differ materially include, but are
not limited to, those discussed below and those discussed from time to time
in the Company's various filings with the Securities and Exchange Commission,
including the Company's Annual Report on Form 10-K.
Completion of the Company's pending transaction with Cerulean is contingent
upon, among other things, receipt of necessary approvals from certain federal
and state agencies on or before July 9, 1999. Broad latitude in
administering the applicable regulations is given to the agencies from which
WellPoint and Cerulean must seek these approvals. There can be no assurance
that these approvals will be obtained. As a condition to approval of the
transaction, regulatory agencies may impose requirements or limitations or
costs on the way that the combined company conducts business after
consummation of the transaction. If the Company or Cerulean were to agree to
any material requirements or limitations in order to obtain any approvals
required to consummate the transaction, such requirements or limitations or
additional costs associated therewith could adversely affect WellPoint's
ability to integrate the operations of Cerulean with those of WellPoint, and a
material adverse effect on WellPoint's revenues and results of operations
following completion of the transaction could result.
The Company intends to incur debt to finance some or all of the cash payments
to be made to Cerulean shareholders in connection with the pending
acquisition. In addition, WellPoint has received authorization to, and is
currently in the process of, repurchasing shares of WellPoint stock to offset
shares that are expected to be issued in connection with the transaction.
WellPoint has made significant purchases of treasury stock for this purpose,
using excess cash as well as the issuance of additional indebtedness.
WellPoint has also entered into an agreement with its largest stockholder,
the California HealthCare Foundation (the ""Foundation''), which holds
approximately 25% of the outstanding WellPoint stock, to repurchase 1,000,000
shares of WellPoint stock held by the Foundation. These shares will be
repurchased at a price per share equal to the price at which shares are
issued in the merger as soon as practicable after the closing date of the
merger. This agreement may be terminated at any time by either party. Upon
completion of the Cerulean transaction, WellPoint could incur significant
additional indebtedness to fund not only the cash portion of the transaction
but also any further repurchases of shares of WellPoint stock. Such
additional indebtedness may require that a significant amount of the
Company's cash flow be applied to the payment of interest, and there can be
no assurance that the Company's operations will generate sufficient cash flow
to service the indebtedness. Any additional indebtedness may adversely
affect the Company's ability to
24
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FACTORS THAT MAY AFFECT FUTURE RESULTS OF OPERATIONS, CONTINUED
finance its operations and could limit its ability to pursue business
opportunities that may be in the best interests of the Company and its
stockholders.
As part of the Company's business strategy, the Company has acquired
substantial operations in new geographic markets during the last three years.
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 incurred and will, among other things,
need to continue to incur considerable expenditures for provider networks,
distribution channels and information systems in addition to the costs
associated with the integration of these acquisitions. The integration of
these complex businesses may result in, among other things, temporary
increases in claims inventory or other service-related issues that may
negatively affect the Company's relationship with its customers and
contribute to increased attrition of such customers. The Company's results
of operations could be adversely affected in the event that the Company
experiences such problems or is otherwise unable to implement fully its
expansion strategy.
The Company's operations are subject to substantial regulation by Federal,
state and local agencies in all jurisdictions in which the Company operates.
Many of these agencies have increased their scrutiny of managed health care
companies in recent periods. The Company also provides insurance products to
Medi-Cal beneficiaries in various California counties under contracts with
the California Department of Health Services and provides administrative
services to the Health Care Finance Administration ("HCFA") in various
capacities. There can be no assurance that acting as a government contractor
in these circumstances will not increase the risk of heightened scrutiny by
such government agencies and that profitability from this business will not
be adversely impacted through inadequate premium rate increases due to
governmental budgetary issues. Future actions by any regulatory agencies may
have a material adverse effect on the Company's business.
The Company and certain of its subsidiaries are subject to capital
requirements by the California Department of Corporations, various other
state departments of insurance 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
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FACTORS THAT MAY AFFECT FUTURE RESULTS OF OPERATIONS, CONTINUED
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
and limit the Company's ability to negotiate favorable rates. Recently,
large physician practice management companies have experienced extreme
financial difficulties, including bankruptcy, which may subject the Company
to increased credit risk related to provider groups and cause the Company to
incur duplicative claims expense. 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, cash flows 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. Typically,
government-sponsored programs involve the Company's higher-risk managed care
products. 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
primarily attributable to product mix change, product design, competitive
pressure and greater regulatory restrictions applicable to the small employer
group market. In 1998 and again in early 1999, the Company
26
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FACTORS THAT MAY AFFECT FUTURE RESULTS OF OPERATIONS, CONTINUED
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 merits of the Company's geographic expansion strategy.
Substantially all of the Company's investment assets are in interest-yielding
debt securities of varying maturities or equity securities. The value of
fixed income securities is highly sensitive to fluctuations in short and
long-term interest rates, with the value decreasing as such rates increase and
increasing as such rates decrease. In addition, the value of equity
securities can fluctuate significantly with changes in market conditions.
Changes in the value of the Company's investment assets, as a result of
interest rate fluctuations, can affect the Company's results of operations
and stockholders' equity. There can be no assurances that interest rate
fluctuations will not have a material adverse effect on the results of
operations or financial condition of the Company.
The Company is dependent on retaining existing employees, attracting
additional qualified employees and achieving productivity gains from the
Company's investment in technology to meet its future profit objectives. 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.
27
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PART II OTHER INFORMATION
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 Agreement and Plan of Reorganization dated as of July 22,
1997 by and among the Registrant, WellPoint Health
Networks Inc., a California corporation ("WellPoint
California"), and WLP Acquisition Corp., incorporated by
reference to Exhibit 99.1 of Registrant's Current Report
on Form 8-K filed on August 5, 1997
2.03 Agreement and Plan of Merger dated as of July 9, 1998, by
and among Cerulean Companies, Inc., WellPoint and Water
Polo Acquisition Corp., incorporated by reference to
Exhibit 2.4 of Registrant's Registration Statement on Form
S-4 (Registration No. 333-64955).
2.04 Stock Purchase Agreement dated as of July 29, 1998, by and
between the Registrant and Fremont Indemnity Company,
incorporated by reference to Exhibit 2.1 to Registrant's
Current Report on Form 8-K dated September 1, 1998.
2.05 First Amendment to the Stock Purchase Agreement dated as
of November 5, 1998, by and between the registrant and
Fremont Indemnity Company, incorporated by reference to
Exhibit 2.05 to the Registrant's Annual Report on
Form 10-K for the year ended December 31, 1998.
2.06 Second Amendment to the Stock Purchase Agreement dated as
of February 1, 1999, by and between the registrant and
Fremont Indemnity Company, incorporated by reference to
Exhibit 2.06 to the Registrant's Annual Report on Form
10-K for the year ended December 31, 1998.
3.01 Restated Certificate of Incorporation of the Registrant,
incorporated by reference to Exhibit 3.1 of Registrant's
Current Report on Form 8-K filed on August 5, 1997.
3.02 Bylaws of the Registrant, incorporated by reference to
Exhibit 3.02 of Registrant's Annual Report
on Form 10-K for the year ended December 31, 1998.
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 Employment Agreement dated as of February 10, 1999 by
and between the Registrant and Leonard D. Schaeffer.
10.02 Promissory Note dated as of February 10, 1999 made by
Leonard D. Schaeffer in favor of the Registrant.
10.03 Special Executive Retirement Plan dated as of
February 10, 1999 by and between the Registrant and
Leonard D. Schaeffer.
10.04 Officer Severance Plan.
27.1 Financial Data Schedule
(b) Reports on Form 8-K
No Current Reports on Form 8-K were filed by the Company during the
period covered by this Quarterly Report on Form 10-Q.
28
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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 14, 1999 By: \s\ LEONARD D. SCHAEFFER
----------------------------------
Leonard D. Schaeffer
Chairman of the Board of Directors
and Chief Executive Officer
Date: May 14, 1999 By: \s\ DAVID C. COLBY
----------------------------------
David C. Colby
Executive Vice President
and Chief Financial Officer
Date: May 14, 1999 By: \s\ S. LOUISE MCCRARY
----------------------------------
S. Louise McCrary
Senior Vice President and
Chief Accounting Officer
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EMPLOYMENT AGREEMENT
This Employment Agreement ("Agreement"), originally entered into by and
between WELLPOINT HEALTH NETWORKS INC. ("the Company") and LEONARD D.
SCHAEFFER ("Executive") effective January 22, 1997 (the "Effective Date"),
and subsequently amended on three separate occasions, is hereby amended and
restated in its entirety effective February 10, 1999.
RECITALS:
A. Executive is currently the Chairman of the Board of Directors and Chief
Executive Officer of the Company and had previously served in such capacity
for both the Company and Blue Cross of California ("BCC"), which was
previously the principal stockholder of the Company's
predecessor-in-interest ("Old WellPoint").
B. Prior to the Merger, Executive had been party to an employment agreement
with BCC (the "BCC Employment Agreement"), a portion of the cost which was
reimbursed by Old WellPoint based upon the estimated time dedicated by
Executive to the affairs of Old WellPoint, and an employment agreement with
Old WellPoint that was to take effect upon Executive's termination of
employment with BCC.
C. The Company and Executive entered into this Agreement as of the Effective
Date to clarify the terms of Executive's employment with the Company,
amended it on three separate occasions and wish to further amend the
Agreement effective February 10, 1999.
NOW, THEREFORE, IT IS AGREED AS FOLLOWS:
1. EMPLOYMENT. The Company agrees to continue to employ Executive and
Executive agrees to continue in the employ of the Company on the terms and
conditions hereinafter set forth.
2. POSITION. Executive will serve as the Chairman of the Board and
Chief Executive Officer of WellPoint Health Networks Inc.
3. DUTIES. Executive will have all rights, powers and duties now
vested in, and consistent with, the office of the Chairman of the Board and
Chief Executive Officer of the Company under the current Bylaws of the
Company, and shall report directly to the Board. (A description of the
general duties and responsibilities of the Company's Chairman and Chief
Executive Officer is set forth as Attachment No. 1.)
Executive is required to devote his substantial productive time and
effort full-time and exclusively for the benefit of the Company and will not
engage in any other employment (including consulting services) without the
express written approval of the Board. This shall not, however, preclude
Executive from the pursuit of limited teaching, speaking, writing or service
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advisory panels, or the acceptance of honoraria or reimbursement for travel
and incidental expenses associated with such activities. Service on the
board of directors of any for-profit entity may be undertaken only with the
approval of the Board. If Executive will be out of the country, he will
inform the Board and will identify an Acting Chief Executive Officer to serve
during his absence.
4. TERM
The initial term of this Agreement shall commence on the Effective Date.
The initial term of this Agreement shall terminate sixty (60) months
following the Effective Date ("Initial Termination Date"). On each
anniversary of the Effective Date (the "Anniversary Dates"), the term of this
Agreement shall be automatically extended by an additional twelve months if
Executive is employed by the Company on the last day of the calendar month
immediately preceding the applicable Anniversary Date (the "Renewal Date"),
unless the Board of Directors of WellPoint ("Board"), by written notice
delivered to Executive on or before the applicable Renewal Date, elects to
cease such automatic extension, in which case this Agreement will remain in
force for the forty-eight months remaining in the term of this Agreement on
the date such notice is received by Executive. Any failure to extend the term
of this Contract shall not itself be considered a termination or Constructive
Termination of Executive's employment.
5. COMPENSATION
a. BASE SALARY AND INCENTIVE COMPENSATION. The Company agrees to
pay Executive as follows:
(i) From the Effective Date through February 28, 1997, a base
annual salary ("Base Salary") at the rate of $850,000 per year.
(ii) Thereafter, the Board or the Compensation Committee thereof
shall determine the Base Salary of Executive. However, the
Base Salary of Executive will not decrease from any previous
level, except that Executive's Base Salary may be reduced as
part of, and consistent with, any across-the-board reduction
in the salaries of senior officers of the Company.
The Board or the Compensation Committee thereof will review annually the
performance of Executive and a written copy thereof will be forwarded to
Executive. Executive's performance will be evaluated based upon mutually
approved written criteria to be developed jointly by the Board and\or
Compensation Committee and Executive. In connection with that review, the
Board or Compensation Committee shall also review and consider appropriate
adjustments to Executive's Base Salary and other compensation and may retain
a qualified compensation consultant. Unless Executive expressly agrees
otherwise, he shall be eligible to participate in the Company's current long-
and short-term incentive programs (including the Company's stock option plan)
and any other incentive programs hereafter established for senior officers of
the Company (subject to such modifications to such programs as the
Compensation Committee shall determine to be necessary and appropriate to
preserve deductibility of bonus
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amounts) at participation levels determined each calendar year in connection
with Executive's annual performance review.
b. MEDICAL AND DENTAL COVERAGE. The Company shall provide full
medical and dental coverage for Executive and his family based on the
programs in effect from time to time for senior officers of the Company. The
Company shall pay all premiums for such coverage for the term of this
Agreement and any extensions. This coverage shall also be provided following
termination of Executive's employment, in certain circumstances, in
accordance with the provisions of Sections 7 and 8, which provisions shall
not bar the Executive or his dependents, after the periods of time set forth
therein, from receiving such benefits as are allowable under Section 4980B of
the Internal Revenue Code of 1986 as amended or any successor section
("COBRA"). Executive shall remain eligible for retiree health benefits under
the terms of the Company's retiree health program as it exists on the
Effective Date, whether or not such program is thereafter otherwise
terminated or modified with respect to other employees.
c. LIFE INSURANCE. The Company will provide to Executive for the
term of this Agreement and any extensions life insurance in an amount
totaling three times Executive's then current Base Salary; which obligation
may be satisfied in whole or in part by life insurance coverage provided
through one or more individual policies of insurance or through Company-paid
coverage under the Company's life insurance programs for employees or
executives generally.
d. LONG-TERM DISABILITY. The Company shall provide to Executive
for the term of this Agreement and any extensions long-term disability
benefits at an annual level equal to Executive's then current Base Salary,
which obligation may be satisfied in whole or in part by payment of salary
continuation, disability insurance coverage under one or more individual
disability insurance policies the premiums of which are paid by the Company,
through Company-paid coverage under the Company's disability insurance
programs for employees or executives generally and/or, if necessary
self-insurance. Such benefits shall begin upon disability (that prevents
Executive from performing his duties as Chairman and Chief Executive Officer)
and shall continue until at least age 65 (or if earlier, the date that such
disability ceases). However, if Executive begins to receive retirement
benefits under the Special Executive Retirement Plan (formerly known as the
Excess Benefit Plan for Leonard D. Schaeffer), as amended and restated
effective February 10, 1999 and as hereafter amended (the "SERP"), the
Company's obligation to provide disability benefits shall be reduced by the
amount of such retirement benefits. If any long-term disability policy
through which the Company satisfies its obligations hereunder does not
provide for such a reduction, then to the extent necessary to prevent the
payment of disability payments in excess of Company's obligation hereunder,
any benefits that continue to be paid from such policy after retirement
benefits begin under the SERP shall be in satisfaction on a dollar-for-dollar
basis of the Company's obligation to provide retirement benefits under the
SERP.
e. RETIREMENT AND DEFERRED COMPENSATION PROGRAMS. Executive
shall be entitled to participate in any existing retirement or deferred
compensation programs or other existing employee benefit programs (other than
severance pay programs, including the Company's Change of Control Severance
Plan) of the Company on the Effective Date and shall also be entitled to
participate in any such programs established in the future. For this purpose
any split-
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dollar life insurance arrangement maintained for Executive shall not be
deemed to be a severance benefit. The Company shall continue to perform its
obligations, including funding obligations, under the SERP (as defined in (d)
above)."
f. AUTOMOBILE AND CLUB MEMBERSHIPS. During the term of this
Agreement and any extensions thereof, the Company will provide Executive with
one automobile, including operating expenses and insurance, and will pay for
up to three memberships in luncheon, professional or athletic clubs of
Executive's choice.
g. FINANCIAL COUNSELING. The Company shall provide financial,
legal and/or tax counseling services to Executive or, at his request,
reimburse him for such services provided by the provider of his choice, at a
cost not to exceed $10,000 in each calendar year of this Agreement. This
shall be in addition to the financial and/or tax counseling, if any,
available to Executive under a standard program maintained by the Company for
senior officers of the Company.
h. VACATION. Executive will be entitled to paid vacation of four
weeks per calendar year and any other holiday, sick leave and time off
benefits per existing Company policy, with payment for unused vacation to be
made consistent with Company policy for other employees.
i. DEFERRED STOCK COMPENSATION. Simultaneous with execution of
the February 10, 1999 restatement of this Agreement, the Company shall issue
to Executive those sixty-four thousand one hundred eighty-seven (64,187)
shares of the Company's common stock previously credited to a deferred stock
account on his behalf and otherwise payable upon Executive's termination of
employment. Issuance of these shares shall be in full satisfaction of the
Company's obligations with respect to such shares. To assist Executive in
the payment of taxes resulting from such issuance, the Company shall make an
extension of credit to Executive under the terms of the promissory note
attached to here as Attachment No. 2.
6. EXPENSES AND INDEMNIFICATION
a. EXPENSES. Executive is authorized to incur and shall be
reimbursed in full for all reasonable expenses incurred in promoting and
conducting business of the Company, including expenses for entertainment,
travel, business and professional association dues, and similar items.
b. INDEMNIFICATION. The Company will indemnify Executive against
liability claims in accordance with the terms of the Company's standard
Indemnification Agreement made available to its directors and certain of its
officers.
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7. TERMINATION OF AGREEMENT BEFORE EXPIRATION OF TERM.
This Agreement shall terminate prior to the expiration of its term only
upon the occurrence of any one of the following events:
a. MUTUAL AGREEMENT. This Agreement may be terminated by mutual
agreement between the Board and Executive upon such terms as the Board and
Executive shall agree.
b. DEATH. This Agreement shall terminate upon the death of
Executive. In such case, Executive's estate or, as appropriate, his
designated beneficiary shall be entitled to (i) the full compensation which
Executive would have received hereunder up to the date of such termination,
(ii) a prorata portion of any bonus that he would otherwise have received for
the year of termination; (iii) continuation of the Company-provided medical
and dental coverage described in section 5.b. for forty-eight (48) months
following termination (or, if longer, to Executive's spouse until such time
as she remarries, and to Executive's children until their twenty-third
birthday or, if enrolled in a junior college, college or university, until
their twenty-sixth birthday); and (iv) such other benefits as are determined
in accordance with the Company's employee benefit plans.
c. DISABILITY. If Executive has become so physically or mentally
disabled as to be incapable of satisfactorily performing the duties of the
office of the Chairman of the Board and Chief Executive Officer for a period
of one hundred eighty (180) consecutive days, either Executive or the Company
may, by written notice to the other, elect to terminate this Agreement. In
such case, Executive shall be entitled to (i) the full compensation which
Executive would have received hereunder up to the date of such termination; a
prorata portion of the bonus that he would have otherwise received for the
year of termination; (ii) continuation of the Company-provided medical and
dental coverage and group life insurance described in sections 5.b. and 5.c.
for forty-eight (48) months following termination (or, if longer, in the case
of medical and dental coverage, for the remaining term of this Agreement);
and (vi) such other benefits as are determined in accordance with the
Company's employee benefit plans. The determination of whether or not
Executive is disabled shall be made by an independent physician selected by
mutual consent of the Chairman of the Compensation Committee of the Board and
Executive or, if appropriate, Executive's representative.
d. TERMINATION FOR CAUSE. The Company may terminate this
Agreement for cause (as defined below). In such event, Executive shall be
entitled to compensation paid and salary and bonus (including any prorata
bonus earned for the year of termination) earned through the date of
termination; continuation of the Company-provided medical and dental benefits
described in section 5.b. for 120 days from the date of termination; but no
further compensation hereunder, except such other benefits as are determined
in accordance with the Company's employee benefit plans. For purposes of
this Agreement, "cause" means:
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(i) any act of fraud, embezzlement or theft of property of the
Company by Executive, including any conviction which
adversely affects the bonding or liability insurability of
Executive or the Company; or
(ii) conviction of Executive of a felony; or
(iii) an intentional act or omission by Executive, other than one
performed in good faith, that is determined by a ruling of a
regulatory body with jurisdiction in the matter to violate the
law.
No termination for cause shall occur under this subsection 7.d. unless
Executive first shall have received written notice from the Board specifying
the acts or omissions alleged to constitute such event of termination, and
Executive fails to correct the event specified (in the case of an event
specified in subsection 7.d.(i) or (ii)) or such conduct continues after
Executive shall have had reasonable opportunity to correct the events
specified.
e. INVOLUNTARY TERMINATION WITHOUT CAUSE. The Company may, after
giving ninety (90) days' notice in writing to Executive terminate this
Agreement without cause. In the event of such a termination, Executive shall
be entitled to (i) an immediate lump sum cash severance payment equal to 2.99
times Executive's then current annual Base Salary plus 2.99 times Executive's
then current annual target incentive compensation; (ii) the full compensation
which Executive would have received hereunder up to the date of such
termination; (iii) a prorata portion of any bonus that he would otherwise
have received for the year of termination; (iv) a continuation for forty
eight (48) months of the benefits provided under subsections 5.b. through
5.g. (relating to medical and dental benefits, life insurance, long-term
disability benefits, retirement and deferred compensation benefits, financial
counseling, automobile and club memberships) and subsection 6.b. (relating to
indemnification); (v) the immediate exercisability of any options granted to
Executive on or after January 22, 1997; and (vii) such other benefits as are
determined in accordance with the Company's benefit plans.
f. VOLUNTARY TERMINATION. Upon ninety (90) days' written notice
to the Company, Executive may terminate this Agreement for any reason. In
such event, Executive's Base Salary will continue for a period of three (3)
months following the date of Executive's notice. Executive shall also be
entitled to (i) continuation of the Company-provided health and dental
coverage, life insurance and disability benefits described in sections 5.b.,
5.c. and 5.d. for a period of six (6) months following the date of
Executive's notice and (ii) such other benefits as are determined in
accordance with the Company's employee benefit plans. Subsection 7.g.,
rather than this subsection 7.f., shall govern a termination without cause if
it constitutes a Constructive Termination described therein.
g. CONSTRUCTIVE TERMINATION. If there is a Constructive
Termination of Executive's employment, Executive shall be entitled to the
severance pay and other benefits described in section 7.e. as if this
Agreement had been terminated by reason of involuntary termination without
cause. For purposes of this Agreement, "Constructive Termination" means one
or more of the following:
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(i) A material reduction in the duties, responsibilities, status,
reporting responsibilities, title, or offices that Executive
had with the Company immediately before the reduction.
(ii) Reduction by more than 10% of the total annual cash
compensation (including base salary and target bonuses) that
Executive was eligible to receive from the Company and its
affiliates immediately before the reduction, except a
reduction that both (A) is part of, and consistent with, an
across-the-board reduction in the salaries of senior officers
of the Company and (B) is not implemented on or after, or in
contemplation of, a Change of Control (as defined in section
8.a. hereof).
(iii) A change in Executive's principal place of employment with
the Company such that Executive's one-way commute will be
increased by more than thirty-five (35) miles.
(iv) The failure of any successor to the Company by merger,
consolidation or acquisition of all or substantially all of
the business of the Company to assume the Company's
obligations under this Contract.
(v) A material breach by the Company of its obligations under this
Contract.
However, a Constructive Termination shall not be deemed to have occurred
unless (i) within sixty (60) days of the occurrence that Executive deems to
be a Constructive Termination, Executive shall have notified the Company in
writing that he has experienced a Constructive Termination, which notice
shall describe the event that he believes constitutes a Constructive
Termination, (ii) the Company has not, within fifteen (15) days of receipt of
such notice, corrected the circumstance that would otherwise result in a
Constructive Termination and (iii) Executive terminates his employment within
one hundred twenty (120) days thereafter.
h. ADDITIONAL BENEFITS UPON TERMINATION OF AGREEMENT. If
Executive's employment with the Company terminates for reason other than
cause (as defined above), he shall be entitled to the following additional
benefits, if and to the extent that such benefits would not otherwise be
provided under Sections 7.b. through 7.g. above: (i) transfer to Executive
of full title and ownership of the automobile then provided to him pursuant
to section 5.f., (ii) the financial counseling benefits referred to in
section 5.g. for the five calendar years following the year of termination
(which shall include the services referred to in the first sentence thereof
along with such financial and/or tax counseling then provided generally to
senior officers of the Company), (iii) office space and clerical support for
a period of sixty (60) months following such termination and (iv) such other
retirement benefits as are determined in accordance with the Company's
employee benefit plans.
-7-
<PAGE>
8. EFFECT OF CHANGE OF CONTROL AND EXCESS PARACHUTE PAYMENTS
a. EFFECT OF CHANGE OF CONTROL. 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.. The Company, or any successor to the Company following such
change of control, shall be obligated to provide all rights and benefits
applicable to Executive under any plan or program of the Company, and shall,
as a condition to the consummation of such change of control, agree to
continue and assume all obligations to provide all such rights and benefits.
b. EFFECT OF EXCESS PARACHUTE PAYMENTS. If any compensation
under this Agreement, alone or together with other compensation payable to
Executive, would, in the determination of counsel or other advisor mutually
acceptable to the Company and Executive, constitute a parachute payment
within the meaning of Section 280G of the Code that would subject Executive
to an excise tax under Section 4999 of the Code or any successor provisions,
the Company shall pay Executive an additional amount in cash, which when
added to such compensation, provides Executive with the same net after-tax
compensation (considering Executive's federal and state income tax brackets
and the excise tax on such compensation and such additional payment) that
Executive would realize from such compensation (without such additional
payment) if no excise tax applied.
9. ARBITRATION
Any disputes arising out of our in connection with this Agreement or
employment of Executive by the Company which are not resolved between the
Company and Executive shall be submitted to arbitration in accordance with
the rules of Commercial Arbitration of the American Arbitration Association.
Any such arbitration shall take place in the city of which Executive
resides at the time of the arbitration. The arbitrator shall be a person
experienced in employment and compensation of corporate business executives
who is mutually acceptable to the Company and Executive. If an arbitrator
cannot be agreed upon within 15 days after a dispute is submitted to
arbitration, the parties shall each select one representative who is not and
has never been associated with the Company and who is not related to
Executive, and these two representatives shall choose a neutral arbitrator
with the qualifications described above. If the representatives cannot reach
agreement, one arbitrator with the qualifications described above shall be
selected by the nearest regional office of the American Arbitration
Association.
All actions and proceedings under this section shall be kept
confidential and neither party shall divulge any part thereof to third
parties without the prior written consent of the other party.
-8-
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10. ENTIRE AGREEMENT
This Agreement, including all attachments and documents incorporated by
reference herein, constitutes the entire understanding between the parties
with respect to Executive's employment with the Company, superseding all
prior agreements, written or oral, concerning said employment and no
representations or statements not incorporated or referred to in this
Agreement shall be binding on either party. This Agreement may not be
amended except in writing by the parties hereto.
11. SUCCESSORS AND ASSIGNS
This Agreement shall inure to the benefit of, and be binding upon, the
successors and assigns of the Company.
12. CONSTRUCTION OF AGREEMENT. This Agreement is made and entered into
in the State of California and shall be construed under the laws of
California, without regard to its conflict of laws rules.
Executive Company
/s/ Leonard D. Schaeffer
- ------------------------------ By /s/ Stephen L. Davenport
---------------------------------
Chair, Compensation Committee
Attachments
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PROMISSORY NOTE
$2,243,670 FEBRUARY 10 , 1999
Thousand Oaks, California
FOR VALUE RECEIVED, the undersigned Maker promises to pay to the
order of WellPoint Health Networks Inc. (the "Company"), at its principal
offices at 120 South Via Merida, Thousand Oaks, California 91362, the
principal sum of Two Million, Two Hundred Forty-Three Thousand, Six Hundred
and Seventy Dollars ($2,243,670), upon the terms and conditions specified
below.
1. PRINCIPAL. The entire principal balance of this Note shall
become due and payable in one lump sum on February 10, 2003. Upon mutual
agreement between Maker and the Company, the term of this Note shall be
extended by an additional twelve (12) months.
2. INTEREST. No interest shall accrue under the Note while Maker
continues in employment with the Company. However, Maker shall be
responsible for the payment of all federal and state income and employment
taxes attributable to the compensation income imputed to Maker during the
period this Note remains interest free.
Upon Maker's cessation of employment with the Company,
interest shall accrue on the unpaid balance of this Note until paid at the
minimum per annum rate, compounded semi-annually, required to avoid the
imputation of compensation income to Maker under the federal tax laws.
3. APPLICATION OF PAYMENT. Payment shall be made in lawful
tender of the United States and shall be applied first to any accrued and
unpaid interest on this Note and the balance to principal. Prepayment of the
principal balance of this Note, together with any accrued and unpaid
interest, may be made in whole or in part at any time without penalty.
4. EVENTS OF ACCELERATION. Subject to Section 9 hereof, the
entire unpaid principal sum of this Note shall become immediately due and
payable upon one or more of the following events:
A. the failure of Maker to pay any installment of accrued
interest when due and the continuation of such default for
thirty (30) days, or
B. the date Maker ceases employment with the Company for any
reason, or
C. the insolvency of Maker, the commission of any act of
bankruptcy by Maker, the execution by Maker of a general
assignment for the benefit of creditors, the filing by or
against Maker of any petition in bankruptcy or any petition
for relief under the provisions of the federal bankruptcy act
or any other state or federal law for the relief of debtors
and the continuation of such petition without dismissal for a
period of thirty (30) days or more, the appointment of a
receiver or trustee to take possession of any property or
assets of Maker, or the attachment of or execution against any
property or assets of Maker.
5. EMPLOYMENT REQUIREMENT. The benefits of the interest
arrangements under this Note are not transferable by Maker and are
conditioned on the future performance of substantial services
<PAGE>
by Maker. For purposes of this Note, Maker shall be considered to remain in
the employment of the Company for so long as Maker renders services as a
full-time employee of the Company or one or more of its 50%-or-more owned
(directly or indirectly) subsidiaries.
6. COLLECTION. If action is instituted to collect this Note,
Maker promises to pay all costs and expenses (including reasonable attorney
fees) incurred in connection with such action.
7. WAIVER. No previous waiver and no failure or delay by the
Company in acting with respect to the terms of this Note shall constitute a
waiver of any breach, default, or failure of condition under this Note or the
obligations secured thereby. A waiver of any term of this Note or of any of
the obligations secured thereby must be made in writing and shall be limited
to the express terms of such waiver.
Maker hereby waives presentment, demand for payment, notice of
dishonor, default or delinquency, notice of acceleration, notice of protest
and non-payment, notice of costs, expenses or losses and interest thereon,
notice of interest on interest, and diligence in taking any action to collect
any sums owing under this Note or in proceeding against any of the rights or
interests in or to properties securing payment of this Note.
8. CONFLICTING AGREEMENTS. In the event of any inconsistencies
between the terms of this Note and the terms of any other document related to
the loan evidenced by the Note, the terms of this Note shall prevail.
9. LOAN FORGIVENESS. The principal balance of this Note shall be
subject to forgiveness as follows: If Maker continues in employment with the
Company through February 10, 2003, then (i) Fifty Percent (50%) of the
principal balance shall be forgiven on such date and (ii) an additional
Twenty-Five Percent (25%) of the principal balance shall be forgiven if the
Fair Market Value (as defined herein) of one share of the Company's common
stock (the "Common Stock") on that date is equal to or greater than $103.494
or the remaining Fifty Percent (50%) of the principal balance shall be
forgiven if the Fair Market Value of one share of Common Stock on that date
is equal to or greater than $123.634. In addition, the entire outstanding
principal balance of this Note shall be forgiven upon (i) Maker's termination
of employment with the Company prior to the end of the term of the Note by
reason of death, disability (as provided in Section 7.c of the Employment
Agreement dated as of February 10, 1999 by and between Maker and the Company
(the "Employment Agreement"), involuntary termination without cause (as
provided in Section 7.e of the Employment Agreement) or Constructive
Termination (as defined in the Employment Agreement) or (ii) a Change in
Control (as defined in the Special Executive Retirement Plan established by
the Company to benefit Maker, as amended and restated effective February 10,
1999). Maker shall, however, be responsible for the payment of all income
and employment withholding taxes applicable to any such forgiveness and shall
make appropriate arrangements with the Company for the satisfaction of such
tax liability. For purposes of this Note, the "Fair Market Value" of the
Common Stock as of a certain date shall equal the average of the 10 highest
closing trading prices of the Common Stock on the New York Stock Exchange (or
such other exchange or trading market on which the Common Stock is then
included) during the 60 business days immediately preceding such date.
10. GOVERNING LAW. This Note shall be construed in accordance
with the laws of the State of California, without reference to the
conflict-of-law provisions thereof.
/s/ Leonard D. Schaeffer
------------------------------------
MAKER: LEONARD D. SCHAEFFER
2.
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SPECIAL EXECUTIVE RETIREMENT PLAN
This Special Executive Retirement Plan ("PLAN"), formerly known as
the Excess Benefit Plan for Leonard D. Schaeffer, was adopted effective as of
December 30, 1986 and was amended and restated effective as of July 24, 1989,
as of January 1, 1993, and as of September 1, 1997. This document constitutes
a complete amendment and restatement of the Plan effective February 10, 1999.
1. PURPOSE
The Plan is established and maintained by WellPoint Health Networks
Inc. ("the COMPANY") as part of a program to provide supplemental retirement
benefits for Leonard D. Schaeffer ("EXECUTIVE") as partial consideration for
his services to the Company and its predecessors, including Blue Cross of
California ("BLUE CROSS"), and their Affiliates. Benefits under the Plan are
designed to supplement benefits payable to Executive under the Company's
Pension Accumulation Plan and the Noncontributory Retirement Program for
Certain Employees of Blue Cross of California, including each predecessor,
successor or replacement to each plan (collectively, "Qualified Plan") and
under the Company's Supplemental Pension Plan, including each successor or
replacement to that plan ("Supplemental Plan"), as those plans may be amended
from time to time. All terms used herein shall have the meanings assigned to
them under the provisions of the Pension Accumulation Plan unless otherwise
qualified by the context or specifically defined in a different manner.
Executive, a highly compensated, management employee of the Company, shall be
the sole participant in the Plan.
2. NORMAL RETIREMENT BENEFIT
(a) ELIGIBILITY. If Executive's employment with the Company and
all other Affiliated Companies (as defined in the Qualified Plan) terminates
on or after the date that Executive has attained age 65 (other than due to
Executive's death), Executive will be entitled to a monthly retirement
benefit ("NORMAL RETIREMENT BENEFIT") under the Plan for Executive's
lifetime. The Normal Retirement Benefit will become payable in monthly
installments commencing on Executive's "NORMAL RETIREMENT BEGINNING DATE,"
which will not be later than thirty (30) days after Executive's employment
with the Company and all other Affiliated Companies terminates. Such monthly
installments shall constitute to be paid on the first day of each month
thereafter until the date of payment of the last installment.
(b) CALCULATION. Each monthly installment payment of the Normal
Retirement Benefit will equal the monthly Base Amount calculated in (i)
below, reduced by the Offset Amount calculated in (ii) below; provided,
however, that in no event will the aggregate Normal Retirement Benefit
payable under the Plan, the Supplemental Plan and the Qualified Plan be less
than Executive's accrued benefit under the Plan, the Supplemental Plan and
the Qualified Plan on December 31, 1992.
<PAGE>
(i) "BASE AMOUNT." The Base Amount will be two-thirds
(2/3rds) of Executive's Targeted Annual Compensation. "TARGETED ANNUAL
COMPENSATION" means the SUM OF the following:
(A) BASE SALARY. An amount equal to Executive's average
monthly base salary from the Company and all other Affiliated
Companies (including base salary paid or reimbursed by Blue
Cross or its then subsidiary WellPoint Health Networks Inc.
("Old WellPoint") before their merger to form the Company's
predecessor-in-interest) for the 12 consecutive month period
of Executive's employment with the Company (or Blue Cross or
Old WellPoint) and any other Affiliated Company (whether
occurring before or after June 1, 1997) for which such average
is the highest. For purposes of computing this average,
Executive's base salary for any calendar month beginning after
December 31, 1997 shall be deemed to be as follows: (i) on
each January 1 through January 1, 2003, Executive's monthly
base salary, starting with Executive's actual monthly base
salary as of December 31, 1997, shall be increased by five
percent (5%), (ii) on any date after December 31, 1997 and
before January 2, 2003 that Executive's actual monthly base
salary is increased so that the cumulative increase in such
actual monthly base salary since the most recent December 31
is more than five percent (5%), Executive's monthly base
salary shall be increased by the percentage increase in actual
monthly base salary, but only to the extent that such increase
when added to earlier actual increases since the most recent
December 31 exceeds five percent (5%), and (iii) on any date
after January 1, 2003, Executive's monthly base salary shall
be increased in the same percentage amount and at the same
time that Executive's actual monthly base salary is increased
after that date.
(B) ANNUAL BONUS. An amount equal to one-twelfth (1/12th) of
the largest annual target incentive bonus established at any
time for Executive by the board of directors or the compensation
committee of the Board of Directors of the Company (including
the board of directors and the compensation committees of Blue
Cross and Old WellPoint) and, if applicable, any other Affiliated
Company.
(ii) "OFFSET AMOUNT." The Offset Amount will be the SUM OF
the following amounts:
(A) QUALIFIED PLAN. The monthly benefit that would be
payable over Executive's lifetime as a single life annuity
with payments guaranteed for a period of ten years under the
terms of the Qualified Plan if all benefits payments under the
Qualified Plan were to begin on the Normal Retirement
Beginning Date.
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<PAGE>
(B) SUPPLEMENTAL PLAN. The monthly benefit that would be
payable over Executive's lifetime as a single life annuity
with payments guaranteed for a period of ten years under the
terms of the Supplemental Plan if all benefit payments under
the Supplemental Plan were to begin on the Normal Retirement
Beginning Date.
3. EARLY RETIREMENT BENEFIT
(a) ELIGIBILITY. If Executive's employment with the Company and
all other Affiliated Companies (as defined in the Qualified Plan) terminates
(other than due to Executive's death) before Executive has attained age 65,
Executive will be entitled to a monthly retirement benefit ("EARLY RETIREMENT
BENEFIT") under the Plan for Executive's lifetime. The Early Retirement
Benefit will become payable in monthly installments commencing on Executive's
"EARLY RETIREMENT BEGINNING DATE," which will not be later than thirty (30)
days after Executive's employment with the Company and all other Affiliated
Companies terminates; provided that if Executive terminates employment by
reason of disability and is entitled to disability benefits in accordance
with his employment agreement with the Company or under an employee benefit
plan maintained by the company, Executive may delay his Early Retirement
Beginning Date to the first day of any month after termination of employment
and before the earlier of the date that he attains age 65 or the date that
such disability benefits cease. Such monthly installments shall continue to
be paid on the first day of each month thereafter until the date of payment
of the last installment.
(b) CALCULATION. Each monthly installment payment of the Early
Retirement Benefit will equal the monthly Base Amount calculated under
Section 2(b)(i) above, reduced by one-twelfth of 6.25% for each month
(prorated for a fraction of a month) by which the Early Retirement Beginning
Date is earlier than the date Executive would attain age 60, and reduced
further by the sum of the following:
(i) QUALIFIED PLAN. The monthly benefit that would be payable
over Executive's lifetime as a single life annuity with payments
guaranteed for a period of ten years under the terms of the
Qualified Plan if all benefit payments under the Qualified Plan
were to begin on the Early Retirement Beginning Date.
(ii) SUPPLEMENTAL PLAN. The monthly benefit that would be payable
over Executive's lifetime as a single life annuity with payments
guaranteed for a period of ten years under the terms of the
Supplemental Plan if all benefit payments under the Supplemental
Plan were to begin on the Early Retirement Beginning Date.
4. DEATH BENEFIT FOR DESIGNATED BENEFICIARY
(a) DEATH BEFORE BEGINNING DATE. If Executive terminates employment
by reason of death before commencement of Normal or Early Retirement
Benefits, Executive's Designated
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<PAGE>
Beneficiary will be entitled to a monthly death benefit that will be payable
for 120 months. Each such monthly payment will equal 100% of the monthly
Normal Retirement Benefit. This monthly benefit will become payable
commencing within thirty (30) days after the date of Executive's death.
(b) DEATH AFTER BEGINNING DATE. If Executive dies after his
Normal or his Early Retirement Benefits commence, but before Executive has
received 120 monthly payments under the Plan, Executive's Designated
Beneficiary will be entitled to a monthly death benefit payable for the
balance of this 120 month period. Each such monthly payment will equal 100%
of the monthly amount that Executive was receiving under the Plan. This death
benefit will become payable commencing within thirty (30) days of the date of
Executive's death.
(c) "DESIGNATED BENEFICIARY." The Initial Designated Beneficiary
shall be the person or trustee so designated by Executive by the latest
written instrument delivered to the Company before his death. Upon the death
of any Designated Beneficiary, the Designated Beneficiary shall be the
contingent Designated Beneficiary so designated by Executive by the latest
written instrument delivered to the Company before his death. If no
Designated Beneficiary is designated by Executive, or is living at the date
of death of Executive or of any Designated Beneficiary, the Designated
Beneficiary shall be duly appointed executor or administrator of Executive's
estate. If the Designated Beneficiary is not Executive's Spouse (defined
below), his Spouse must consent to such designation by Executive, prior to
the date of Executive's death, in writing, to the extent required by the
community property laws, if any, of the state in which Executive is domiciled
at the date of designation.
5. SPOUSAL DEATH BENEFIT
(a) DEATH BEFORE BEGINNING DATE. If Executive terminates
employment by reason of death before his Normal or Early Retirement Benefits
commence, Executive's Spouse will be entitled to a monthly Spousal Death
Benefit equal to 50% of the Normal Retirement Benefit. The first such monthly
installment will be paid not later than thirty (30) days after the date that
the last payment of a death benefit to a Designated Beneficiary is made
pursuant to Section 4(a) and will continue for the remainder of the Spouse's
life.
(b) DEATH AFTER BEGINNING DATE. If Executive dies after his Normal
or his Early Retirement Benefits commence, Executive's Spouse will be
entitled to a monthly Spousal Death Benefit for the remainder of her
lifetime. This Spousal Death Benefit will equal 50% of the monthly amount
that Executive was receiving under the Plan. Benefits will become payable
commencing within thirty (30) days after Executive's death, unless Executive
dies before receiving one hundred twenty (120) monthly benefit payments, in
which cases the Spousal Death Benefit will commence within thirty (30) days
after the last monthly payment to a Designated Beneficiary under Section 4(b).
(c) "SPOUSE." For purposes of the Plan, Spouse means a spouse who
survives Executive and to whom Executive is legally married on the date of
his death. For purposes of the Plan, the term Spouse does not include any
successor in interest to a Spouse, including but not limited to a Spouse's
estate or a Spouse's beneficiaries.
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<PAGE>
6. ACTUARIAL EQUIVALENTS
The actuarial assumptions specified in the Company's Pension
Accumulation Plan as of the date of termination of Executive's employment
with the Company and all other Affiliated Companies, used for purposes of
determining the form of a benefit or the adjustment of a benefit to reflect
the timing of commencement of the benefit thereunder, shall also be used for
such purposes with respect to a benefit under the Plan. All actuarial
adjustments required under the Plan shall be made by the enrolled actuary or
firm of enrolled actuaries acting for the Pension Accumulation Plan at the
date of adjustment.
7. TRUST FUNDING AND OBLIGATIONS
(a) TRUST FUNDING AND INVESTMENT. The Company shall, no later than
February 15 of each calendar year after 1992 (or, in the case of 1993, as
soon as practicable after execution of the Plan) make such contributions to
the Trust as shall be necessary, together with prior contributions, to fund
the Early Retirement Benefit payable hereunder upon Executive's retirement at
age 60 (assumed, for this purpose, to be payable in the form of a joint and
survivor annuity that pays 100% of the original monthly amount of Early
Retirement Benefit until the later of (A) the month of Executive's death or
(B) the month in which the 120th monthly payment is made and, thereafter, 50%
of the original monthly amount to Executive's Spouse for her life) under a
generally accepted funding method and reasonable actuarial assumptions
determined by the Company, in its sole discretion, which will result in full
funding of such benefits no later than the date Executive attains age 60.
Contributions shall be invested by the Trustees in their sole discretion.
(b) ACTUARIAL ADJUSTMENTS. All actuarial assumptions utilized in
making the actuarial adjustments called for in this Section 7 shall be
reasonable assumptions agreed to by the Company and Executive.
8. CHANGE IN CONTROL
(a) EFFECT. In the event of a Change in Control (as defined
below), any benefit to which Executive or his beneficiary becomes entitled
hereunder shall be computed as if Executive had remained employed by the
Company through May 15, 2003 or, if later, the date of Executive's actual
termination of employment.
(b) DEFINED. For purposes of this Plan, a "Change in Control"
means:
(i) the acquisition, directly or indirectly by any person or
related group of persons (as such term is used in Sections 13(d) and
14(d) of the Securities Exchange Act of 1934 (the "Exchange Act", but
other than the Company or a person that directly or indirectly
controls, is controlled by, or is under common control with the
Company) of beneficial ownership (as defined in Rule 13d-3 of the
Exchange Act) of securities of the Company that result in such person
or related group of persons beneficially owning securities
representing 40% or more of the combined voting power of the Company's
then outstanding securities; provided that this provision shall not
apply to an acquisition by the California HealthCare Foundation that
either -
5
<PAGE>
(A) is on or before May 20, 1996, or
(B) is both (I) after May 20, 1996 but before the first
date thereafter, if any, that California HealthCare Foundation's
beneficial ownership is less than 35% of (II) involves securities
representing less than 50% (or, if lower, the lowest percentage of
beneficial ownership by the California Healthcare Foundation on or
after May 20, 1996 plus 10%) of the combined voting power of the
Company's then outstanding securities.
(ii) a merger or consolidation to which the Company is a
party but is not the surviving entity, if the beneficial owners of
the Company's securities immediately before the transaction do not,
immediately after the transaction have beneficial ownership of
securities of the surviving entity or parent thereof representing at
least 60% of the combined voting power of the then outstanding
securities of the surviving entity or parent;
(iii) a change in the composition of the Board of Directors of
the Company (the "Board") over a period of thirty-six (36)
consecutive months or less such that a majority of the Board members
ceases, by reason of one or more contested elections for Board
membership, to be comprised of individuals who either (A) have been
Board members continuously since the beginning of such period or (B)
have been elected or nominated for election as Board members during
such period by at least a majority of the Board members described in
clause (A) who were still in office at the time the Board approved
such election or nomination; or
(iv) the sale, transfer or other disposition of all or
substantially all of the Company's assets in complete liquidation
or dissolution of the Company unless the beneficial owners of the
Company's securities immediately before the transaction have,
immediately after the transaction, beneficial ownership of securities
representing at least 60% of the combined voting power of the then
outstanding securities of the entity acquiring the Company's assets.
9. ADMINISTRATION
The Retirement Committee that administers the Company's Pension
Accumulation Plan has full discretionary authority, exercised in a reasonable
manner, to administer and interpret the Plan, including discretionary
authority, exercised in a reasonable manner, to determine eligibility for
benefits and the amount of benefits under the terms of the Plan. The
Retirement Committee may delegate its discretionary authority and such duties
and responsibilities as it deems appropriate to facilitate the day-to-day
administration of the Plan. No member of the Retirement Committee and no
delegate of the Retirement Committee acting within his or her delegated
authority will be liable to any person for any action taken or omitted in
connection with the interpretation and administration of the Plan unless
attributable to willful misconduct or lack of good faith.
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10. AMENDMENT AND DISCONTINUANCE
The Company reserves the right, with the consent of Executive or,
if he is deceased, with the consent of Executive's Spouse, or if there is no
Spouse, with the consent of the Designated Beneficiary, to amend or terminate
the Plan at any time.
11. RIGHT TO BENEFITS
(a) LIMITS. Benefits payable under the Plan shall be payable by the
Company from its own assets and from assets of the Trust and shall not (i)
impose any obligation upon the Trust Fund under the Qualified Plan; (ii) be
paid from the Trust Fund under the Qualified Plan; or (iii) have any effect
whatsoever on the Qualified Plan or the payment of benefits from the Trust
Fund under the Qualified Plan. No person shall have any right to a benefit
under the Plan except in accordance with the terms of the Plan.
(b) GENERAL CREDITOR STATUS. The Plan and the Company's obligations
hereunder are intended to be unfunded for purposes of the Internal Revenue
Code of 1986 and the Employee Retirement Income Security Act of 1974, each as
amended. The Plan represents a mere promise to pay benefits in the future, as
detailed herein. Any right of Executive, Executive's Spouse, or Executive's
Designated Beneficiary to receive a benefit under the Plan or from the Trust
is the right of an unsecured general creditor against the Company and neither
Executive nor Executive's Spouse nor Executive's Designated Beneficiary shall
have any preferred rights in or against any specific assets of the Company
any other Affiliated Company or the Trust. All amounts credited to the Trust
shall constitute general assets of the Company and may be disposed of by the
Company pursuant to the terms of the Trust. The Trust established by the
Company to assist it in providing benefits under the Plan and the assets held
thereunder shall conform to the terms of the model trust described in Revenue
Procedure 92-64, issued by the Internal Revenue Service.
(c) PREMATURE TAXATION. Notwithstanding anything to the contrary
contained herein; (i) in the event that the Internal Revenue Service prevails
in its claim that amounts contributed to and held in the Trust, and/or
earnings thereon, constitute taxable income to the Executive or his Spouse or
Designated Beneficiary for any taxable year of such person, prior to the
taxable year in which such contributions or earnings are distributed to such
persons; or (ii) in the event that legal counsel satisfactory to Company and
the Executive or his Spouse or Designated Beneficiary renders an opinion that
the Internal Revenue Service would likely prevail in such a claim, there
shall be distributed from the Trust to the Executive, his Spouse or
Designated Beneficiary (as the case may be), as soon as practicable, as an
advance payment of benefits under the Plan, an amount necessary to satisfy,
after taxes on such amount, the Executive's or his Spouse or Designated
Beneficiary's federal, state and local income and employment tax liability on
the amount of the Trust held to be taxable. Benefits otherwise payable
thereafter to Executive, and, to the extent necessary, his Spouse and\or
Beneficiary under the Plan shall be reduced by the amount of any such
distribution.
The Internal Revenue Service shall be deemed to have prevailed in a
claim if such claim is upheld by a court of final jurisdiction, or if
Executive or his Spouse or Designated Beneficiary (as the case may be), based
upon an opinion of legal counsel satisfactory to
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<PAGE>
Company and the Executive or his Spouse or Designated Beneficiary (as the
case may be), fails to appeal a decision of the Internal Revenue Service, or
a court of applicable jurisdiction, with respect to such claim, to an
appropriate Internal Revenue Service appeals authority or to a court of
higher jurisdiction within the appropriate time period.
12. RESTRICTIONS ON ASSIGNMENT
No interest of any person or entity in, or right to receive a
benefit under, the Plan shall be subject in any manner to sale, transfer,
assignment, pledge, attachment, garnishment, or other alienation or
encumbrance of any kind; nor may such interest or right to receive a benefit
be taken, either voluntarily or involuntarily, for the satisfaction of the
debts of, or other obligations or claims against, such person or entity,
including claims for alimony, support, separate maintenance and claims in
bankruptcy proceedings.
13. CONTINUED EMPLOYMENT
Nothing contained in this document shall be construed as conferring
on Executive the right to continue in the employee of the Company or any
other Affiliated Company in any capacity.
14. BINDING
The Plan shall be binding on and inure to the benefit of the
Company and its respective successors and assigns and Executive, his heirs,
executors, administrators and legal representatives. In the event of the
merger or consolidation of the Company with or into any other corporation, or
in the event substantially all of the assets of the Company are transferred
to another corporation (other than any direct or indirect subsidiary of the
Company in connection with its formation), the successor corporation
resulting from the merger or consolidation, or the transferee of such assets,
as the case may be, shall, as a condition to the consummation of the merger,
consolidation or sale, assume the obligations of the Company under the Plan
and shall be substituted for the Company under this document.
15. CLAIMS
If the Executive or the Executive's Spouse or Designated
Beneficiary believes that he or she is entitled to a greater benefit or a
different form of benefit under the Plan, he or she may file a signed,
written application with the Retirement Committee. The Executive or the
Executive's Spouse or Designated Beneficiary will generally be notified of
the approval or denial of this application within ninety (90) days of the
date that the Retirement Committee receives the application. If no such
notice is received within such time period, the claim shall be deemed denied.
If the claim is denied, the notification will state specific reasons for the
denial and the Executive or the Executive's Spouse or Designated Beneficiary
will have sixty (60) days to file a signed, written request for a review of
the denial with the Retirement Committee. Executive or Executive's Spouse or
Designated Beneficiary shall have the right to review all documents relevant
to his or her claim in connection with such request for review. This request
should include the reasons for requesting a review, facts supporting the
request and any other relevant comments. The Retirement Committee will
generally make a final, written
8
<PAGE>
determination with respect to the claim within sixty (60) days of receipt of
the request for review.
16. ARBITRATION
Any controversy or claim which arises out of or relates to the Plan
or the construction of the Plan (including the denial of a claim for
benefits) or the breach of Plan provisions shall be settled by arbitration in
accordance with the Commercial Arbitration Rules of the American Arbitration
Association ("AAA"), then in effect, except as otherwise provided in this
Section 16. The proceeding will be held in Los Angeles, California. The
prevailing party to such arbitration shall be entitled to expenses of
arbitration, including reasonable attorneys' fees, as fixed by the
arbitrators or a majority of them. As provided in Section 1283.05 of the Code
of Civil Procedure of the State of California, depositions may be taken and
discovery obtained in any such arbitration proceedings and the provisions of
Section 1283.05 shall be deemed to be made a part of and applicable to the
Plan.
The arbitration proceeding shall be conducted by a single
arbitrator selected as provided in the AAA rules. The arbitrator so
appointed shall proceed to determine the matter in question and the decision
or award of said arbitrator shall be final, conclusive and binding on all
persons. Judgement upon the award of the arbitrator may be entered in any
court having jurisdiction thereof.
Should any litigation be commenced between the parties to compel
arbitration under this Section 16 (including proceedings in trial and
appellate courts) or to confirm an award of the arbitrators (including
proceedings in trial and appellate courts), the party prevailing in such
litigation shall be entitled to reimbursement of reasonable attorneys' fees,
expenses and court costs incurred in connection with such litigation.
9
<PAGE>
17. LAW
The Plan shall be construed in accordance with and governed by the
laws of the State of California to the extent not preempted by Federal law.
Agreed to as of February 10, 1999.
WellPoint Health Networks Inc.
By: /s/ Stephen L. Davenport
-----------------------------------
Chair, Compensation Committee
Agreed to as of February 10, 1999.
/s/ Leonard D. Schaeffer
--------------------------------------
Leonard D. Schaeffer
10
<PAGE>
WELLPOINT HEALTH NETWORKS INC.
OFFICER SEVERANCE PLAN
(AS ADOPTED OCTOBER 27, 1998)
This WellPoint Health Networks Inc. Officer Severance Plan (the "Plan") is
designed to provide each officer of WellPoint Health Networks Inc. ("WellPoint"
or the "Company") and/or its affiliates with certain benefits in the event that
such officer is involuntarily terminated from employment from WellPoint or one
of its affiliates. Except to the extent provided herein, the Plan replaces any
similar plan previously in effect as of the date of adoption providing for
monetary or other compensation to any officer in the event that such officer is
involuntarily terminated from employment with WellPoint or one of its
affiliates.
ARTICLE I
DEFINITIONS
Unless otherwise indicated, capitalized terms used herein shall have the
following meaning:
"Affiliate" means an entity that is linked to WellPoint by a 51% or greater
chain of ownership. For this purpose, ownership is determined by applying the
principles of Section 414 of the Code and by substituting a 51% control test for
an 80% control test.
"Affiliated Group" means WellPoint and all of its Affiliates.
"Base Salary" means a participant's highest annual rate of base salary paid
by a member of the Affiliated Group during the twelve calendar months
immediately preceding the Participant's Termination Date.
"CEO" means the Chief Executive Officer of WellPoint or such person's
delegate.
"Code" means the Internal Revenue Code of 1986 as amended.
"Committee" shall mean the Compensation Committee of the Board of Directors
of WellPoint, whose membership shall be comprised solely of independent
directors of WellPoint and to which the CEO shall report periodically regarding
actions taken under this Plan.
"Constructive Termination" means a change in the Participant's principal
place of employment such that the Participant's one-way commute will be
increased by more than 35 miles. However, a Constructive Termination will not
be deemed to have occurred unless (i) within sixty (60) days of the occurrence
that the Participant deems to be a Constructive Termination, the Participant
notifies WellPoint in writing that he or she has experienced a Constructive
Termination, which notice describes the event that the Participant believes
constitutes a Constructive Termination, (ii) WellPoint has not, within
<PAGE>
fifteen (15) days of receipt of such notice, corrected the circumstance that
would otherwise result in a Constructive Termination, and (iii) the
Participant terminates his or her employment within ninety (90) days of such
15-day period.
"Involuntary Termination" means actual termination of a Participant's
employment with a member of the Affiliated Group initiated by one or more
members of the Affiliated Group, other than (i) Termination for Cause, (ii)
termination due to the Participant's total and permanent disability, as that
term is defined in the WellPoint long-term disability plan in effect on the date
in question, or (iii) termination due to the Participant's death. Involuntary
Termination shall also mean the resignation by a Participant in lieu of
discharge from employment by mutual agreement between such Participant and the
member of the Affiliated Group.
"Participant" means any person holding the title of Vice President or
higher with WellPoint or any member of the Affiliated Group; provided, however,
that it shall not include (i) any person covered by an employment agreement with
any member of the Affiliated Group on his or Termination Date unless such
person's employment agreement provides otherwise; and (ii) unless otherwise
designated by the CEO, it shall not include any person holding the title of
"Regional Vice President" or any other title (whether or not such title includes
"Vice President") which is not considered to be an officer position of the
Affiliated Group and is not entitled to participate in benefits generally
reserved for officers of the Affiliated Group.
"Service" means the number of years from a Participant's latest or adjusted
hire date, whichever is longer. An adjusted hire date shall apply to any
Participant who is reinstated with the Affiliated Group and who has had a break
in service with the Affiliated Group of a duration of less than one year.
Participants who have a break in service of one year or greater shall not accrue
any service credit for the period prior to such break in service.
"Termination Date" is the first date that a Participant is subject to a
Constructive Termination or an Involuntary Termination.
"Termination for Cause" means (i) a commission by a Participant of any act
of fraud, embezzlement or dishonesty against any member of the Affiliated Group;
(ii) the conviction of a Participant for any criminal offense involving fraud or
dishonesty or any similar conduct that is injurious to the reputation of
WellPoint or any member of the Affiliated Group; or (iii) willful engagement by
a Participant in gross misconduct injurious to WellPoint or any member of the
Affiliated Group.
ARTICLE II
ELIGIBILITY
A Participant who is subject to a Constructive Termination or an
Involuntary Termination from the Affiliated Group will be eligible for the Plan
Benefits provided in Article III hereof (subject to the terms and conditions of
this Plan).
2
<PAGE>
ARTICLE III
PLAN BENEFITS
3.1. BASIC BENEFIT. (a) The Basic Benefit for each Participant will be as
provided in the Schedule attached hereto applicable to such Participant based
upon the Participant's position as of the Termination Date; provided, however,
that in no event will the Basic Benefit be less than the lowest Basic Benefit
for the highest position held by the Participant with a member of the Affiliated
Group at any time during the 12 calendar months immediately preceding the
Participant's Termination Date.
(b) For purposes of calculating the Basic Benefit, the term "Target Bonus"
referred to in the applicable Schedule is an amount equal to (i) the target
bonus percentage (if any) for the Participant for the fiscal year immediately
preceding his or her Termination Date under WellPoint's then-applicable annual
management incentive plan, or any other cash incentive plan maintained by a
member of the Affiliated Group, multiplied by (ii) the Participant's Base Salary
at the time of termination.
3.2. OTHER BENEFITS. Each Participant shall receive health, vision, dental
and life insurance benefits comparable (including the Participant responsibility
for the employee contribution required at such time) to those generally provided
to employees of WellPoint or its Affiliates until the earlier to occur of:
(i) the Participant becoming eligible for such benefits under the health
and welfare benefit plan or plans maintained by any successor employer
of the Participant; and
(ii) depending on the title of the Participant, the period set forth in the
applicable Schedule attached hereto.
In lieu of providing the benefits described in this Section 3.2, WellPoint
may, in its discretion, elect to make cash payments to Participant in amounts
sufficient, on an after-tax basis and after taking into account the employee
contribution required at such time, for Participant to otherwise purchase such
benefits.
3.3. EXCESS PARACHUTE PAYMENTS. If any Participant determines that (i)
any benefit under this Plan, either alone or when aggregated with other
compensation payable to such Participant, would subject such Participant to an
excise tax under Section 4999 of the Code (relating to excess parachute
payments) and (ii) the net amount that the Participant would realize from such
payments on an after-tax basis would be greater if the benefit payable hereunder
were limited, then the benefit payable hereunder shall be limited in the manner
reasonably determined by such Participant to maximize such Participant's net
payments received on an after tax basis, UNLESS under a separate written
agreement, plan or program, such Participant is entitled to an additional
payment that, net of all taxes thereon, fully reimburses or "grosses up" the
Participant for the amount of such excise tax.
3
<PAGE>
3.4. OFFSET FOR OTHER PAYMENTS RECEIVED. The Worker Adjustment and
Retraining Notification Act (commonly known as the WARN Act) requires that
advance notice of certain layoffs be given to employees. Other laws may
impose similar notice requirements or require that pay in-lieu of notice,
severance pay or similar benefits be paid. WellPoint and/or its Affiliates
shall be entitled to deduct from any benefits otherwise payable to a
Participant under this Plan any other amount that a member of the Affiliated
Group is legally required to pay to the Participant under such laws plus any
compensation and any benefits paid to the Participant following distribution
of such a legally required notice to the Participant. Similarly, benefits
paid under this Plan will be applied to satisfy any legal obligations that a
member of the Affiliated Group may have under such laws or similar laws for
which Plan benefits are paid.
3.5. FORM OF PAYMENT. The Basic Benefit will be paid to the Participant
in a lump sum as soon as reasonably practicable after the later to occur of
the Participant's Termination Date and WellPoint's receipt of an executed
general release from the Participant provided pursuant to Section 3.10
hereof.
3.6. WITHHOLDING. WellPoint and/or the appropriate member of the
Affiliated Group may withhold taxes and other payroll deductions from Plan
benefit payments.
3.7. EFFECT ON OTHER PLANS. Payments under this Plan will not be
treated as compensation for purposes of any other employee benefit plan,
unless the other employee benefit plan expressly provides otherwise.
3.8. COORDINATION WITH OTHER PLANS. Any person otherwise eligible as a
Participant under this Plan shall not be considered a Participant if such
person is then covered under any other severance plan or arrangement
maintained by a member of the Affiliated Group, under which benefits are
payable as a result of Participant's Constructive Termination or Involuntary
Termination (a "Severance Plan"), other than WellPoint's Officer
Change-in-Control Plan. Such person shall only be considered a Participant
hereunder upon receipt by the Company of a duly executed termination
agreement, in a form acceptable to the Company, with respect to such person
under such Severance Plan or Plans. In any event, any benefits otherwise
payable to a Participant hereunder upon a Constructive Termination or
Involuntary Termination shall be reduced on a dollar-for-dollar basis for any
benefits received by the Participant from any other Severance Plan or Plans
(whether maintained by the Company, any member of the Affiliated Group or any
former or successor employers of the Participant), including WellPoint's
Officer Change-in-Control Plan.
3.9. EFFECT OF DIVESTITURES OR OTHER SIGNIFICANT CORPORATE
TRANSACTIONS. A Participant shall not be deemed to have suffered a
Constructive Termination or Involuntary Termination solely by virtue of the
Company or any member of the Affiliated Group consummating a divestiture,
sale or other similar transaction (whether by asset sale, stock sale or
otherwise) (a "Divestiture") with respect to a member of the Affiliated Group
or business unit or division (a "Transferred Unit") so long as the
Participant shall continue in his or her employment with the Transferred Unit
or shall
4
<PAGE>
be offered a position having a substantially similar title,
responsibilities, compensation and benefits with the entity acquiring such
Transferred Unit. Notwithstanding the foregoing, in the event that a
Participant shall suffer an Involuntary Termination or Constructive
Termination from the Transferred Unit within the time period after completion
of the Divestiture specified in the applicable Schedule, such Participant
shall be entitled to receive the benefits specified in Sections 3.1 and 3.3
hereof (subject to the terms and conditions of this Plan, including Sections
3.8 and 3.10 hereof).
3.10. EXECUTION OF GENERAL RELEASE. It shall be a condition to receipt
of any benefit under this Plan that Participant shall have executed a general
release of all claims that the Participant may have against WellPoint and all
members of the Affiliated Group and their respective employees and agents.
Such general release shall be in the form customarily used by WellPoint.
ARTICLE IV
MISCELLANEOUS
4.1. ASSIGNMENT AND SOURCE. Plan benefits are not assignable and will
be paid when due from the general assets of WellPoint and/or from the general
assets of an Affiliate controlled by WellPoint.
4.2. COMPLIANCE WITH AGREEMENTS. Plan benefits are conditioned on an
eligible Participant's compliance with any confidentiality agreement that the
Participant has entered into with any member of the Affiliated Group.
4.3. CLAIMS PROCEDURE. If a Participant believes that he or she is
entitled to a benefit under this Plan or to a Plan benefit that is greater
than the benefit which such person has received, the Participant may submit a
signed, written application to the CEO within 60 days of the Participant's
Termination Date. The Participant will generally be notified of the approval
or denial of this application within 90 days of the date that the CEO
receives the application. If the Participant is not so notified the
Participant may, but need not, treat the claim as denied. If the
Participant's claim is denied, the notification will state specific reasons
for the denial and the Participant will have 60 days from the date of such
notification to file a signed, written request for a review of the denial
with the CEO. This request shall include the reasons the Participant is
requesting a review, facts supporting the Participant's request and any other
relevant comments. The CEO will generally make a final, written
determination of the Participant's eligibility for Plan benefits within 60
days of receipt of the Participant's request for review.
4.4. ARBITRATION. If a Participant is denied part or all of a Plan
benefit pursuant to Section 4.3, the Participant's sole remedy will be to
appeal the matter to an impartial arbitrator. Arbitration will be in
accordance with the Model Employment Arbitration Procedures of the American
Arbitration Association (the "AAA") before an arbitrator who is familiar with
employee benefit matters and who is licensed to practice law in the
5
<PAGE>
state in which the arbitration is convened (the "Arbitrator"). The
Arbitrator will be selected by alternate striking from a list of eleven
arbitrators drawn by the AAA from its panel of labor and employment
arbitrators. The arbitration will take place in or near the city in which
the Participant is or was last employed by WellPoint or an Affiliate
controlled by WellPoint or in such other location as may be acceptable to
both the Participant and WellPoint. The arbitrator will not be allowed to
consider or include any claims of other Participants. The Arbitrator will
have the exclusive authority to resolve any factual or legal claim relating
to the Plan or relating to the interpretation, applicability or
enforceability of this arbitration provision, including but not limited to,
any claim that all or any part of this provision is void or voidable. The
arbitration will be final and binding upon all parties. The costs of the
Arbitration will be split equally between the parties to the arbitration.
4.5. AMENDMENT OR TERMINATION OF PLAN. The Committee shall have the
authority to amend or terminate the Plan at any time; provided, however, that
no termination of the Plan or amendment thereto that adversely affects the
rights of Participants shall be effective sooner than the January 1 that next
occurs after the first anniversary of the approval of such amendment or
termination by the Committee.
4.6. NO RIGHT TO CONTINUED EMPLOYMENT. This Plan does not provide a
Participant with any right to continued employment with any member of the
Affiliated Group or affect the right of any member of the Affiliated Group to
terminate the services of any Participant at any time with or without cause
or notice, subject to the terms of any written employment agreement executed
by both parties thereto.
4.7. GOVERNING LAW. This Plan is intended to be an unfunded welfare
benefit plan for a select group of management or highly compensated employees
within the meaning of the Employee Retirement Income Security Act of 1974, as
amended ("ERISA") and Department of Labor Regulation 2520.104-24. To the
extent applicable and not preempted by ERISA, the laws of the State of
California will govern this Plan.
4.8. EFFECTIVE DATE. This Plan is effective for Constructive
Terminations and Involuntary Terminations occurring on or after October 27,
1998.
WELLPOINT HEALTH NETWORKS INC.
BY: /s/ Leonard D. Schaeffer DATE: October 27, 1998
------------------------------
LEONARD D. SCHAEFFER
6
<PAGE>
SCHEDULE OF BENEFITS
APPLICABLE TO EXECUTIVE VICE PRESIDENTS
BASIC BENEFIT. (Section 3.1)
12 months Base Salary and 100% of Target Bonus (or, if greater, the time
period and percentages set forth in any officer severance agreement in effect
on October 27, 1998). Participants with over five years of Service will
receive one additional week of salary continuation for each completed year of
Service in excess of five years, up to a maximum of 13 additional weeks of
salary continuation.
OTHER BENEFITS. (Section 3.2)
12 Months (or, if greater, the time period set forth in any officer
severance agreement in effect on October 27, 1998)
EFFECTIVE OF DIVESTITURES OR OTHER SIGNIFICANT CORPORATE TRANSACTIONS.
(Section 3.9)
The period referred to in the final sentence of Section 3.9 shall be 12
months (or, if greater, the period referred to under "Other Benefits.
(Section 3.2)" directly above).
7
<PAGE>
SCHEDULE OF BENEFITS
APPLICABLE TO SENIOR VICE PRESIDENTS
BASIC BENEFIT. (Section 3.1)
9 months Base Salary and 75% of Target Bonus. Participants with over
five years of Service will receive one additional week of salary continuation
for each completed year of Service in excess of five years, up to a maximum
of 13 additional weeks of salary continuation.
OTHER BENEFITS. (Section 3.2)
9 Months
EFFECTIVE OF DIVESTITURES OR OTHER SIGNIFICANT CORPORATE TRANSACTIONS.
(Section 3.9)
The period referred to in the final sentence of Section 3.9 shall be
9 months.
8
<PAGE>
SCHEDULE OF BENEFITS
APPLICABLE TO GENERAL MANAGERS / VICE PRESIDENTS
BASIC BENEFIT. (Section 3.1)
6 months Base Salary and 50% of Target Bonus. Participants with over
five years of Service will receive one additional week of salary continuation
for each completed year of Service in excess of five years, up to a maximum
of 13 additional weeks of salary continuation.
OTHER BENEFITS. (Section 3.2)
6 Months
EFFECTIVE OF DIVESTITURES OR OTHER SIGNIFICANT CORPORATE TRANSACTIONS.
(Section 3.9)
The period referred to in the final sentence of Section 3.9 shall be 6
months.
9
<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, 1999 AND IS QUALIFIED IN ITS ENTIRETY
BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> MAR-31-1999
<CASH> 365,185
<SECURITIES> 2,343,691
<RECEIVABLES> 576,455
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 3,540,383
<PP&E> 133,158
<DEPRECIATION> 0
<TOTAL-ASSETS> 4,328,961
<CURRENT-LIABILITIES> 2,256,427
<BONDS> 300,000
0
0
<COMMON> 710
<OTHER-SE> 1,355,914
<TOTAL-LIABILITY-AND-EQUITY> 4,328,961
<SALES> 0
<TOTAL-REVENUES> 1,771,245
<CGS> 0
<TOTAL-COSTS> 1,640,489
<OTHER-EXPENSES> 8,085
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 6,100
<INCOME-PRETAX> 116,571
<INCOME-TAX> 45,461
<INCOME-CONTINUING> 71,110
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> (20,558)
<NET-INCOME> 50,552
<EPS-PRIMARY> 0.75
<EPS-DILUTED> 0.74
</TABLE>
