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SCHEDULE 14A INFORMATION
Proxy Statement Pursuant to Section 14(a) of
the Securities Exchange Act of 1934 (Amendment No. )
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<S> <C>
Filed by the Registrant /X/
Filed by a Party other than the Registrant / /
Check the appropriate box:
/ / Preliminary Proxy Statement
/ / Confidential, for Use of the Commission Only (as permitted
by Rule 14a-6(e)(2))
/X/ Definitive Proxy Statement
/ / Definitive Additional Materials
/ / Soliciting Material Pursuant to Section240.14a-11(c) or
Section240.14a-12
</TABLE>
<TABLE>
<C> <S>
WELLPOINT HEALTH NETWORKS INC.
- ------------------------------------------------------------
(Name of Registrant as Specified In Its Charter)
- ------------------------------------------------------------
(Name of Person(s) Filing Proxy Statement, if other than the
Registrant)
</TABLE>
Payment of Filing Fee (Check the appropriate box):
<TABLE>
<S> <C> <C>
/X/ No fee required.
/ / Fee computed on table below per Exchange Act Rules 14a-6(i)(1)
and 0-11.
(1) Title of each class of securities to which transaction
applies:
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(2) Aggregate number of securities to which transaction
applies:
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(3) Per unit price or other underlying value of transaction
computed pursuant to Exchange Act Rule 0-11 (set forth the
amount on which the filing fee is calculated and state how
it was determined):
----------------------------------------------------------
(4) Proposed maximum aggregate value of transaction:
----------------------------------------------------------
(5) Total fee paid:
----------------------------------------------------------
/ / Fee paid previously with preliminary materials.
/ / Check box if any part of the fee is offset as provided by
Exchange Act Rule 0-11(a)(2) and identify the filing for which
the offsetting fee was paid previously. Identify the previous
filing by registration statement number, or the Form or
Schedule and the date of its filing.
(1) Amount Previously Paid:
----------------------------------------------------------
(2) Form, Schedule or Registration Statement No.:
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(3) Filing Party:
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(4) Date Filed:
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</TABLE>
<PAGE>
[LOGO]
March 23, 2000
To our Stockholders:
You are cordially invited to attend the 2000 Annual Meeting of Stockholders
of WellPoint Health Networks Inc. (the "Company") which will be held on May 9,
2000, at 10:00 a.m., at the Hyatt Westlake Plaza, 880 South Westlake Boulevard,
Westlake Village, California 91361.
At the meeting, you will be asked to vote upon proposals to:
- Elect three Class I directors;
- Approve an amendment and restatement of the Company's Employee Stock
Purchase Plan; and
- Ratify the selection of PricewaterhouseCoopers LLP as the Company's
independent public accountants.
Details of business to be conducted at the Annual Meeting are given in the
attached Notice of Annual Meeting and Proxy Statement.
Please take this opportunity to participate in the affairs of the Company by
voting on the business to be presented at this meeting. Whether or not you plan
to attend the meeting, PLEASE SIGN, DATE AND RETURN THE ENCLOSED PROXY PROMPTLY
IN THE ACCOMPANYING REPLY ENVELOPE. Returning the proxy does not deprive you of
your right to attend the meeting and to vote your shares in person for the
matters acted upon at the meeting.
If you plan to attend the Annual Meeting and are a registered stockholder,
please bring the admission ticket which is attached to your proxy card. If your
shares are registered in the name of a bank or your broker, please bring your
bank or broker statement showing your beneficial ownership with you to the
Annual Meeting.
We look forward to your attendance at the Annual Meeting.
Sincerely,
/s/ LEONARD D. SCHAEFFER
Leonard D. Schaeffer
CHAIRMAN OF THE BOARD
AND CHIEF EXECUTIVE OFFICER
<PAGE>
WELLPOINT HEALTH NETWORKS INC.
----------------
NOTICE OF ANNUAL MEETING OF STOCKHOLDERS
TO BE HELD ON MAY 9, 2000
------------------------
The 2000 Annual Meeting of Stockholders of WellPoint Health Networks Inc.
(the "Company") will be held on Tuesday, May 9, 2000, at 10:00 a.m., local time,
at the Hyatt Westlake Plaza located at 880 South Westlake Boulevard, Westlake
Village, California 91361 to act on the following matters:
1. Elect three Class I directors of the Company to serve until the 2003
Annual Meeting or the election of their successors;
2. Approve an amendment and restatement of the Employee Stock Purchase Plan
(the "Employee Stock Purchase Plan"), in order to, among other things,
authorize the future issuance of an additional 1,000,000 shares under the
Employee Stock Purchase Plan;
3. Ratify the selection of PricewaterhouseCoopers LLP as the Company's
independent public accountants for the fiscal year ending December 31,
2000; and
4. Transact such other business as may properly come before the meeting or
any adjournment or postponement thereof.
These matters are more fully described in the Proxy Statement accompanying
this Notice.
Only stockholders of record at the close of business on March 17, 2000 are
entitled to notice of and to vote at the Annual Meeting. A complete list of the
stockholders entitled to vote at the meeting will be available for at least
10 days prior to the Annual Meeting at the Company's principal executive office
located at 1 WellPoint Way, Thousand Oaks, California 91362 for the examination
of any stockholders and will also be available for inspection at the meeting.
By Order of the Board of Directors
/s/ THOMAS C. GEISER
Thomas C. Geiser
SECRETARY
Thousand Oaks, California
March 23, 2000
YOUR VOTE IS IMPORTANT
ALL STOCKHOLDERS ARE CORDIALLY INVITED TO ATTEND IN PERSON. HOWEVER, TO
ENSURE YOUR REPRESENTATION AT THE MEETING, PLEASE MARK, SIGN, DATE AND RETURN
THE ENCLOSED PROXY CARD AS SOON AS POSSIBLE IN THE ENCLOSED POSTAGE-PAID
ENVELOPE. IF YOU ATTEND THE MEETING, YOU MAY VOTE IN PERSON EVEN IF YOU HAVE
PREVIOUSLY RETURNED A PROXY.
<PAGE>
WELLPOINT HEALTH NETWORKS INC.
----------------
PROXY STATEMENT
2000 ANNUAL MEETING OF STOCKHOLDERS
---------------------
GENERAL
The enclosed proxy is solicited on behalf of the Board of Directors of
WellPoint Health Networks Inc. (the "Company" or "WellPoint") for use at the
Annual Meeting of Stockholders to be held on May 9, 2000, at 10:00 a.m., local
time, or at any adjournment or postponement thereof, for the purposes set forth
in the foregoing Notice of Annual Meeting of Stockholders. The Annual Meeting
will be held at the Hyatt Westlake Plaza located at 880 South Westlake
Boulevard, Westlake Village, California 91361. The Company's principal executive
office is located at 1 WellPoint Way, Thousand Oaks, California 91362 and the
Company's telephone number is (818) 703-4000. This Proxy Statement and the proxy
card are being mailed to stockholders on or about March 29, 2000.
PROXIES
If any stockholder is unable to attend the Annual Meeting, the stockholder
may vote by proxy. The enclosed proxy is solicited by the Company's Board of
Directors (the "Board of Directors" or the "Board") and, when the proxy card is
returned properly completed, it will be voted as directed by the stockholder on
the proxy card. Stockholders are urged to specify their choices on the enclosed
proxy card. If a proxy card is signed and returned without choices specified, in
the absence of contrary instructions, the shares of Common Stock represented by
the proxy will be voted "FOR" Proposals 1, 2 and 3 and will be voted in the
proxyholders' discretion as to other matters that may properly come before the
Annual Meeting. Any proxy given pursuant to this solicitation may be revoked by
the person giving it at any time before its use by (i) delivering to the
Company's principal executive office, 1 WellPoint Way, Thousand Oaks, California
91362, Attention: Secretary, a written notice of revocation or duly executed
proxy bearing a later date, or (ii) attending the Annual Meeting and voting in
person.
The cost of soliciting proxies will be borne by the Company. The Company
expects to reimburse brokerage firms and other persons representing beneficial
owners of shares for their expenses in forwarding solicitation materials to such
beneficial owners. Proxies may be solicited by certain of the Company's
directors, officers and regular employees, without additional compensation, in
person, by telephone or facsimile. The Company's transfer agent, ChaseMellon
Shareholder Services, L.L.C., will assist in the solicitation of proxies as part
of its transfer agent services to the Company. The fee for such services will be
approximately $5,000 plus reasonable expenses.
WHO IS ENTITLED TO VOTE?
Only holders of Common Stock of record at the close of business on
March 17, 2000, the record date and time fixed by the Board of Directors, are
entitled to vote at the meeting. As of March 17, 2000, approximately 61,911,003
shares of the Company's Common Stock were issued and outstanding. Each
stockholder is entitled to one vote for each share of Common Stock held by such
stockholder. A majority of the shares of Common Stock will constitute a quorum
for the transaction of business at the Annual Meeting.
<PAGE>
QUORUM REQUIREMENT AND VOTING ISSUES
An affirmative vote of a majority of shares of Common Stock present and
voting at the meeting is required for approval of all items being submitted to
the stockholders for their consideration, other than the election of directors.
Directors are elected by a plurality of votes cast. An automated system
administered by the Company's transfer agent tabulates stockholder votes.
Abstentions will be treated as the equivalent of a negative vote for the purpose
of determining whether a proposal has been adopted and will have no effect for
the purpose of determining whether a director has been elected. Abstentions will
be counted in determining whether there is a quorum. As to certain matters other
than the election of directors, the New York Stock Exchange Rules generally
require when shares are registered in "street" or nominee name that their member
brokers receive specific instruction from the beneficial owners in order to vote
on such a proposal. If a member broker indicates on the proxy that the broker
does not have discretionary authority as to certain shares to vote on a
particular matter, the Company will not consider those shares as present and
entitled to vote with respect to those matters. The Company will, however, count
the shares represented by such "broker non-votes" in determining whether there
is a quorum.
Except to the extent that a stockholder withholds votes from the nominees,
the proxyholders named in the accompanying form of proxy, in their sole
discretion, will vote the proxy for the election of the nominees listed below as
directors of the Company.
The shares of Common Stock beneficially owned by the California HealthCare
Foundation (the "Foundation"), which as of March 15, 2000 owned 4,410,000 shares
(or approximately 7.1% of the outstanding Common Stock), will be voted in
accordance with the terms of existing voting agreements. See "Voting Agreements
with the California HealthCare Foundation."
Under the provisions of the Company's 401(k) Retirement Savings Plan (the
"401(k) Plan"), approximately 475,747 shares (as of March 15, 2000) of Common
Stock of the Company held by Vanguard Fiduciary Trust Company, the trustee of
the 401(k) Plan, may be voted at the meeting pursuant to confidential
instructions from participating employees.
VOTING AGREEMENTS WITH THE CALIFORNIA HEALTHCARE FOUNDATION
On May 20, 1996, Blue Cross of California ("BCC") and the Company's
predecessor, WellPoint Health Networks Inc., a Delaware corporation ("Old
WellPoint"), concluded a recapitalization (the "Recapitalization") in which,
among other actions, Old WellPoint merged with and into BCC and the surviving
entity changed its name to WellPoint Health Networks Inc. In connection with the
Recapitalization, BCC relinquished its rights under the Blue Cross License
Agreement dated January 1, 1991 between Blue Cross of California and the Blue
Cross Blue Shield Association (the "BCBSA"), which licenses the use of the Blue
Cross name and mark. The BCBSA and the Company entered into a License Agreement
(the "License Agreement"), pursuant to which the Company became the exclusive
licensee for the right to use the Blue Cross name and related service marks in
California and became a member of the BCBSA.
The License Agreement required that the Foundation enter into a voting trust
agreement (the "Voting Trust Agreement"), under which the Foundation deposited
into a voting trust (the "Voting Trust") the number of shares of the Company's
Common Stock sufficient to reduce the Foundation's holdings outside such Voting
Trust to a level not in excess of 50% of the voting power of the outstanding
shares of the Company's Common Stock. The shares held by the trustee under the
Voting Trust Agreement (the "Voting Trust Shares") generally must be voted
- with respect to the elections of directors, where the nominees have been
selected by the Nominating Committee (or, in certain instances, subsets of
the Board) in conformity with procedures set forth in the Company's
Bylaws, to support the position of the Board of Directors,
- with certain exceptions, on matters requiring a vote of at least an
absolute majority of all outstanding shares of Common Stock, as the
majority of non-Voting Trust Shares vote, and
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<PAGE>
- on all other matters, in the identical proportion in favor of or in
opposition to such matters as non-Voting Trust Shares vote.
With respect to the removal of directors, calling of stockholder meetings and
amendments of the Company's Certificate of Incorporation and Bylaws, where such
actions are opposed by the Board of Directors, the Foundation has also agreed
under the Voting Trust Agreement to support the position of the Board of
Directors. In addition, the Voting Trust Agreement requires that the Foundation,
through sales (which may involve exercises of registration rights granted to the
Foundation at the time of the Recapitalization) or additional deposits into the
Voting Trust, reduce its holdings outside the Voting Trust to 20% and 5% of the
outstanding Common Stock on and after June 12, 1998 and June 12, 1999,
respectively. As of March 15, 2000, approximately 1,311,181 shares held by the
Foundation were subject to the provisions of the Voting Trust Agreement.
With respect to those shares held by the Foundation in excess of the
Ownership Limit (as such term is defined in the Company's Restated Certificate
of Incorporation) that are not subject to the Voting Trust Agreement, the
Foundation also entered into a voting agreement (the "Voting Agreement"). The
Voting Agreement provided, among other things, that the Foundation, during the
period that it continued to own in excess of the Ownership Limit, would vote all
shares of the Company's Common Stock owned by it in excess of 5% of the
outstanding shares (except those shares held pursuant to the Voting Trust
Agreement) in favor of each nominee to the Board of Directors of the Company, or
under certain circumstances, other subsets of the Board, all as set forth in the
Company's Bylaws. With respect to the removal of directors, calling of
stockholder meetings and amendment of the Company's Certificate of Incorporation
and Bylaws, where such actions are opposed by the Board of Directors, the
Foundation also agreed under the Voting Agreement to support the position of the
Board of Directors. As of March 15, 2000, no shares of Common Stock were subject
to the Voting Agreement.
At the time of the Recapitalization, the "Ownership Limit" was established
as one share less than 5% of the Company's outstanding voting securities. In
December 1997, the Company and the BCBSA, in accordance with the provisions of
Article VII, Section 14(f)(2) of the Companys' Certificate of Incorporation,
agreed to modify the Ownership Limit to be the following:
- for any "Institutional Investor," one share less than 10% of the Company's
outstanding voting securities; and
- for any "Noninstitutional Investor," other than the Foundation, one share
less than 5% of the Company's outstanding voting securities. For these
purposes, "Institutional Investor" means any person if (but only if) such
person is (1) a broker or dealer registered under Section 15 of the
Securities Exchange Act of 1934 (the "Exchange Act"), (2) a bank as
defined in Section 3(a)(6) of the Exchange Act, (3) an insurance company
as defined in Section 3(a)(19) of the Exchange Act, (4) an investment
company registered under Section 8 of the Investment Company Act of 1940,
(5) an investment adviser registered under Section 203 of the Investment
Advisers Act of 1940, (6) an employee benefit plan, or pension fund which
is subject to the provisions of the Employee Retirement Income Security
Act of 1974 or an endowment fund, (7) a parent holding company, provided
the aggregate amount held directly by the parent, and directly and
indirectly by its subsidiaries which are not persons specified in
paragraphs (1) through (6), does not exceed one percent of the securities
of the subject class, or (8) a group, provided that all the members are
persons specified in paragraphs (1) through (7). In addition, every filing
made by such person with the SEC under Regulation 13D-G (or any successor
Regulation) under the Exchange Act with respect to such person's
beneficial ownership must contain a certification (or a substantially
similar one) that the WellPoint Common Stock acquired by such person was
acquired in the ordinary course of business and was not acquired for the
purpose of and does not have the effect of changing or influencing the
control of WellPoint and was not acquired in connection with or as a
participant
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<PAGE>
in any transaction having such purpose or effect. For such purposes,
"Noninstitutional Investor" means any person that is not an Institutional
Investor.
In December 1997, the Company and the BCBSA also agreed that the License
Agreement would be subject to termination in the event that any entity other
than the Foundation became the beneficial owner of 20% or more of WellPoint's
then-outstanding Common Stock or other equity securities which (either by
themselves or in combination) represent an ownership interest of 20% or greater.
WellPoint also agreed that it would not issue any class or series of securities
other than shares of Common Stock, non-voting, non-convertible debt securities
or such other securities as WellPoint may approve, provided that WellPoint will
provide the BCBSA with at least 30 days advance notice of the issuance of such
securities and the BCBSA will have the authority to determine how such
securities will be treated for purposes of determining a particular holder's
beneficial ownership of Common Stock.
In July 1999, WellPoint issued an aggregate of $299 million in principal
amount at maturity of Zero Coupon Convertible Subordinated Debentures Due 2019
(the "Debentures"). The BCBSA has determined that it will treat a holder of
Debentures at a particular time as beneficially owning shares of Common Stock
equal to the greater of
- the number of shares into which the Debentures could be converted upon
exercise of the conversion right of the Debentures at such time, and
- the number of shares of Common Stock which the holder would receive if
WellPoint paid the holder in shares of Common Stock upon exercise of the
holder's redemption right (assuming redemption of the Debentures at a
price equal to the original issue price plus then-accrued original issue
discount and based on the then-current market price of the Common Stock).
This deemed beneficial ownership will be aggregated with a Debentureholder's
other beneficial ownership of Common Stock for purposes of determining if the
Ownership Limit provisions have been violated. Any Debentureholder's deemed
beneficial ownership of Common Stock will fluctuate as a result of changes in
the market price of the Common Stock.
Each of the material agreements entered into in connection with the
Recapitalization was amended and restated on substantially similar terms at the
time of the Company's August 1997 reincorporation in Delaware (which was
approved by the stockholders at the Company's 1997 Annual Meeting).
4
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PROPOSAL NO. 1:
ELECTION OF DIRECTORS
The Board of Directors proposes the election of three Class I directors at
the Annual Meeting. The Company's Bylaws provide for nine directors. The Board
of Directors is divided into three classes, each serving three-year terms, as
provided in the Company's Restated Certificate of Incorporation. There are
currently three Class I directors. The three current Class I directors hold
office until this Annual Meeting. The one Class II director holds office until
the 2001 Annual Meeting and the three Class III directors hold office until the
2002 Annual Meeting. Unless otherwise instructed, the proxyholders will vote the
proxies received by them for the three Class I director nominees to the Board of
Directors named below. Mr. Birk has served as a director of the Company since
April 1993, Ms. Burke has served as a director of the Company since April 1997
and Ms. Sanders has served as a director of the Company since May 1996. If a
nominee is unable or declines to serve as a director at the time of the Annual
Meeting, the proxies will be voted for any nominee designated by the
proxyholders to fill the vacancy. However, it is not expected that any nominee
will be unable or will decline to serve as a director. The term of office of
each person elected as a Class I director will continue until the 2003 Annual
Meeting of Stockholders or until the director's successor has been elected.
NOMINEES FOR ELECTION AS DIRECTORS
The names of the nominees and certain biographical information about them
are set forth below:
<TABLE>
<S> <C>
ROGER E. BIRK, age 69, has been a director of the Company
[PHOTO] since April 1993. He is retired. Mr. Birk served as
President of the Federal National Mortgage Association
("Fannie Mae") from 1987 to 1992 and as Chairman and Chief
Executive Officer of Merrill Lynch & Co., Inc. from 1982 to
1986. Mr. Birk serves as a director of Penske Corporation,
Fannie Mae and Golden Bear Golf, Inc. Mr. Birk serves as the
chairperson of the Audit Committee of the Board and serves
on the Nominating & Governance Committee of the Board.
SHEILA P. BURKE, age 49, has been a director of the Company
[PHOTO] since April 1997. Since December 1996, Ms. Burke has been
an Executive Dean of the John F. Kennedy School of
Government, Harvard University. Previously in 1996,
Ms. Burke was a senior advisor to the Dole for President
Campaign. From 1986 until June 1996, Ms. Burke was the
chief of staff for the Office of the Republican Leader of
the United States Senate. Ms. Burke currently serves on the
Board of Directors of Chubb Corp. Ms. Burke serves on the
Audit Committee and the Compensation Committee of the Board.
ELIZABETH A. SANDERS, age 54, has been a director of the
[PHOTO] Company since May 1996. Ms. Sanders has been a consultant to
executive management from 1990 to the present. She was
employed by Nordstrom Inc. from 1971 to 1990 and served as
Vice President and General Manager of Nordstrom, Inc. from
1981 to 1990. Ms. Sanders is a founder of the National Bank
of Southern California and was on its board of directors
from 1983 to 1990. She currently serves on the following
boards of directors: Washington Mutual Inc., Wal-Mart
Stores, Inc., Wolverine Worldwide, Inc. and the Advantica
Restaurant Group, Inc. Ms. Sanders serves on the Audit
Committee and the Compensation Committee of the Board.
</TABLE>
The Board of Directors recommends that stockholders vote FOR the election of
each of the nominees set forth above.
5
<PAGE>
DIRECTORS OTHER THAN THE NOMINEES
The directors of the Company other than the nominees are as follows:
<TABLE>
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W. TOLIVER BESSON, age 55, a Class III director, has been a
[PHOTO] director of the Company since May 1996, was an independent
director of BCC from April 1994 until May 1996 and prior to
that served as an advisory director of BCC from 1989. He has
been a partner with the law firm of Paul, Hastings,
Janofsky & Walker since 1978. He served on its national
management committee from 1985 to 1990 and served on the
Board of Governors of the California State Bar from 1979 to
1980. He currently serves as a member of the management
committee of Cross Country Ventures (a venture capital
limited partnership). Pursuant to an agreement with the
California Department of Corporations (the "DOC") made at
the time of the Recapitalization, Mr. Besson has effectively
agreed not to serve as a director beyond April 2003.
Mr. Besson serves on the Audit Committee of the Board.
STEPHEN L. DAVENPORT, age 67, a Class II director, has been
[PHOTO] a director of the Company since May 1996, was an independent
director of BCC from 1991 until May 1996 and prior to that
served as an advisory director of BCC from 1989. He is
retired. From 1980 to 1995, he was president of D/A
Financial Group. Prior to that he was Senior Vice President
of Provident Mutual Life Insurance Company. Pursuant to an
agreement with the DOC made at the time of the
Recapitalization, Mr. Davenport has effectively agreed not
to serve as a director beyond April 2002. Mr. Davenport
serves on the Nominating & Governance Committee of the Board
and as the chairperson of the Compensation Committee of the
Board.
JULIE A. HILL, age 53, a Class III director, has been a
[PHOTO] director of the Company since March 1994. Since December
1998, she has been the President of Hiram-Hill Development,
a residential real estate development firm. Ms. Hill was
President and Chief Executive Officer of Costain Homes Inc.
("Costain") from January 1991 until November 1998. During
1998, Ms. Hill also served as Chairman of the Board of
Costain. Costain was a division of London-based Costain
Group PLC and built single-family detached residential
communities. Ms. Hill serves on the Compensation Committee
and as the chairperson of the Nominating & Governance
Committee of the Board.
LEONARD D. SCHAEFFER, age 54, a Class III director, has been
[PHOTO] Chairman of the Board of Directors and Chief Executive
Officer of the Company since August 1992. Mr. Schaeffer has
also been Chief Executive Officer of BCC since 1986 and
Chairman of its Board of Directors since 1989. From 1982 to
1986, Mr. Schaeffer served as President of Group
Health, Inc., an HMO in the midwestern United States. Prior
to joining Group Health, Inc., Mr. Schaeffer was the
Executive Vice President and Chief Operating Officer of the
Student Loan Marketing Association ("Sallie Mae"), a
financial institution that provides a secondary market for
student loans, from 1980 to 1981. From 1978 to 1980,
Mr. Schaeffer was the Administrator of the Health Care
Financing Administration ("HCFA"). HCFA administers the
Federal Medicare, Medicaid and Peer Review Organization
programs. Mr. Schaeffer serves as a director of
Allergan, Inc.
</TABLE>
BOARD MEETINGS AND COMMITTEES
The Board of Directors of the Company held a total of eight meetings
(including regularly scheduled meetings and special meetings) during 1999.
During the same period, the Board of Directors acted several times by unanimous
written consent. During 1999, each of the directors attended or participated in
75% or
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more of the aggregate number of meetings of the Board of Directors and
committees of the Board on which the director served. The Board of Directors has
an Audit Committee, a Compensation Committee and a Nominating & Governance
Committee.
The Audit Committee, which consists of Messrs. Birk and Besson and Mesdames
Burke and Sanders, met three times during 1999. The Audit Committee reviews
financial and auditing issues of the Company, recommends engagement of the
Company's independent auditors, approves the services performed by the Company's
independent auditors and reviews the Company's accounting principles, internal
control structure and policies and procedures. Mr. Birk is chairperson of the
Audit Committee.
The Compensation Committee, which consists of Mr. Davenport and Mesdames
Burke, Hill and Sanders, met three times during 1999. The Compensation Committee
reviews and makes recommendations to the Board concerning the Company's
executive compensation policy, bonus plans and stock incentive plans, and
approves the granting of stock options and awards to executive officers.
Mr. Davenport is chairperson of the Compensation Committee.
The Nominating & Governance Committee, which currently consists of Ms. Hill
and Messrs. Birk and Davenport, met two times during 1999. The Nominating &
Governance Committee recommends qualified candidates for election as directors
of the Company and generally reviews and makes recommendations to the Board
concerning governance issues and Board compensation policies. Ms. Hill is
chairperson of the Nominating & Governance Committee. Pursuant to the terms of
the License Agreement, until the Foundation ceases to own voting capital stock
of the Company in excess of the Ownership Limit specified in the Company's
Restated Certificate of Incorporation, the Nominating & Governance Committee
will be composed of three directors, each of whom will be an independent
director. One of the members of the Nominating & Governance Committee must be
one of the directors (or their replacement) designated by BCC prior to the
Recapitalization. The BCC-designated directors are Ms. Burke and Mr. Davenport.
Stockholders wishing to recommend candidates for consideration by the
Nominating & Governance Committee may do so by writing to the Secretary of the
Company at the Company's principal executive office, giving the candidate's
name, biographical affidavit and qualifications.
The Board of Directors has adopted certain internally developed guidelines
concerning its deliberations, conduct of meetings and other corporate governance
issues. Pursuant to these guidelines, the Board of Directors meets at least two
times per year in executive session. The Nominating & Governance reports
regularly to the full Board of Directors and makes recommendations regarding
governance issues. In considering nominations to the Board of Directors, the
Board takes into account several factors, including the skills and experience as
well as the independence of potential directors. The current Board of Directors
consists entirely of non-employee directors, other than Mr. Schaeffer.
There are currently two Class II vacancies on the Board of Directors.
Pursuant to the Company's Bylaws, the remaining directors intend to elect a new
director to fill one of these vacancies. Such election may occur prior to or
after the time of the Annual Meeting. In addition, in connection with the
Company's pending acquisition of Cerulean Companies, Inc., the Company has
agreed to nominate and elect to the Board of Directors a current director of
Cerulean. Such election will occur upon completion of this transaction, which
the Company currently expects to occur during 2000. Any directors so elected
would become Class II directors and would hold office until the 2001 Annual
Meeting of Stockholders.
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Exchange Act requires the Company's directors,
executive officers and holders of more than 10 percent of the Company's Common
Stock to file reports of ownership and changes in ownership with the Securities
and Exchange Commission ("SEC"). Officers, directors and greater than 10 percent
stockholders are required by SEC regulations to furnish the Company with copies
of all Section 16(a) forms they file.
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Based solely on a review of the copies of such forms received by it, or
written representations from certain reporting persons, the Company believes
that during the year ended December 31, 1999, the Company's officers, directors
and greater than 10 percent beneficial owners complied with all applicable
filing requirements, except Thomas C. Geiser and S. Louise McCrary (who served
as the Company's Chief Accounting Officer during 1999), each of whom reported
late one transaction occurring in 1998 due to an administrative error by Company
personnel assisting in such filings.
COMPENSATION OF DIRECTORS
All non-employee directors of the Company are entitled to the following
compensation: (i) $23,000 per year paid in quarterly installments; and
(ii) $1,300 per Board meeting and $900 per committee meeting, with the
chairperson of the committee receiving $1,100 per committee meeting. The meeting
fee is $500 for any telephonic Board or committee meeting. Non-employee
directors of the Company are also entitled to receive a Company-paid annual
physical examination.
Non-employee directors may elect to defer the receipt of all or a portion of
their fees. Under the Company's Board of Directors Deferred Compensation Plan
(the "Directors' Deferred Compensation Plan"), amounts deferred may be credited
with earnings at a rate equal to the actual rate of return of a range of
investment vehicles authorized by the Compensation Committee. Alternatively,
fees may be foregone in return for the grant of a non-statutory stock option.
The number of shares of Common Stock subject to such option is equal to the
dollar amount of cash compensation deferred divided by the product of the fair
market value of the Company's Common Stock on the option grant date and 25%. The
automatic stock awards discussed in the following paragraph may also be deferred
under the Directors' Deferred Compensation Plan.
On each date on which annual grants are made to officers of the Company
subject to the short-swing profit liability of Section 16 of the Exchange Act,
continuing non-employee directors who have served for at least six full calendar
months automatically receive 800 shares of Common Stock and a 2,000-share stock
option grant under the Company's 1999 Stock Incentive Plan. The 800-share grant
is immediately vested and the 2,000-share stock option grant vests on the third
anniversary of the grant date. Each newly elected non-employee director is also
entitled to receive a 8,000-share stock option grant on the date of such
director's election. This 8,000-share grant is immediately vested with respect
to 2,000 shares, with the remaining shares vesting ratably on the first three
anniversaries of the grant date.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The Compensation Committee of the Board of Directors is composed of
Stephen L. Davenport, Julie A. Hill, Sheila P. Burke and Elizabeth A. Sanders.
The Company's Compensation Committee does not include any present or former
officers or employees of the Company or any of its subsidiaries.
8
<PAGE>
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth the beneficial ownership of Common Stock of
the Company as of March 15, 2000 (or such other date as indicated) by (a) each
person known by the Company to own beneficially more than five percent of the
outstanding Common Stock; (b) the Chief Executive Officer of the Company;
(c) each of the four other most highly compensated executive officers of the
Company (determined for the year ended December 31, 1999) (collectively, with
the Chief Executive Officer, the "Named Executive Officers"); (d) each director
of the Company; and (e) all directors and executive officers as a group:
<TABLE>
<CAPTION>
NUMBER OF
SHARES TOTAL SHARES
NUMBER OF SHARES PERCENT OF SUPPLEMENTALLY BENEFICIALLY AND PERCENT
NAME AND ADDRESS BENEFICIALLY OWNED(1) CLASS(2) OWNED SUPPLEMENTALLY OWNED OF CLASS
- ---------------- --------------------- ---------- -------------- -------------------- --------
<S> <C> <C> <C> <C> <C>
The Prudential Insurance Company of 6,181,979 9.97% -- 6,181,979 9.97%
America(3) ............................
751 Broad Street
Newark, NJ 07102
Neuberger Berman LLC(4) ................. 5,633,862 9.1% -- 5,633,862 9.1%
605 Third Avenue
New York, NY 10158
FMR Corp.(5) ............................ 4,754,639 7.7% -- 4,754,639 7.7%
82 Devonshire Street
Boston, MA 02109
Bankers Trust Company(6) ................ 4,574,488 7.4% -- 4,574,488 7.4%
31 West 52nd Street
New York, NY 10019
California HealthCare Foundation ........ 4,410,000(7) 7.1% -- 4,410,000 7.1%
21550 Oxnard Street
Woodland Hills, CA 91367
T. Rowe Price Associates, Inc.(8) ....... 3,423,900 5.5% -- 3,423,900 5.5%
100 East Pratt Street
Baltimore, MD 21202
Leonard D. Schaeffer..................... 949,823(9) 1.5% 2,142(10) 951,965 1.5%
D. Mark Weinberg......................... 306,108(11) * 27,023(12) 333,131 *
Ronald A. Williams....................... 342,763(13) * 319(14) 343,082 *
David C. Colby........................... 160,710(15) * 18,214(16) 178,924 *
Joan E. Herman........................... 21,216(17) * 3,822(18) 25,038 *
W. Toliver Besson........................ 7,100(19) * 1,600(20) 8,700 *
Roger E. Birk............................ 17,702(21) * -- 17,702 *
Sheila P. Burke.......................... 6,400(22) * -- 6,400 *
Stephen L. Davenport..................... 9,500(23) * -- 9,500 *
Julie A. Hill............................ 7,915(24) * -- 7,915 *
Elizabeth A. Sanders..................... 6,400(25) * 800(26) 7,200 *
All executive officers and directors as a
group (13 persons)..................... 1,915,527(27) 3.0% 59,590 1,975,117 3.1%
</TABLE>
- ------------------------------
* Less than one percent.
(1) Except as indicated in footnotes to this table, the stockholders named in
this table are known to the Company to have sole voting and investment
power with respect to all shares of Common Stock shown as beneficially
owned by them, subject to community property laws where applicable. Shares
shown as beneficially owned by any person have been determined in
accordance with the requirements of Rule 13d-3 promulgated under the
Exchange Act.
(2) Calculation based on approximately 61,976,383 shares of Common Stock
outstanding as of March 15, 2000.
(3) Based on information provided to the Company by The Prudential Insurance
Company of America as of March 23, 2000.
(4) Based solely on a Schedule 13G report filed with the SEC prepared as of
December 31, 1999. Both Neuberger Berman LLC and its affiliate Neuberger
Berman Management, Inc. are deemed to be the beneficial owners of 5,633,862
shares since they exercise shared power to make decisions. Neuberger Berman
LLC and Neuberger Berman Management Company, Inc. serve as sub-advisor and
investment manager, respectively, of Neuberger Berman's various mutual
funds which hold such shares in
9
<PAGE>
the ordinary course of their business and not with the purpose nor with the
effect of changing or influencing the control of the issuer.
(5) Based solely on a Schedule 13G report filed with the SEC prepared as of
December 31, 1999. Fidelity Management & Research Company, an investment
advisor and a wholly owned subsidiary of FMR Corp., is deemed to be the
beneficial owner of 4,366,071 of such shares as a result of acting as
investment advisor to various investment companies registered under the
Investment Company Act of 1940 and as sub-advisor to Fidelity Americal
Special Situations Trust. Each of Edward C. Johnson 3d, FMR Corp. and the
investment companies has sole power to dispose of the 4,366,071 shares
owned by the investment companies. Neither FMR Corp. nor Edward C.
Johnson 3d has the sole power to vote or direct the voting of the shraes
held by the investment companies, which power resides in the boards of
trustees of the investment companies.
(6) Based solely on a Schedule 13G report filed with the SEC prepared as of
December 31, 1999. Bankers Trust Company, DB Alex. Brown LLC, Deutsche Bank
Securities Inc. and EA Strategies are indirect wholly-owned subsidiaries of
Taunus Corporation holding the Company's Common Stock. In addition, Alex.
Brown Investment Management LP, a limited partnership 50% owned by Taunus
Corporation, beneficially owns 3,749,630 shares of the Company's Common
Stock.
(7) As of March 15, 2000, approximately 1,311,181 shares were subject to the
Voting Trust Agreement administered by the Wilmington Trust Company. This
agreement contains provisions with respect to the voting of shares subject
to them on certain specified matters. See "Voting Agreements with the
California HealthCare Foundation."
(8) These securities are owned by various individuals and institutional
investors for which T. Rowe Price Associates, Inc. ("Price Associates")
serves as investment advisor with powers to direct investment and/or sole
power to vote the securities. For purposes of the reporting requirements of
the Exchange Act, Price Associates is deemed to be a beneficial owner of
such securities; however, Price Associates expressly disclaims that it is,
in fact, the beneficial owner of such securities.
(9) Includes 400 shares held in a Keogh account, 200 shares held in an
Individual Retirement Account ("IRA") and 53 shares held in a
401(k) account for the benefit of Mr. Schaeffer. Includes 797,573 shares
subject to presently exercisable options, options that become exercisable
within 60 days and restricted share right grants that vest within 60 days.
(10) Includes a restricted share right grant with respect to 1,500 shares that
vests on May 12, 2001. Includes deferred rights to 642 shares held in a
deferred compensation account for the benefit of Mr. Schaeffer.
(11) As of March 16, 2000. Includes 4,980 shares held in a 401(k) account for
the benefit of Mr. Weinberg and 237,716 shares subject to presently
exercisable options or options that become exercisable within 60 days.
(12) Represents deferred rights to 27,023 shares held in a deferred
compensation account for the benefit of Mr. Weinberg.
(13) Includes 176 shares held in a 401(k) account for the benefit of
Mr. Williams and 290,590 shares subject to presently exercisable options
or options that become exercisable within 60 days.
(14) Represents deferred rights to 319 shares held in a deferred compensation
account for the benefit of Mr. Williams.
(15) Includes 252 shares held in a 401(k) account for the benefit of Mr. Colby
and 121,783 shares subject to presently exercisable options, options that
become exercisable within 60 days and restricted share right grants that
vest within 60 days.
(16) Includes a restricted share right grant with respect to 12,500 shares that
vests on September 1, 2002. Includes a restricted share right grant with
respect to 1,000 shares made to Mr. Colby that vests on May 12, 2001 and a
restricted share right grant with respect to 4,000 shares that vest in
equal installments on August 18, 2000, 2001 and 2002. Includes deferred
rights to 714 shares held in a deferred compensation account for the
benefit of Mr. Colby.
(17) Includes 122 shares held in a 401(k) account for the benefit of
Ms. Herman and 19,970 shares subject to presently exercisable options,
options that become exercisable within 60 days and restricted share right
grants that vest within 60 days.
(18) Includes a restricted share right grant with respect to 1,875 shares that
vests in equal installments on June 1, 2000, 2001 and 2002. Includes
deferred rights to 1,947 shares held in a deferred compensation account
for the benefit of Ms. Herman.
(19) Includes 900 shares owned by the W. Toliver Besson Retirement Plan, of
which Mr. Besson is trustee, and 100 shares owned by Mr. Besson's wife.
Includes 4,000 shares subject to presently exercisable options.
(20) Includes deferred rights to 1,600 shares under the Company's Board of
Directors Deferred Compensation Plan. See "Compensation of Directors."
(21) Includes 4,000 shares subject to presently exercisable options.
(22) Includes 4,000 shares subject to presently exercisable options.
(23) Includes 1,000 shares held in an IRA for the benefit of Mr. Davenport and
4,741 shares owned by the Davenport Family Trust, of which Mr. Davenport
is trustee. Includes 3,759 shares subject to presently exercisable
options.
(24) Includes 4,000 shares subject to presently exercisable options.
(25) Includes 3,780 shares subject to presently exercisable options.
(26) Includes deferred rights to 800 shares under the Company's Board of
Directors Deferred Compensation Plan. See "Compensation of Directors."
(27) Includes 1,528,132 shares subject to presently exercisable options,
options that become exercisable within 60 days or restricted share right
grants that vest within 60 days.
10
<PAGE>
EXECUTIVE COMPENSATION AND OTHER INFORMATION
SUMMARY OF CERTAIN COMPENSATION
The following table provides certain summary information concerning
compensation paid or accrued by the Company and its subsidiaries to or on behalf
of the Company's Chief Executive Officer and each of the four other Named
Executive Officers for the years ended December 31, 1997, 1998 and 1999:
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM COMPENSATION
AWARDS
ANNUAL COMPENSATION --------------------------
------------------------------------------ SECURITIES
OTHER ANNUAL RESTRICTED UNDERLYING ALL OTHER
NAME YEAR SALARY ($) BONUS ($) COMPENSATION ($) STOCK ($) OPTIONS(#) COMPENSATION ($)(1)
- ---- -------- ---------- ---------- ---------------- ---------- ---------- -------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Leonard D. Schaeffer...... 1999 $999,992 $2,200,000 $ 4,887(2) 0 361,231 $133,557
Chairman and Chief 1998 977,951 1,150,000 4,727(2) $317,531(3) 143,350 105,814
Executive Officer 1997 890,387 630,000 3,757(2) 0 200,000 105,607
D. Mark Weinberg.......... 1999 $532,116 $ 400,000 0 0 113,141 $ 40,286
Executive Vice 1998 516,156 250,000 0 0 77,430 41,383
President, Individual 1997 492,948 240,000 $258,734(4) 0 100,000 51,023
and Small Group
Businesses
Ronald A. Williams........ 1999 $532,116 $ 562,000 $ 4,887(2) 0 121,155 $ 48,055
Executive Vice 1998 516,155 300,000 4,727(2) 0 85,874 46,260
President, Large Group 1997 489,424 285,000 204,701(4) 0 100,000 70,399
Businesses
David C. Colby(5)......... 1999 $423,154 $ 374,800 $ 3,900(2) $316,750(6) 45,000 $ 35,752
Executive Vice President 1998 405,654 300,000 289,056(7) 211,688(8) 42,000 24,176
and Chief Financial 1997 123,077 169,300(9) 33,877(10) 706,250(11) 116,673 138
Officer
Joan E. Herman (12)....... 1999 $366,962 $ 350,000 $ 38,293(13) 0 30,174 $ 27,416
Executive Vice 1998 195,192 192,525 121,663(14) $154,844(15) 30,000 9,437
President, Senior,
Specialty and
State-Sponsored Program
Businesses
</TABLE>
- ------------------------------
(1) For the year ended December 31, 1999, "All Other Compensation" includes the
following:
- Contributions on behalf of Leonard D. Schaeffer, D. Mark Weinberg, Ronald
A. Williams and David C. Colby in the amount of $8,500, $6,000, $7,500 and
$7,500, respectively, to the 401(k) plan to match 1999 pre-tax elective
deferral contributions (included under Salary) made by each to such plan;
- Contributions on behalf of Leonard D. Schaeffer, D. Mark Weinberg, Ronald
A. Williams, David C. Colby and Joan E. Herman in the amount of $101,150,
$29,570, $29,945, $25,042 and $24,518, respectively, to match 1999 pre-tax
elective deferral contributions (included under Salary) made by each to
WellPoint's deferred compensation plan; and
- Life insurance premiums paid on behalf of Leonard D. Schaeffer, D. Mark
Weinberg, Ronald A. Williams, David C. Colby and Joan E. Herman in the
amount of $23,907, $4,716, $10,610, $3,210 and $2,898, respectively.
(2) Represents financial and tax planning services provided by the Company.
(3) Represents a restricted share right grant of 4,500 shares vesting in equal
installments on May 12, 1999, 2000 and 2001. As of December 31, 1999, the
shares underlying this grant (1,500 of which were vested) had a fair market
value of approximately $296,719, not accounting for vesting restrictions.
The unvested shares underlying this grant are subject to forfeiture in
certain instances and to accelerated vesting upon a change in control.
Dividends will not be paid on any shares prior to the lapsing of vesting
restrictions.
(4) Represents a retention bonus paid pursuant to a management retention
agreement that terminated in April 1997.
(5) Mr. Colby joined the Company on September 1, 1997.
(6) Represents a restricted share right grant of 4,000 shares vesting in equal
installments on August 18, 2000, 2001 and 2002. As of December 31, 1999,
the shares underlying this grant (none of which were vested) had a fair
market value of approximately $263,750, not accounting for vesting
restrictions. The unvested shares underlying this grant are subject to
forfeiture in certain instances and to accelerated vesting upon a change in
control. Dividends will not be paid on any shares prior to the lapsing of
vesting restrictions.
(7) Represents reimbursement of relocation expenses.
11
<PAGE>
(8) Represents a restricted share right grant of 3,000 shares vesting in equal
installments on May 12, 1999, 2000 and 2001. As of December 31, 1999, the
shares underlying this grant (1,000 of which were vested) had a fair market
value of approximately $197,813, not accounting for vesting restrictions.
The unvested shares underlying this grant are subject to forfeiture in
certain instances and to accelerated vesting upon a change in control.
Dividends will not be paid on any shares prior to the lapsing of vesting
restrictions.
(9) Includes a sign-on bonus of $100,000.
(10) Includes reimbursement of relocation expenses of $31,662.
(11) Represents a restricted share right grant of 12,500 shares vesting on
September 2, 2002. As of December 31, 1999, the shares underlying this
grant had a fair market value of approximately $824,219, not accounting
for vesting restrictions. The unvested shares underlying this grant are
subject to forfeiture in certain instances and to accelerated vesting upon
a change in control. The unvested shares are also subject to pro rata
vesting under certain instances if Mr. Colby's employment with the Company
is terminated prior to September 2, 2002. Dividends will not be paid on
any shares prior to the lapsing of vesting restrictions.
(12) Ms. Herman joined the Company on June 1, 1998.
(13) Represents forgiveness of $25,000 of a relocation loan, financial and tax
planning services of $10,831, and reimbursement of relocation expenses of
$2,462.
(14) Represents reimbursement of relocation expenses of $117,877 and financial
and tax planning services of $3,786.
(15) Represents a restricted right grant of 2,500 shares vesting in equal
installments on June 1, 1999, 2000, 2001 and 2002. As of December 31,
1999, the shares underlying this grant (625 of which were vested) had a
fair market value of approximately $164,844, not accounting for vesting
restrictions. The unvested shares underlying this grant are subject to
forfeiture in certain instances and to accelerated vesting upon a change
in control. Dividends will not be paid on any shares prior to the lapsing
of vesting restrictions.
12
<PAGE>
OPTION/SAR GRANTS IN LAST FISCAL YEAR
The following table sets forth certain information with respect to stock
options granted to the Named Executive Officers during 1999. No stock
appreciation rights ("SARs") were granted in 1999.
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS
------------------------------
PERCENTAGE OF
NUMBER OF SHARES TOTAL OPTIONS
UNDERLYING GRANTED TO EXPIRATION GRANT DATE
NAME OPTIONS GRANTED EMPLOYEES EXERCISE PRICE DATE PRESENT VALUE(1)
- ---- ---------------- ------------- -------------- ------------ ----------------
<S> <C> <C> <C> <C> <C>
Leonard D. Schaeffer................. 140,000 7.34% $ 70.69 2/10/09 $3,622,008
42,792 2.24% $ 70.69 2/10/09 $1,107,085
42,791 2.24% $103.49 2/10/09 $ 703,471
42,791 2.24% $123.63 2/10/09 $ 541,670
12,787 0.67% $ 78.88 2/9/07 $ 371,118
19,391 1.02% $ 82.44 2/9/07 $ 600,691
45,469 2.39% $ 72.88 2/9/07 $1,254,599
15,209 0.80% $ 72.88 12/31/03 $ 419,653
D. Mark Weinberg..................... 60,000 3.14% $ 70.69 2/10/09 $1,552,278
20,787 1.09% $ 78.88 2/9/07 $ 603,303
4,139 0.22% $ 72.88 3/3/06 $ 114,205
28,215 1.48% $ 72.88 1/4/05 $ 778,520
Ronald A. Williams................... 60,000 3.14% $ 70.69 2/10/09 $1,552,278
4,161 0.22% $ 78.88 5/20/06 $ 120,765
20,901 1.10% $ 78.88 2/9/07 $ 606,612
17,656 0.93% $ 78.88 5/20/06 $ 512,432
13,167 0.69% $ 72.88 3/3/06 $ 363,309
5,270 0.28% $ 72.88 1/4/05 $ 145,412
David C. Colby....................... 45,000 2.36% $ 70.69 2/10/09 $1,164,209
Joan E. Herman....................... 30,000 1.57% $ 70.69 2/10/09 $ 776,139
174 0.01% $ 72.88 6/3/08 $ 4,801
</TABLE>
- ------------------------------
(1) Grant date present values were calculated using the Black-Scholes option
valuation model with the following assumptions:
<TABLE>
<C> <S> <C>
- Expected life of options.................................... Four years
- Volatility.................................................. 38.00%
- Dividend yield.............................................. 0%
- Risk-free interest rate:
For grants made on February 11, 1999...................... 4.82%
For grants made on March 1, 1999.......................... 4.95%
For grants made on June 1, 1999........................... 5.48%
For grants made on September 1, 1999...................... 5.67%
</TABLE>
The actual value, if any, which a Named Executive Officer may realize will
be based upon the difference between the market price of the Company's Common
Stock on the date of exercise and the exercise price. There is no assurance that
the actual realized value, if any, will be at or near the value estimated by the
Black-Scholes model. The Black-Scholes model is only one method of valuing
options, and the Company's use of the model should not be construed as an
endorsement of its accuracy.
The options shown for each individual may include annual grants of incentive
stock options and nonqualified stock options as well as so-called "reload"
grants of stock options resulting from a stock-for-stock option exercise. Reload
options are granted when a stock option is exercised with the payment of the
option price in the form of previously owned shares of the Company's Common
Stock. The first grant shown for each individual in the table is the annual
grant. Each annual grant vests in three equal annual installments beginning on
the first anniversary of the grant date. Each such grant contains provisions for
earlier vesting in full upon a change in control. With the exception of
Mr. Schaeffer, any additional grants shown represent reload stock options. These
reload options are immediately vested and retain the expiration date of the
original annual stock option grant. Mr. Schaeffer's grants made during 1999 also
include special grants to purchase an aggregate of 128,374 shares. See
"--Employment Contracts, Termination of Employment and Change in Control
Agreements--Employment Agreement with Leonard D. Schaeffer."
13
<PAGE>
AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR AND YEAR-END OPTION/SAR
VALUES
The following table sets forth certain information with respect to exercises
by the Named Executive Officers of stock options during 1999 and the value of
all unexercised employee stock options as of December 31, 1999 held by the Named
Executive Officers. No SARs were exercised or outstanding in 1999.
<TABLE>
<CAPTION>
NUMBER OF SHARES VALUE OF UNEXERCISED
UNDERLYING UNEXERCISED IN-THE-MONEY
OPTIONS AT FISCAL YEAR-END OPTIONS AT FISCAL YEAR-END(1)
SHARES ACQUIRED --------------------------- ------------------------------
NAME ON EXERCISE VALUE REALIZED EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ---- --------------- -------------- ----------- ------------- ------------- --------------
<S> <C> <C> <C> <C> <C> <C>
Leonard D.
Schaeffer.......... 143,467 $5,963,740 531,167 425,040 $11,379,363 $3,058,736.5
D. Mark Weinberg..... 94,368 3,638,355 204,269 133,333 3,392,412 1,480,306
Ronald A. Williams... 61,155 2,419,835 207,227 133,333 3,688,595 1,480,306
David C. Colby....... 0 0 91,783 111,890 1,020,345 716,219
Joan E. Herman....... 204 2,180 9,970 50,000 36,735 75,000
</TABLE>
- ------------------------
(1) In accordance with SEC rules, value at fiscal year-end is calculated as the
difference between (i) the aggregate trading price as of December 31, 1999
of all shares subject to the options, and (ii) the aggregate option exercise
price. The actual amount realized from unexercised options is dependent upon
the price of the Company's Common Stock at the time shares obtained upon
exercise of such options are sold and, as to unexercisable options, whether
restrictions on exercise of such options lapse.
PENSION PLANS
PENSION PLAN
The Company sponsors the WellPoint Health Networks Inc. Pension Accumulation
Plan (the "Pension Plan"), a cash balance plan that is designed to be a
qualified defined benefit pension plan under the Internal Revenue Code of 1986,
as amended (the "Internal Revenue Code"). The benefit payable under the Pension
Plan is generally equal to the amount of annual annuity that could be purchased
at age 65 (based on certain actuarial assumptions) with the balance of an
account that is credited with the following amounts for each calendar year after
1986: (i) 3% of the participant's compensation for that year, PLUS (ii) 1% of
the participant's compensation for that year, if the participant has at least
10 years of service, PLUS (iii) 1% of the participant's compensation for that
year if the participant has at least 20 years of service, PLUS (iv) interest on
the balance of such account at a rate equal to the 5-year Treasury Bill average
yield for the immediately preceding December (but not less than 2 1/2%). The
Pension Plan became effective on January 1, 1987 as a successor plan to the
Non-Contributory Retirement Program for Certain Employees of Blue Cross of
California (the "Prior Plan"). Certain participants in the Pension Plan are also
eligible to receive retirement benefits under the Prior Plan.
The Company also sponsors the Supplemental Pension Plan (the "Supplemental
Plan") of WellPoint Health Networks Inc. which provides additional benefits
payable out of general corporate assets to certain employees equal to the
benefits these employees cannot receive under the Pension Plan because of
Internal Revenue Code limits on benefits and restrictions on participation by
highly compensated employees.
The estimated annual benefit payable upon retirement at age 65 under the
Pension Plan and the Supplemental Plan for the Named Executive Officers as of
December 31, 1999 based on service and compensation to such date and as
projected at age 65 is: Leonard D. Schaeffer, $39,071 and $51,520; D. Mark
Weinberg, $56,091 and $161,446; Ronald A. Williams, $43,644 and $167,290; David
C. Colby, $26,148 and $79,148; and Joan E. Herman, $21,724 and $44,998.
Mr. Schaeffer is also entitled to an additional annual annuity of $5,135 from
the Prior Plan.
14
<PAGE>
SPECIAL EXECUTIVE RETIREMENT PLAN
The Company maintains a Special Executive Retirement Plan (the "SERP") with
respect to Mr. Schaeffer. The SERP, as amended February 10, 1999, provides that,
within 30 days of his retirement, Mr. Schaeffer will begin receiving an annual
benefit equal to two-thirds of his then-current "Target Annual Compensation,"
reduced by the benefits provided by the Pension Plan, the Prior Plan and
Supplemental Plan described above. Target Annual Compensation is defined as base
salary plus target annual incentive compensation. For purposes of the SERP, base
salary for any calendar month beginning after December 31, 1997 will be computed
in the following manner: (i) on each January 1 through January 1, 2003,
Mr. Schaeffer's base salary, starting with his base salary as of December 31,
1997, will be increased by five percent (5%), (ii) on any date after
December 31, 1997 and before January 2, 2003 that Mr. Schaeffer's actual base
salary is increased so that the cumulative increase in his actual base salary
since the most recent December 31 is more than five percent (5%), his base
salary will be increased by the actual percentage increase in his 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, his base salary will be increased in
the same percentage amount that his actual base salary is increased. The benefit
will be reduced by 6 1/4% per year for retirement before age 60. This retirement
benefit is to be paid in monthly installments for the greater of
Mr. Schaeffer's lifetime or a 10-year period, with payments, if any, made to
Mr. Schaeffer's designated beneficiary after Mr. Schaeffer's death. On
Mr. Schaeffer's death (or, if later, after retirement payments have been made
for 10 years), the SERP provides for a survivor benefit to be paid to his spouse
for her lifetime equal to 50% of the benefit that he would receive. The
Company's obligations under the SERP are secured by a trust to which the Company
makes annual, irrevocable contributions. Based upon fiscal 2000 base salary and
target annual incentive levels, the estimated annual benefit payable to
Mr. Schaeffer under the SERP upon retirement at age 65 is $1,070,941.
EMPLOYMENT CONTRACTS, TERMINATION OF EMPLOYMENT AND CHANGE IN CONTROL
ARRANGEMENTS
EMPLOYMENT AGREEMENT WITH LEONARD D. SCHAEFFER
In January 1997, Leonard D. Schaeffer entered into an employment agreement
with the Company which covers a five-year period that expires in January 2002,
but which will be extended automatically on January 22 of each year for an
additional year unless the Board of Directors elects to cease such automatic
extension. This employment agreement was amended as of September 1, 1997 and as
of February 10, 1999. Under Mr. Schaeffer's employment agreement, Mr. Schaeffer
is entitled to receive an annual base salary of not less than $850,000, which
can be adjusted upward as determined by the Board of Directors; provided,
however, that the base salary in each successive year may not be less than the
base salary in the preceding year. Mr. Schaeffer's annual base salary as of
March 15, 2000 was $1,100,000.
The employment agreement with Mr. Schaeffer provides that the Company will
provide long-term disability benefits equal to Mr. Schaeffer's then-current
annual base salary until he reaches age 65 if he continues to be considered
disabled during such period. In connection with the February 1999 amendment to
Mr. Schaeffer's employment agreement, the Company also agreed to provide Mr.
Schaeffer with certain additional benefits in the event that his employment is
terminated for any reason other than cause after he has qualified for early or
normal retirement from the Company. In such event, the Company has agreed to
(i) transfer ownership to Mr. Schaeffer of any automobile then provided to him
by the Company, (ii) provide financial counseling benefits for five
calendar years following his termination, and (iii) provide office space and
clerical support for a period of 60 months following his termination.
In addition, Mr. Schaeffer's employment agreement provides that, in the
event that he is constructively terminated or the Company terminates his
employment other than for cause, he will receive, in addition to payments under
the SERP described above, a lump-sum payment equal to 2.99 times his then-
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annual base salary plus an amount equal to 2.99 times his then-current annual
target incentive compensation. Mr. Schaeffer's annual target incentive
compensation for 2000 is $1,100,000. To the extent that any such payment (alone
or with other compensation payable to Mr. Schaeffer) would subject
Mr. Schaeffer to an excise tax under Section 4999 of the Internal Revenue Code,
the Company will make an additional cash payment to Mr. Schaeffer such that
Mr. Schaeffer's net after-tax compensation is not reduced by such excise tax. In
the event of such termination, he will continue to receive certain fringe
benefits for 48 months. In addition, Mr. Schaeffer will be entitled to a pro
rata portion of any bonus pursuant to the Company's bonus programs, and any
options granted to Mr. Schaeffer on or after January 22, 1997 will immediately
become exercisable. If the Company agrees to a change of control, the employment
agreement with Mr. Schaeffer provides that rights and privileges under the
agreement may not be affected. Mr. Schaeffer may elect to terminate his
employment with the Company upon 90 days' written notice to the Company. In such
event, Mr. Schaeffer will continue to receive his salary during the 90-day
notification period. In addition, Mr. Schaeffer will continue to receive health,
dental and life insurance and disability benefits for a six-month period.
The current employment agreement with Mr. Schaeffer replaces previous
employment agreements with BCC and the Company. At the time of the execution of
Mr. Schaeffer's current employment agreement in January 1997, the Company also
agreed that Mr. Schaeffer would receive 8,821 shares of the Company's Common
Stock upon termination of Mr. Schaeffer's employment with the Company for any
reason. At the time of the termination of certain cash-based performance units
in May 1996, the Company granted Mr. Schaeffer deferred share rights with
respect to an additional 55,366 shares of the Company's Common Stock. All of the
64,187 shares underlying these deferred share rights were issued to
Mr. Schaeffer in February 1999 in connection with the execution of the most
recent amendment to his employment agreement.
In connection with the issuance of such shares in February 1999, the Company
made an interest-free loan to Mr. Schaeffer of $2,243,670, representing the
federal and state tax obligations associated with the value of such shares.
Fifty percent of the principal balance of the loan will be forgiven provided
that Mr. Schaeffer remains with the Company through February 10, 2003. An
additional 25% of the principal balance will be forgiven if the fair market
value (as defined) of the Company's Common Stock is equal to or greater than
$103.49 on February 10, 2003; the entire remaining 50% of the loan will be
forgiven if the fair market value of the Common Stock is $123.63 on such date.
The entire outstanding principal balance of the note will also be forgiven upon
a change in control or if Mr. Schaeffer's employment with the Company is
terminated prior to February 10, 2003 by reason of his death, disability,
involuntary termination without cause or constructive termination.
In connection with the execution of the February 1999 amendment to Mr.
Schaeffer's employment agreement, the Company issued to Mr. Schaeffer a stock
option with respect to 128,374 shares. This option has an exercise price of
$70.69 per share (the fair market value on the date of grant) with respect to
42,792 shares, $103.49 per share with respect to 42,791 shares and $123.63 per
share with respect to 42,791 shares.
OFFICER SEVERANCE PLAN
The Company maintains an Officer Severance Plan for the benefit of officers
not otherwise covered by employment agreements or special officer severance
agreements. Each of Messrs. Williams, Weinberg and Colby and Ms. Herman
participates in this plan or has a separate agreement with the Company regarding
severance benefits. With respect to persons holding the title of Executive Vice
President, the Plan generally provides for a lump-sum payment, if an officer is
involuntarily terminated (other than for cause), equal to 12 months salary and
100% of the previous fiscal year's target bonus, plus continuation for
12 months health, dental, vision and life insurance paid by the Company. Each of
Messrs. Williams and Weinberg, in the event of involuntary termination (other
than for cause), is entitled to receive 24 months salary and 200% of the
previous fiscal year's target bonus plus benefits continuation for 24 months.
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RELOCATION LOANS
In connection with the purchase of a residence by Ms. Herman in 1998, the
Company made an interest-free loan of $100,000 to Ms. Herman, forgivable in four
annual installments of $25,000, so long as she remains employed by the Company.
If Ms. Herman terminates employment voluntarily or if the Company terminates her
employment for cause before the entire balance of the loan is forgiven, the
remaining unpaid, unforgiven balance would become due. As of March 15, 2000, the
outstanding principal balance of this loan was $75,000.
In connection with the purchase of a residence by Clifton R. Gaus, Executive
Vice President, the Company made an interest-free loan of $100,000 to Mr. Gaus
in 1999, forgivable in four annual installments of $25,000, so long as he
remains employed by the Company. If Mr. Gaus terminates employment voluntarily
or if the Company terminates his employment for cause before the entire balance
of the loan is forgiven, the remaining unpaid, unforgiven balance would become
due. As of March 15, 2000, the outstanding principal balance of this loan was
$75,000.
CHANGE IN CONTROL PLAN
The Company has adopted the WellPoint Health Networks Inc. Officer Change in
Control Plan (the "Change in Control Plan") to provide officers of WellPoint and
affiliates controlled by WellPoint with benefits in the event of a "Change in
Control." The Change in Control Plan defines a Change in Control as
- the acquisition, directly or indirectly by any person or related group of
persons, but other than WellPoint or a person that directly or indirectly
controls, is controlled by, or is under, control with the Company, of
beneficial ownership of securities of the Company that results in such
person or related group of persons beneficially owning securities
representing 40% or more of the combined voting power of the Company's
then-outstanding securities; provided that this provision does not apply
to an acquisition by the Foundation that either: (a) is on or before
May 20, 1996, or (b) is both (I) after May 20, 1996 but before the first
day thereafter, if any, that the Foundation's beneficial ownership is less
than 35% and (II) involves securities representing less than 50% (or, if
lower, the lowest percentage of beneficial ownership by the Foundation on
or after May 20, 1996 plus 10%) of the combined voting power of the
Company's then-outstanding securities;
- a merger, recapitalization, consolidation or similar transaction to which
WellPoint is a party, if (a) the beneficial owners of WellPoint's
securities immediately before the transaction, do not, immediately after
the transaction, have beneficial ownership of securities of the surviving
entity or parent thereof representing at least 60% of the combined voting
power of the then-outstanding securities of the surviving entity or
parent, and (b) the directors of WellPoint immediately prior to
consummation of the transaction do not constitute at least a majority of
the board of directors of the surviving entity or parent upon consummation
of the transaction;
- a change in the composition of the Board of Directors of WellPoint (the
"Board") over a period of thirty-six (36) consecutive months or less such
that a majority of the Board members ceases, by reason of one or more
contested elections for Board membership, to be comprised of individuals
who either (a) have been Board members since the beginning of such period
or (b) have been elected or nominated for election as Board members during
such period by at least a majority of the Board members described in
clause (a) who were still in office at the time the Board approved such
election or nomination; or
- the sale, transfer or other disposition of all or substantially all of the
Company's assets in complete liquidation or dissolution of WellPoint
unless (a) the beneficial owners of WellPoint's securities immediately
before the transaction have, immediately after the transaction, beneficial
ownership of securities representing at least 60% of the combined voting
power of the then-outstanding securities of the entity acquiring
WellPoint's assets, and (b) the directors of WellPoint immediately prior
to
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consummation of the transaction constitute a majority of the board of
directors of the entity acquiring WellPoint's assets after consummation of
the transaction.
Officers will be eligible to receive Change in Control Plan severance
benefits if the Company or any Affiliate (as defined in the Change in Control
Plan) involuntarily terminates (other than for cause) or constructively
discharges the officer within 36 months after a Change in Control. An officer is
deemed constructively discharged for purposes of the Change in Control Plan if,
after a Change in Control, the Company or any Affiliate significantly reduces
the officer's duties, responsibilities, status, titles or offices, reduces the
officer's aggregate salary and target bonus by more than 10%, requests the
officer to relocate further than 35 miles from the officer's place of employment
or fails to assume the Company's obligations under the plan. Severance payments
will consist of a base amount plus an outplacement benefit. The base amount is
2.75 times base salary plus 2.75 times target annual bonus in effect for an
Executive Vice President. The outplacement benefit consists of outplacement
services consistent with the Company's then-current policy. Each of
Mr. Weinberg, Mr. Williams, Mr. Colby and Ms. Herman currently participates in
the Change in Control Plan. Mr. Schaeffer does not participate.
The Change in Control Plan also provides that, if any person holding a title
of Senior Vice President or above receives compensation from the Company that
subjects such person to an excise tax under Section 4999 of the Internal Revenue
Code, the Company will make an additional payment to such person that, net of
all such taxes, fully reimburses the employee for the amount of such excise tax.
An officer who is to receive other severance benefits from an Affiliate will
not receive benefits under the Change in Control Plan unless the other severance
benefit plan so provides or the officer waives benefits under the other
severance benefit plan. The Compensation Committee may amend or terminate the
Change in Control Plan at any time; provided, that termination of the Change in
Control Plan or any amendment that adversely affects the rights of participants
will be effective no sooner than one year after the approval of such amendment
or termination by the Committee.
In addition to the benefits under the Change in Control Plan, options and
restricted share right awards granted under the Company's stock incentive plans,
including grants to the Named Executive Officers under the Company's 1999 Stock
Incentive Plan, contain provisions for immediate acceleration of vesting upon a
change in control (which is defined in substantially similar terms as in the
Change in Control Plan).
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REPORT OF THE COMPENSATION COMMITTEE
OF THE BOARD OF DIRECTORS
THE REPORT OF THE COMPENSATION COMMITTEE SHALL NOT BE DEEMED INCORPORATED BY
REFERENCE BY ANY GENERAL STATEMENT INCORPORATING BY REFERENCE THIS PROXY
STATEMENT INTO ANY FILING UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE
"SECURITIES ACT"), OR UNDER THE EXCHANGE ACT, EXCEPT TO THE EXTENT THAT
WELLPOINT SPECIFICALLY INCORPORATES THIS INFORMATION BY REFERENCE AND SHALL NOT
OTHERWISE BE DEEMED FILED UNDER SUCH ACTS.
The Compensation Committee (the "Committee") of the Board of Directors is
responsible for determining the compensation of the executive officers of the
Company, including the Named Executive Officers. In making its determinations,
the Committee receives advice from Fredric W. Cook & Co., compensation
consultants, and reviews appropriate decisions with all non-employee directors
who constitute a majority of the full Board of Directors. Three Committee
meetings were held during 1999.
COMPENSATION PHILOSOPHY
The Company's executive compensation program reflects the philosophy that
executives' rewards should be structured to closely align their interests with
those of the stockholders. The program emphasizes pay for performance and
stock-based incentives, and extends these concepts beyond the executive officers
to other employees in the interests of motivation, teamwork and fairness. Annual
earnings per share ("EPS") growth is the measure of short-term success and is
rewarded through the Management Bonus Plan (the "MBP"). Stockholder value (as
indicated by stock price appreciation) is the long-term measure and is rewarded
through stock options which are currently the sole form of long-term incentive
compensation. Stock ownership is an important element of the Company's
compensation philosophy, and there are guidelines for Company stock ownership
levels covering officers (including the Named Executive Officers) and
non-employee directors.
Compensation surveys and external competitiveness are used as tests for
reasonableness, but corporate, business unit and individual performance are the
primary determinants of individual pay amounts. The competitive market is viewed
to be the Company's competitors in the managed-care industry (which includes
some but not all of the companies that are included in the peer group indices
described under "Stock Performance" below) as well as companies in general
industry of similar market value, size, operating complexity and growth
potential, so that the Company can compete for the best talent across different
market segments.
PROGRAM OVERVIEW
The elements of the Company's executive compensation program in 1999
consisted of base salaries, annual cash incentives (under the MBP), stock
options and benefits. The mix of compensation for executive officers is weighted
more heavily toward performance-based incentives rather than base salaries as
position level increases.
BASE SALARIES
Base salaries for the Named Executive Officers were set based upon the
competitive market and individual responsibilities, experience and performance.
In 1999, the Named Executive Officers received merit-based salary increases. The
Committee believes that current base salaries for the Named Executive Officers
generally are between the competitive median and 75th percentile for comparable
positions, which is in accordance with the Company's pay-for-performance
philosophy.
ANNUAL INCENTIVES
The MBP is a goal-driven plan where participants, including all of the Named
Executive Officers, have the opportunity to earn annual cash bonus awards in
relation to specified target award levels defined as percentages of base
salaries. Target awards correspond to 100% goal achievement. They are intended
to
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result in approximately median-to-75th-percentile total annual compensation as
compared to the competitive market when combined with WellPoint base salaries.
An award pool or fund is determined based on Company-wide annual financial
performance and is allocated to individuals to reward teamwork, business-unit
performance, and individual accomplishments. The allocation is discretionary as
determined by the Committee, giving strong consideration to the Chief Executive
Officer's recommendations for positions other than his own.
Company financial performance is measured against an EPS growth goal
established by the Committee at the start of the year. This goal is based on
internal business-plan objectives. No awards are earned unless a specified EPS
threshold performance level is achieved. Overall, the Company exceeded its
financial goals for 1999, reflecting the combination of above-plan performance
in some business units and below-plan performance in others. There were also
significant strategic accomplishments during 1999, which included exceeding
enrollment targets and a 16% increase in revenue from 1998. As a result of 1999
performance, WellPoint was again named to FORBES magazine's Platinum List as one
of America's best large companies, and FORTUNE magazine identified WellPoint as
America's most admired health care company for the second year in a row.
STOCK OPTIONS
The Committee uses stock options as the primary long-term incentive award.
Stock options are currently granted on an annual schedule. They generally have
10-year terms and become vested in one-third cumulative installments on each of
the first three annual grant date anniversaries. Individual option grants are
based on grant guidelines designed to approximate the present value of median
competitive annual long-term incentives for comparable companies and positions.
Individual grants to the Named Executive Officers under the Company's 1994 Stock
Option/Award Plan (the predecessor plan to the Company's 1999 Stock Incentive
Plan) varied above and below the guidelines based upon the Committee's
evaluation of individual performance, past grant history and other relevant
factors. With the exception of reload grants and the special option grant to Mr.
Schaeffer (which is explained below), the Committee believes that the regular
1999 option grants for the Named Executive Officers generally are between the
competitive median and 75th percentile for comparable positions, and the
Committee intends to continue to use stock options in future years to provide
executives with competitive long-term incentive compensation opportunities.
CHIEF EXECUTIVE OFFICER COMPENSATION
Mr. Schaeffer did not receive a base salary increase in 1999. This was due
to the fact that his 1998 base salary increase was set as a two-year increase.
The Committee believes that Mr. Schaeffer's salary is in the median-to-75th
percentile competitive range for comparable positions. Mr. Schaeffer's annual
incentive bonus was $2,200,000 for 1999 performance, based on the Company
exceeding its EPS growth goals for the year and his leadership in accomplishing
critical strategic objectives. These include the accomplishments summarized
earlier in the annual incentive discussion plus successfully completing a major
public stock offering in July 1999. The Committee also awarded Mr. Schaeffer a
regular annual stock option grant that was set between the competitive median
and 75th percentile, based on the 1998 competitive market analysis.
As discussed under the caption "Employment Contracts, Termination of
Employment and Change in Control Arrangements--Employment Agreement with Leonard
D. Schaeffer," the Committee amended Mr. Schaeffer's employment agreement during
1999. In conjunction with this amendment, the Committee made a special stock
option grant and loan to Mr. Schaeffer intended to provide incentives to
Mr. Schaeffer to increase his stock ownership and to remain with WellPoint, and
to provide performance-based incentives for Mr. Schaeffer that are contingent on
increases in WellPoint's stock price.
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COMPLIANCE WITH INTERNAL REVENUE CODE SECTION 162(m)
Section 162(m) of the Internal Revenue Code generally disallows a tax
deduction to public companies for compensation in excess of $1 million paid to a
company's Chief Executive Officer or any of the four other most highly
compensated executive officers. Qualifying performance-based compensation is not
subject to the deduction limit if Internal Revenue Code requirements are met.
The Committee believes that stock options granted under the 1999 Stock Incentive
Plan at an exercise price of 100% of the fair market value of the underlying
Common Stock on the date of grant will qualify as performance-based
compensation. In addition, in 1999 the Company's stockholders approved the 1999
Executive Officer Annual Incentive Plan (the "Annual Incentive Plan"). The
Annual Incentive Plan is intended to allow the cash performance-based
compensation paid to the participants in such plan starting in 2001 (for
performance in 2000) to comply with the deductibility requirements of
Section 162(m).
The foregoing report has been furnished by the Compensation Committee of the
Board of Directors of WellPoint Health Networks Inc.
Stephen L. Davenport, Chairperson
Sheila P. Burke
Julie A. Hill
Elizabeth A. Sanders
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STOCK PERFORMANCE
THE STOCK PERFORMANCE GRAPH SHALL NOT BE DEEMED INCORPORATED BY REFERENCE BY
ANY GENERAL STATEMENT INCORPORATING BY REFERENCE THIS PROXY STATEMENT INTO ANY
FILING UNDER THE SECURITIES ACT OR UNDER THE EXCHANGE ACT, EXCEPT TO THE EXTENT
THAT WELLPOINT SPECIFICALLY INCORPORATES THIS INFORMATION BY REFERENCE, AND
SHALL NOT OTHERWISE BE DEEMED FILED UNDER SUCH ACTS.
In accordance with the regulations of the SEC, the following graph compares
the cumulative total stockholder return on the Company's Common Stock with the
cumulative total stockholder returns of the Standards & Poor's 500 stock index
and a Managed Care Peer Group (1). The comparison assumes the investment of $100
on December 31, 1994, and that all dividends were reinvested.
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<CAPTION>
MANAGED CARE
<S> <C> <C> <C>
WellPoint Peer Group S&P 500
12/31/94 $100.00 $100.00 $100.00
12/31/95 $110.30 $140.78 $137.58
12/31/96 $108.13 $139.25 $169.17
12/31/97 $132.92 $141.99 $225.61
12/31/98 $275.89 $166.49 $290.09
12/31/99 $209.10 $155.41 $351.13
</TABLE>
- ------------------------
(1) The Managed Care Peer Group is comprised of the following publicly traded
managed care companies: Aetna, Inc.; CIGNA Corporation; Coventry
Corporation; First Health Group Corp.; Foundation Health Systems, Inc.;
Humana Inc.; Mid Atlantic Medical Services, Inc.; Oxford Health
Plans, Inc.; PacifiCare Health Systems, Inc.; United HealthCare Corporation;
and WellPoint. The numbers provided above are weighted annually by market
capitalization of the companies comprising the Managed Care Peer Group.
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CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Pursuant to the requirements of the BCBSA in connection with the
Recapitalization, certain shares of the Common Stock owned by the Foundation are
subject to the terms of the Voting Trust Agreement. Pursuant to the Voting Trust
Agreement, as of March 15, 2000, the voting power of the Foundation was limited
to less than 5% of the voting power of the outstanding shares of WellPoint
Common Stock. WellPoint Common Stock owned by the Foundation above such limit is
required to be held in a voting trust and will be voted by the voting trustee
(i) with respect to elections and removal of directors, calling of stockholder
meetings and amendments of the WellPoint charter and bylaws, to support the
position of the Board of Directors, and (ii) with respect to other matters
generally to support the vote of the other stockholders. As of March 15, 2000,
approximately 1,311,181 shares of Common Stock (or approximately 2.1% of the
outstanding Common Stock) held by the Foundation were subject to the Voting
Trust Agreement. See "Voting Agreements with the California HealthCare
Foundation" for a more complete description of the restrictions in the Voting
Trust Agreement.
In connection with the Recapitalization, the Company and the Foundation also
entered into a Registration Rights Agreement. Under certain circumstances and
subject to certain limitations, the Registration Rights Agreement requires
WellPoint to effect under applicable securities laws the registration of shares
of WellPoint Common Stock held by the Foundation for sale to the public, as well
as permit the Foundation to participate in certain of such registrations that
WellPoint effects on its own initiative. The undertakings that the Foundation
made to the DOC in order to secure the DOC's approval of the Recapitalization
include annual distribution of approximately 5% of the value of its investment
assets beginning in 1997. In order to fund such required distributions, the
Foundation may sell shares of WellPoint. In November 1996, April 1997,
April 1998 and July 1999, the Company effected registrations pursuant to which
the Foundation sold 14,950,000 shares, 8,500,000 shares, 12,000,000 shares and
11,500,000 shares respectively, of WellPoint Common Stock to the public.
In July 1999, the Company purchased an aggregate of 2,000,000 shares of
Common Stock owned by the Foundation for a purchase price of $81.00 per share.
At the time of such purchase, the Company and the Foundation terminated the
Stock Purchase Agreement dated as of November 20, 1998.
Mr. Besson is a partner in the law firm of Paul, Hastings, Janofsky &
Walker, which has been retained by the Company to advise it on a variety of
matters. During 1999, approximately $64,000 was paid by WellPoint to such firm
for legal fees and disbursements.
Fredrick Davenport, CLU, ChFC, the son of Stephen L. Davenport, serves as an
insurance broker for Company-provided insurance and provides financial
counseling services to officers of the Company. In connection with such
services, Fredrick Davenport serves as the originating agent for certain life
insurance policies provided to officers by the Company. For life insurance
policies in force during 1999, a company in which Fredrick Davenport had an
ownership interest received commissions, expense reimbursements and other
amounts of approximately $37,000. Stephen L. Davenport has no equity or other
ownership interest in this entity.
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PROPOSAL NO. 2:
ADOPTION OF
AMENDMENT AND RESTATMENT OF
EMPLOYEE STOCK PURCHASE PLAN
GENERAL
At the 2000 Annual Meeting, the stockholders will be asked to approve an
amended and restated Employee Stock Purchase Plan (the "Amended Plan").
The amendments included in the Amended Plan, among other things, increase
the maximum number of shares that may be issued under the Employee Stock
Purchase Plan and provide the committee administering the Amended Plan with
additional flexibility in determining the fair market value of any shares
purchased and the maximum number of shares that may be purchased by any
individual in any offering period.
If the Company does not obtain stockholder approval of the Amended Plan, the
Company will continue to issue shares of Common Stock under the Employee Stock
Purchase Plan up to the previously approved maximum of 400,000 shares. The
Company currently anticipates that such maximum will be reached on or prior to
the expected issuance related to the semi-annual offering period ending
December 31, 2000. After such maximum has been reached, the Company will no
longer be able to issue shares under the Employee Stock Purchase Plan.
The description of the Amended Plan contained below is qualified in its
entirety by reference to the provisions of the Amended Plan, which is attached
as Appendix I to this Proxy Statement.
PURPOSE
The Employee Stock Purchase Plan is intended to enable the Company to
provide to eligible employees an opportunity to participate in the ownership of
the Company's Common Stock. The Employee Stock Purchase Plan is also intended to
qualify as an "employee stock purchase plan" as defined in Section 423 of the
Internal Revenue Code of 1986, as amended (the "Code").
The Employee Stock Purchase Plan is administered by a committee or
committees (the "Committee") appointed by the Board, consisting of two or more
members of the Board. The Committee currently consists of the members of the
Compensation Committee of the Board of Directors, Stephen L. Davenport,
Sheila P. Burke, Julie A. Hill and Elizabeth A. Sanders.
ADMINISTRATION
The Committee is generally authorized to construe and interpret the Employee
Stock Purchase Plan and to adopt rules and regulations for administering the
Employee Stock Purchase Plan as the Committee deems necessary.
The Company will pay all costs of the administration of the Employee Stock
Purchase Plan. Cash proceeds received from the issuance of awards under the
Employee Stock Purchase Plan will be used for general corporate purposes.
SHARES ISSUABLE UNDER THE EMPLOYEE STOCK PURCHASE PLAN
Stock subject to issuance under the Employee Stock Purchase Plan is the
Company's authorized but unissued or reacquired Common Stock. The Employee Stock
Purchase Plan previously received stockholder approval for the issuance of up to
400,000 shares of Common Stock, subject to future adjustment for certain changes
in capital structure. The Amended Plan increases the authorized number of shares
to 1,400,000 shares, subject to future adjustment for certain changes in capital
structure.
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If the Amended Plan were not approved, the Company would continue to issue
shares under the Employee Stock Purchase Plan in accordance with the original
limit on the number of shares that may be issued under the Employee Stock
Purchase Plan. The Company currently anticipates that this limit would otherwise
be exceeded at the time of the expected issuance related to the semi-annual
offering period ending December 31, 2000.
The market value of the Company's Common Stock as recorded on the New York
Stock Exchange as of March 15, 2000 was $63 1/2 per share.
Nothing in the Employee Stock Purchase Plan prevents the Company from
adopting other equity compensation programs for employees of the Company and its
subsidiaries including employees eligible to participate in the Employee Stock
Purchase Plan.
ELIGIBILITY AND TERMS
Under the Employee Stock Purchase Plan, eligible employees of the Company
are offered Common Stock for purchase through a series of successive offering
periods. The Committee determines the length of each offering period and may
provide for more than one purchase period within each offering period. Under the
Employee Stock Purchase Plan, no offering period may have a term exceeding
27 months. The purchase rights under the Plan (described in more detail below)
are exercised on the last business day of each purchase period within a
particular offering period. Currently, the Committee has established two
semi-annual offering periods beginning on January 1 and July 1 of each calendar
year.
Each employee of the Company as of the first day of the offering period is
eligible to participate in the Employee Stock Purchase Plan provided that (i)
any employee covered by a collective bargaining agreement is not eligible to
participate if the union representing such employee chooses not to participate
and (ii) the employee has completed any minimum service requirement (not to
exceed two years) specified by the Committee for such offering period. As of
March 15, 2000, approximately 11,347 employees (including 134 officers) were
eligible to participate in the Employee Stock Purchase Plan. The Employee Stock
Purchase Plan provides that no employee may be granted purchase rights to
purchase shares under the Employee Stock Purchase Plan if such person would,
immediately after such grant, own or hold outstanding options or other rights to
purchase stock possessing 5% or more of the total combined voting power or value
of all classes of the Company's stock.
On the first day of each offering period, each eligible participant is
granted a purchase right to purchase up to a fixed number of shares of Common
Stock determined as of such date by dividing the total amount anticipated to be
collected from such person during the offering period, together with any amount
carried over from any preceding offering period, by 100% of the fair market
value of the Company's Common Stock on the first day of the offering period and
multiplying the result by a constant number (which will not exceed one and
one-half) specified by the Committee for such offering period. The Committee
currently specifies that this constant number is one and one-half. Under the
Amended Plan, the Committee would have the discretion to determine the fixed
maximum number of shares, or the applicable formula to determine such number,
purchasable by any individual during such offering period. On the final day of
the offering period, the purchase right is exercised and each participant
purchases the full number of purchasable shares under such purchase right at a
price per share of Common Stock equal to the lower of (i) a percentage specified
by the Committee (but not less than 85%) of the fair market value on the first
day of the offering period or (ii) a percentage specified by the Committee (but
not less than 85%) of the fair market value on the purchase date. The Committee
has currently specified this percentage as 85%. Any amounts contributed by an
employee that are not applied to the purchase of Common Stock on a particular
purchase date because they are not sufficient to purchase a whole share are held
for purchase of Common Stock on the next purchase date. For purposes of the
Employee Stock Purchase Plan, the fair market value of the Common Stock is
generally the closing price on the New York
25
<PAGE>
Stock Exchange on the applicable date. Under the Amended Plan, the Committee
would have discretion to establish a procedure for determining the applicable
fair market value.
In its discretion, the Committee may determine that any shares of Common
Stock acquired under the Employee Stock Purchase Plan will be subject to
restrictions on transfer for a period of up to one year. The Committee may also
provide that, if any participant attempt to transfer shares held in escrow or
terminates employment while shares are held in escrow, the Company will have an
automatic right to repurchase the Shares at the lesser of the price originally
paid by the participant or the fair market value on the date of repurchase.
Payment for Common Stock under the Employee Stock Purchase Plan is effected
by means of authorized payroll deductions or such other means as the Committee
may authorize. The Committee may allow employees to deduct payroll deductions
through a flat dollar amount per payroll period or a percentage of a
participant's compensation during an offering period in one percent increments
(not to exceed 15%). The maximum contribution to the Plan per employee per year
is $21,250. In addition, no purchase right may permit the rights of a
participant to purchase stock under all "employee stock purchase plans" (as
defined in Section 423 of the Code) of the Company to accrue at a rate that
exceeds $25,000 of the fair market value of the Common Stock (determined at the
time that purchase right is granted) for each calendar year.
ADJUSTMENTS
If there is a change in the Common Stock due to a change in the capital
structure of the Company, the Committee will make appropriate adjustments to the
maximum number and class of shares subject to the Employee Stock Purchase Plan
and to the maximum number and class of shares issuable under outstanding
purchase rights. The Committee's determination will be conclusive.
CORPORATE TRANSACTIONS
Under the Employee Stock Purchase Plan, in the event of the disposition of
all or substantially all of the assets or outstanding capital stock of the
Company by means of a sale, reorganization or liquidation, each outstanding
purchase right under the Employee Stock Purchase Plan will automatically be
exercised immediately prior to completion of the applicable corporate
transaction, unless each purchase right is assumed pursuant to a written
agreement by the successor corporation or a parent or a subsidiary of such
successor.
TAX WITHHOLDING
The issuance of shares under the plan will be subject to the satisfaction of
any tax withholding requirements that may apply.
AMENDMENT OR TERMINATION
The Employee Stock Purchase Plan provides that the Board may alter, amend,
suspend or discontinue the Employee Stock Purchase Plan at any time, provided
that, without stockholder approval the Board may not (i) make any change to
increase the number of shares subject to the Employee Stock Purchase Plan
(unless necessary to effect the adjustments specified in the Employee Stock
Purchase Plan) or (ii) make any other change with respect to which the Board
determines that stockholder approval is required by applicable law or regulatory
standards.
26
<PAGE>
NEW PLAN BENEFITS
During the year ended December 31, 1999, the following persons purchased the
following number of shares under the Employee Stock Purchase Plan:
<TABLE>
<CAPTION>
NUMBER OF SHARES
NAME OR CATEGORY PURCHASED
- ---------------- ----------------
<S> <C>
Leonard D. Schaeffer........................................ 295
D. Mark Weinberg............................................ 295
Ronald A. Williams.......................................... 295
David C. Colby.............................................. 295
Joan E. Herman.............................................. 295
Current executive officers as a group (seven persons)....... 1,475
Non-executive Director group (six persons).................. --
All employees, including all current officers who are not
executive officers, as a group (approximately 10,593
persons).................................................. 91,925
</TABLE>
Elections by eligible employees to participate in the Employee Stock
Purchase Plan are discretionary and it is, therefore, impossible to determine
who will receive awards and in what amounts in the event that the Amended Plan
is approved.
FEDERAL INCOME TAX CONSEQUENCES
The following is only a summary of the Federal income tax consequences to
the participant and the Company with respect to issuances of Common Stock under
the Employee Stock Purchase Plan. Reference should be made to the applicable
provisions of the Code. In addition, this summary does not discuss the tax
consequences of a participant's death or the income tax laws of any city, state
or foreign country in which a participant may reside.
The Employee Stock Purchase Plan is intended to be an "employee stock
purchase plan" within the meaning of Section 423 of the Code. Under a plan which
so qualifies, no taxable income will be recognized by a participant, and no
deductions will be allowable to the Company, in connection with the grant or the
exercise of an outstanding purchase right. Taxable income will not be recognized
until there is a sale or other disposition of the shares acquired under the
Employee Stock Purchase Plan or in the event the participant should die while
still owning the purchased shares.
If the participant sells or otherwise disposes of the purchased shares
within one (1) year of the purchase date or within two (2) years after the start
date of the purchase period in which such shares were acquired, then the
participant will recognize ordinary income in the year of sale or disposition
equal to the amount by which the fair market value of the shares on the purchase
date exceeded the purchase price paid for those shares, and the Company will be
entitled to an income tax deduction, for the taxable year in which such sale or
disposition occurs, equal in amount to such excess.
If the participant sells or disposes of the purchased shares more than one
(1) year after the purchase date and more than two (2) years after the start
date of the purchase period in which such shares were acquired, then the
participant will recognize ordinary income in the year of sale or disposition
equal to the lesser of (i) the amount by which the fair market value of the
shares on the sale or disposition date exceeded the purchase price paid for
those shares or (ii) 15% of the fair market value of the shares on the start
date of that purchase period, and any additional gain upon the disposition will
be taxed as a long-term capital gain. The Company will not be entitled to any
income tax deduction with respect to such sale or disposition.
If the participant still owns the purchased shares at the time of death, the
lesser of (i) the amount by which the fair market value of the shares on the
date of death exceeds the purchase price or (ii) 15% of the
27
<PAGE>
fair market value of the shares on the start date of the purchase period in
which those shares were acquired will constitute ordinary income in the year of
death.
Contrary to its prior administrative positions, the Internal Revenue Service
has recently taken the position in some taxpayer company audits and certain
internal communications that the gain recognized upon the purchase of shares
under a qualified employee stock purchase plan constitutes wages subject to
FICA, Medicare and FUTA taxes. The issue is the subject of a pending court case.
ACCOUNTING TREATMENT
The following is a summary of certain accounting consequences awards under
generally accepted accounting principles. Under current accounting rules, the
issuance of Common Stock under the Employee Stock Purchase Plan will not result
in a compensation expense chargeable against the Company's reported earnings.
However, the Company must disclose, in pro forma statements to the Company's
financial statements, the impact the purchase rights granted under the Employee
Stock Purchase Plan, along with the impact of options granted under the
Company's stock option plans, would have upon the Company's reported earnings
were the value of those purchase rights treated as compensation expense.
VOTE REQUIRED FOR APPROVAL OF THE AMENDED PLAN
The affirmative vote of a majority of the shares of Common Stock represented
and voting at the Annual Meeting is necessary to approve the Amended Plan. The
Board believes the Amended Plan is in the best interests of the Company and its
stockholders.
THE BOARD OF DIRECTORS RECOMMENDS THAT THE STOCKHOLDERS VOTE FOR THIS PROPOSAL.
28
<PAGE>
PROPOSAL NO. 3:
RATIFICATION OF SELECTION OF INDEPENDENT PUBLIC ACCOUNTANTS
The firm of PricewaterhouseCoopers LLP served as the Company's independent
public accountants for the fiscal year ended December 31, 1999. The Board of
Directors has selected that firm to continue in this capacity for the current
fiscal year. Ratification by the stockholders will be sought by the Board of
Directors for the selection of PricewaterhouseCoopers LLP as independent public
accountants to audit the accounts and records of the Company for the fiscal year
ending December 31, 2000, and to perform other appropriate services.
THE BOARD OF DIRECTORS RECOMMENDS THAT STOCKHOLDERS VOTE FOR THE PROPOSAL TO
RATIFY PRICEWATERHOUSECOOPERS LLP AS INDEPENDENT PUBLIC ACCOUNTANTS OF THE
COMPANY FOR THE FISCAL YEAR ENDING DECEMBER 31, 2000.
A representative of PricewaterhouseCoopers LLP will be present at the Annual
Meeting to respond to appropriate questions and to make a statement if the
representative so desires.
OTHER MATTERS
The Company knows of no other matters to be submitted to this meeting. If
any other matters properly come before the meeting, the persons named in the
accompanying form of proxy will vote the shares represented by proxy as the
Board of Directors may recommend or as the proxyholders, acting in their sole
discretion, may determine.
STOCKHOLDERS PROPOSALS FOR 2001 ANNUAL MEETING
Stockholder proposals submitted pursuant to Rule 14a-8 under the Exchange
Act must be received by the Company at its principal executive office at 1
WellPoint Way, Thousand Oaks, California 91362 no later than November 23, 2000
to be considered for inclusion in the Proxy Statement for the 2001 Annual
Meeting of Stockholders, which is expected to be held on May 8, 2001. The
Company's management may exercise discretionary voting authority with respect to
any stockholder proposal which is not submitted pursuant to Rule 14a-8 for
inclusion in the Proxy Statement for the 2001 Annual Meeting of Stockholders if
such proposal is received by the Company after February 13, 2001.
ADDITIONAL INFORMATION
The audited financial statements of the Company for the year ended
December 31, 1999, a Management's Discussion and Analysis of Financial Condition
and Results of Operations and certain other information are included as
supplemental information to this Proxy Statement.
THE COMPANY WILL MAIL WITHOUT CHARGE TO ANY STOCKHOLDER, UPON WRITTEN OR
ORAL REQUEST, A COPY OF THE COMPANY'S ANNUAL REPORT ON FORM 10-K FOR THE YEAR
ENDED DECEMBER 31, 1999, INCLUDING THE FINANCIAL STATEMENTS, SCHEDULES AND A
LIST OF EXHIBITS. REQUESTS SHOULD BE SENT TO INVESTOR RELATIONS, WELLPOINT
HEALTH NETWORKS INC., 1 WELLPOINT WAY, THOUSAND OAKS, CALIFORNIA 91362. THE
COMPANY'S TELEPHONE NUMBER IS (818) 703-4000.
By Order of the Board of Directors
/s/ THOMAS C. GEISER
Thomas C. Geiser
SECRETARY
March 23, 2000
29
<PAGE>
WELLPOINT HEALTH NETWORKS INC.
SUPPLEMENTAL INFORMATION
TO 2000 PROXY STATEMENT
INDEX TO SUPPLEMENTAL INFORMATION
<TABLE>
<CAPTION>
PAGE
--------
<S> <C>
Executive Officers of the Registrant........................ 31
Market for the Registrant's Common Equity and Related
Stockholder Matters....................................... 32
Selected Financial Data..................................... 33
Management's Discussion and Analysis of Financial Condition
and Results of Operations................................. 34
Selected Quarterly Financial Information (Unaudited)........ 52
Report of Independent Accountants........................... 53
Consolidated Balance Sheets as of December 31, 1999 and
1998...................................................... 54
Consolidated Income Statements for the Three Years Ended
December 31, 1999......................................... 55
Consolidated Statements of Changes in Stockholders' Equity
for the Three Years Ended December 31, 1999............... 56
Consolidated Statements of Cash Flows for the Three Years
Ended December 31, 1999................................... 57
Notes to Consolidated Financial Statements.................. 58
</TABLE>
30
<PAGE>
EXECUTIVE OFFICERS OF THE REGISTRANT
Leonard D. Schaeffer, age 54, has been Chairman of the Board of Directors
and Chief Executive Officer of the Company since August 1992. Mr. Schaeffer has
also been Chief Executive Officer of Blue Cross of California since 1986 and
Chairman of its Board of Directors since 1989. From 1982 to 1986, Mr. Schaeffer
served as President of Group Health, Inc., an HMO in the midwestern United
States. Prior to joining Group Health, Inc., Mr. Schaeffer was the Executive
Vice President and Chief Operating Officer of the Student Loan Marketing
Association ("Sallie Mae"), a financial institution that provides a secondary
market for student loans, from 1980 to 1981. From 1978 to 1980, Mr. Schaeffer
was the Administrator of HCFA. HCFA administers the Federal Medicare, Medicaid
and Peer Review Organization programs. Mr. Schaeffer serves as a director of
Allergan, Inc.
D. Mark Weinberg, age 47, has been Executive Vice President, Individual and
Small Group Businesses of the Company since April 1999. From October 1995 until
March 1999, he has served as Executive Vice President, UNICARE Businesses of the
Company. From August 1992 until May 1996, Mr. Weinberg served as a director of
the Company. From February 1993 to October 1995, Mr. Weinberg was Executive Vice
President, Consumer and Specialty Services of the Company. Prior to
February 1993, Mr. Weinberg was Executive Vice President of BCC's Consumer
Services Group from December 1989 to February 1993 and was Senior Vice President
of Individual and Senior Services of BCC from April 1987 to December 1989. From
1981 to 1987, Mr. Weinberg held a variety of positions at Touche Ross & Co. From
1976 to 1981, Mr. Weinberg was general manager for the CTX Products Division of
PET, Inc.
Ronald A. Williams, age 50, has been Executive Vice President, Large Group
Businesses of the Company since April 1999. From October 1995 until March 1999,
he has served as Executive Vice President, Blue Cross of California Businesses
of the Company. From August 1992 until May 1996, Mr. Williams served as a
director of the Company. From February 1993 to October 1995, Mr. Williams was
Executive Vice President, Group and Network Services of the Company. Prior to
February 1993, Mr. Williams was Executive Vice President of BCC's Group Services
from May 1992 to February 1993. Prior to that time, Mr. Williams served as
Executive Vice President of BCC's Health Services and Products Group from
December 1989 to May 1992 and as BCC's Senior Vice President of Marketing and
Related Products from November 1988 to December 1989. From May 1987 to
November 1988 he was Vice President of Corporate Services of BCC. From
July 1984 to May 1987 he was Senior Vice President of Vista Health Corporation,
an alternative delivery system for outpatient psychological and substance abuse
services of which he was also a co-founder. Mr. Williams also serves as a
director of Syncor International Corporation.
Joan E. Herman, age 46, joined the Company in June 1998 as Executive Vice
President, Specialty Businesses. From April 1999 until March 2000, Ms. Herman
was Executive Vice President, Senior and Specialty Businesses. Since March 2000,
Ms. Herman has been Executive Vice President, Senior, Specialty and
State-Sponsored Programs Businesses. From 1982 until joining the Company,
Ms. Herman was with Phoenix Home Life Mutual Insurance Company, a mutual
insurance company, most recently serving as Senior Vice President. Ms. Herman is
a member of the Society of Actuaries and American Academy of Actuaries.
Clifton R. Gaus, age 57, joined the Company in March 1999 as Executive Vice
President and Chief Administrative Officer. From March 1998 until joining the
Company, Mr. Gaus was Senior Vice President, Research and Development of Kaiser
Permanente, a managed health care firm. From March 1997 to 1998, Mr. Gaus was a
health care consultant. From February 1993 until March 1997, Mr. Gaus worked in
the United States Department of Health and Human Services, where he served in
various positions, including the Administrator of the Agency for Health Care
Policy and Research and senior advisor for the Office of Assistant Secretary.
Mr. Gaus was the founder and initial President of the Association for Health
Services Research.
31
<PAGE>
David C. Colby, age 46, joined the Company in September 1997 as Executive
Vice President and Chief Financial Officer. From April 1996 until joining the
Company, Mr. Colby was Executive Vice President, Chief Financial Officer and
Director of American Medical Response, Inc., a health care services company
focusing on ambulance services and emergency physician practice management. From
July 1988 until March 1996, Mr. Colby was with Columbia/HCA Healthcare
Corporation, most recently serving as Senior Vice President and Treasurer. From
September 1983 until July 1988, Mr. Colby was Senior Vice President and Chief
Financial Officer of The Methodist Hospital in Houston, Texas.
Thomas C. Geiser, age 49, has been Executive Vice President, General Counsel
and Secretary of the Company since May 1996. From July 1993 until May 1996,
Mr. Geiser held the position of Senior Vice President, General Counsel and
Secretary. Prior to joining the Company, he was a partner in the law firm of
Brobeck, Phleger & Harrison from June 1990 to June 1993 and a partner in the law
firm of Epstein Becker Stromberg & Green from May 1985 to May 1990. Mr. Geiser
joined the law firm of Hanson, Bridgett, Marcus, Vlahos & Stromberg as an
associate in March 1979 and became a partner in the firm, leaving in May 1985.
MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's Common Stock has been traded on the New York Stock Exchange
under the symbol "WLP" since the Company's initial public offering on
January 27, 1993. The following table sets forth for the periods indicated the
high and low sale prices for the Common Stock.
<TABLE>
<CAPTION>
HIGH LOW
----------- -----------
<S> <C> <C>
Year Ended December 31, 1998
First Quarter............................................. 70 1/16 42 1/4
Second Quarter............................................ 74 61 15/16
Third Quarter............................................. 74 11/16 51 1/4
Fourth Quarter............................................ 87 51 7/16
Year Ended December 31, 1999
First Quarter............................................. 87 13/16 69 3/8
Second Quarter............................................ 97 66 13/16
Third Quarter............................................. 86 11/16 54 3/4
Fourth Quarter............................................ 67 5/8 48 1/4
</TABLE>
On March 15, 2000 the closing price on the New York Stock Exchange for the
Company's Common Stock was $63 1/2 per share. As of March 15, 2000, there were
approximately 555 holders of record of Common Stock.
The Company did not pay any dividends on its Common Stock in 1998 or 1999.
Management currently expects that all of WellPoint's future income will be used
to expand and develop its business. The Board of Directors currently intends to
retain the Company's net earnings during 2000.
During October and November 1999, the Company inadvertently sold
approximately 6,030 shares without registration under the Securities Act of 1933
to its employees participating in the Company's 401(k) Retirement Savings Plan.
These shares were sold for an aggregate of approximately $375,000.
32
<PAGE>
SELECTED FINANCIAL DATA.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------------------------------------
1999 1998 1997 1996 1995
---------- ---------- ---------- ---------- ----------
(IN THOUSANDS, EXCEPT PER SHARE DATA, MEMBERSHIP
DATA AND OPERATING STATISTICS)
<S> <C> <C> <C> <C> <C>
CONSOLIDATED INCOME STATEMENTS(A)
Revenues:
Premium revenue......................................... $6,896,857 $5,934,812 $5,068,947 $3,699,337 $2,776,760
Management services revenue............................. 429,336 433,960 377,138 147,911 61,151
Investment income....................................... 159,234 109,578 196,153 123,584 120,913
---------- ---------- ---------- ---------- ----------
7,485,427 6,478,350 5,642,238 3,970,832 2,958,824
Operating Expenses:
Health care services and other benefits................... 5,533,068 4,776,345 4,087,420 2,825,914 2,090,036
Selling expense........................................... 328,619 280,078 249,389 202,318 177,058
General and administrative expense........................ 1,075,449 975,099 836,581 543,541 327,951
Nonrecurring costs........................................ -- -- 14,535 -- 57,074
---------- ---------- ---------- ---------- ----------
6,937,136 6,031,522 5,187,925 3,571,773 2,652,119
---------- ---------- ---------- ---------- ----------
Operating Income............................................ 548,291 446,828 454,313 399,059 306,705
Interest expense.......................................... 20,178 26,903 36,658 36,628 --
Other expense, net........................................ 40,792 27,939 31,301 25,195 9,718
---------- ---------- ---------- ---------- ----------
Income from Continuing Operations before provision for
income taxes, extraordinary gain and cumulative effect of
accounting change......................................... 487,321 391,986 386,354 337,236 296,987
Provision for income taxes................................ 190,110 72,438 156,917 138,718 122,232
---------- ---------- ---------- ---------- ----------
Income from Continuing Operations before extraordinary gain
and cumulative effect of accounting change................ 297,211 319,548 229,437 198,518 174,755
Income (loss) from discontinued operations................ -- (88,268) (2,028) 3,484 5,234
Extraordinary gain from early extinguishment of debt,
net of tax.............................................. 1,891 -- -- -- --
Cumulative effect of accounting change, net of tax........ (20,558) -- -- -- --
---------- ---------- ---------- ---------- ----------
Net Income.................................................. $ 278,544 $ 231,280 $ 227,409 $ 202,002 $ 179,989
========== ========== ========== ========== ==========
Per Share Data(A)(B)(C):
Income from Continuing Operations before extraordinary
gain and cumulative effect of accounting change:
Earnings Per Share...................................... $ 4.50 $ 4.63 $ 3.33 $ 2.99 $ 2.63
Earnings Per Share Assuming Full Dilution............... $ 4.38 $ 4.55 $ 3.30 $ 2.99 $ 2.63
Extraordinary Gain:
Earnings Per Share........................................ $ 0.03 -- -- -- --
Earnings Per Share Assuming Full Dilution................. $ 0.02 -- -- -- --
Cummulative Effect Of
Accounting Change......................................... $ (0.31) -- -- -- --
Earnings Per Share Assuming Full Dilution................. $ (0.30) -- -- -- --
Income (Loss) from Discontinued Operations:
Earnings Per Share...................................... -- $ (1.28) $ (0.03) $ 0.05 $ 0.08
Earnings Per Share Assuming Full Dilution............... -- $ (1.26) $ (0.03) $ 0.05 $ 0.08
Net Income:
Earnings Per Share...................................... $ 4.22 $ 3.35 $ 3.30 $ 3.04 $ 2.71
Earnings Per Share Assuming Full Dilution............... $ 4.10 $ 3.29 $ 3.27 $ 3.04 $ 2.71
OPERATING STATISTICS (A)(D):
Loss ratio................................................ 80.2% 80.5% 80.6% 76.4% 75.3%
Selling expense ratio..................................... 4.5% 4.4% 4.6% 5.3% 6.2%
General and administrative expense ratio.................. 14.7% 15.3% 15.4% 14.1% 11.6%
Net income ratio.......................................... 3.8% 3.6% 4.2% 5.3% 6.3%
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------------------------------------------
1999 1998 1997 1996 1995
---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA(A):
Cash and investments...................................... $3,258,666 $2,764,302 $2,560,537 $1,849,814 $1,981,532
Total assets.............................................. $4,593,234 $4,225,834 $4,234,124 $3,149,378 $2,471,360
Long-term debt............................................ $ 347,884 $ 300,000 $ 388,000 $ 625,000 --
Total equity.............................................. $1,312,700 $1,315,223 $1,223,169 $ 870,459 $1,670,226
Cash dividends declared per common share(E)............... -- -- -- $ 10.00 --
MEDICAL MEMBERSHIP(F)....................................... 7,300,00 6,892,000 6,638,000 4,485,000 2,797,000
</TABLE>
- ----------------------------------
(A) Financial information prior to 1998 has been restated to present the
workers' compensation business as a discontinued operation.
(B) Per share data for all periods presented prior to 1996 have been recomputed
using 66,366,500 shares, the number of shares outstanding immediately
following completion of the Recapitalization. Per share data for the year
ended December 31, 1996 has been calculated using such 66,366,500 shares,
plus the weighted average number of shares issued during 1996 after the
Recapitalization.
(C) Per share data includes nonrecurring costs of $0.13 and $0.52 per basic and
diluted share for 1997 and 1995, respectively.
(D) The loss ratio represents health care services and other benefits as a
percentage of premium revenue. All other ratios are shown as a percentage of
premium revenue and management services revenue.
(E) The Company paid a $995.0 million special dividend in conjunction with the
Recapitalization which occurred on May 20, 1996. Management currently
expects that all of the Company's future income will be used to expand and
develop its business.
(F) Membership numbers are approximate and include some estimates based upon the
number of contracts at the relevant date and an actuarial estimate of the
number of members represented by each contract.
33
<PAGE>
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 December 31, 1999, WellPoint had approximately 7.3 million
medical members and approximately 32 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 medical
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 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. The Company markets
its products in California under the name Blue Cross of California and outside
of California under the name UNICARE. Historically, the Company's primary market
for managed care products has been California. The Company holds the exclusive
right in California to market its products under the Blue Cross name and mark.
SALE OF WORKERS' COMPENSATION SEGMENT
On July 29, 1998, WellPoint entered into a Stock Purchase Agreement (the
"Stock Purchase Agreement") by and between WellPoint and Fremont Indemnity
Company ("Fremont"). Pursuant to the Stock Purchase Agreement, Fremont acquired
all of the outstanding capital stock of UNICARE Specialty Services, Inc., a
wholly owned subsidiary of WellPoint ("UNICARE Specialty"). The transaction was
completed on September 1, 1998. The principal asset of UNICARE Specialty was the
capital stock of UNICARE Workers' Compensation Insurance Company ("UNICARE
Workers' Compensation"). The purchase price for the acquisition was the
statutory surplus (adjusted in accordance with the terms of the Purchase
Agreement) of UNICARE Workers' Compensation as of the date of the closing. The
purchase price based upon adjusted statutory surplus of UNICARE Workers'
Compensation as of September 1, 1998, the closing date of the transaction, was
approximately $110.0 million, after closing adjustments. Subsequent to
September 1, 1998, the Company and Fremont are jointly marketing integrated
workers' compensation and medical insurance products in the small employer group
market. Based upon the results of a post-closing audit, the Company made a
payment of approximately $6.7 million in final settlement of the purchase price.
NATIONAL EXPANSION AND OTHER RECENT DEVELOPMENTS
In an effort to pursue the expansion of the Company's business outside the
state of California, the Company acquired two businesses in 1996 and 1997, 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 March 1, 2000 acquisition
of Rush Prudential Health Plans and its pending transaction with Cerulean
Companies, Inc. ("Cerulean") are also components of this expansion strategy.
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 networks of hospitals, physicians and
other health care service providers, develop distribution channels for its
products and
34
<PAGE>
successfully convert acquired books of business to the Company's existing
information systems, which will require continued investments by the Company.
In response to rising medical and pharmacy costs the Company has recently
implemented premium increases with respect to certain of its products. The
Company will continue to evaluate the need for further premium increases, plan
design changes and other appropriate actions in the future in order to maintain
or restore profit margins. There can be no assurances, however, that the Company
will be able to take subsequent pricing or other actions or that any actions
previously taken or implemented in the future will be successful in addressing
any concerns that may arise with respect to the performance of certain
businesses.
ACQUISITION OF RUSH PRUDENTIAL
On March 1, 2000, the Company completed its acquisition of Rush Prudential
Health Plans ("Rush Prudential"). Rush Prudential offers a broad array of
products and services ranging from HMO products to traditional PPO products. The
acquisition has more than doubled the Company's current Illinois medical
membership to nearly 600,000 members. The transaction, which was financed with
cash, is valued at approximately $200 million, subject to certain post-closing
adjustments. This acquisition will be accounted for under the purchase method of
accounting.
PENDING ACQUISITION OF CERULEAN
On July 9, 1998, the Company entered into an Agreement and Plan of Merger
with Cerulean (See Note 22 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 medical
loss ratio than the Company's core businesses due to its higher percentage of
large group business and fewer managed care offerings. 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. The transaction is expected to be completed during
2000.
LEGISLATION
In September 1999, the California Legislature enacted and the California
Governor subsequently signed into law a number of health care reform measures.
Federal legislation enacted during the last four years seeks, among other
things, to insure the portability of health coverage and mandates minimum
maternity hospital stays. California legislation enacted during 1999, among
other things, establishes an explicit duty on managed care entities to exercise
ordinary care in arranging for the provision of medically necessary health care
services and establishes a system of independent medical review. In 1997, Texas
adopted legislation purporting to make managed care organizations such as the
Company liable for their failure to exercise ordinary care when making health
care treatment decisions. Similar legislation has also been enacted in Georgia.
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 and
administrative costs or decreasing the affordability of the Company's products.
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
35
<PAGE>
1900. As a result, the year 2000 presented a number of potential problems for
such systems, including potentially significant processing errors or failure.
Given the Company's reliance on its computer systems to process health care
transactions, the Company's results of operations could be materially adversely
affected by any significant errors or failures. Additionally, the year 2000
presented potential problems for other systems and applications containing
date-dependent embedded microprocessors ("non-IT systems"), such as elevators
and heating and ventilation equipment.
Beginning in 1997 and continuing throughout 1998 and 1999, the Company
developed and implemented a comprehensive plan designed to address the "year
2000" issue for its IT and non-IT systems and applications. This plan included a
detailed risk assessment of the Company's various computer systems, business
applications and other affected systems, the completion of remediation efforts,
on-going internal testing and third-party review of certain of its year 2000
remediation efforts.
As part of its year 2000 readiness efforts, the Company's various business
units formulated detailed contingency plans in order to address unexpected year
2000 readiness issues or issues beyond the Company's control. These contingency
plans 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 year ended December 31, 1999, the Company spent approximately
$7.1 million for remediation of its IT software systems and applications,
approximately $1.0 million for renovation or replacement of its
telecommunications equipment. The Company expensed year 2000 remediation costs
as incurred and funded these costs through cash flow from operations.
To date, the Company has not experienced any significant disruptions in its
operations as a result of year 2000 issues nor is the Company aware of any
significant year 2000-related disruptions experienced by any other company with
which the Company interacts on a regular basis. The Company will continue to
monitor its IT and non-IT systems throughout 2000 with respect to year 2000
compliance issues.
If the Company were to experience any year 2000 issues, either as a result
of a failure of its own systems or those of third parties with which it
interacts, the Company could be subject to a number of potential consequences
including, among others, inability to timely and accurately process health care
claims, collect customers' premiums and administrative fees, verify subscriber
eligibility, assess utilization trends or compile accurate financial data for
use by management. The Company is attempting to limit its exposure to any year
2000 issues by closely monitoring its on-going year 2000 readiness efforts,
assessing the year 2000 readiness efforts of various third party 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.
RESULTS OF OPERATIONS
The Company's revenues are primarily generated from premiums earned for
risk-based health care and specialty services provided to its members, fees for
administrative services, including claims processing and access to provider
networks for self-insured employers and investment income. Operating expenses
include health care services and other benefits expenses, consisting primarily
of payments for physicians, hospitals and other providers for health care and
specialty products claims; selling expenses for broker and agent commissions;
general and administrative expenses; interest expense; depreciation and
amortization expense; and income taxes.
The Company's consolidated results of operations for each of the years ended
December 31, 1999 and 1998, include a full year of earnings for the MMHD and GBO
acquired businesses. The results of operations for the year ended December 31,
1997 include ten months of earnings for the GBO, from the date of its
acquisition.
36
<PAGE>
The following table sets forth selected operating ratios. The loss ratio for
health care services and other benefits is shown as a percentage of premium
revenue. All other ratios are shown as a percentage of premium revenue and
management services revenue combined.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
Operating Revenues:
Premium revenue................................. 94.1% 93.2% 93.1%
Management services revenue..................... 5.9% 6.8% 6.9%
----- ----- -----
100.0% 100.0% 100.0%
Operating Expenses:
Health care services and other benefits (loss
ratio)........................................ 80.2% 80.5% 80.6%
Selling expense................................. 4.5% 4.4% 4.6%
General and administrative expense.............. 14.7% 15.3% 15.4%
</TABLE>
37
<PAGE>
MEMBERSHIP
The following table sets forth membership data and the percent change in
membership:
<TABLE>
<CAPTION>
AS OF DECEMBER 31,
--------------------- PERCENT
1999 1998 CHANGE
--------- --------- --------
<S> <C> <C> <C>
Medical Membership (a)(b):
Large Employer Group (c)
California
HMO..................................................... 1,650,350 1,416,569 16.5%
PPO and Other........................................... 1,790,671 1,422,340 25.9%
--------- ---------
Total California...................................... 3,441,021 2,838,909 21.2%
--------- ---------
Texas..................................................... 170,435 173,541 (1.8)%
Georgia................................................... 53,237 89,232 (40.3)%
Other States.............................................. 1,545,715 1,849,902 (16.4)%
--------- ---------
Total Large Employer Group............................ 5,210,408 4,951,584 5.2%
--------- ---------
Individual and Small Employer Group
California
HMO..................................................... 336,315 330,454 1.8%
PPO and Other........................................... 1,167,959 1,135,488 2.9%
--------- ---------
Total California...................................... 1,504,274 1,465,942 2.6%
--------- ---------
Texas..................................................... 168,517 100,610 67.5%
Georgia................................................... 30,100 22,156 35.9%
Other States.............................................. 150,638 137,425 9.6%
--------- ---------
Total Individual and Small Employer Group............. 1,853,529 1,726,133 7.4%
--------- ---------
Senior (d)
California
HMO..................................................... 28,207 17,143 64.5%
PPO and Other........................................... 168,059 159,005 5.7%
--------- ---------
Total California...................................... 196,266 176,148 11.4%
--------- ---------
Texas..................................................... 22,224 25,346 (12.3)%
Georgia................................................... 516 310 66.5%
Other States.............................................. 17,060 12,082 41.2%
--------- ---------
Total Senior.......................................... 236,066 213,886 10.4%
--------- ---------
Total Medical Membership.................................... 7,300,003 6,891,603 5.9%
========= =========
MEMBERSHIP BY NETWORK (E)
Proprietary Networks...................................... 5,342,740 4,537,000 17.8%
Affiliate Networks........................................ 1,189,813 1,411,097 (15.7)%
Non-Network............................................... 767,450 943,506 (18.7)%
--------- ---------
Total Medical Membership.................................... 7,300,003 6,891,603 5.9%
========= =========
California................................................ 1,217,176 886,000 37.4%
Other States.............................................. 1,382,390 1,694,119 (18.4)%
--------- ---------
TOTAL MANAGEMENT SERVICES MEMBERSHIP (F).................... 2,599,566 2,580,119 0.8%
========= =========
</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 states for employer groups is determined by the zip
code of the subscriber. Medical membership reflects a shift of 205,865
members as of December 31, 1998, representing employees (and their
dependents) of certain California-based companies who reside out of state
and were previously classified as California members.
(c) Large Employer Group membership includes 709,598 and 495,357 state-sponsored
program members as of December 31, 1999, and 1998, respectively.
(d) Senior membership includes members covered under both Medicare risk and
Medicare supplement products.
(e) Proprietary networks consist of California, Texas and other
WellPoint-developed networks. Affiliate 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.
(f) Medical membership includes management services members which are primarily
included within the Large Employer Group segment.
38
<PAGE>
SPECIALTY MEMBERSHIP
<TABLE>
<CAPTION>
AS OF DECEMBER 31,
----------------------- PERCENT
1999 1998 CHANGE
---------- ---------- --------
<S> <C> <C> <C>
Pharmacy(a).................................. 21,979,758 15,003,377 46.5%
Dental....................................... 2,452,727 3,148,528 (22.1)%
Utilization Management....................... 2,664,566 2,908,383 (8.4)%
Life......................................... 2,125,214 2,155,805 (1.4)%
Disability................................... 598,129 778,860 (23.2)%
Behavioral Health(b)......................... 2,156,642 743,507 190.1%
</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 December 31, 1999, WellPoint provided both claims processing
services and clinical management services to approximately 4.4 million
members.
(b) The increase in behavioral health membership is due to approximately 1.4
million additional California large employer group and certain
state-sponsored program members whose behavioral health benefits were
formerly not counted separately from medical benefits.
COMPARISON OF RESULTS FOR THE YEAR ENDED DECEMBER 31, 1999 TO THE YEAR ENDED
DECEMBER 31, 1998
The following table depicts premium revenue by business segment:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------
1999 1998
----------- -----------
(IN THOUSANDS)
<S> <C> <C>
Large Employer Group................................. $3,889,032 $3,467,742
Individual and Small Employer Group.................. 2,551,961 2,114,094
Corporate and Other.................................. 455,864 352,976
---------- ----------
Consolidated......................................... $6,896,857 $5,934,812
========== ==========
</TABLE>
Premium revenue increased 16.2%, or $962.1 million, to $6,896.9 million for
the year ended December 31, 1999 from $5,934.8 million for the year ended
December 31, 1998. The overall increase was due to an increase in insured member
months of 9.5% in the Large Employer Group and the Individual and Small Employer
Group business segments, and the implementation of price increases throughout
the Company's business segments. The Company expects that it will experience
some level of further membership dilution of its acquired MMHO and GBO members
during the first half of 1999 as it continues to increase prices and pursues its
strategy of motivating members to select managed care products.
39
<PAGE>
The following table depicts management services revenue by business segment:
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
-------------------
1999 1998
-------- --------
(IN THOUSANDS)
<S> <C> <C>
Large Employer Group.................................... $367,060 $388,301
Individual and Small Employer Group..................... 4,579 4,627
Corporate and Other..................................... 57,697 41,032
-------- --------
Consolidated............................................ $429,336 $433,960
======== ========
</TABLE>
Management services revenue decreased 1.1% for the year ended December 31,
1999 in comparison to the same period in the prior year. The overall decline is
due to a 4.0% decline in management services member months, offset by the
implementation of price increases in the Large Employer Group business segment.
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 $159.2 million for the year ended December 31, 1999
compared to $109.6 million for the year ended December 31, 1998, an increase of
$49.6 million. The increase was primarily due to an increase in net interest and
dividend income of $51.3 million to $196.5 million for the year ended
December 31, 1999 in comparison to $145.2 million for the year ended
December 31, 1998. This increase was primarily due to interest income of $23.8
million related to the Company's refund from the IRS (See "--Liquidity and
Capital Resources") and higher average investment balances in 1999 versus 1998.
Interest and dividend income for the year ended December 31, 1999 also included
a $1.3 million charge related to the partial termination of the Company's
interest rate swap agreements (See "--Liquidity and Capital Resources"). The
increase was also attributable to the recognition of an "other than temporary"
decline in value in accordance with SFAS No. 115 of $48.7 million in 1998
relating to the Company's equity holdings in FPA Medical Management Inc.
("FPA"). Net realized losses on investment securities totaled $33.8 million for
the year ended December 31, 1999 in comparison to a gain of $16.7 million for
the year ended December 31, 1998, excluding the FPA loss.
The loss ratio attributable to managed care and related products for the
year ended December 31, 1999 decreased to 80.2% compared to 80.5% for the year
ended December 31, 1998. The decline is primarily due to price increases
implemented throughout the year in the Company's Large Employer Group and
Individual and Small Employer Group business segments. In addition, the decline
was also attributable to membership attrition related to underperforming MMHD
and GBO acquired accounts in the Company's Large Employer Group business, which
have historically experienced a higher loss ratio than the Company's other
business.
Selling expense consists of commissions paid to outside brokers and agents
representing the Company. The selling expense ratio increased slightly to 4.5%
for the year ended December 31, 1999 from 4.4% from the year ended December 31,
1998.
The general and administrative expense ratio decreased to 14.7% for the year
ended December 31, 1999 from 15.3% for the year ended December 31, 1998. The
overall decline is primarily attributable to savings from the consolidation of
various offices outside of California, the integration of information systems
centers related to acquired businesses with the Company's information systems
and a reduction in Year 2000 remediation expense from 1998 levels, in addition
to economies of scale associated with membership and premium revenue growth in
relation to certain fixed general and administrative expenses.
Interest expense was $20.2 million for the year ended December 31, 1999
compared to $26.9 million for the year ended December 31, 1998. The decrease in
interest expense is related to the higher average debt balance in 1999 compared
to 1998, which was more than offset by a decrease in the effective interest rate
due to the issuance of the Company's Zero Coupon Convertible Subordinated
Debentures (the
40
<PAGE>
"Debentures"). The weighted average interest rate for all debt for the year
ended December 31, 1999, including the fees associated with the Company's
borrowings and interest rate swaps, was 7.04%.
The provision for income taxes increased $117.7 million, resulting in a tax
provision of $190.1 million for the year ended December 31, 1999. The increase
was primarily due to the effect of a private letter ruling received from the IRS
in September 1998, which resulted in a decrease in income tax expense of $85.5
million during 1998. Excluding the ruling, the provision for income taxes would
have been $157.9 million during the year ended December 31, 1998, representing
an overall tax rate consistent with the tax rate for 1999.
Effective January 1, 1999, the Company changed its method of accounting for
start-up costs related to the Company's provider network and distribution
channel development. The cumulative effect of this change of $20.6 million, net
of tax, was reflected in the results of operations for the year ended
December 31, 1999.
During the fourth quarter of 1999, the Board of Directors authorized the
repurchase of some or all of the Debentures, which were issued in July 1999 to
fund the purchase of 2 million WellPoint common shares from the California
HealthCare Foundation. The Company's income from continuing operations,
excluding the cumulative effect of accounting change and the extraordinary gain
for the year ended December 31, 1999 was $297.2 million, compared to $319.5
million for the year ended December 31, 1998. The decrease is primarily the
result of the impact of the private letter ruling received from the IRS in 1998.
Earnings per share from continuing operations, excluding the cumulative effect
of accounting change and the extraordinary gain, totaled $4.50 and $4.63 for the
year ended December 31, 1999 and 1998, respectively.
Earnings per share for the year ended December 31, 1999 is based upon
weighted average shares outstanding of 66.1 million, excluding potential common
stock, and 68.1 million shares, assuming full dilution. Earnings per share for
the year ended December 31, 1998 is based on 69.1 million shares excluding
potential common stock, and 70.3 million shares, assuming full dilution. The
decrease in weighted average shares outstanding primarily relates to the effect
of the repurchase of approximately 4.3 million shares during the year ended
December 31, 1999. In addition, for weighted average shares outstanding assuming
full dilution, the decline was partially offset by the impact of the assumed
conversion of the Debentures.
COMPARISON OF RESULTS FOR THE YEAR ENDED DECEMBER 31, 1998 TO THE YEAR ENDED
DECEMBER 31, 1997
The following table depicts premium revenue by business segment:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------
1998 1997
----------- -----------
(IN THOUSANDS)
<S> <C> <C>
Large Employer Group................................. $3,467,742 $2,999,422
Individual and Small Employer Group.................. 2,114,094 1,785,096
Corporate and Other.................................. 352,976 284,429
---------- ----------
Consolidated......................................... $5,934,812 $5,068,947
========== ==========
</TABLE>
Premium revenue increased 17.1%, or $865.9 million, to $5,934.8 million for
the year ended December 31, 1998 from $5,068.9 million for the year ended
December 31, 1997. The overall increase was primarily due to an increase in
insured member months of 12.1%, in the Large Employer Group and Individual and
Small Employer Group business segments, in addition to the implementation of
price increases in both segments. The additional two months of premium revenue
in 1998 related to the GBO accounted for $80.1 million or 9.3% of the overall
increase, or 17.1% of the increase in the Large Employer Group business segment.
41
<PAGE>
The following table depicts management services revenue by business segment:
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
-------------------
1998 1997
-------- --------
(IN THOUSANDS)
<S> <C> <C>
Large Employer Group.................................... $388,301 $327,753
Individual and Small Employer Group..................... 4,627 3,613
Corporate and Other..................................... 41,032 45,772
-------- --------
Consolidated............................................ $433,960 $377,138
======== ========
</TABLE>
Management services revenue increased 15.1%, or $56.9 million, to $434.0
million for the year ended December 31, 1998 from $377.1 million for the year
ended December 31, 1997. The increase was primarily due to a 14.7% increase in
management services member months, primarily in the Company's Large Employer
Group business segment. The additional two months of management services revenue
in 1998 related to the GBO accounted for $22.3 million or 39.2% of the overall
increase, or 36.9% of the increase in the Large Employer Group business segment.
Also contributing to the increase was the incremental impact of the addition of
a management services contract also in the Company's Large Employer Group
business segment with the State of Illinois effective as of July 1997.
Investment income decreased $86.6 million to $109.6 million for the year
ended December 31, 1998, compared to $196.2 million for the year ended
December 31, 1997. The decline was primarily attributable to recognition in 1998
of an "other than temporary" decline in value of $48.7 million relating to the
Company's equity holdings in FPA, which subsequently filed for bankruptcy.
Further contributing to the decrease between years was the initial gain of
$30.3 million recognized in 1997 related to the exchange of Health Partners Inc.
("HPI") stock for FPA. Excluding the effects of both the "other than temporary"
decline in value in 1998 and the gain related to the stock-for-stock merger with
FPA in 1997, investment income would have been $158.3 million and
$165.9 million, for 1998 and 1997, respectively. Including the loss on FPA in
1998, and the gain on HPI in 1997, the net realized loss on investment
securities for the year ended December 31, 1998 was $32.0 million compared to a
net realized gain of $64.3 million for the year ended December 31, 1997. Net
interest and dividend income increased $11.3 million to $145.2 million for the
year ended December 31, 1998 in comparison to $133.9 million for the year ended
December 31, 1997, primarily due to increased interest income resulting from the
investment portfolios of the acquired GBO businesses partially offset by lower
yields on invested assets in 1998 versus 1997. Net investment income also
included a loss of approximately $4.5 million in 1998 related to the Company's
interest rate swap agreements.
The loss ratio attributable to managed care and related products for the
year ended December 31, 1998 decreased slightly to 80.5% compared to 80.6% for
the year ended December 31, 1997. Excluding the GBO for the period prior to its
acquisition for the year ended December 31, 1998, the loss ratio would have been
80.0%. The decline is primarily due to membership attrition related to
underperforming MMHD and GBO acquired accounts, combined with the growth in the
Company's Medi-Cal business that experienced a lower loss ratio, primarily in
the Company's Large Employer Group business segment.
The selling expense ratio for the year ended December 31, 1998 decreased to
4.4% from 4.6% for the year ended December 31, 1997, largely due to the
acquisition of the GBO primarily in the Company's Large Employer Group business
segment, which has a lower selling expense ratio than the Company's existing
business due to the use of an internal sales force. Excluding the GBO for the
period prior to its acquisition for the year ended December 31, 1998, the
selling expense ratio would have been 4.5%. The Large Employer Group business
segment's growth in Medi-Cal and large employer group medical products had a
further impact on lowering the selling expense ratio as a result of the lower
selling costs associated with these products in comparison to the Company's
other products.
42
<PAGE>
The general and administrative expense ratio decreased slightly to 15.3% for
1998 compared to 15.4% for 1997. The GBO has historically experienced a higher
administrative expense ratio than the Company's traditional California-based
businesses due to the GBO's higher percentage of management services business.
The administrative expense ratio, excluding the GBO for the period prior to its
acquisition for the year ended December 31, 1998, was 15.0%. This decline in
comparison to the previous year is primarily due to savings from the
consolidation of various regional offices outside of California and the
integration of information system centers related to acquired businesses with
the Company's information systems, in addition to economies of scale associated
with membership and premium revenue growth in relation to fixed corporate
general and administrative expenses.
Interest expense decreased for the year ended December 31, 1998 to $26.9
million, from $36.7 million for the year ended December 31, 1997. The decrease
is primarily related to the repayment of indebtedness as the effective interest
rate paid by the Company remained relatively stable as a result of its interest
rate swaps. The Company's long-term indebtedness at December 31, 1998 was $300.0
million compared to $388.0 million at December 31, 1997. The weighted average
interest rate for all debt for the year ended December 31, 1998, including the
cost associated with the fee on the Company's credit agreements and its interest
rate swap agreements, was 7.6%. See "--Liquidity and Capital Resources."
The provision for income taxes decreased $84.5 million, or 53.9%, to $72.4
million for the year ended December 31, 1998. The decline was primarily due to
the effect of the private letter ruling received from the IRS in September 1998,
which resulted in a decrease in income tax expense of $85.5 million. (See
Note 8 to the Consolidated Financial Statements.) Excluding the ruling, the
provision for income taxes would have been $157.9 million, representing an
overall tax rate consistent with the prior period.
The Company's income from continuing operations before extraordinary gain
and cumulative effect of accounting change for the year ended December 31, 1998
was $319.5 million, compared to $229.4 million for the year ended December 31,
1997. Earnings per share from continuing operations before extraordinary gain
and cumulative effect of accounting change totaled $4.63 and $3.33 for the years
ended December 31, 1998 and 1997, respectively. Earnings per share from
continuing operations before extraordinary gain and cumulative effect of
accounting change assuming full dilution totaled $4.55 and $3.30 for the years
ended December 31, 1998 and 1997, respectively. Earnings per share from
continuing operations before extraordinary gain and cumulative effect of
accounting change for the year ended December 31, 1997 included non-recurring
costs of $0.13 per share (See Note 17 to the Consolidated Financial Statements).
Earnings per share for the year ended December 31, 1998 is based upon
weighted average shares outstanding of 69.1 million, excluding potential common
stock, and 70.3 million shares assuming full dilution. Earnings per share for
the year ended December 31, 1997 has been calculated using 68.8 million,
excluding potential common stock, and 69.5 million shares, assuming full
dilution. For the year ended December 31, 1998, the increase in weighted average
shares outstanding primarily relates to common stock issued through the
Company's stock option plans and the incremental impact in 1998 of the public
offering of 3.0 million shares of the Company's common stock in April 1997,
partially offset by the repurchase of 3.5 million shares during the latter part
of 1998.
FINANCIAL CONDITION
The Company's consolidated assets increased by $367.4 million, or 8.7%, from
$4,225.8 million as of December 31, 1998 to $4,593.2 million as of December 31,
1999. The increase in total assets was primarily due to growth in cash and
investments as a result of strong operating cash flow. Cash and investments
totaled $3.3 billion as of December 31, 1999, or 70.9% of total assets. Income
taxes recoverable declined approximately $179.9 million, resulting in a net
payable of $84.0 million at December 31, 1999. The primary reason for the
decrease was the receipt in the third quarter of 1999 of the IRS refund (See "--
Liquidity and Capital Resources").
43
<PAGE>
Overall claims liabilities increased $170.6 million, or 12.9%, from $1,320.6
million at December 31, 1998 to $1,491.2 million at December 31, 1999. This
increase was primarily due to an increase in insured membership from December
31, 1998 to December 31, 1999 of approximately 9.0% in the Company's Large
Employer Group and Individual and Small Employer Group businesses, in addition
to the timing of certain pharmacy claim payments.
As of December 31, 1999, $347.9 million was outstanding under the Company's
long-term debt facilities of which $147.9 million was related to the Company's
Debentures and $200.0 million was related to the Company's revolving credit
facility. As of December 31, 1998, $300.0 million was outstanding under the
Company's long-term debt facilities of which $280 million was related to the
Company's revolving credit facility and $20 million was due under a term note
issued in connection with the MMHD acquisition. Debt repayments during 1999 were
primarily funded from cash flow from continuing operating activities.
Stockholders' equity totaled $1,312.7 million as of December 31, 1999, a
slight decrease of $2.5 million from $1,315.2 million as of December 31, 1998.
The decline related primarily to stock repurchases made during the year totaling
$291.7 million, funded principally from the proceeds from the Company's issuance
of the Debentures and from income from operations, and a $25.9 million increase
in net unrealized losses on investment securities, net of tax, partially offset
by net income of $278.5 million for the year ended December 31, 1999 and
$33.8 million of stock issuances under the Company's stock option and purchase
plans.
During the year ended December 31, 1998, the Company's Board of Directors
approved a stock repurchase plan of up to eight million shares. During the year
ended December 31, 1999, the Board of Directors amended the plan to approve the
repurchase of an additional 4.7 million shares. At December 31, 1999,
approximately 5.0 million shares remained available for repurchase under that
plan.
LIQUIDITY AND CAPITAL RESOURCES
The Company's primary sources of cash are premium and management services
revenues received and investment income. The primary uses of cash include health
care claims and other benefits, capitation payments, income taxes, repayment and
repurchases of long-term debt, interest expense, broker and agent commissions,
administrative expenses, common stock repurchases and capital expenditures. In
addition to the foregoing, other uses of cash include costs of provider networks
and systems development, and costs associated with the integration of acquired
businesses.
The Company generally receives premium revenue in advance of anticipated
claims for related health care services and other benefits. The Company's
investment policies are designed to provide liquidity, preserve capital and
maximize total return on invested assets. Cash and investment balances
maintained by the Company are sufficient to meet applicable regulatory financial
stability and net worth requirements. As of December 31, 1999, the Company's
investment portfolio consisted primarily of investment grade fixed-maturity
securities. Approximately 10% of the portfolio was invested in equity
securities.
Net cash flow provided by continuing operating activities was
$829.4 million for the year ended December 31, 1999, compared with
$394.6 million in 1998. Cash flow from continuing operations for the year ended
December 31, 1999 was due primarily to income from continuing operations, before
the extraordinary gain and cumulative effect of accounting change, of
$297.2 million, and the cash refund from the IRS of $183.0 million. In addition,
cash flow from continuing operations was affected by increases in medical claims
payable of $195.7 million related to the growth of insured members, and the
timing of other operating liability payments.
Net cash used in continuing investing activities in 1999 totaled $531.1
million, compared with $21.6 million in 1998. The cash used in 1999 was
attributable primarily to the purchase of investments and property, plant and
equipment, net of sales proceeds of $3,456.3 million and $36.6 million,
respectively, the first quarter 1999 adjustment of $6.7 million of the sales
price of the Company's workers' compensation
44
<PAGE>
business, which was sold in 1998, in addition to the payment of approximately
$7.7 million related to the transition of Omni Healthcare members to the
Company's health plans. This was partially offset by the proceeds from
investments sold and matured of $2,976.2 million.
Net cash used in financing activities totaled $204.1 million in 1999,
compared to $241.9 million in 1998. Net cash used in financing activities in
1999 was primarily due to the repurchase of 4.3 million shares of the Company's
Common Stock totaling $291.7 million and repayments of long-term debt totaling
$149.8 million related to both the Company's revolving credit facility and
Debentures. These uses of cash were partially offset by the receipt of
approximately $201.0 million of proceeds related to the issuance of the
Debentures (See Note 7 to the Consolidated Financial Statements) in addition to
$36.6 million related to the issuance of Common Stock through the Company's
employee stock purchase and 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 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 $200.0 million and $280.0
million as of December 31, 1999 and 1998, respectively. The weighted average
interest rate for the year ended December 31, 1999, including the facility and
other fees and the effect of the interest rate swap agreements discussed in the
following paragraph, was 7.04%.
As a part of a hedging strategy to limit its exposure to interest rate
increases, in 1996 the Company entered into three interest rate swap agreements.
During 1999, the Company's 6.45%, $100.0 million fixed interest rate swap
agreement matured. In addition, on September 22 and October 1, 1999, the Company
entered into partial termination agreements to reduce the notional amount of the
Company's 7.05%, $150.0 million swap agreement to $50.0 million. All of the
remaining terms and conditions of the swap agreement remained unchanged, with
the exception of the fixed interest rate which was 7.06% as of December 31,
1999. The swap agreements are contracts to exchange variable-rate interest
payments (weighted average rate for 1999 of 5.4%) for fixed-rate interest
payments (weighted average rate for 1999 of 6.3%) without the exchange of the
underlying notional amounts. The agreements mature at various dates through
2006. In 1999, the Company entered into an additional interest rate swap
agreement with a notional amount of $100.0 million to exchange three month LIBOR
(the index associated with the aforementioned swap) for one month LIBOR (the
index associated with the Company's revolving credit facility) in order to hedge
against rising interest rates at the end of the year. This agreement matured
February 28, 2000.
The Company has entered into foreign currency forward exchange contracts for
each of the fixed maturity securities on hand as of December 31, 1999
denominated in foreign currencies in order to hedge asset positions with respect
to currency fluctuations related 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 IRS 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's
45
<PAGE>
liquidity for 1999 was positively affected by a reduction in income tax payments
of approximately $47.0 million. In August 1999, the Company received a cash
refund (including applicable accrued interest) of approximately $183.0 million,
which is reflected in the statement of cash flows for the year ended
December 31, 1999. The Company has also submitted a claim for refund with
respect to an additional $38.0 million.
In July 1999, the Company received proceeds of approximately $200.8 million
from the issuance of the Debentures. Of this amount, $162.0 million was used to
repurchase 2,000,000 shares of the Company's Common Stock from the California
HealthCare Foundation, and the remaining proceeds are available for general
corporate purposes. The Debentures accrue interest at a yield to maturity of
2.0% per year, compounded semi-annually. The Debentures will result in an
increase in accrued interest expense of approximately $3.1 million during the
one-year period immediately following their issuance, with such annual accrued
interest expense increasing until maturity. The Debentures may be converted into
Common Stock, at the option of the debentureholder, at a rate of 6.797 shares
per $1,000 principal amount at maturity. The Company may redeem the Debentures
for cash at any time after July 2, 2002. The applicable redemption price will be
the original issue price plus original issue discount accrued to the date of
redemption. The Debentureholders can cause the Company to repurchase the
Debentures on July 2, 2002, July 2, 2009 and July 2, 2014 at a price equal to
the original issue price plus original issue discount accrued to the date of
repurchase.
On October 6, 1999, the Board of Directors authorized the repurchase from
time to time of some or all of the Company's Debentures for cash. As of
December 31, 1999, the Company had repurchased $81.0 million aggregate principal
amount of the Debentures for a total purchase price of $49.8 million.
The Company intends to monitor its other cash needs before making additional
repurchases of its Debentures or its common stock under its current
authorizations.
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 December 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
December 31, 1999, no indebtedness had been issued pursuant to this registration
statement.
The Company believes that cash flow generated by operations and 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 (including the proposed merger with Cerulean)
for the foreseeable future.
NEW ACCOUNTING 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 SFAS No.
133, 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
2001. The Company is presently assessing the effect of SFAS No. 133 on the
financial statements of the Company.
46
<PAGE>
FACTORS THAT MAY AFFECT FUTURE RESULTS OF OPERATIONS
Certain statements contained herein, such as statements concerning potential
or future loss ratios, expected membership attrition as the Company continues to
integrate its recently acquired operations, the pending transaction with
Cerulean 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.
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 December 31, 2000. Broad latitude in
administering the applicable regulations is given to the agencies from which
WellPoint and Cerulean must seek these approvals. There can be no assurance that
these approvals will be obtained. As a condition to approval of the transaction,
regulatory agencies may impose requirements or limitations or costs on the way
that the combined company conducts business after consummation of the
transaction. If the Company or Cerulean were to agree to any material
requirements or limitations in order to obtain any approvals required to
consummate the transaction, such requirements or limitations or additional costs
associated therewith could adversely affect WellPoint's ability to integrate the
operations of Cerulean with those of WellPoint. A material adverse effect on
WellPoint's revenues and results of operations following completion of the
transaction could result.
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. The
Company has made significant purchases of treasury stock for this purpose
utilizing excess cash as well as the incurrence of additional debt. Upon
completion of the Cerulean transaction, WellPoint could incur significant
additional indebtedness to fund not only the cash portion of the transaction but
to fund any further repurchase of shares of WellPoint stock. Such additional
indebtedness may require that a significant amount of the Company's cash flow be
applied to the payment of interest, and there can be no assurance that the
Company's operations will generate sufficient cash flow to service the
indebtedness. Any additional indebtedness may adversely affect the Company's
ability to finance its operations and could limit its ability to pursue business
opportunities that may be in the best interests of the Company and its
stockholders.
As part of the Company's business strategy, over the past four years the
Company has acquired substantial operations in new geographic markets. As
discussed above, the Company has 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 of MMHD and GBO, the Company has
continued to work extensively on the integration of these businesses; however,
there can be no assurances regarding the ultimate success of the Company's
integration efforts or regarding the ability of the Company to maintain or
improve the results of operations of the businesses of completed or pending
transactions as the Company pursues its strategy of motivating the acquired
members to select managed care products. In order to implement this business
strategy, the Company has and will, among other things, need to continue to
incur considerable expenditures for provider networks, distribution channels and
information systems in addition to the costs associated with the integration of
these acquisitions. The integration of these complex businesses may result in,
among other things, temporary increases in claims inventory or other
service-related issues that may negatively affect the Company's relationship
with its customers and contribute to increased attrition of such customers. The
Company's results of operations could be adversely affected in the event that
the Company experiences such problems or is otherwise unable to implement fully
its expansion strategy.
47
<PAGE>
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 (or delegated local agencies) 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 affected 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 surplus
requirements by the California Department of Corporations, various other state
Departments of Insurance and the Blue Cross Blue Shield Association. Although
the Company believes that it is currently in compliance with all applicable
requirements, there can be no assurances that such requirements will not be
increased in the future.
The Company's future results will depend in large part on accurately
predicting health care costs incurred on existing business and upon the
Company's ability to control future health care costs through product and
benefit design, underwriting criteria, utilization management and negotiation of
favorable provider contracts. Changes in mandated benefits, utilization rates,
demographic characteristics, health care practices, provider consolidation,
inflation, new pharmaceuticals/technologies, clusters of high-cost cases, the
regulatory environment and numerous other factors are beyond the control of any
health plan provider and may adversely affect the Company's ability to predict
and control health care costs and claims, as well as the Company's financial
condition, cash flows 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. 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, cash flows 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. Additional increases
in competition (including competition from market contracts found in
internet-based products and services), could adversely affect the Company's
financial condition.
As a result of the Company's recent acquisitions, the Company operates on a
select geographic basis nationally 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
48
<PAGE>
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 attributable to product mix change, product design, competitive
pressure and greater regulatory restrictions applicable to the small employer
group market. In response to pressure on margins in 1998 and again in 1999, the
Company implemented price increases in certain of its managed care businesses.
While these price increases are intended to improve profitability, there can be
no assurance that this will occur. Subsequent unfavorable changes in the
relative profitability between the Company's various products could have a
material adverse effect on the Company's results of operations and on the
continued feasibility of the Company's geographic expansion strategy.
Substantially all of the Company's investment assets are in
interest-yielding debt securities of varying maturities or equity securities.
The value of fixed income securities is highly sensitive to fluctuations in
short- and long-term interest rates, with the value decreasing as such rates
increase or increasing as such rates decrease. In addition, the value of equity
securities can fluctuate significantly with changes in market conditions.
Changes in the value of the Company's investment assets, as a result of interest
rate fluctuations, can affect the Company's stockholders' equity which could
impact leverage ratios, credit ratings or compliance with covenants of its
revolving credit facility. There can be no assurances that interest rate
fluctuations will not have a material adverse effect on the financial condition
of the Company.
The Company is dependent on retaining existing employees and attracting
additional qualified employees to meet its future needs. The Company faces
intense competition for qualified information technology personnel and other
skilled professionals. 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.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company regularly evaluates its asset and liability interest rate risks
as well as the appropriateness of investments relative to its internal
investment guidelines. The Company operates within these guidelines by
maintaining a well-diversified portfolio, both across and within asset classes.
The Company has retained an independent consultant to advise the Company on the
appropriateness of its investment policy and the compliance therewith.
Asset interest rate risk is managed within a duration band tied to the
Company's liability interest rate risk. Credit risk is managed by maintaining
high average quality ratings and a well-diversified portfolio.
The Company's use of derivative instruments is generally limited to hedging
purposes and has principally consisted of forward exchange contracts intended to
minimize the portfolio's exposure to currency volatility associated with certain
foreign demoninated bond holdings. The Company's investment policy prohibits the
use of derivatives for leveraging purposes as well as the creation of risk
exposures not otherwise allowed within the policy.
Since 1996, the Company has from time to time entered into interest rate
swap agreements primarily by exchanging the floating debt payments due under its
outstanding indebtedness for fixed rate payments. The Company believes that this
allows it to better anticipate its interest payments while helping to manage the
asset-liability relationship.
49
<PAGE>
INTEREST RATE RISK
As of December 31, 1999, approximately 86% of the Company's investment
portfolio consisted of fixed income securities (maturing in more than one year),
the value of which generally varies inversely with changes in interest rates.
The Company has evaluated the net impact to the fair value of its fixed
income investments from a hypothetical change in all interest rates of 100, 200
and 300 basis points ("bp"). In doing so, optionality was addressed through
Monte Carlo simulation of the price behavior of securities with embedded
options. In addressing prepayments on mortgage backed securities, the model
follows the normal market practice of estimating a non-interest rate sensitive
component (primarily related to relocations) and an interest sensitive component
(primarily related to refinancings) separately. The model is based on
statistical techniques applied to historical prepayment and market data, and
then incorporates forward-looking mortgage market research and judgments about
future prepayment behavior. Changes in the fair value of the investment
portfolio are reflected in the balance sheet through stockholders' equity. Under
the requirements of SFAS No. 133, effective January 1, 2001, all derivative
financial instruments will be reflected on the balance sheet at fair value. The
results of this analysis as of December 31, 1999 are reflected in the table
below.
<TABLE>
<CAPTION>
INCREASE (DECREASE) IN FAIR VALUE
GIVEN AN INTEREST RATE INCREASE OF:
--------------------------------------
100 BP 200 BP 300 BP
-------- -------- --------
(IN MILLIONS)
<S> <C> <C> <C>
Fixed Income Portfolio........................ ($83.5) ($161.9) ($234.6)
</TABLE>
Results as of December 31, 1998 are reflected in the table. The table
reflects the change in valuation of interest rate swap agreements for the year
ended December 31, 1998 to the extent that the notional amount of interest rate
swap agreements exceeded the principal balance of the Company's floating rate
indebtedness.
<TABLE>
<CAPTION>
INCREASE (DECREASE) IN FAIR VALUE GIVEN
AN INTEREST RATE INCREASE OF:
-----------------------------------------
100 BP 200 BP 300 BP
--------- --------- ---------
<S> <C> <C> <C>
(In millions)
Fixed Income Portfolio........................ ($80.4) ($161.4) ($240.2)
Valuation of Interest Rate Swap Agreements.... 16.3 31.6 46.0
------ ------- -------
($64.1) ($129.8) ($194.2)
====== ======= =======
</TABLE>
The Company believes that an interest rate shift in a 12-month period of 100
bp represents a moderately adverse outcome, while a 200 bp shift is
significantly adverse and a 300 bp shift is unlikely given historical
precedents. Although the Company holds its bonds as "available for sale" for
purposes of SFAS No. 115, the Company's cash flows and the short duration of its
investment portfolio should allow it to hold securities to maturity, thereby
avoiding the recognition of losses, should interest rates rise significantly.
INTEREST RATE SWAP AGREEMENTS
The Company has entered into interest rate swap agreements in order to
reduce the volatility of interest expense resulting from changes in interest
rates. As of December 31, 1999, the Company had entered into $200 million of
floating to fixed rate swap agreements and also had $200 million of LIBOR-based
floating rate debt outstanding. The Company also receives a LIBOR-based payment
as a result of its swap arrangements, thereby eliminating the payment exposure
to changes in interest rates on that $200 million of outstanding debt. In 1999,
the Company entered into an additional interest rate swap agreement with a
notional amount of $100 million to exchange three month LIBOR (the index
associated
50
<PAGE>
with the aforementioned swap) for one month LIBOR (the index associated with the
revolving credit facility) in order to hedge against rising interest rates at
the end of the year.
EQUITY PRICE RISK
The Company's equity securities are comprised primarily of domestic stocks
as well as certain foreign holdings. Assuming an immediate decrease of 10% in
equity prices, as of December 31, 1999 and 1998, the hypothetical loss in fair
value of stockholders' equity is estimated to be approximately $31.4 million and
$27.4 million, respectively.
FOREIGN EXCHANGE RISK
The Company has generally hedged the foreign exchange risk associated with
its fixed income portfolio. The Company generally uses short-term foreign
exchange contracts to hedge the risk associated with certain fixed income
securities denominated in foreign currencies. Therefore, the Company believes
that there is minimal risk to the fixed-income portfolio due to currency
exchange rate fluctuations. The Company's hedging program related to its foreign
currency denominated investments is described in Note 15 to the Consolidated
Financial Statements.
The Company does not hedge its foreign exchange risk arising from equity
investments denominated in foreign currencies. Assuming a foreign exchange loss
of 10% across all foreign equity investments, the net hypothetical pre-tax loss
in fair value as of December 31, 1999 and 1998, is estimated to be $8.9 million
and $5.5 million, respectively.
51
<PAGE>
WELLPOINT HEALTH NETWORKS INC.
QUARTERLY SELECTED FINANCIAL INFORMATION
(UNAUDITED)
<TABLE>
<CAPTION>
FOR THE QUARTER ENDED
------------------------------------------------------
MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31,
(IN THOUSANDS, EXCEPT PER SHARE DATA AND 1999 1999 1999 1999
MEMBERSHIP DATA) ---------- ---------- ------------- ------------
<S> <C> <C> <C> <C>
Total revenues...................................... $1,771,245 $1,856,773 $1,891,513 $1,965,896
Operating income.................................... 130,756 132,720 136,614 148,201
Income before provision for income taxes............ 116,571 116,563 125,014 129,173
Income before extraordinary gain and cumulative
effect of accounting change....................... 71,110 71,079 76,233 78,789
Extraordinary gain, net of tax...................... -- -- -- 1,891
Cumulative effect of accounting change, net of
tax............................................... (20,558) -- -- --
---------- ---------- ---------- ----------
Net income.......................................... $ 50,552 $ 71,079 $ 76,233 $ 80,680
========== ========== ========== ==========
Per Share Data:
Earnings Per Share................................ $ 1.06 $ 1.05 $ 1.16 $ 1.24
========== ========== ========== ==========
Earnings Per Share Assuming Full Dilution......... $ 1.04 $ 1.03 $ 1.11 $ 1.20
========== ========== ========== ==========
Medical membership.................................. 6,913,107 7,014,456 7,174,363 7,300,003
========== ========== ========== ==========
</TABLE>
<TABLE>
<CAPTION>
FOR THE QUARTER ENDED
------------------------------------------------------
MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31,
(IN THOUSANDS, EXCEPT PER SHARE DATA AND 1998(A) 1998 1998 1998
MEMBERSHIP DATA) ---------- ---------- ------------- ------------
<S> <C> <C> <C> <C>
Total revenues...................................... $1,584,216 $1,561,819(B) $1,628,739 $1,703,576
Operating income.................................... 125,743 68,717(B) 124,651 127,717
Income before provision for income taxes............ 112,058 54,353(B) 112,304 113,271
Income from continuing operations................... 67,192 32,752(B) 152,208(C) 67,396
Loss from discontinued operations................... (8,678) (79,590) -- --
---------- ---------- ---------- ----------
Net income (loss)................................... $ 58,514 $ (46,838) $ 152,208 $ 67,396
========== ========== ========== ==========
Per Share Data:
Earnings Per Share................................ $ 0.96 $ 0.47(B) $ 2.20(C) $ 1.01
========== ========== ========== ==========
Earnings Per Share Assuming Full Dilution......... $ 0.95 $ 0.45(B) $ 2.16(C) $ 0.99
========== ========== ========== ==========
Medical membership.................................. 6,727,586 6,783,224 6,828,512 6,891,603
========== ========== ========== ==========
</TABLE>
- --------------------------
(A) Financial information for quarters prior to June 30, 1998 has been restated
to include the workers' compensation business as a discontinued operation.
(B) The second quarter of 1998 includes a charge of $48.7 million, before tax,
$29.0 million, after tax, or $.26 per basic and diluted share related to the
write off of the Company's investment in FPA Holdings, Inc.
(C) The third quarter of 1998 includes a tax benefit of $85.5 million, or $1.24
per basic and $1.21 per diluted share related to a favorable IRS ruling
regarding the deductibility of a cash payment made by the Company's former
parent company at the time of its May 20, 1996 Recapitalization.
52
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
January 31, 2000
To the Stockholders and Board of Directors
WellPoint Health Networks Inc.
In our opinion, the accompanying consolidated balance sheets and the related
consolidated income statements and consolidated statements of changes in
stockholders' equity and cash flows present fairly, in all material respects,
the financial position of WellPoint Health Networks Inc. and its subsidiaries
(the "Company") at December 31, 1999 and 1998, and the results of its operations
and cash flows for each of the three years in the period ended December 31,
1999, in conformity with accounting principles generally accepted in the United
States. These financial statements are the responsibility of the Company's
management; our responsibility is to express an opinion on these financial
statements based on our audits. We conducted our audits of these financial
statements in accordance with auditing standards generally accepted in the
United States, which require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for the opinion expressed above.
As discussed in Note 2 to the Consolidated Financial Statements, effective
January 1, 1999, the Company changed its method of accounting for start-up
costs.
PricewaterhouseCoopers LLP
Los Angeles, California
53
<PAGE>
WELLPOINT HEALTH NETWORKS INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------
1999 1998
(IN THOUSANDS, EXCEPT SHARE DATA) ---------- ----------
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents................................. $ 505,014 $ 410,875
Investment securities, at market value.................... 2,645,372 2,250,174
Receivables, net.......................................... 513,079 485,259
Deferred tax assets....................................... 92,774 121,881
Income taxes recoverable.................................. -- 95,902
Other current assets...................................... 59,725 70,349
---------- ----------
Total Current Assets.................................... 3,815,964 3,434,440
Property and equipment, net................................. 125,917 131,459
Intangible assets, net...................................... 96,298 93,937
Goodwill, net............................................... 307,647 336,155
Long-term investments, at market value...................... 108,280 103,253
Deferred tax assets......................................... 84,063 79,976
Other non-current assets.................................... 55,065 46,614
---------- ----------
Total Assets.......................................... $4,593,234 $4,225,834
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Medical claims payable.................................... $1,142,183 $ 946,502
Reserves for future policy benefits....................... 57,435 55,024
Unearned premiums......................................... 230,407 215,058
Accounts payable and accrued expenses..................... 440,412 342,713
Experience rated and other refunds........................ 223,066 249,685
Income taxes payable...................................... 84,026 --
Other current liabilities................................. 349,757 373,882
---------- ----------
Total Current Liabilities............................... 2,527,286 2,182,864
Accrued postretirement benefits............................. 68,903 67,058
Reserves for future policy benefits, non-current............ 291,626 319,056
Long-term debt.............................................. 347,884 300,000
Other non-current liabilities............................... 44,835 41,633
---------- ----------
Total Liabilities....................................... 3,280,534 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, 71,390,971 and 70,620,657 issued in 1999 and
1998, respectively...................................... 714 706
Treasury stock, at cost, 7,764,668 and 3,501,556 shares in
1999 and 1998, respectively............................. (481,331) (193,435)
Additional paid-in capital................................ 955,016 921,747
Retained earnings......................................... 854,642 576,598
Accumulated other comprehensive income.................... (16,341) 9,607
---------- ----------
Total Stockholders' Equity.............................. 1,312,700 1,315,223
---------- ----------
Total Liabilities and Stockholders' Equity............ $4,593,234 $4,225,834
========== ==========
</TABLE>
See the accompanying notes to the consolidated financial statements.
54
<PAGE>
WELLPOINT HEALTH NETWORKS INC.
CONSOLIDATED INCOME STATEMENTS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------
1999 1998 1997
---------- ---------- ----------
(IN THOUSANDS, EXCEPT EARNINGS PER
SHARE)
<S> <C> <C> <C>
Revenues:
Premium revenue........................................... $6,896,857 $5,934,812 $5,068,947
Management services revenue............................... 429,336 433,960 377,138
Investment income......................................... 159,234 109,578 196,153
---------- ---------- ----------
7,485,427 6,478,350 5,642,238
Operating Expenses:
Health care services and other benefits................... 5,533,068 4,776,345 4,087,420
Selling expense........................................... 328,619 280,078 249,389
General and administrative expense........................ 1,075,449 975,099 836,581
Nonrecurring costs........................................ -- -- 14,535
---------- ---------- ----------
6,937,136 6,031,522 5,187,925
---------- ---------- ----------
Operating Income............................................ 548,291 446,828 454,313
Interest expense.......................................... 20,178 26,903 36,658
Other expense, net........................................ 40,792 27,939 31,301
---------- ---------- ----------
Income from Continuing Operations before Provision for
Income Taxes, Extraordinary Gain and Cumulative Effect
of Accounting Change.................................... 487,321 391,986 386,354
Provision for income taxes................................ 190,110 72,438 156,917
---------- ---------- ----------
Income from Continuing Operations before Extraordinary......
Gain and Cumulative Effect of Accounting Change........... 297,211 319,548 229,437
Discontinued Operations:
Loss from Workers' Compensation
Segment, net of tax benefit of $6,959 and $2,126,
respectively............................................ -- (12,592) (2,028)
Loss on disposal of Workers' Compensation
Segment, net of tax benefit of $33,022.................. -- (75,676) --
---------- ---------- ----------
Loss from Discontinued Operations........................... -- (88,268) (2,028)
Extraordinary Gain from Early Extinguishment of Debt, net of
tax....................................................... 1,891 -- --
Cumulative Effect of Accounting Change, net of tax.......... (20,558) -- --
---------- ---------- ----------
Net Income.................................................. $ 278,544 $ 231,280 $ 227,409
========== ========== ==========
Earnings Per Share:
Income from continuing operations before extraordinary
gain and cumulative effect of accounting change......... $ 4.50 $ 4.63 $ 3.33
Loss from discontinued operations......................... -- (1.28) (0.03)
Extraordinary gain from early extinguishment of debt, net
of tax.................................................. 0.03 -- --
Cumulative effect of accounting change, net of tax........ (0.31) -- --
---------- ---------- ----------
Net income................................................ $ 4.22 $ 3.35 $ 3.30
========== ========== ==========
Earnings Per Share Assuming Full Dilution:
Income from continuing operations before extraordinary
gain and cumulative effect of accounting change......... $ 4.38 $ 4.55 $ 3.30
Loss from discontinued operations......................... -- (1.26) (0.03)
Extraordinary gain from early extinguishment of debt, net
of tax.................................................. 0.02 -- --
Cumulative effect of accounting change, net of tax........ (0.30) -- --
---------- ---------- ----------
Net income................................................ $ 4.10 $ 3.29 $ 3.27
========== ========== ==========
</TABLE>
See the accompanying notes to the consolidated financial statements.
55
<PAGE>
WELLPOINT HEALTH NETWORKS INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(IN THOUSANDS)
<TABLE>
<CAPTION>
COMMON STOCK
--------------------------------- ACCUMULATED
ISSUED IN TREASURY ADDITIONAL OTHER
PREFERRED ------------------- ----------- PAID-IN RETAINED COMPREHENSIVE
STOCK SHARES AMOUNT AMOUNT CAPITAL EARNINGS INCOME TOTAL
--------- -------- -------- ----------- ---------- -------- -------------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCE AS OF JANUARY 1,
1997...................... $ -- 66,527 $665 $ -- $761,879 $117,909 $ (9,994) $ 870,459
Net proceeds from common
stock offering............ 3,000 30 110,310 110,340
Stock grants to employees
and directors............. 6 270 270
Stock issued for employee
stock option and stock
purchase plans............ 245 3 9,853 9,856
Stock repurchased, 4,571
shares at cost............ (103) (103)
Comprehensive income
Net income................ 227,409 227,409
Other comprehensive
income, net of tax
Change in unrealized
valuation adjustment
on investment
securities, net of
reclassification
adjustment............ 4,938 4,938
-------- -------- ----------
Total comprehensive
income.................... 227,409 4,938 232,347
----- ------- ---- --------- -------- -------- -------- ----------
BALANCE AS OF DECEMBER 31,
1997...................... -- 69,778 698 (103) 882,312 345,318 (5,056) 1,223,169
Stock grants to employees
and directors............. 6 399 399
Stock issued for employee
stock option and stock
purchase plans............ 837 8 39,036 39,044
Stock repurchased, 3,496,985
shares at cost............ (193,332) (193,332)
Comprehensive income
Net income................ 231,280 231,280
Other comprehensive
income, net of tax
Change in unrealized
valuation adjustment
on investment
securities, net of
reclassification
adjustment............ 14,663 14,663
-------- -------- ----------
Total comprehensive
income.................... 231,280 14,663 245,943
----- ------- ---- --------- -------- -------- -------- ----------
BALANCE AS OF DECEMBER 31,
1998...................... -- 70,621 706 (193,435) 921,747 576,598 9,607 1,315,223
Stock grants to employees
and directors............. 75 1 172 3,051 3,224
Stock issued for employee
stock option and stock
purchase plans............ 695 7 3,616 30,218 33,841
Stock repurchased, 4,332,500
shares at cost............ (291,684) (291,684)
Net losses from treasury
stock reissued............ (500) (500)
Comprehensive income
Net income................ 278,544 278,544
Other comprehensive
income, net of tax
Change in unrealized
valuation adjustment
on investment
securities, net of
reclassification
adjustment............ (26,179) (26,179)
Foreign currency
adjustments, net of
tax................... 231 231
-------- -------- ----------
Total comprehensive
income.................... 278,544 (25,948) 252,596
----- ------- ---- --------- -------- -------- -------- ----------
BALANCE AS OF DECEMBER 31,
1999...................... $ -- 71,391 $714 $(481,331) $955,016 $854,642 $(16,341) $1,312,700
===== ======= ==== ========= ======== ======== ======== ==========
</TABLE>
See the accompanying notes to the consolidated financial statements
56
<PAGE>
WELLPOINT HEALTH NETWORKS INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------------
1999 1998 1997
----------- ----------- -----------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Income from continuing operations before extraordinary gain
and cumulative effect of accounting change................ $ 297,211 $ 319,548 $ 229,437
Adjustments to reconcile income from continuing operations
before extraordinary gain and cumulative effect of
accounting change to net cash provided by continuing
operating activities:
Depreciation and amortization, net of accretion........... 68,767 54,590 51,239
(Gains) losses on sales of assets, net.................... 31,898 34,679 (59,168)
Provision (benefit) for deferred income taxes............. 41,087 (83,261) 20,699
Amortization of deferred gain on sale of building......... (4,426) (4,425) (4,426)
Accretion of interest on zero coupon convertible
subordinated debentures................................. 1,465 -- --
(Increase) decrease in certain assets:
Receivables, net........................................ (29,263) 17,621 (11,315)
Income taxes recoverable................................ 191,079 15,099 --
Other current assets.................................... (26,169) (20,087) (30,536)
Other non-current assets................................ (8,451) 1,978 1,719
Increase (decrease) in certain liabilities:
Medical claims payable.................................. 195,681 23,844 170,728
Reserves for future policy benefits..................... (25,019) (9,142) 407
Unearned premiums....................................... 15,349 18,853 14,072
Accounts payable and accrued expenses................... 107,086 (6,415) 102,662
Experience rated and other refunds...................... (26,619) (5,810) 17,726
Other current liabilities............................... (5,227) 35,398 3,745
Accrued postretirement benefits......................... 1,845 3,167 2,805
Other non-current liabilities........................... 3,064 (1,027) (13,698)
----------- ----------- -----------
Net cash provided by continuing operating
activities........................................... 829,358 394,610 496,096
----------- ----------- -----------
Loss from discontinued operations........................... -- (12,592) (2,028)
Adjustment to derive cash flows from discontinued operating
activities:
Change in net operating assets.......................... -- 7,410 59,012
----------- ----------- -----------
Net cash provided by (used in) discontinued operating
activities -- (5,182) 56,984
----------- ----------- -----------
Net cash provided by operating activities............. 829,358 389,428 553,080
----------- ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Investments purchased..................................... (3,456,317) (2,843,102) (2,641,752)
Proceeds from investments sold............................ 2,892,802 2,666,355 1,836,541
Proceeds from investments matured......................... 83,404 106,436 143,218
Property and equipment purchased.......................... (38,516) (78,431) (58,619)
Proceeds from property and equipment sold................. 1,925 25,721 503
Proceeds from sale of Workers' Compensation business...... -- 101,413 --
Settlement of sales price for sale of Workers'
Compensation business................................... (6,733) -- --
Additional investment in subsidiaries..................... -- -- (18,317)
Acquisition of new businesses, net of cash acquired....... (7,700) -- 361,977
----------- ----------- -----------
Net cash used in continuing investing activities...... (531,135) (21,608) (376,449)
----------- ----------- -----------
Net cash provided by (used in) investing activities of
discontinued operations................................... -- 15,877 (76,149)
----------- ----------- -----------
Net cash used in investing activities................. (531,135) (5,731) (452,598)
----------- ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from long-term debt.............................. 200,823 -- 150,000
Repayment of long-term debt............................... (149,788) (88,000) (387,000)
Net proceeds from common stock offering................... -- -- 110,340
Proceeds from the issuance of common stock................ 36,565 39,443 10,126
Common stock repurchased.................................. (291,684) (193,332) (103)
----------- ----------- -----------
Net cash used in financing activities................. (204,084) (241,889) (116,637)
----------- ----------- -----------
Net increase (decrease) in cash and cash equivalents........ 94,139 141,808 (16,155)
Cash and cash equivalents at beginning of year.............. 410,875 269,067 285,222
----------- ----------- -----------
Cash and cash equivalents at end of year.................... $ 505,014 $ 410,875 $ 269,067
=========== =========== ===========
</TABLE>
See the accompanying notes to the consolidated financial statements.
57
<PAGE>
WELLPOINT HEALTH NETWORKS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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
December 31, 1999, WellPoint had approximately 7.3 million medical members and
approximately 32 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 service, 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 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.
As more fully described in Note 11, on September 1, 1998, the Company
completed the sale of its workers' compensation segment. Such sale was accounted
for as a discontinued operation.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
As a managed health care organization, the Company derives the majority of
its revenues from premiums received for providing prepaid health services and
prepares its financial statements in accordance with the AICPA Audit and
Accounting Guide for "Health Care Organizations." The following is a summary of
significant accounting policies used in the preparation of the accompanying
consolidated financial statements. Such policies are in accordance with
accounting principles generally accepted in the United States and have been
consistently applied. The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses for each reporting
period. The significant estimates made in the preparation of the Company's
consolidated financial statements relate to the assessment of the carrying value
of the goodwill and intangible assets, medical claims payable, reserves for
future policy benefits, experience rated refunds and contingent liabilities.
While management believes that the carrying value of such assets and liabilities
is adequate as of December 31, 1999 and 1998, actual results could differ from
the estimates upon which the carrying values were based.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the Company
and its subsidiaries. All significant intercompany transactions and accounts
have been eliminated in consolidation.
CASH EQUIVALENTS
The Company considers cash equivalents to include highly liquid debt
instruments purchased with an original remaining maturity of three months or
less.
58
<PAGE>
WELLPOINT HEALTH NETWORKS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
CONCENTRATION OF CREDIT RISK
Financial instruments that potentially subject the Company to significant
concentrations of credit risk consist principally of cash investments,
investment securities, foreign currency denominated forward exchange contracts
and interest rate swaps. The Company invests its excess cash primarily in
commercial paper and money market funds. Although a majority of the cash
accounts exceed the federally insured deposit amount, management does not
anticipate nonperformance by financial institutions and reviews the financial
viability of these institutions on a periodic basis. The Company attempts to
limit its risk in investment securities by maintaining a diversified portfolio.
The components of investment securities are shown in Note 3.
INVESTMENTS
Investment securities consist primarily of U.S. Treasury and agency
securities, foreign currency denominated bonds, mortgage-backed securities,
investment grade corporate bonds and equity securities. The Company has
determined that its investment securities are available for use in current
operations and, accordingly, has classified such investment securities as
current without regard to contractual maturity dates.
Long-term investments consist primarily of restricted assets, equity and
other investments. Restricted assets, at market value, included in long-term
investments at December 31, 1999 and 1998 were $100.0 million and
$96.6 million, respectively, and consisted of investments on deposit with the
California Department of Corporations ("DOC"). These deposits consisted
primarily of U.S. Treasury bonds and notes. Due to their restricted nature, such
investments are classified as long-term without regard to contractual maturity.
The Company has determined that its debt and equity securities are available
for sale. Debt and equity securities are carried at estimated fair value based
on quoted market prices for the same or similar instruments. Unrealized gains
and losses are computed on the basis of specific identification and are included
in other comprehensive income, net of applicable deferred income taxes. Realized
gains and losses on the disposition of investments are included in investment
income. The specific identification method is used in determining the cost of
debt and equity securities sold.
The Company participates in a securities lending program whereby marketable
securities in the Company's portfolio are transferred to an independent broker
or dealer in exchange for collateral equal to at least 102% of the market value
of securities on loan.
In order to mitigate foreign currency risk for certain investments on the
foreign currency denominated bonds within the Company's investment portfolio,
the Company has entered into two types of foreign currency derivative
instruments. The first type is a forward exchange contract which is entered into
to hedge the foreign currency risk between the trade date and the settlement
date of a foreign currency investment transaction. Gains and losses related to
such instruments are recognized in the Company's income statement at the
settlement date. The Company has also entered into foreign currency contracts
for each of the fixed maturity securities owned as of December 31, 1999 and 1998
to hedge asset positions denominated in other currencies. The unrealized gains
and losses, net of deferred taxes, from such forward contracts and the related
hedged investments are reflected in other comprehensive income at the balance
sheet dates.
59
<PAGE>
WELLPOINT HEALTH NETWORKS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
PREMIUMS RECEIVABLE
Premiums receivable are shown net of an allowance based on historical
collection trends and management's judgment on the collectibility of these
accounts. These collection trends, as well as prevailing and anticipated
economic conditions, are routinely monitored by management, and any adjustments
required are reflected in current operations.
PROPERTY AND EQUIPMENT, NET
Property and equipment are stated at cost, net of depreciation, and are
depreciated on the straight-line method over the estimated useful lives of the
assets. Leasehold improvements are stated net of amortization and are amortized
over a period not exceeding the term of the lease. Upon disposal of property,
plant and equipment, the cost of the asset and the related accumulated
depreciation are removed from the accounts while the resulting gain or loss is
reflected in current operations.
Computer software costs that are incurred in the preliminary project stage
are expensed as incurred. Direct consulting costs, payroll and payroll related
cost for employees, incurred during the development stage, who are directly
associated with each project are capitalized and amortized over a five-year
period when placed into production.
INTANGIBLE ASSETS AND GOODWILL, NET
Intangible assets and goodwill represent the cost in excess of fair value of
the net assets, net of the related tax impact, acquired in purchase
transactions. Intangible assets and goodwill are being amortized, utilizing a
composite useful life, on a straight-line basis over periods ranging from three
to 25 years. (See Note 6 for a more complete discussion of the Company's
intangible assets and goodwill.)
The Company periodically evaluates whether events or circumstances have
occurred that may affect the estimated useful life or the recoverability of the
remaining balance of goodwill and other identifiable intangible assets.
Impairment of an intangible asset is triggered when the estimated future
undiscounted cash flows (excluding interest charges) do not exceed the carrying
amount of the intangible asset and related goodwill. If the events or
circumstances indicate that the remaining balance of the intangible asset and
goodwill may be permanently impaired, such potential impairment will be measured
based upon the difference between the carrying amount of the intangible asset
and goodwill and the fair value of such asset determined using the estimated
future discounted cash flows (excluding interest charges) generated from the use
and ultimate disposition of the respective acquired entity.
MEDICAL CLAIMS PAYABLE
The liability for medical claims payable includes claims in process and a
provision for incurred but not reported claims, which is actuarially determined
based on historical claims payment experience and other statistics. Claim
processing expenses are also accrued based on an estimate of expenses necessary
to process such claims. Such reserves are continually monitored and reviewed
with any adjustments reflected in current operations. Capitation costs represent
monthly fees paid one month in advance to physicians, certain other medical
service providers and hospitals in the Company's HMO networks as retainers for
providing continuing medical care. The Company maintains various programs that
provide incentives to physicians, certain other medical service providers and
hospitals participating in its HMO networks through the use of risk-sharing
agreements and other programs. Payments under such agreements are
60
<PAGE>
WELLPOINT HEALTH NETWORKS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
made based on the providers' performance in controlling health care costs while
providing quality health care. Expenses related to these programs, which are
based in part on estimates, are recorded in the period in which the related
services are rendered.
RESERVES FOR FUTURE POLICY BENEFITS
The estimated reserves for future policy benefits relate to life and
disability policies written in connection with health care contracts. Reserves
for future extended benefit coverage are based on projections of past
experience. Reserves for future policy and contract benefits for certain
long-term disability products and group paid-up life products are based upon
interest, mortality and morbidity assumptions from published actuarial tables,
modified based upon the Company's experience. Reserves are continually monitored
and reviewed, and as settlements are made or reserves adjusted, differences are
reflected in current operations. The current portion of reserves for future
policy benefits relates to the portion of such reserves which management expects
to pay within one year.
POSTRETIREMENT BENEFITS
The Company currently provides certain health care and life insurance
benefits to eligible retirees and their dependents under plans administered by
the Company. The Company accrues the estimated costs of retiree health and other
postretirement benefits during the periods in which eligible employees render
service to earn the benefits.
INTEREST RATE SWAP AGREEMENTS
The Company utilizes interest rate swap agreements to manage interest rate
exposures. The principal objective of such contracts is to minimize the risks
and/or costs associated with financial activities. The counterparties to these
contractual arrangements are major financial institutions with which the Company
also has other financial relationships. These counterparties expose the Company
to credit loss in the event of nonperformance. However, the Company does not
anticipate nonperformance by the counterparties.
The Company entered into interest rate swap agreements to reduce the impact
of changes in interest rates on its floating rate debt under its revolving
credit facility. The swap agreements are contracts to exchange floating interest
rate payments for fixed interest rate payments periodically over the life of the
agreements without the exchange of the underlying notional amounts. The notional
amounts of the interest rate swap agreements are used to measure interest to be
paid. For interest rate instruments that effectively hedge interest rate
exposures, the net cash amounts paid on the agreements are accrued and
recognized as an adjustment to interest expense. If an agreement no longer
qualifies as a hedge instrument, then it is marked to market and carried on the
balance sheet at fair value. The change in fair value of these instruments is
included in investment income.
INCOME TAXES
The Company files a consolidated income tax return with its subsidiaries.
The Company's provision for income taxes reflects the current and future tax
consequences of all events that have been recognized in the financial statements
as measured by the provision of currently enacted tax laws and rates applicable
to future periods.
61
<PAGE>
WELLPOINT HEALTH NETWORKS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
RECOGNITION OF PREMIUM REVENUE AND MANAGEMENT SERVICES REVENUE
For most health care and life insurance contracts, premiums are billed in
advance of coverage periods and are recognized as revenue over the period in
which services or benefits are obligated to be provided. Premiums include
revenue from other contracts, which principally relate to minimum premium
contracts, where revenue is recognized based upon the ultimate loss experience
of the contract. These contracts obligate the Company to arrange for the
provision of health care for the members covered by the related contract and
expose the Company to financial risk based upon its ability to manage health
care costs below a contractual fixed attachment point. Premium revenue includes
an adjustment for experience rated refunds based on an estimate of incurred
claims. Experience rated refunds are paid based on contractual requirements.
The Company's group life and disability insurance contracts are traditional
insurance contracts which are typically issued only in conjunction with a health
care contract. Additionally, WellPoint has a limited number of indemnity health
insurance contracts principally acquired from the Life and Health Benefits
Management Division of the Massachusetts Mutual Life Insurance Company ("MMHD")
and the Group Benefits Operations of the John Hancock Mutual Life Insurance
Company ("GBO"). All of these contracts provide insurance protection for a fixed
period ranging from one month to a year.
The Company has the ability at a minimum to cancel the contract or adjust
the provisions of the contract at the end of the contract period. As a result,
the Company's insurance contracts are considered short-duration contracts.
Premiums applicable to the unexpired contractual coverage periods are
reflected in the accompanying consolidated balance sheet as unearned premiums.
Management services revenue is earned as services are performed and consists
of administrative fees for services provided to third parties, including
management of medical services, claims processing and access to provider
networks. Under administrative service contracts, self-funded employers retain
the full risk of financing benefits. Funds received from employers are equal to
amounts required to fund benefit expenses and pay earned administrative fees.
Because benefit expenses are not the obligation of the Company, premium revenue
and benefit expenses for these contracts are not included in the Company's
financial statements. Administrative service fees received from employer groups
are included in the Company's revenues.
LOSS CONTRACTS
The Company monitors its contracts for the provision of medical care and
recognizes losses on those contracts when it is probable that expected future
health care and maintenance costs, under a group of existing contracts, will
exceed anticipated future premiums on those contracts. The estimation of future
health care medical costs includes all costs related to the provision of health
care to members covered by the related group of contracts. In determining
whether a loss has been incurred, the Company reviews contracts either
individually or collectively, depending upon the Company's method of
establishing premium rates for such contracts.
The Company further monitors its life insurance contracts and recognizes
losses on those contracts for which estimated future claims costs and
maintenance costs exceed the related unearned premium.
62
<PAGE>
WELLPOINT HEALTH NETWORKS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
HEALTH CARE SERVICES AND OTHER BENEFITS
Health care services and other benefits expense includes the costs of health
care services, capitation expenses and expenses related to risk sharing
agreements with participating physicians, medical groups and hospitals and
incurred losses on the disability and life products. The costs of health care
services are accrued as services are rendered, including an estimate for claims
incurred but not yet reported.
ADVERTISING COSTS
The Company uses print and broadcast advertising to promote its products.
The cost of advertising is expensed as incurred and totaled approximately $40.8
million, $43.3 million and $36.5 million for the years ended December 31, 1999,
1998 and 1997, respectively.
EARNINGS PER SHARE
Basic Earnings per share is computed excluding the impact of potential
common stock and earnings per share assuming full dilution is computed including
the impact of potential common stock.
STOCK-BASED COMPENSATION
Statement of Financial Accounting Standards No. 123, "Accounting for
Stock-Based Compensation," ("SFAS No. 123") encourages, but does not require,
companies to record compensation cost for stock-based employee compensation
plans at fair value. The Company has chosen to continue to account for
stock-based compensation using the intrinsic method prescribed in Accounting
Principles Board ("APB") Opinion No. 25, "Accounting for Stock Issued to
Employees," and related interpretations. Accordingly, compensation cost for
stock options, under existing plans is measured as the excess, if any, of the
quoted market price of the Company's stock at the date of the grant over the
amount an employee must pay to acquire the stock.
COMPREHENSIVE INCOME
Effective January 1, 1998, the Company adopted the provisions of Statement
of Financial Accounting Standards No. 130, "Comprehensive Income". Comprehensive
income encompasses all changes in stockholders' equity (except those arising
from transactions with stockholders) and includes net income and net unrealized
gains or losses on available-for-sale securities. Comprehensive income is net of
reclassification adjustments to adjust for items currently included in net
income, such as realized gains on investment securities.
START-UP COSTS
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 the AICPA Statement of Position No. 98-5, "Reporting on the Costs
of Start-Up Activities." The change involves expensing these costs as incurred,
rather than capitalizing and subsequently amortizing such costs. The total
amount of deferred start-up costs reported as a cumulative effect of a change in
accounting principle is $20.6 million, net of a tax benefit of $14.3 million.
63
<PAGE>
WELLPOINT HEALTH NETWORKS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
RECLASSIFICATIONS
Certain amounts in the prior years consolidated financial statements have
been reclassified to conform to the 1999 presentation.
NEW ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board 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 SFAS No. 133, 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 2001. The Company is
presently assessing the effect of SFAS No. 133 on the financial statements of
the Company.
3. INVESTMENTS
INVESTMENT SECURITIES
The Company's investment securities consist of the following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31, 1999
---------------------------------------------
GROSS UNREALIZED
AMORTIZED ------------------- ESTIMATED
COST GAINS LOSSES FAIR VALUE
---------- -------- -------- ----------
<S> <C> <C> <C> <C>
U.S. Treasury and agency........... $ 178,350 $ -- $ 2,091 $ 176,259
Foreign government securities...... 98,435 470 3,507 95,398
Mortgage-backed securities......... 783,736 957 19,133 765,560
Corporate and other securities..... 1,341,928 1,582 49,732 1,293,778
---------- ------- ------- ----------
Total debt securities............ 2,402,449 3,009 74,463 2,330,995
Equity and other investments....... 266,972 60,396 12,991 314,377
---------- ------- ------- ----------
Total investment securities...... $2,669,421 $63,405 $87,454 $2,645,372
========== ======= ======= ==========
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, 1998
---------------------------------------------
GROSS UNREALIZED
AMORTIZED ------------------- ESTIMATED
COST GAINS LOSSES FAIR VALUE
---------- -------- -------- ----------
<S> <C> <C> <C> <C>
U.S. Treasury and agency........... $ 274,004 $ 4,546 $ 894 $ 277,656
Foreign government securities...... 88,332 2,413 1,046 89,699
Mortgage-backed securities......... 598,529 8,517 688 606,358
Corporate and other securities..... 995,596 17,810 10,661 1,002,745
---------- ------- ------- ----------
Total debt securities............ 1,956,461 33,286 13,289 1,976,458
Equity and other investments....... 278,229 20,705 25,218 273,716
---------- ------- ------- ----------
Total investment securities...... $2,234,690 $53,991 $38,507 $2,250,174
========== ======= ======= ==========
</TABLE>
64
<PAGE>
WELLPOINT HEALTH NETWORKS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
3. INVESTMENTS (CONTINUED)
The amortized cost and estimated fair value of debt securities as of
December 31, 1999, based on contractual maturity dates, are summarized below (in
thousands). Expected maturities for mortgage-backed securities will differ from
contractual maturities because borrowers may have the right to call or prepay
obligations with or without call or prepayment penalties.
<TABLE>
<CAPTION>
AMORTIZED ESTIMATED
COST FAIR VALUE
---------- ----------
<S> <C> <C>
Due in one year or less.............................. $ 67,633 $ 67,484
Due after one year through five years................ 860,857 843,400
Due after five years through ten years............... 659,537 634,201
Due after ten years.................................. 814,422 785,910
---------- ----------
Total debt securities................................ $2,402,449 $2,330,995
========== ==========
</TABLE>
For the years ended December 31, 1999, 1998 and 1997, proceeds from the
sales and maturities of debt securities were $2,713.8 million, $2,569.1 million
and $1,566.1 million, respectively. Gross gains of $16.2 million and gross
losses of $52.6 million were realized on the sales of debt securities for the
year ended December 31, 1999. For 1998, gross realized gains and gross realized
losses from sales of debt securities were $28.2 million and $10.8 million,
respectively. In 1997, gross realized gains and gross realized losses from sales
of debt securities were $9.5 million and $7.2 million, respectively.
For the years ended December 31, 1999, 1998 and 1997, proceeds from the
sales of equity securities were $262.4 million, $203.7 million and
$413.7 million, respectively. Gross gains of $30.9 million and gross losses of
$26.5 million were realized on the sales of equity securities in 1999. For 1998,
gross realized gains and gross realized losses on the sales of equity securities
were $15.5 million and $64.9 million, respectively. In 1997, gross realized
gains and gross realized losses on the sales of equity securities were
$68.5 million and $6.5 million, respectively.
Securities on loan under the Company's securities lending program are
included in its cash and investment portfolio shown on the accompanying
consolidated balance sheets. Under this program, broker/ dealers are required to
deliver substantially the same security to the Company upon completion of the
transaction. The balance of securities on loan as of December 31, 1999 and 1998
was $127.2 million and $262.8 million, respectively, and income earned on
security lending transactions for the years ended December 31, 1999, 1998 and
1997 was $0.6 million, $1.0 million and $2.0 million, respectively.
LONG-TERM INVESTMENTS
The Company's long-term investments consist of the following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31, 1999
---------------------------------------------
GROSS
UNREALIZED
AMORTIZED -------------------- ESTIMATED
COST GAINS LOSSES FAIR VALUE
--------- --------- -------- ----------
<S> <C> <C> <C> <C>
U.S. Treasury and agency securities....... $ 24,500 $ -- $140 $ 24,360
Mortgage backed securities................ 71,450 -- 478 70,972
Equity and other investments.............. 12,948 -- -- 12,948
-------- --------- ---- --------
Total long-term investments............. $108,898 $ -- $618 $108,280
======== ========= ==== ========
</TABLE>
65
<PAGE>
WELLPOINT HEALTH NETWORKS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
3. INVESTMENTS (CONTINUED)
<TABLE>
<CAPTION>
DECEMBER 31, 1998
--------------------------------------------
GROSS
UNREALIZED
AMORTIZED ------------------- ESTIMATED
COST GAINS LOSSES FAIR VALUE
--------- -------- -------- ----------
<S> <C> <C> <C> <C>
U.S. Treasury and agency securities....... $ 94,131 $408 $29 $ 94,510
Equity and other investments.............. 8,743 -- -- 8,743
-------- ---- --- --------
Total long-term investments............. $102,874 $408 $29 $103,253
======== ==== === ========
</TABLE>
At December 31, 1999 the Company's debt securities had contractual maturity
dates: due in one to five years, amortized cost of $57.5 million and market
value of $57.1 million; due in five to ten years, amortized cost of $38.5
million and market value of $38.2 million. Expected maturities for mortgage-
backed securities will differ from contractual maturities because borrowers may
have the right to call or prepay obligations with or without call or prepayment
penalties.
In 1997, the Company owned an interest in the stock of Health Partners Inc.
("HPI") which was accounted for under the equity method. In October 1997, HPI
entered into a business combination with FPA Medical Management Inc. ("FPA"), a
publicly traded company, which was accounted for as a pooling of interests. As a
result of the transaction, the Company exchanged its HPI stock for FPA stock and
recognized a gain of $30.3 million at the date of the transaction. In 1998, the
Company's investment in FPA experienced an "other than temporary" decline in
market value. As a result, the Company recognized a pre-tax loss of
$48.7 million.
4. RECEIVABLES, NET
Receivables consist of the following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------
1999 1998
-------- --------
<S> <C> <C>
Premiums receivable..................................... $291,743 $362,225
Investment income and other receivables................. 271,775 168,614
-------- --------
563,518 530,839
Less allowance for doubtful accounts.................... 50,439 45,580
-------- --------
Receivables, net........................................ $513,079 $485,259
======== ========
</TABLE>
66
<PAGE>
WELLPOINT HEALTH NETWORKS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
5. PROPERTY AND EQUIPMENT, NET
Property and equipment, at cost, consist of the following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
USEFUL -------------------
LIFE 1999 1998
------------- -------- --------
<S> <C> <C> <C>
Furniture and fixtures................... 8 years $ 49,990 $ 50,412
Software................................. 5 years 69,489 44,747
Equipment................................ 5 years 100,454 117,762
Leasehold improvements................... Term of Lease 63,263 41,543
-------- --------
283,196 254,464
Less: accumulated depreciation and
amortization........................... 157,279 123,005
-------- --------
Property and equipment, net.............. $125,917 $131,459
======== ========
</TABLE>
Depreciation and amortization expense for the years ended December 31, 1999,
1998 and 1997 was $39.3 million, $36.8 million and $32.6 million, respectively.
6. INTANGIBLE ASSETS AND GOODWILL, NET
The intangible assets balance consists of the following components (in
thousands)
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------
1999 1998
-------- --------
<S> <C> <C>
Employer group relationships............................ $ 85,691 $ 77,991
Self-developed software................................. 7,280 7,280
Provider contracts...................................... 9,208 9,208
Miscellaneous intangible assets......................... 5,728 5,728
-------- --------
107,907 100,207
Less: accumulated amortization.......................... (11,609) (6,270)
-------- --------
Intangible assets, net.................................. $ 96,298 $ 93,937
======== ========
</TABLE>
The goodwill balance consists of the following components (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------
1999 1998
-------- --------
<S> <C> <C>
Goodwill................................................ $359,975 $368,310
Less: accumulated amortization.......................... (52,328) (32,155)
-------- --------
Goodwill, net........................................... $307,647 $336,155
======== ========
</TABLE>
During the fourth quarter of 1998, the Company re-evaluated the useful life
of the intangible assets and goodwill related to its acquisitions of the GBO and
MMHD and reduced such composite lives from 35 to 20 years.
67
<PAGE>
WELLPOINT HEALTH NETWORKS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
6. INTANGIBLE ASSETS AND GOODWILL, NET (CONTINUED)
In May 1999, the Company entered into an agreement with Omni Healthcare
("Omni"), a Sacramento, California based health plan to transition Omni members
to the Company's Blue Cross of California subsidiary. The Company paid $7.7
million, subject to adjustment in exchange for Omni's cooperation in
transferring its approximately 124,000 members. The entire amount has been
allocated to intangible assets and is being amortized over 3 years.
Amortization charged to operations was $25.5 million, $19.9 million and
$17.9 million for the years ended December 31, 1999, 1998 and 1997,
respectively.
7. LONG-TERM DEBT
NOTES PAYABLE
In connection with the MMHD acquisition, the Company issued a Series A term
note for $62.0 million on March 31, 1996. At December 31, 1998, $20.0 million
was outstanding under this note. The Series A term note matured on March 31,
1999 and was repaid by the Company.
REVOLVING CREDIT FACILITY
As of December 31, 1999, the Company has a $1.0 billion five-year revolving
credit facility with a consortium of financial institutions. The facility
expires as of May 15, 2002, although it may be extended for an additional
one-year period under certain circumstances. At December 31, 1999 and 1998,
$200.0 million and $280.0 million, respectively, was outstanding under this
facility.
The agreement provides for interest on committed advances at rates
determined by reference to the bank's base rate or to the London Interbank
Offered Rate ("LIBOR") plus a margin determined by reference to the Company's
leverage ratio (as defined in the credit agreement) or the then-current rating
of the Company's unsecured long-term debt by specified rating agencies. Interest
is determined using whichever of these methods is the most favorable to the
Company (The effective interest rate was 6.7% at December 31, 1999). Borrowings
under the credit facility are made on a committed basis or pursuant to an
auction-bid process. A facility fee based on the facility amount, regardless of
utilization, is payable quarterly. The facility fee rate is also determined by
the unsecured debt ratings or the leverage ratio of the Company.
ZERO COUPON CONVERTIBLE SUBORDINATED DEBENTURES
On July 2, 1999, the Company issued $299.0 million aggregate principal
amount at maturity of zero coupon convertible subordinated debentures due 2019
(the "Debentures"). The proceeds totaled approximately $200.8 million. The
Debentures accrue interest at a yield to maturity of 2.0% per year compounded
semi-annually. The Debentures will result in an increase in accrued interest
expense of approximately $3.1 million during the one-year period immediately
following their issuance, with such annual accrued interest expense increasing
until maturity. Holders have the option to convert the Debentures into the
Company's common stock at any time prior to maturity at a rate of 6.797 shares
per $1,000 principal amount at maturity. In lieu of delivering shares of common
stock upon conversion of any Debentures, the Company may elect to pay cash for
the Debentures in an amount equal to the last reported sales price of its common
stock on the trading day preceding the conversion date. The debentures are
subordinate in right of payment to all existing and future senior indebtedness.
68
<PAGE>
WELLPOINT HEALTH NETWORKS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
7. LONG-TERM DEBT (CONTINUED)
On October 6, 1999, the Board of Directors authorized the repurchase of some
or all of the Company's Debentures for cash. During the year ended December 31,
1999, the Company repurchased $81.0 million in aggregate principal amount at
maturity of the Company's Debentures at a total purchase price of $49.8 million.
The gain on such repurchase is shown on the Company's income statement as an
extraordinary gain, net of applicable tax.
As of December 31, 1999, the Company had $147.9 million of Debentures
outstanding. For the year ended December 31, 1999, the Company accrued $1.5
million of interest related to the Debentures.
SHELF REGISTRATION STATEMENT
In July 1996, the Company filed a registration statement relating to the
issuance of $1.0 billion of senior or subordinated unsecured indebtedness. As of
December 31, 1999, no indebtedness had been issued pursuant to this registration
statement.
MATURITIES
At December 31, 1999, the Company's long-term debt maturities were as
follows: 2000--zero; 2001--zero; 2002--$200 million; 2003--zero; 2004--zero;
2019--$218 million.
DEBT COVENANTS
The Company's revolving credit facility requires the maintenance of certain
financial ratios and contains other restrictive covenants, including
restrictions on the occurrence of additional indebtedness and the granting of
certain liens, limitations on acquisitions and investments and limitations on
changes in control. As of December 31, 1999, the Company was in compliance with
the requirements outlined in these agreements.
INTEREST RATE SWAPS
As described in Note 15, as of December 31, 1999, the Company is a party to
three separate interest rate swap agreements two of which convert underlying
variable-rate debt into fixed-rate debt. The other converts three month LIBOR
for one month LIBOR.
INTEREST PAID
Interest paid on long-term debt for the years ended December 31, 1999, 1998
and 1997 was $22.1 million, $25.9 million and $38.9 million, respectively.
69
<PAGE>
WELLPOINT HEALTH NETWORKS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
8. INCOME TAXES
The components of the provision (benefit) for income taxes are as follows
(in thousands):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
Current:
Federal..................................... $106,036 $ 97,231 $107,695
State....................................... 42,987 30,929 28,523
-------- -------- --------
149,023 128,160 136,218
-------- -------- --------
Deferred:
Federal..................................... 43,968 (51,398) 19,041
State....................................... (2,881) (4,324) 1,658
-------- -------- --------
41,087 (55,722) 20,699
-------- -------- --------
Provision for income taxes from continuing
operations.................................. $190,110 $ 72,438 $156,917
======== ======== ========
</TABLE>
The overall effective tax rate differs from the statutory federal tax rate
as follows (percent of pretax income from continuing operations):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
Tax provision based on the federal statutory rate... 35.0% 35.0% 35.0%
State income taxes, net of federal benefit.......... 5.3 4.4 5.1
Non-deductible expenses/non-taxable items........... (0.4) 0.9 0.1
Tax benefit from IRS ruling in excess of noncurrent
intangible assets related to business
combination....................................... -- (21.8) --
Other, net.......................................... (0.9) -- 0.4
---- ----- ----
Effective tax rate.................................. 39.0% 18.5% 40.6%
==== ===== ====
</TABLE>
70
<PAGE>
WELLPOINT HEALTH NETWORKS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
8. INCOME TAXES (CONTINUED)
Net deferred tax assets are comprised of the following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------
1999 1998
-------- --------
<S> <C> <C>
Gross deferred tax assets:
Market valuation on investment securities............. $ 7,951 $ --
Vacation and holiday accruals......................... 9,549 8,521
Incurred claim reserve discounting.................... 13,237 10,726
Provision for doubtful accounts....................... 19,010 16,619
Unearned premium reserve.............................. 17,469 15,852
State income taxes.................................... 14,039 10,707
Postretirement benefits............................... 28,075 27,332
Deferred gain on building............................. 5,260 7,063
Deferred compensation................................. 15,091 11,349
Expenses not currently deductible..................... 28,645 44,791
Intangible asset impairment........................... 7,190 7,940
Capital loss carryover................................ 23,483 11,247
Alternative minimum tax credit carryover.............. -- 46,616
Start up costs........................................ 6,114 --
Other, net............................................ 9,686 8,599
-------- --------
Total gross deferred tax assets..................... 204,799 227,362
-------- --------
Gross deferred tax liabilities:
Market valuation on investment securities............. -- (5,757)
Depreciation and amortization......................... (5,912) (11,313)
Bond discount and basis differences................... (6,778) (6,682)
Internally developed software......................... (13,491) --
Other, net............................................ (1,781) (1,753)
-------- --------
Total gross deferred tax liabilities................ (27,962) (25,505)
-------- --------
Net deferred tax assets................................. $176,837 $201,857
======== ========
</TABLE>
Management believes that the deferred tax assets listed above are fully
recoverable and, accordingly, no valuation allowance has been recorded. Expenses
not currently deductible include various financial statement charges and
expenses that will be deductible for income tax purposes in future periods.
Income taxes paid (refunded) for the years ended December 31, 1999, 1998 and
1997 were ($57.0) million, $103.0 million and $121.2 million, respectively.
71
<PAGE>
WELLPOINT HEALTH NETWORKS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
8. INCOME TAXES (CONTINUED)
INCOME TAXES
In September 1998, the Company received a private letter ruling from the
Internal Revenue Service with respect to the treatment of certain payments made
at the time of WellPoint's 1996 Recapitalization and acquisition of the BCC
Commercial Operations. The ruling allows the Company to deduct as an ordinary
and necessary business expense an $800.0 million cash payment made by BCC in May
1996 to one of two newly formed charitable foundations. As a result of the
ruling in 1998, the Company reduced the remaining intangible asset of $194.5
million arising from the acquisition of certain assets and liabilities of BCC
Commercial Operations at the time of the Recapitalization and recognized a
reduction in its income tax expense of $85.5 million. As a result, the Company
filed amended tax returns for prior years requesting a refund of approximately
$200.0 million and anticipated that current and future income tax payments would
be reduced by approximately $80.0 million and, therefore, recognized an income
tax recoverable and a deferred tax asset, respectively, in its financial
statements for the year ended December 31, 1998. In August 1999, the Company
received a cash refund (including applicable accrued interest) of approximately
$183.0 million.
The Company has a Federal capital loss carryforward of $44.3 million and a
California capital loss carryforward of $139.1 million. The carryforward amounts
begin to expire on December 31, 2003.
9. PENSION AND POSTRETIREMENT BENEFITS
PENSION BENEFITS
The Company covers substantially all employees through two non-contributory
defined benefit pension plans. One plan covers employees of a bargaining unit,
while the second plan, which was established on January 1, 1987, covers all
eligible exempt and administrative employees meeting certain age and employment
requirements. Plan assets are invested primarily in pooled income funds. The
Company's policy is to fund its plans according to the applicable Employee
Retirement Income Security Act of 1974 and income tax regulations. The Company
uses the unit credit method of cost determination.
72
<PAGE>
WELLPOINT HEALTH NETWORKS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
9. PENSION AND POSTRETIREMENT BENEFITS (CONTINUED)
The funded status of the plans is as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------
1999 1998
-------- --------
<S> <C> <C>
CHANGE IN BENEFIT OBLIGATION
Benefit obligation at beginning of year..................... $77,503 $ 63,554
Service cost................................................ 8,117 8,045
Interest cost............................................... 5,583 5,183
Actuarial loss (gain)....................................... (8,643) 4,736
Benefits paid............................................... (4,904) (4,015)
------- --------
Benefit obligation at end of year........................... $77,656 $ 77,503
======= ========
CHANGE IN PLAN ASSETS
Fair value at beginning of year............................. $65,799 $ 55,173
Actual return on fair value................................. (949) 5,024
Employer contributions...................................... 12,182 9,617
Benefits paid............................................... (4,904) (4,015)
------- --------
Fair value at end of year................................... $72,128 $ 65,799
======= ========
Funded status............................................... $(5,528) $(11,703)
Unrecognized prior service cost............................. 437 401
Unrecognized actuarial loss................................. 10,447 11,668
------- --------
Net amount recognized....................................... $ 5,356 $ 366
======= ========
Amounts recognized in the statement of financial position
consists of:
Prepaid benefit cost...................................... $ 5,356 $ 1,146
Accrued benefit liability................................. -- (780)
------- --------
Net amount recognized....................................... $ 5,356 $ 366
======= ========
WEIGHTED AVERAGE ASSUMPTIONS
Discount rate............................................... 7.75% 7.00%
Expected return on plan assets.............................. 9.50% 8.50%
Rate of compensation increases.............................. 5.00% 5.00%
</TABLE>
73
<PAGE>
WELLPOINT HEALTH NETWORKS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
9. PENSION AND POSTRETIREMENT BENEFITS (CONTINUED)
Net periodic pension expense for the Company's defined benefit pension plans
includes the following components:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------
1999 1998 1997
-------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Service cost--benefits earned during the year............... $ 8,117 $ 8,045 $ 6,510
Interest cost on projected benefits obligations............. 5,583 5,183 4,353
Expected return on plan assets.............................. (6,603) (4,908) (3,992)
Amortization of prior service cost.......................... 14 9 9
Amortization of transition obligation....................... -- -- (15)
Recognized net actuarial loss............................... 81 196 191
------- ------- -------
Net periodic pension expense................................ $ 7,192 $ 8,525 $ 7,056
======= ======= =======
</TABLE>
For the years ended December 31, 1999, 1998 and 1997, the pension expense
was $7.2 million, $8.5 million and $7.1 million, respectively.
The Company sponsors the WellPoint 401(k) Retirement Savings Plan (the
"401(k) Plan"). Employees over 18 years of age are eligible to participate in
the 401(k) Plan if they meet certain length of service requirements. Under this
plan, employees may contribute a percentage of their pre-tax earnings to the
401(k) Plan. After one year of service, employee contributions up to 6% of
eligible compensation are matched by an employer contribution equal to 75% on
the employee's contribution. Matching contributions are immediately vested.
Effective January 1, 1998, 33.3% of the employer contribution was in the
Company's common stock. The employer contribution is 85% for those employees
with ten to nineteen years of service as of January 1, 1997 and 100% for those
employees with twenty years or more of service as of such date. Company expense
related to the 401(k) Plan totaled $15.9 million, $13.0 million and $11.8
million for the years ended December 31, 1999, 1998 and 1997, respectively.
POSTRETIREMENT BENEFITS
The Company currently provides certain health care and life insurance
benefits to eligible retirees and their dependents. Certain employees acquired
as a result of the MMHD acquisition and all employees hired after January 1,
1997 are not covered under the Company's postretirement benefit plan. All other
Company employees are fully eligible for retiree benefits upon attaining 10
years of service and a minimum age of 55. The plan in effect for those retiring
prior to September 1, 1994 provides for Company-paid life insurance for all
retirees based on age and a percent of salary. In addition, the majority of
retirees from age 62 or greater currently receive fully paid health benefit
coverage for themselves and their dependents. For employees retiring on or after
September 1, 1994, the Company currently subsidizes health benefit coverage
based on the retiree's years of service at retirement and date of hire. Life
insurance benefits for retirees hired on or after May 1, 1992 are set at $10,000
upon retirement and are reduced to $5,000 at age 70.
74
<PAGE>
WELLPOINT HEALTH NETWORKS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
9. PENSION AND POSTRETIREMENT BENEFITS (CONTINUED)
The accumulated postretirement benefit obligation ("APBO") and the accrued
postretirement benefits as of December 31, 1999 and 1998 are as follows (in
thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------
1999 1998
-------- --------
<S> <C> <C>
Benefit obligation at the beginning of the year............. $56,324 $54,687
Service cost................................................ 1,650 1,780
Interest cost............................................... 3,933 3,843
Actuarial gain.............................................. (3,655) (2,080)
Benefits paid............................................... (3,320) (1,906)
------- -------
Accumulated postretirement benefits obligation.............. 54,932 56,324
Unrecognized net gain from accrued postretirement benefit
cost...................................................... 13,971 10,734
------- -------
Accrued postretirement benefits............................. $68,903 $67,058
======= =======
</TABLE>
The Company currently pays for its postretirement benefit obligations as
they are incurred. As such, there are no plan assets.
The above actuarially determined APBO was calculated using discount rates of
7.75% and 7.00% as of December 31, 1999 and 1998, respectively. The medical
trend rate is assumed to decline gradually from 10% (under age 65) and 8% (age
65 and over) to 6% by the year 2002. These estimated trend rates are subject to
change in the future. The medical trend rate assumption has a significant effect
on the amounts reported. For example, an increase in the assumed health care
trend rates of one percent in each year would increase the APBO as of December
31, 1999 by $6.2 million and would increase service and interest costs by $0.8
million. Conversely, a decrease in the assumed health care trend rate of one
percent in each year would decrease the APBO as of December 31, 1999 by $5.4
million and would decrease service and interest costs by $0.7 million. For life
insurance benefit calculations, a compensation increase of 5.0% was assumed.
Net periodic postretirement benefit cost includes the following components
(in thousands):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
Service cost................................................ $1,650 $1,780 $1,980
Interest cost............................................... 3,933 3,843 3,783
Net amortization and deferral............................... (418) (550) (621)
------ ------ ------
Net periodic postretirement benefit cost.................... $5,165 $5,073 $5,142
====== ====== ======
</TABLE>
75
<PAGE>
WELLPOINT HEALTH NETWORKS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
10. COMMON STOCK
STOCK OPTION PLANS
In 1996, the Company adopted an Employee Stock Option Plan (the "Employee
Option Plan"). In May 1996, all eligible employees were granted options to
purchase common stock under the Employee Option Plan. The exercise price of
options granted under the Employee Option Plan is the fair market value of the
Common Stock on the date of the grant. Each option granted has a maximum term of
10 years. Options granted under the Employee Option Plan vest in accordance with
the terms of the applicable grant.
In 1996, the Company also implemented a Stock Option/Award Plan (the "Stock
Option/Award Plan") for key employees, officers and directors. The exercise
price per share is fixed by a committee appointed by the Board of Directors to
administer the Stock Option/Award Plan, but for any incentive stock option, the
exercise price will not be less than the fair market value on the date of grant.
The maximum term for an option is ten years. Options granted will vest in
accordance with the terms of each grant. The Stock Option/Award Plan also allows
the grant or award of restricted stock, performance units and phantom stock.
On May 11, 1999, the stockholders of the Company approved a new Stock
Incentive Plan (the "Plan") for key employees, officers and directors. This new
plan serves as the successor to the Company's Stock Option/Award Plan and
Employer Stock Option Plan (the "Predecessor Plans"). All options granted under
the Predecessor Plans and outstanding on the Plan's effective date were
incorporated into the Plan and treated as outstanding awards under the Plan. The
exercise price is determined by the plan administrator, however, will generally
not be less than the fair market value on the date of grant. The maximum term
for an option is ten years. Options granted will vest in accordance with the
terms of each grant. The Stock Incentive Plan also allows the grant or award of
restricted stock, performance units and phantom stock. The maximum number of
shares issuable under the Plan, subject to subsequent adjustments for certain
changes in the Company's capital structure, is 5.2 million shares in addition to
the number of shares of common stock remaining for issuance under the
Predecessor Plans.
76
<PAGE>
WELLPOINT HEALTH NETWORKS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
10. COMMON STOCK (CONTINUED)
The following summarizes activity in the Company's stock option plans for
the years ended December 31, 1999, 1998 and 1997:
<TABLE>
<CAPTION>
WEIGHTED
AVERAGE
EXERCISE PRICE
SHARES PER SHARE
---------- --------------
<S> <C> <C>
Outstanding at January 1, 1997...................... 3,164,996 $39.26
Granted............................................. 1,698,327 36.13
Canceled............................................ (572,511) 37.76
Exercised........................................... (192,089) 39.61
----------
Outstanding at December 31, 1997.................... 4,098,723 38.12
----------
Granted............................................. 1,533,908 56.86
Canceled............................................ (296,993) 43.66
Exercised........................................... (836,400) 37.67
----------
Outstanding at December 31, 1998.................... 4,499,238 44.23
----------
Granted............................................. 1,957,605 73.85
Canceled............................................ (141,604) 52.58
Exercised........................................... (1,014,479) 39.08
----------
Outstanding at December 31, 1999.................... 5,300,760 55.94
==========
Exercisable at:
December 31, 1997................................... 1,077,221 39.32
December 31, 1998................................... 1,801,311 40.65
December 31, 1999................................... 2,464,325 47.92
</TABLE>
The options outstanding at December 31, 1999 have exercise prices ranging
from $26.85 to $123.63 per share.
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
----------------------------------------------- ----------------------------
NUMBER WEIGHTED AVERAGE WEIGHTED NUMBER WEIGHTED
ACTUAL RANGE OUTSTANDING REMAINING AVERAGE OUTSTANDING AVERAGE
OF EXERCISE PRICES AT 12/31/99 CONTRACTUAL LIFE EXERCISE PRICE AT 12/31/99 EXERCISE PRICE
- --------------------- ----------- ---------------- -------------- ----------- --------------
<S> <C> <C> <C> <C> <C>
$ 26.85-39.68 1,895,085 6.3 $ 37.53 1,530,704 $38.53
$ 42.31-62.19 1,450,333 8.0 $ 55.36 569,969 $54.77
$ 65.63-83.88 1,869,760 8.7 $ 72.40 363,652 $76.75
$103.49-123.63 85,582 9.1 $113.56 -- $ --
--------- ---------
5,300,760 7.6 $ 55.94 2,464,325 $47.92
========= =========
</TABLE>
STOCK PURCHASE PLAN
On May 18, 1996, the Company's stockholders approved the Company's Employee
Stock Purchase Plan (the "ESPP"). The ESPP allows eligible employees to purchase
Common Stock at the lower of 85% of the market price of the stock at the
beginning or end of each offering period. The aggregate amount of common stock
that may be issued pursuant to the ESPP shall not exceed 400,000 shares, subject
to
77
<PAGE>
WELLPOINT HEALTH NETWORKS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
10. COMMON STOCK (CONTINUED)
adjustment pursuant to the terms of the ESPP. During the years ended December
31, 1999, 1998 and 1997, approximately 93,400, 99,300 and 50,700 shares of
common stock were purchased under the ESPP. Beginning in 1998, there are
offering periods for the first half and second half of the year and accordingly,
two purchase prices. For the year ended December 31, 1999, the purchase prices
were $72.14 and $56.05 per share. For the year ended December 31, 1998, the
purchase prices were $35.91 and $57.35 per share. For the year ended December
31, 1997, the purchase price totaled $29.22.
SFAS NO. 123 DISCLOSURE
In accordance with the provisions of SFAS No. 123, the Company applies APB
Opinion No. 25 and related interpretations in accounting for its stock option
plans and, accordingly, does not recognize compensation cost. If the Company had
elected to recognize the compensation cost based on the fair value of the
options granted at grant date as prescribed by SFAS No. 123, net income and
earnings per share for the years ended December 31, 1999, 1998 and 1997 would
have been reduced to the pro forma amounts indicated in the table which follows:
<TABLE>
<CAPTION>
1999 1998 1997
-------- -------- --------
(IN MILLIONS, EXCEPT
PER SHARE AMOUNTS)
<S> <C> <C> <C>
Net income--as reported..................................... $278.5 $231.3 $227.4
Net income--pro forma....................................... $256.3 $218.6 $218.2
Earnings per share--as reported............................. $ 4.22 $ 3.35 $ 3.30
Earnings per share--pro forma............................... $ 3.88 $ 3.16 $ 3.17
Earnings per share assuming full dilution--as reported...... $ 4.10 $ 3.29 $ 3.27
Earnings per share assuming full dilution--pro forma........ $ 3.76 $ 3.11 $ 3.14
</TABLE>
<TABLE>
<CAPTION>
OFFICERS EMPLOYEES
---------- -----------
<S> <C> <C>
1999
ASSUMPTIONS
Expected dividend yield.............................. -- --
Risk-free interest rate.............................. 5.02% 4.86%
Expected stock price volatility...................... 38.00% 38.00%
Expected life of options............................. four years three years
<CAPTION>
OFFICERS EMPLOYEES
---------- -----------
<S> <C> <C>
1998
ASSUMPTIONS
Expected dividend yield.............................. -- --
Risk-free interest rate.............................. 5.38% 5.35%
Expected stock price volatility...................... 37.00% 37.00%
Expected life of options............................. four years three years
</TABLE>
78
<PAGE>
WELLPOINT HEALTH NETWORKS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
10. COMMON STOCK (CONTINUED)
<TABLE>
<CAPTION>
OFFICERS EMPLOYEES
---------- -----------
<S> <C> <C>
1997
ASSUMPTIONS
Expected dividend yield.............................. -- --
Risk-free interest rate.............................. 6.26% 6.13%
Expected stock price volatility...................... 37.00% 37.00%
Expected life of options............................. five years three years
</TABLE>
The above pro forma disclosures may not be representative of the effects on
reported pro forma net income for future years. The weighted average fair value
of options granted during 1999, 1998 and 1997 is $23.76, $18.72, $13.72 per
share respectively.
TREASURY STOCK
As of December 31, 1999, the Company was authorized to repurchase
approximately 12.7 million shares of its common stock. A portion of this
authorization was approved in anticipation of the pending Cerulean transaction
in which Cerulean stockholders will receive cash and WellPoint Common Stock with
an aggregate market value of $500 million. As of December 31, 1999, 7.8 million
shares of common stock had been repurchased pursuant to this authorization.
11. DISCONTINUED OPERATIONS
During 1998, the Company discontinued its workers' compensation business
segment. On July 29, 1998, the Company entered into an agreement to sell its
workers' compensation business to Fremont Indemnity Company ("Fremont") for
approximately $110.0 million. The Company received proceeds of $101.4 million as
of the closing date, representing the initial purchase price as defined in the
agreement. The transaction closed on September 1, 1998. In the first quarter of
1999, the Company paid Fremont $6.7 million, representing the settlement of the
sales price.
Revenues for the workers' compensation segment totaled $24.0 million for the
period beginning July 1, 1998, the measurement date, through the date of sale,
and $94.6 million for the period beginning January 1, 1998 through the date of
sale. Revenues totaled $184.2 million for the year ended December 31, 1997.
79
<PAGE>
WELLPOINT HEALTH NETWORKS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
12. EARNINGS PER SHARE
The following is an illustration of the dilutive effect of the Company's
potential common stock on earnings per share ("EPS"). There were no antidilutive
securities in any of the three periods presented.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
BASIC EARNINGS PER SHARE CALCULATION:
NUMERATOR
Income from continuing operations before extraordinary gain
and cumulative effect of accounting change................ $297,211 $319,548 $229,437
Loss from discontinued operations........................... -- (88,268) (2,028)
Extraordinary gain from early extinguishment of debt, net of
tax....................................................... 1,891 -- --
Cumulative effect of accounting change, net of tax.......... (20,558) -- --
-------- -------- --------
Net Income.................................................. $278,544 $231,280 $227,409
======== ======== ========
DENOMINATOR
Weighted average shares outstanding......................... 66,070 69,099 68,811
======== ======== ========
EARNINGS PER SHARE
Income from continuing operations before extraordinary gain
and cumulative effect of accounting change................ $ 4.50 $ 4.63 $ 3.33
Loss from discontinued operations........................... -- (1.28) (0.03)
Extraordinary gain from early extinguishment of debt, net of
tax....................................................... 0.03 -- --
Cumulative effect of accounting change, net of tax.......... (0.31) -- --
-------- -------- --------
Net Income.................................................. $ 4.22 $ 3.35 $ 3.30
======== ======== ========
EARNINGS PER SHARE ASSUMING FULL DILUTION CALCULATION:
NUMERATOR
Income from continuing operations before extraordinary gain
and cumulative effect of accounting change................ $297,211 $319,548 $229,437
Interest expense on zero coupon convertible subordinated
debentures, net of tax.................................... 930 -- --
-------- -------- --------
Adjusted income from continuing operations before
extraordinary gain and cumulative effect of accounting
change.................................................... 298,141 319,548 229,437
Loss from discontinued operations........................... -- (88,268) (2,028)
Extraordinary gain from early extinguishment of debt, net of
tax....................................................... 1,891 -- --
Cumulative effect of accounting change, net of tax.......... (20,558) -- --
-------- -------- --------
Adjusted Net Income......................................... $279,474 $231,280 $227,409
======== ======== ========
DENOMINATOR
Weighted average shares outstanding......................... 66,070 69,099 68,811
Net effect of dilutive stock options........................ 1,077 1,160 651
Assumed conversion of zero coupon convertible subordinated
debentures................................................ 949 -- --
-------- -------- --------
Fully diluted weighted average shares outstanding........... 68,096 70,259 69,462
======== ======== ========
</TABLE>
80
<PAGE>
WELLPOINT HEALTH NETWORKS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
12. EARNINGS PER SHARE (CONTINUED)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
EARNINGS PER SHARE ASSUMING FULL DILUTION
Income from continuing operations before extraordinary gain
and cumulative effect of accounting change................ $ 4.38 $ 4.55 $ 3.30
Loss from discontinued operations........................... -- (1.26) (0.03)
Extraordinary gain from early extinguishment of debt, net of
tax....................................................... 0.02
Cumulative effect of accounting change, net of tax.......... (0.30) -- --
-------- -------- --------
Net Income.................................................. $ 4.10 $ 3.29 $ 3.27
======== ======== ========
</TABLE>
13. LEASES
Effective January 1, 1996, the Company entered into a new lease agreement
for a 24-year period for its former corporate headquarters, expiring in December
2019, with two options to extend the term for up to two additional five-year
terms. In addition to base rent, beginning in January 1997, the Company must pay
a contingent amount based upon annual changes in the consumer price index. The
Company paid $30 million to the owner of the building in connection with this
lease agreement which is being amortized on a straight-line basis over the life
of the new lease.
The Company's other lease terms range from one to 20 years with certain
options to renew. Certain lease agreements provide for escalation of payments
which are based on fluctuations in certain published cost-of-living indices.
Future minimum rental payments under operating leases utilized by the
Company having initial or remaining noncancellable lease terms in excess of one
year at December 31, 1999 are as follows:
<TABLE>
<CAPTION>
YEAR ENDING DECEMBER 31,
- ------------------------ (IN THOUSANDS)
<S> <C>
2000........................................................ $ 57,515
2001........................................................ 53,592
2002........................................................ 36,202
2003........................................................ 24,157
2004........................................................ 17,843
Thereafter.................................................. 245,277
--------
Total payments required................................. $434,586
========
</TABLE>
Rental expense for the years ended December 31, 1999, 1998 and 1997 for all
operating leases was $41.8 million, $43.4 million and $33.3 million,
respectively. Contingent rentals included in the above rental expense for the
years ended December 31, 1999, 1998 and 1997 were $0.9 million, $0.6 million and
$0.3 million, respectively.
81
<PAGE>
WELLPOINT HEALTH NETWORKS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
14. FAIR VALUE OF FINANCIAL INSTRUMENTS
The following methods and assumptions were used to estimate the fair value
of each class of financial instrument:
CASH AND CASH EQUIVALENTS. The carrying amount approximates fair value,
based on the short-term maturities of these instruments.
INVESTMENT SECURITIES. The carrying amount approximates fair value, based
on quoted market prices for the same or similar instruments.
LONG-TERM INVESTMENTS. The carrying amount approximates fair value, based
on quoted market prices for the same or similar instruments and at cost
for certain equity investments.
REVOLVING CREDIT FACILITY. The carrying amount for the revolving credit
facility approximates fair value as the underlying instruments have
variable interest rates at market value.
CONVERTIBLE DEBT. The fair value for the convertible debt is based upon
the last price paid by the Company to repurchase the debt. The carrying
value is based on the face value adjusted for accretion of original issue
discount.
INTEREST RATE SWAPS. The fair value of the interest rate swaps is based
on its quoted market prices by the financial institutions which are the
counterparties to the swaps.
FORWARD EXCHANGE CONTRACTS. The carrying value for forward exchange
contracts represents the fair value of such contracts that exceed the
fair value of the related foreign denominated bond position. The fair
value of such contracts is determined by the counterparties to the
contracts.
The carrying amounts and estimated fair values of the Company's financial
instruments as of December 31, 1999 are summarized below:
<TABLE>
<CAPTION>
CARRYING ESTIMATED
AMOUNT FAIR VALUE
---------- ----------
(IN THOUSANDS)
<S> <C> <C>
Cash and cash equivalents............................ $ 505,014 $ 505,014
Investment securities................................ 2,645,372 2,645,372
Long-term investments................................ 108,280 108,280
Revolving credit facility............................ 200,000 200,000
Convertible debt..................................... 147,884 136,795
Interest rate swaps.................................. (562) (1,134)
Forward exchange contracts........................... 2,793 2,793
</TABLE>
82
<PAGE>
WELLPOINT HEALTH NETWORKS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
15. HEDGING ACTIVITIES
The Company utilizes interest rate swap agreements and foreign currency
contracts to manage interest rate and foreign currency exposures. The principal
objective of such contracts is to minimize the risks and/or costs associated
with financial and investing activities. The Company does not utilize financial
instruments for trading or speculative purposes. The counterparties to these
contractual arrangements are major financial institutions with which the Company
also has other financial relationships. These counterparties expose the Company
to credit loss in the event of non-performance. However, the Company does not
anticipate non-performance by the other parties.
INTEREST RATE SWAP AGREEMENTS: In 1996, the Company entered into three
interest rate swap agreements to reduce the impact of changes in interest rates
on its floating rate debt under its revolving credit facility. During 1999, the
Company's 6.45%, $100.0 million fixed interest rate swap agreement matured. In
addition, on September 22 and October 1, 1999, the Company entered into partial
termination agreements to reduce the notional amount of the Company's 7.05%,
$150.0 million swap agreement to $50.0 million. All of the remaining terms and
conditions of the swap agreement remained unchanged, with the exception of the
fixed interest rate which was revised to 7.06%. The swap agreements are
contracts to exchange variable-rate (weighted average rate for 1999 of 5.4%) for
fixed-rate interest payments (weighted average rate for 1999 of 6.3%) without
the exchange of the underlying notional amounts. The agreements mature at
various dates through 2006. In 1999, the Company entered into an additional
interest rate swap agreement with a notional amount of $100.0 million to
exchange three month LIBOR (the index associated with the aforementioned swap)
for one month LIBOR (the index associated with the Company's revolving credit
facility), in order to hedge against rising interest rates at the end of the
year. This agreement matured February 28, 2000.
The notional amounts of the interest rate swap agreements are used to
measure interest to be paid and do not represent the amount of exposure to
credit loss. For interest rate instruments that effectively hedge interest rate
exposures, the net cash amounts paid on the agreements are accrued and
recognized as an adjustment to interest expense. If an agreement no longer
qualifies as a hedge instrument, then it is marked to market and carried on the
balance sheet at fair value. As of December 31, 1999, no such condition existed.
For the year ended December 31, 1998, the Company recognized a charge of $4.5
million for the market value decrease on the interest rate swap agreements not
serving as a hedge.
As of December 31, 1999 the Company had the following interest rate swap
agreements in effect (notional amount in thousands):
<TABLE>
<CAPTION>
NOTIONAL AMOUNT STRIKE RATE EXPIRATION DATE
- --------------- ------------------ -----------------
<S> <C> <C>
$150,000 6.99% October 17, 2003
$ 50,000 7.06% October 17, 2006
$100,000 One Month LIBOR February 28, 2000
</TABLE>
FOREIGN EXCHANGE CONTRACTS: As part of the Company's investment strategy to
diversify and obtain a higher rate of return on its investment portfolio, the
Company has invested in certain fixed maturity securities denominated in foreign
currencies. In order to mitigate the foreign currency risk, the Company has
entered into two types of foreign currency derivative instruments. The first
type of instrument is a forward exchange contract which is entered into to hedge
the currency risk of a foreign currency investment transaction between the trade
date and the settlement date. Gains and losses related to such instruments are
recognized in the Company's income statement. The Company recognized a loss of
$1.9
83
<PAGE>
WELLPOINT HEALTH NETWORKS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
15. HEDGING ACTIVITIES (CONTINUED)
million and a gain of $0.5 million from such hedging activities for the years
ended December 31, 1999 and 1998, respectively. No such hedging activity
occurred during the year ended December 31, 1997.
The Company has also entered into foreign currency contracts for each of the
fixed maturity securities owned as of December 31, 1999 to hedge asset positions
denominated in other currencies. As of December 31, 1999, the Company had the
following foreign currency contracts in effect (notional amount in thousands of
U. S. dollars):
<TABLE>
<CAPTION>
NOTIONAL AMOUNT SETTLEMENT DATE
------------------- -------------------
CURRENCY BUY SELL BUY SELL
- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C>
Australian dollar....................................... $ 7,263 05/08/00
Danish kroner........................................... $ 6,585 02/23/00
Japanese yen............................................ $ 3,478 03/08/00
Euro dollar............................................. $1,104 $20,412 02/07/00 02/07/00
Euro dollar............................................. $15,340 02/25/00
Euro dollar............................................. $14,422 03/15/00
Euro dollar............................................. $11,486 04/06/00
</TABLE>
The unrealized gains and losses from effective forward exchange contracts
are reflected in other comprehensive income. As of December 31, 1999, the
unrealized gains arising from the above forward exchange contracts amounted to
$1.5 million. As of December 31, 1998, the unrealized losses arising from the
above forward exchange contracts amounted to $1.7 million. The unrealized gains
and losses from ineffective foreign currency contracts are reflected in the
Company's income statement. For the years ended December 31, 1999 and 1998, the
Company recognized gains from such hedging activities of $0.3 million and $2.7
million, respectively. No such hedging activity occurred during the years ended
December 31, 1997.
16. 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. Recently, a
number of class-action lawsuits have been brought against several of the
Company's competitors alleging, among other things, various misrepresentations
regarding their health plans and breaches of fiduciary obligations to health
plan members. The Company has not yet been made a party to any of such lawsuits.
The financial and operational impact that these and other evolving theories of
recovery will have on the managed care industry generally, or the Company in
particular, is at present unknown.
Certain of such legal proceedings are or may be covered under insurance
policies or indemnification agreements. Based upon information presently
available, management of the Company believes that the final outcome of all such
proceedings should not have a material adverse effect on the Company's results
of operations, cash flows or financial condition.
84
<PAGE>
WELLPOINT HEALTH NETWORKS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
17. NONRECURRING COSTS
The Company recorded $14.5 million of nonrecurring costs for the year ended
December 31, 1997, of which $8.0 million recorded in the second quarter of 1997
related primarily to the write-down related to the Company's dental practice
management operations and discontinuance of the Company's medical practice
management operations in Santa Barbara and San Luis Obispo. In addition, $6.5
million incurred in the first quarter of 1997 consisted of severance and
retention payments associated with the GBO acquisition.
18. REGULATORY REQUIREMENTS
Certain of the Company's regulated subsidiaries must comply with certain
minimum capital or tangible net equity requirements in each of the states in
which they operate. As of December 31, 1999, the Company and its regulated
subsidiaries were in compliance with these requirements.
The ability of the Company's licensed insurance company subsidiaries to pay
dividends is limited by the Departments of Insurance in their respective states
of domicile. Generally, dividends in any 12-month period are limited to the
greater of the prior year's statutory net income or 10% of statutory surplus.
Larger dividends, classified as extraordinary, require a special request of the
respective Departments of Insurance. The maximum dividend payable in 2000
without prior approval by WellPoint's licensed insurance company subsidiaries is
estimated to be $86.3 million.
19. FISCAL INTERMEDIARY FUNCTION
Under an agreement with the BCBSA, the Company has contracted to administer
Part A of Title XVIII of the Social Security Act (Medicare) in certain regions
or for certain health care providers. The agreement is renewable annually unless
terminated by the parties involved. As fiscal intermediary under the agreement,
the Company makes disbursements to providers for medical care from funds
provided by the Federal Government and is reimbursed for these expenses incurred
under the agreement. The Company disbursed approximately $8.8 billion, $8.5
billion and $8.4 billion and received administrative fees of approximately $40.7
million, $34.3 million and $29.9 million for the years ended December 31, 1999,
1998 and 1997, respectively. The reimbursement is treated as a direct recovery
of general and administrative expenses.
20. BUSINESS SEGMENT INFORMATION
Effective April 1, 1999, the Company effected a modification of its internal
business operations. As a result of this modification, the Company has two
reportable segments: the Large Employer Group business segment and the
Individual and Small Employer Group business segment. The Large Employer Group
and Individual and Small Employer Group 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 and
individuals. Included in Corporate and Other is the Company's Senior business
and Specialty business.
The Company's management identified its reportable segments based upon the
following factors: (1) The Company's organizational structure contains Senior
Executives that oversee each of these segments, (2) The Company's Chief
Operating Decision Maker (Chief Executive Officer) reviews the results of
operations for each of the following segments and holds each Division President
accountable for results, and (3) A Division President's overall compensation is
based upon the related segment's results.
85
<PAGE>
WELLPOINT HEALTH NETWORKS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
20. BUSINESS SEGMENT INFORMATION (CONTINUED)
The accounting policies of the segments are the same as those described in
the summary of significant accounting policies and are consistent with generally
accepted accounting principles with the exception of the exclusion of allocated
corporate overhead to the reportable segments.
The following tables present segment information for the Large Employer
Group and Individual and Small Employer Group for the years ended December 31,
1999, 1998 and 1997:
1999
<TABLE>
<CAPTION>
LARGE INDIVIDUAL &
EMPLOYER SMALL EMPLOYER CORPORATE &
GROUP GROUP OTHER CONSOLIDATED
---------- -------------- ------------ ------------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Premium revenue............................. $3,889,032 $2,551,961 $ 455,864 $6,896,857
Management services revenue................. 367,060 4,579 57,697 429,336
---------- ---------- ---------- ----------
Total revenue from external customers....... 4,256,092 2,556,540 513,561 7,326,193
Intercompany revenues....................... 19,941 2,500 (22,441) --
Investment income........................... 98,410 53,627 7,197 159,234
Interest expense............................ 20,949 278 (1,049) 20,178
Depreciation and amortization expense....... 36,829 14,641 13,328 64,798
Income tax expense (benefit)................ 145,973 105,347 (61,210) 190,110
Extraordinary gain / cumulative effect...... (12,328) (7,685) 1,346 (18,667)
Segment net income (loss)................... $ 167,435 $ 134,828 $ (23,719) $ 278,544
========== ========== ========== ==========
Segment Assets.............................. $2,300,056 $ 998,060 $1,295,118 $4,593,234
========== ========== ========== ==========
</TABLE>
1998
<TABLE>
<CAPTION>
LARGE INDIVIDUAL &
EMPLOYER SMALL EMPLOYER CORPORATE &
GROUP GROUP OTHER CONSOLIDATED
---------- -------------- ----------- ------------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
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) --
Investment income........................... 91,284 43,281 (24,987) 109,578
Interest expense............................ 26,471 351 81 26,903
Depreciation and amortization expense....... 34,773 11,511 10,397 56,681
Income tax expense (benefit)................ 118,915 87,517 (133,994) 72,438
Loss from discontinued operations........... (44,526) (39,827) (3,915) (88,268)
Segment net income (loss)................... $ 138,514 $ 91,249 $ 1,517 $ 231,280
========== ========== ========== ==========
Segment Assets.............................. $2,299,178 $ 783,505 $1,143,151 $4,225,834
========== ========== ========== ==========
</TABLE>
86
<PAGE>
WELLPOINT HEALTH NETWORKS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
20. BUSINESS SEGMENT INFORMATION (CONTINUED)
1997
<TABLE>
<CAPTION>
LARGE INDIVIDUAL & CORPORATE
EMPLOYER SMALL EMPLOYER &
GROUP GROUP OTHER CONSOLIDATED
---------- -------------- ---------- ------------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
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) --
Investment income.............................. 85,602 38,124 72,427 196,153
Interest expense............................... 35,033 379 1,246 36,658
Depreciation and amortization expense.......... 31,408 9,975 9,227 50,610
Income tax expense (benefit)................... 99,167 78,238 (20,488) 156,917
Loss from discontinued operations.............. (13,276) 2,673 8,575 (2,028)
Segment net income (loss)...................... $ 131,408 $ 107,858 $ (11,857) $ 227,409
========== ========== ========== ==========
Segment Assets................................. $2,397,814 $ 777,029 $1,059,281 $4,234,124
========== ========== ========== ==========
</TABLE>
RECONCILIATIONS
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------------------
1999 1998 1997
---------- ---------- ----------
(IN THOUSANDS)
<S> <C> <C> <C>
Total assets for reportable segments........................ $3,298,116 $3,082,683 $3,174,843
Corporate and other assets.................................. 1,295,118 1,143,151 860,869
Goodwill not allocated to segments (corporate).............. -- -- 198,412
---------- ---------- ----------
Consolidated total........................................ $4,593,234 $4,225,834 $4,234,124
========== ========== ==========
</TABLE>
21. COMPREHENSIVE INCOME
The following summarizes comprehensive income reclassification adjustments
included in the statements of changes in stockholders' equity:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------
1999 1998 1997
-------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Holding gain (loss) on investment securities arising during
the period (net of tax benefit of $6,295 and tax expense
of $24,218 and tax benefit of $20,581, respectively)...... $ (9,847) $35,579 $(30,236)
Holding loss related to foreign exchange transactions (net
of tax benefit of $1,013)................................. (1,584) -- --
Add:
Reclassification adjustment for realized gains (losses) on
investment securities (net of tax benefit of $10,442,
$14,237, and tax expense of $23,942, respectively)........ (16,332) (20,916) 35,174
Reclassification adjustment related to foreign exchange
gains on investment securities (net of tax expense of
$1,160)................................................... 1,815 -- --
-------- ------- --------
Net gain (loss) recognized in other comprehensive income
(net of tax benefit of $16,590 and tax expense of $9,981
and $3,361, respectively)................................. $(25,948) $14,663 $ 4,938
======== ======= ========
</TABLE>
87
<PAGE>
WELLPOINT HEALTH NETWORKS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
22. PENDING TRANSACTIONS
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
1.7 million persons in the State of Georgia as of December 31, 1999. At the
effective time of the Merger, the shareholders of Cerulean will receive
WellPoint Common Stock with a market value of $500.0 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 $225.0 million. The transaction is intended to qualify as a
tax-free reorganization for Cerulean shareholders that elect to receive
WellPoint Common Stock. On June 25, 1999, the shareholders of Cerulean approved
the plan of merger with the Company. In order to complete the transaction, the
Company must obtain the approval of the Georgia Department of Insurance after a
public hearing
23. EXTRAORDINARY GAIN
On October 6, 1999, the Board of Directors authorized the repurchase of some
or all of the Company's Debentures for cash. During the year ended December 31,
1999, the Company repurchased $81.0 million aggregate principal amount at
maturity of the Company's Debentures at a total purchase price of $49.8 million.
This repurchase resulted in an extraordinary gain of $1.9 million, or $0.02 per
share assuming full dilution, net of tax expense totaling $1.2 million.
24. SUBSEQUENT EVENT (UNAUDITED)
On March 1, 2000, the Company completed its acquisition of Rush Prudential
Health Plans ("Rush Prudential"). Rush Prudential offers a broad array of
products and services ranging from HMO products to traditional PPO products. The
acquisition has more than doubled the Company's current Illinois medical
membership to nearly 600,000 members. The transaction, which was financed with
cash, is valued at approximately $200 million, subject to certain post-closing
adjustments. The acquisition will be accounted for under the purchase method of
accounting.
88
<PAGE>
ANNEX I
WELLPOINT HEALTH NETWORKS INC.
1996 EMPLOYEE STOCK PURCHASE PLAN
(AS AMENDED AND RESTATED EFFECTIVE APRIL 1, 2000)
1. PURPOSE
The WellPoint Health Networks Inc. Employee Stock Purchase Plan (the
"Plan") is intended to provide an opportunity to participate in the
ownership of Wellpoint Health Networks, Inc. (the "Company") for eligible
employees of the Company and such other companies ("Participating
Companies") as the Board of Directors of the Company (the "Board") or the
Committee (as defined below) shall from time to time designate; provided
that each such company shall qualify as a "parent corporation" or
"subsidiary corporation" (a "Corporate Affiliate"), as defined in Section
425(e) and (f) of the Internal Revenue Code of 1986 (the "Code"), on the
first day of the relevant Offering Period. It is further intended that the
Plan shall qualify as an "employee stock purchase plan" as defined in
Section 423 of the Code. The terms of this amendment and restatement of the
Plan shall be effective for Offering Periods beginning on and after
April 1, 2000.
2. ADMINISTRATION
The Plan shall be administered by a committee or committees (the
"Committee") appointed by the Board. The Committee shall have full authority
to interpret and construe any provision of the Plan and to adopt such
rules and regulations for administering the Plan as it may deem necessary.
Decisions of the Committee shall be final and binding on all parties who
have an interest in the Plan.
3. EFFECTIVE DATE AND TERM OF PLAN
(a) EFFECTIVE DATE. Subject to 3(b), the Plan shall become effective
on May 21, 1996.
(b) ESCROW SHARES. Pending such further approval of the Plan by the
Company's stockholders as the Committee shall deem advisable, all shares
issued under the Plan shall be nontransferable and shall be held in escrow
by the Company. If the Company's stockholders approve the Plan within one
year of the date of adoption of the Plan by the Board, the escrowed shares
will thereafter be subject to the conditions described in Section 7(g) of
the Plan. If the stockholders do not approve the Plan within such one year
period, such shares shall be cancelled and the Company shall refund to
participants the amount of payroll deductions collected with interest
thereon at the rate equal to the rate for one-year Treasury bills
immediately before the first day of the first Offering Period.
(c) TERMINATION OF PLAN. The Plan shall continue in effect until the
date on which all shares available for issuance under the Plan shall have
been issued unless earlier terminated pursuant to Section 9 or 10.
4. STOCK SUBJECT TO THE PLAN
(a) NUMBER OF SHARES. The stock subject to the Plan shall be shares of
the common stock of the Company which are authorized but unissued or which
have been reacquired (the "Common Stock"). In connection with the sale of
shares under the Plan, the Company may repurchase shares of Common Stock in
the open market. The aggregate amount of Common Stock which may be issued
pursuant to the Plan shall not exceed 1,400,000 shares (subject to further
adjustment thereafter as provided in 4(b)).
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<PAGE>
(b) ADJUSTMENT. If any change is made in the Common Stock subject to
the Plan, or subject to any purchase right granted under the Plan (through
merger, consolidation, reorganization, recapitalization, stock dividend,
split-up, combination of shares, exchange of shares, change in corporate
structure, or otherwise), the Committee shall make appropriate adjustments
as to (i) the class and maximum number of shares subject to the Plan,
(ii) the class and maximum number of shares purchasable by each participant
per Offering Period, and (iii) the class and number of shares and price per
share of stock subject to outstanding purchase rights in order to prevent
the dilution or enlargement of benefits thereunder.
(c) CORPORATE AFFILIATE STOCK. Subject to such limits, regulatory
approvals and stockholder approvals as the Committee determines to be
necessary, Common Stock issuable under the Plan may include the stock of a
Corporate Affiliate.
5. OFFERING PERIODS
(a) TERMS OF OFFERING PERIOD. Common Stock shall be offered for
purchase under the Plan through a series of successive Offering Periods
until such time as (i) the maximum number of shares of Common Stock
available for issuance under the Plan shall have been issued pursuant to
purchase rights granted under the Plan or (ii) the Plan shall have been
sooner terminated in accordance with Article 9 or 10. The Committee shall
determine, in its discretion, the length of each Offering Period and may
provide for more than one "Purchase Period" within each Offering Period, in
which case the purchase right for such Offering Period shall be exercised in
successive installments on the last business day of each Purchase Period
within the Offering Period, but no more frequently than quarterly. No
Offering Period shall have a term exceeding 27 months.
(b) INITIAL OFFERING PERIODS. The initial Offering Period under the
Plan will begin on such date as the Board or Committee shall specify and end
on December 31, 1996. The next offering period will begin on the first
business day, and end on the last business day of, 1997. Unless the
Committee otherwise determines, subsequent Offering Periods will be
approximately six months long and will begin on the first business day of
each year and the first business day of the third calendar quarter of each
calendar year that begins thereafter and shall end on the last business day
before the beginning of the next Offering Period.
(c) PURCHASE RIGHTS. Each participant shall be granted a separate
purchase right for each Offering Period in which the individual
participates. The purchase right shall be granted on the first day of such
Offering Period and shall be automatically exercised on the last day of the
Offering Period or in installments on the last day of each separate Purchase
Period authorized within such Offering Period.
6. ELIGIBILITY AND PARTICIPATION
(a) GENERAL RULES. Each employee of the Company or any of the
Participating Companies shall be an eligible employee, provided that an
employee whose terms of employment are subject to the terms of a collective
bargaining agreement shall not be an eligible employee if and for such
period of time as the union representing a collective bargaining unit of
which any employee is a member chooses, on behalf of the members of such
unit, not to participate in the Plan. An employee may participate in an
Offering Period if the employee (i) has become an eligible employee before
the first day of the Offering Period, (ii) has completed any minimum service
requirement that may be specified by the Committee for such Offering Period
(or in the case of an employee whose terms of employment are subject to the
terms of a collective bargaining agreement, any probationary period
specified therein for participation in the Plan), not to exceed two years,
and (iii) remains an eligible employee on the first day of the Offering
Period. Eligible employees may become participants with
I-2
<PAGE>
respect to an Offering Period by delivering instructions in the appropriate
form to such persons and at such time prior to the first day of that
Offering Period as the Committee may specify.
(b) FIVE PERCENT OWNER. Under no circumstances shall purchase rights
be granted under the Plan to any employee if such individual would,
immediately after the grant, own (within the meaning of Code Section
424(d)), or hold outstanding options or other rights to purchase, stock
possessing five percent (5%) or more of the total combined voting power or
value of all classes of stock of the Company or any Corporate Affiliate.
7. PURCHASE RIGHTS
Purchase rights shall be evidenced by instruments in such form as the
Committee may from time to time approve, and shall conform to the following
terms and conditions:
(a) PURCHASE PRICE. The Purchase Price per share of each share
purchased on any date within an Offering Period shall be the lower of (i) a
percentage specified by the Committee (but not less than eighty-five percent
(85%)) of the fair market value per share of the Company's Common Stock on
the first day of the Offering Period, or (ii) a percentage specified by the
Committee (but not less than eighty-five percent (85%)) of the fair market
value per share of the Company's Common Stock on the purchase date.
(b) FAIR MARKET VALUE. For purposes of the Plan, the fair market value
per share of the Company's Common Stock on any day shall be determined
pursuant to a procedure approved by the Committee.
(c) PAYROLL DEDUCTIONS. Payment for Common Stock under the Plan shall
be effected by means of the participant's authorized payroll deductions or
such other means as the Committee may authorize. Such deductions shall begin
with the first pay day following the commencement of the Offering Period and
shall (unless sooner terminated by the participant) remain in effect for
successive Offering Periods. The Committee may permit participants to elect
payroll deductions pursuant to one or either of the following methods:
(i) FLAT DOLLAR AMOUNT. A participant may elect a flat dollar
amount per biweekly payroll check, to be contributed to the Plan. The
minimum contribution is $20 per payroll check. The maximum contribution
is $21,250 per year. A participant may also make a separate election to
contribute to the Plan a specified dollar amount from annual scheduled
bonus payments made in the month of March.
(ii) PERCENTAGE OF COMPENSATION. A participant may elect a
percentage of the participant's compensation paid during the Offering
Period, in one percent (1%) increments (not to exceed fifteen percent
(15%)), to be contributed to the Plan. Compensation for this purpose
means the participant's total compensation, which includes regular base
earnings paid by a Participating Company, sales commissions, overtime,
bonuses and incentive payments, and elective contributions that are not
includible in income under Sections 125, 402(a)(8), 401(h) or 403(b) of
the Code.
(d) NUMBER OF SHARES. On the first day of any Offering Period, a
participant shall be granted a purchase right to purchase up to a fixed
number of shares of Common Stock specified by the Committee or determined
pursuant to a formula specified by the Committee for such Offering Period.
Any payroll deductions not applied to such purchase because they are not
sufficient to purchase a whole share shall be held for the purchase of
Common Stock on the next purchase date.
(e) TERMINATION OF OR CHANGES TO PAYROLL DEDUCTIONS. Unless a
participant has irrevocably elected otherwise, the participant may terminate
payroll deductions at any time by delivering notice in the appropriate form
to such persons and at such time as the Committee may specify. Such
I-3
<PAGE>
termination will become effective on the first day of the first full payroll
period following the delivery of such notice. Any payroll deductions
previously collected from the participant and not previously applied to the
purchase of Common Stock during that Offering Period shall, at the
participant's election, immediately be refunded or held for the purchase of
shares on the next purchase date immediately following such termination. If
no such election is made, then such funds shall be refunded as soon as
possible after the purchase date. Prior to the commencement of any new
Offering Period, a participant may resume, increase or decrease payroll
deductions by delivering instructions in the appropriate form to such
persons and at such time as the Committee may specify. The new payroll
deduction shall become effective on the first day of the first Offering
Period following the delivery of such instructions. Distribution of Common
Stock held in a participant's account shall be distributed pursuant to
Section 7(g).
(f) TERMINATION OF EMPLOYMENT. If a participant ceases to be employed
by the Company or a Participating Company for any reason, including death or
disability, prior to the end of an Offering Period, the participant's
purchase right shall terminate, and any payroll deductions previously
collected from the participant and not previously applied to the purchase of
Common Stock during that Offering Period shall immediately be paid to the
participant or the participant's personal representative. The Committee may
provide, on a uniform basis with respect to any Offering Period, that an
employee who is on a leave of absence will be deemed to have terminated
employment after a specified period.
(g) TRANSFER RESTRICTIONS ON SHARES.
(i) RESTRICTIONS AND ESCROW. The Committee may determine, in its
discretion, that shares of Common Stock acquired under the Plan during an
Offering Period shall not be transferable by the participant, other than
by reason of death or such other reasons as the Committee may specify,
for a period not to exceed one (1) year following the purchase date. If
the Committee does so determine, shares so acquired shall be held in
escrow by the Company until such transfer restrictions lapse. The
Committee may also provide with respect to any Offering Period, that in
the event that a participant attempts to transfer shares held in escrow
on his or her behalf or terminates employment with the Company or
Participating Company while shares are held in escrow on his or her
behalf, the Company shall have an automatic right to repurchase, unless
such repurchase is prohibited or restricted by law, such shares, for an
amount equal to the lesser of (i) the price paid for the shares by the
participant, or (ii) the fair market value (determined in accordance with
Section 7(b)) of the shares on the date of repurchase.
(ii) ADDITIONAL SHARES AND DIVIDENDS. In the event of any stock
dividend, stock split, recapitalization, reorganization or other change
in corporate structure effected without receipt of consideration, then
any new, substituted or additional securities or other property
(including money paid other than as a regular cash dividend) which is by
reason of such transaction distributed with respect to any escrowed
shares shall be reinvested in shares of Common Stock under the Plan, and
shares purchased pursuant to such reinvestment shall be immediately
subject to the above transfer and escrow provisions to the same extent
the previously escrowed shares are at the time. All regular cash
dividends on shares or other securities at the time held on behalf of a
participant shall be reinvested in shares of Common Stock under the Plan.
(h) PRORATION OF PURCHASE RIGHTS. If the total number of shares of
Common Stock for which purchase rights are to be granted on any date in
accordance with the terms of the Plan exceed the number of shares then
remaining available under the Plan (after deduction of all shares for which
purchase rights have been exercised or are then outstanding), the Committee
shall make a pro rata allocation of the shares remaining available in as
near as uniform a manner as shall be practicable and as it shall deem
equitable. The Committee shall give written notice of such allocation to
each participant affected thereby.
I-4
<PAGE>
(i) EXERCISE. Each purchase right shall be exercised automatically on
the purchase date for the full number of purchasable shares, unless the
purchase right has been previously terminated pursuant to Section 7(e) or
7(f).
(j) ASSIGNABILITY. Subject to Section 8, purchase rights under the
Plan shall not be assignable or transferable by the participant other than
by will or by the laws of descent and distribution and during the life of
the participant shall be exercisable only by the participant.
(k) RIGHTS AS STOCKHOLDER. A participant shall have no rights as a
stockholder with respect to shares covered by any purchase right granted
under the Plan until the purchase right is exercised. No adjustments will be
made for dividends or other rights for which the record date is prior to the
date of exercise.
(l) ACCRUAL LIMITATIONS. No purchase right shall permit the rights of
a participant to purchase stock under all "employee stock purchase plans"
(as defined in Section 423 of the Code) of the Company or a Corporate
Affiliate to accrue at a rate that exceeds $25,000 of fair market value of
such stock (determined at the time such purchase right is granted) for each
calendar year in which such purchase right is outstanding at any time.
(m) REGULATORY APPROVAL. The implementation of the Plan, the granting
of any purchase right under the Plan, and the issuance of Common Stock upon
the exercise of any such purchase right shall be subject to the Company's
compliance with all applicable requirements of the Securities Act of 1933,
all applicable listing requirements of any securities exchange on which the
Common Stock is listed and all other applicable requirements established by
law or regulation.
(n) WITHHOLDING. The issuance of shares of Common Stock under the Plan
shall be conditioned upon the satisfaction of any applicable tax withholding
obligations.
(o) OTHER PROVISIONS. Instruments evidencing purchase rights may
contain such other provisions, not inconsistent with the Plan, as the
Committee deems advisable.
8. DESIGNATION OF BENEFICIARY
A participant may file a written designation of a beneficiary who is to
receive shares and cash, if any, credited on behalf of the participant under
the Plan in the event of such participant's death. Such designation of
beneficiary may be changed by the participant at any time by filing the
appropriate form with the Committee. In the event of the death of a
participant and in the absence of a beneficiary validly designated under the
Plan who is living at the time of such participant's death, the Company
shall deliver such shares and/or cash to the executor or administrator of
the estate of the participant, or if no such executor or administrator has
been appointed (to the knowledge of the Company), the Company shall deliver
such shares and/or cash to the participant's spouse or if no spouse is
living, to the children of the participant in equal shares.
9. CORPORATE TRANSACTIONS
(a) TERMINATION. In the event of the disposition of all or
substantially all of the assets or outstanding capital stock of the issuer
of the Common Stock by means of a sale, merger, reorganization, or
liquidation (a "Corporate Transaction"), each purchase right under this
Plan, unless assumed pursuant to a written agreement by the successor
corporation or a parent or subsidiary thereof, will automatically be
exercised immediately prior to the consummation of the Corporate Transaction
as if such date were the last purchase date of the Offering Period. Any
payroll deductions not applied to such purchase shall be promptly refunded
to the participant.
(b) CORPORATE STRUCTURE. The grant of purchase rights under this Plan
will in no way affect the right of the issuer of Common Stock to adjust,
reclassify, reorganize, or otherwise change its capital or
I-5
<PAGE>
business structure or to merge, consolidate, dissolve, liquidate or sell or
transfer all or any part of its business or assets.
10. AMENDMENT AND TERMINATION
(a) AMENDMENT. The Board may from time to time alter, amend, suspend,
or discontinue the Plan with respect to any shares at any time not subject
to purchase rights; provided, however, that no such action of the Board may,
without the approval of stockholders of the Company, (i) increase the number
of shares subject to the Plan (unless necessary to effect the adjustments
required under Section 4(b)), or (ii) make any other change with respect to
which the Board determines that stockholder approval is required by
applicable law or regulatory standards.
(b) TERMINATION. The Board shall have the right, exercisable in its
sole discretion, to terminate the Plan at any time immediately following any
purchase date, which the Committee may, in its discretion, accelerate in
connection with the termination of the Plan. Should the Board elect to
exercise such right, then no further purchase rights shall thereafter be
granted or exercised, and no further payroll deductions shall be collected
under the Plan.
11. NO EMPLOYMENT OBLIGATION
Nothing contained in the Plan (or in any purchase right granted pursuant
to the Plan) shall confer upon any employee any right to continue in the
employ of the Company or any Corporate Affiliate or constitute any contract
or agreement of employment or interfere in any way with the right of the
Company or a Corporate Affiliate to reduce such employee's compensation from
the rate in existence at the time of the granting of a purchase right or to
terminate such employee's employment at any time, with or without cause.
However, nothing contained herein or in any purchase right shall affect any
contractual rights of an employee pursuant to a written employment
agreement.
12. GOVERNING LAW
To the extent not otherwise governed by federal law, the Plan and its
implementation shall be governed by and construed in accordance with the
laws of the State of California.
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- --------------------------------------------------------------------------------
PROXY/VOTING INSTRUCTION CARD
WELLPOINT HEALTH NETWORKS INC.
2000 ANNUAL MEETING OF STOCKHOLDERS
THIS PROXY/VOTING INSTRUCTION CARD IS SOLICITED ON BEHALF OF THE BOARD OF
DIRECTORS
Leonard D. Schaeffer and Thomas C. Geiser, or either of them, are hereby
constituted and appointed as lawful attorneys and proxies of the undersigned,
each with full power of substitution to vote and act as proxy with respect to
all shares of Common Stock of WellPoint Health Networks Inc. ("WellPoint")
standing in the name of the undersigned on the books of WellPoint at the
close of business on March 17, 2000, at the Annual Meeting of Stockholders to
be held at 10:00 A.M. on May 9, 2000, at the Hyatt Westlake Plaza, 880 South
Westlake Boulevard, Westlake Village, CA 91361, or at any adjournment or
postponement thereof (1) as hereinafter specified upon the proposals listed
below and as more particularly described in WellPoint's Proxy Statement,
receipt of which is hereby acknowledged, and (2) in their discretion upon
such other matters as may properly come before the meeting.
The powers hereby granted may be exercised by both of said attorneys or
proxies or their substitutes present and acting at the Annual Meeting of
Stockholders or any adjournment or postponement thereof or, if only one be
present and acting, then by that one. The undersigned hereby revokes any and
all proxies heretofore given by the undersigned to vote at said meeting.
THIS PROXY/VOTING INSTRUCTION CARD WHEN PROPERLY EXECUTED WILL BE VOTED
IN THE MANNER DIRECTED HEREBY BY THE UNDERSIGNED STOCKHOLDER. IF NO
DIRECTION IS MADE, THIS PROXY/VOTING INSTRUCTION CARD WILL BE VOTED FOR THE
NOMINEES LISTED ON THE REVERSE, FOR PROPOSAL 2 AND PROPOSAL 3. IF YOU HAVE A
BENEFICIAL INTEREST IN SHARES HELD BY ANY WELLPOINT BENEFIT PLAN, SUCH AS THE
WELLPOINT 401(K) RETIREMENT SAVINGS PLAN OR THE WELLPOINT COMPREHENSIVE
EXECUTIVE NON-QUALIFIED RETIREMENT PLAN, AND IF YOU DO NOT SIGN AND RETURN
THIS CARD OR ATTEND THE MEETING AND VOTE BY BALLOT, SUCH SHARES WILL BE VOTED
IN ACCORDANCE WITH THE DIRECTION OF THE APPLICABLE PLAN'S TRUSTEE.
(CONTINUED AND TO BE SIGNED ON REVERSE SIDE)
- --------------------------------------------------------------------------------
^ FOLD AND DETACH HERE ^
ADMISSION TICKET
WELLPOINT HEALTH NETWORKS INC.
2000 ANNUAL MEETING OF STOCKHOLDERS
TUESDAY, MAY 9, 2000
10:00 A.M.
HYATT WESTLAKE PLAZA
880 SOUTH WESTLAKE BOULEVARD
WESTLAKE VILLAGE, CA 91361
PLEASE ADMIT NON-TRANSFERABLE
<PAGE>
<TABLE>
<S><C>
- ------------------------------------------------------------------------------------------------------------------------------------
A VOTE FOR THE FOLLOWING PROPOSALS IS RECOMMENDED BY THE BOARD OF DIRECTORS: Please mark
vote in the
following /X/
manner using
dark ink only
FOR all WITHHOLD
nominees listed AUTHORITY
(except as to vote for
indicated below) all nominees
listed below
1. Election of the three (3) Class I / / / / 2. Approve an amendment and FOR AGAINST ABSTAIN
directors proposed in the accompanying restatement of the Employee Stock / / / / / /
Proxy Statement to serve until the Purchase Plan (the "Stock Purchase
2003 Annual Meeting. Plan") in order to, among other
things, authorize the future
issuance of an additional 1,000,000
shares under the Stock Purchase Plan.
3. Ratification of the appointment of FOR AGAINST ABSTAIN
Nominees: Roger E. Birk, Sheila P. Burke, Elizabeth A. Sanders PricewaterhouseCoopers LLP as the / / / / / /
Company's independent public
accountants for the fiscal year
ending December 31, 2000.
(INSTRUCTION: TO WITHHOLD AUTHORITY TO
VOTE FOR ANY INDIVIDUAL, CROSS HIS OR HER NAME OUT ABOVE.)
Signature(s) ____________________________________________________________________________ Dated _________________, 2000
SIGN EXACTLY AS YOUR NAME(S) APPEARS ON YOUR STOCK CERTIFICATE. IF SHARES OF STOCK STAND OF RECORD IN THE NAMES OF TWO OR MORE
PERSONS, OR IN THE NAME OF HUSBAND AND WIFE, WHETHER AS JOINT TENANTS OR OTHERWISE, BOTH OR ALL OF SUCH PERSONS SHOULD SIGN THE
PROXY. IF SHARES OF STOCK ARE HELD OF RECORD BY A CORPORATION, THE PROXY SHOULD BE EXECUTED BY THE PRESIDENT OR VICE PRESIDENT
AND THE SECRETARY OR ASSISTANT SECRETARY, AND THE CORPORATE SEAL SHOULD BE AFFIXED THERETO. EXECUTORS OR ADMINISTRATORS OR OTHER
FIDUCIARIES WHO EXECUTE TO ABOVE PROXY FOR A DECEASED SHAREHOLDER SHOULD GIVE THEIR FULL TITLE. PLEASE DATE THE PROXY .
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