Effective as of January 1, 1996, the Company entered into a new lease for its Woodland Hills, California headquarters facility, which provides for a term expiring in December 2019 with two options to extend the term for up to two additional five-year terms. Rent expense under the new lease was approximately $5.3 million during 1996. The Company, as well as the GBO, have additional offices in California and various other states.
(A) Earnings per share for all periods presented prior to 1996 has been recomputed using 66,366,500 shares, the number of shares outstanding immediately following completion of the Recapitalization. Earnings per share 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 completion of the Recapitalization.
(C) 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.
(D) 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.
(E) 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.
The Company is one of the nation's largest publicly traded managed health care companies with approximately 4.5 million medical members, 11.5 million pharmacy members and 1.6 million dental members as of December 31, 1996. The Company offers a diversified mix of managed care products, including HMOs, PPOs, POS and other hybrid plans and traditional indemnity products. The Company also offers a broad array of specialty products, including pharmacy, dental, life, workers' compensation, disability, behavioral health, COBRA and flexible benefits account administration. In addition, WellPoint offers managed care services for self-funded employers, including claims processing, actuarial services, underwriting assistance, network access, medical cost management and other administrative services. The Company's primary market for its managed care products is California.
In March 1996, the Company completed the MMHD Acquisition through the acquisition of MMHD's parent, MassMutual Holding Company Two, Inc. The acquired MMHD operations now conduct business under the name UNICARE Life & Health Insurance Company. The purchase price was $402.2 million which was funded with $340.2 million in cash and a Series A term note for $62.0 million, of which $20.0 million remained outstanding at December 31, 1996. During 1996, the Company incurred approximately $13.0 million of costs relating to the MMHD Acquisition. During 1997 and 1998, the Company expects to incur approximately $15.0 million of additional costs related to the MMHD Acquisition. As a result of the MMHD Acquisition, WellPoint serves medical members in 50 states. Approximately 50% of MMHD's medical membership is concentrated in seven states: California, New York, Texas, Georgia, Massachusetts, Illinois and Virginia. The acquired MMHD operations also provide specialty products, including dental, life, pharmacy and disability, to members throughout the United States.
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.
(b) As of December 31, 1996, total MMHD medical membership was approximately 1,042,000, of which approximately 141,300 were California members and approximately 900,700 were Out-of-State members.
Premium revenue increased 33.3% to $3,879.8 million for the year ended December 31, 1996 from $2,910.6 million for the year ended December 31, 1995. Premium revenue for 1996 of $523.4 million and $200.2 million was attributable to MMHD and the BCC Commercial Operations, respectively. Also contributing to increased premium revenue in 1996 was a 9.8% increase in medical membership, excluding management services members and the acquired members of MMHD and the BCC Commercial Operations. Workers' compensation premium revenue increased 34.6% in 1996 from 1995, due to a large increase in the number of insured employer groups, primarily in the small employer and California school districts workers' compensation markets. In addition, an increase in premium revenue resulted from moderate increases in the premiums per member in the individual, senior and small group markets.
Health care services and other benefits expense increased 36.5% to $3,003.1 million in 1996 from $2,200.0 million in 1995. Of the $803.1 million increase, $412.2 million was attributable to MMHD and $189.9 million was attributable to the BCC Commercial Operations. Excluding MMHD and the BCC Commercial Operations, increased health care services expense also resulted from medical membership growth. In addition, mix and product design changes, for example, the elimination of deductibles for some PPO plans and pharmacy products, contributed to an increase in health care expenses. Growth in the workers' compensation business also contributed to the increase. These increases were partially offset by savings from hospital recontracting, which was implemented in late 1995. Additional savings were realized by savings from specialist and laboratory recontracting, which was implemented during the third quarter of 1996.
The loss ratio for 1996 increased to 77.4% compared to 75.6% in 1995 due to the PPO benefits changes described above, an increase in the loss and loss adjustment expense reserves related to a portion of the Company's workers' compensation business and the incremental effect of the MMHD Acquisition
General and administrative expense for the year ended December 31, 1996 increased 58.5% to $545.9 million from $344.4 million for the same period in 1995. Of the $201.5 million increase, $153.3 million resulted from the MMHD Acquisition. The administrative expense ratio increased to 13.6% for 1996 compared to 11.6% in 1995, primarily due to the increased administrative expense associated with the Company's continued investment in geographic expansion and the MMHD Acquisition. MMHD has historically had a higher administrative expense ratio due to its higher percentage of management services business. The Company also incurred additional expenses in 1996 for network development costs. The above increases were partially offset by the BCC Commercial Operations' lower administrative expense ratio. Excluding MMHD and the BCC Commercial Operations, the administrative expense ratio would have been 11.9% in 1996.
WellPoint's net income for the year ended December 31, 1996 was $202.0 million or $3.04 per share compared to $180.0 million or $2.71 per share for the year ended December 31, 1995. Earnings per share for the years ended December 31, 1996 and 1995 are based on 66.4 million shares, the number of shares outstanding immediately following the Recapitalization, plus for 1996 the weighted average number of shares issued since the Recapitalization. Earnings per share is determined by dividing net income by the weighted average number of common shares outstanding. Earnings per share for the year ended December 31, 1995 included nonrecurring costs of $0.52 per share (which are discussed in the 1995 results which follow).
COMPARISON OF RESULTS FOR THE YEAR ENDED DECEMBER 31, 1995 TO THE YEAR ENDED DECEMBER 31, 1994
Premium revenue increased 9.9% to $2,910.6 million for the year ended December 31, 1995 from $2,648.0 million for the year ended December 31, 1994. This increase was primarily due to a 4.7% increase in medical members, excluding management services members, to 2.3 million as of December 31, 1995 from 2.2 million members as of December 31, 1994. The increase in premium revenue due to membership growth was partially offset by the conversion of some PPO Cost Plus members to management services
Management services revenue increased $24.9 million to $61.2 million for the year ended December 31, 1995 from $36.3 million in 1994. The increase was due to a number of factors, including new pharmacy and clinical management accounts and the acquisitions of Professional Claim Services, Inc. ("Pro-Serv") in August of 1994 and AHI Healthcare Corporation ("AHI") in February of 1995. The conversion of PPO Cost Plus members to management services arrangements also contributed to the increase. This transfer, which was completed in December 1995, did not have a material impact on net income.
General and administrative expense for the year ended December 31, 1995 increased 3.1% to $344.4 million from $334.2 million for 1994 due in part to increased personnel service costs consistent with the increases in medical and specialty membership, as well as the acquisition of AHI. The administrative expense ratio decreased to 11.6% for the year ended December 31, 1995 compared to 12.5% in 1994 due to a decrease in policyholder dividends resulting from the open rating environment in the workers' compensation industry. Excluding the conversion of PPO Cost Plus members to management services, the administrative expense ratio would have been 11.1% in 1995, reflecting the Company's continued focus on reducing its administrative costs.
WellPoint's net income for the year ended December 31, 1995 was $180.0 million or $2.71 per share compared to $213.2 million or $3.21 per share for 1994. Net income for the year ended December 31, 1995 excluding nonrecurring costs was $214.5 million or $3.23 per share. The number of shares of Common Stock outstanding for the years ended December 31, 1995 and 1994 has been recomputed to 66.4 million, the number of shares outstanding immediately following the Recapitalization, to give effect to the two-for-three share exchange that occurred in connection with the Recapitalization.
The Company's consolidated assets increased by $726.2 million to $3.4 billion as of December 31, 1996. This represents a 27.1% increase from $2,679.3 million as of December 31, 1995 and resulted primarily from the acquisitions of MMHD and the BCC Commercial Operations as well as cash flows generated from operations. Cash and investments were $2.2 billion as of December 31, 1996, or 63.6% of total assets.
As of December 31, 1996, $625.0 million was outstanding under the Company's long-term debt facilities incurred primarily for payment of a special dividend to the stockholders of the Company's predecessor ("Old WellPoint") in connection with the Recapitalization and the MMHD Acquisition. The Company had no long-term borrowings outstanding as of December 31, 1995.
Net cash flow provided by operating activities was $410.9 million for the year ended December 31, 1996, compared with $150.4 million in 1995. The 1996 increase in positive cash flow from operations is mainly due to improvement in continuing operations from increased membership growth in the individual, senior, small group and Medi-Cal segments as well as additional revenue generated through the acquisitions of MMHD and the BCC Commercial Operations and increased liabilities associated with this growth and the acquisitions. The cash provided by these activities was partially offset by the payment of $30 million in the first quarter of 1996 in connection with a new lease for the Company's headquarters
Net cash used by investing activities in 1996 totaled $736.2 million, compared with net cash provided by investing activities of $712.1 million in 1995. The cash used in 1996 was attributable primarily to the acquisition of MMHD and the BCC Commercial Operations and investment purchases, net of investments sold and matured of $239.8 million. In 1995, cash provided by investing activities was primarily due to the net proceeds from the sale and maturities of investments which were invested in cash equivalents in anticipation of the cash requirements for the acquisitions of MMHD and the BCC Commercial Operations as well as the special dividend paid in connection with the Recapitalization.
The MMHD operations were acquired for a total purchase price of $402.2 million. The $402.2 million was funded with $340.2 million in cash and a Series A term note for $62.0 million, of which $20.0 million was outstanding at December 31, 1996. MMHD cash acquired was $27.3 million. The BCC Commercial Operations were acquired during the second quarter of 1996 for a purchase price of $235.0 million. Cash acquired from the BCC Commercial Operations was $118.1 million, resulting in net cash used for the acquisition of $116.9 million.
Net cash used by financing activities totaled $431.0 million in 1996 compared to $43.7 million provided by financing activities in 1995. The net cash used in 1996 primarily resulted from $995.0 million for the special dividend paid in connection with the Recapitalization funded in part with long-term debt of $775.0 million and cash. Repayments on long-term debt totaled $262.0 million in 1996.
In connection with the Recapitalization, the Company entered into a $1.25 billion unsecured 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 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, 2001, although it may be extended for two additional one-year periods 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 $555.0 million as of December 31, 1996. The weighted average interest rate from May 15, 1996, the initial draw date, through December 31, 1996 was 5.9%.
In order to limit its exposure to interest rate increases, in August 1996 the Company entered into a swap agreement for a notional amount of $100.0 million bearing a fixed interest rate of 6.45% and having a maturity date of August 17, 1999. In September 1996, the Company entered into two additional swap agreements for notional amounts of $150.0 million each, bearing fixed interest rates of 6.99% and 7.05%, respectively, and having maturity dates of October 17, 2003 and October 17, 2006, respectively.
The Company believes that cash flow generated by operations, its cash and investment balances, its existing credit facility, its debt registration statement and the subordinated indebtedness will be sufficient to fund continuing operations and expected capital requirements for the foreseeable future.
Certain statements contained herein, such as statements concerning potential or future loss ratios, expected membership attrition as the Company continues to integrate its recently acquired operations and other statements regarding matters that are not historical facts, are forward-looking statements (as such term is defined in the Securities Exchange Act of 1934). Such statements involve a number of risks and uncertainties that may cause actual results to differ from those projected. Factors that can cause actual results to differ materially include, but are not limited to, those discussed below and those discussed from time to time in the Company's various filings with the Securities and Exchange Commission.
The Company's two primary products ([a] managed care products and [b] management services products, including specialty managed care services) are marketed through two internal business units which are organized on a geographic basis, Blue Cross of California and UNICARE. The geographic business units are divided further into individual and small group businesses versus larger employers because of the distinctive differences in the focus needed in targeting each of these markets. The combined cost ratios (medical costs and expenses) for the small group and individual businesses and the large group business vary due primarily to differing product mix between the managed care and management services products and different distribution costs. A greater percentage of small group and individual membership is comprised of higher risk managed care products, which tend to be more profitable than the lower risk managed care and management services products as a result of higher deductibles and co-payments and increased profit margins generally associated with increased underwriting risks. The group services membership is comprised primarily of capitated managed care products and management services products which result in lower margins as a result of the lower level of underwriting risk related to the capitated products and the non-risk nature of the management services products. However, over the past three years, margin erosion has been greater in the individual and small group business than in the large group business primarily as a result of slower growth in membership, product mix change and greater competitive pressure on premium increases. The spread between the profitability of the individual and small group business and large group business in California was 6.2%, 6.5% and 9.4% for the years ended December 31, 1996, 1995 and 1994, respectively.
The location in this Form 10-K of the Company's Consolidated Financial Statements is set forth in the "Index" on page 55 hereof.