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AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MAY 14, 1996
REGISTRATION NO. 333-2796
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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AMENDMENT NO. 2
TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
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CERULEAN COMPANIES, INC.
(Exact name of Registrant as specified in its charter)
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GEORGIA 6321 58-2217138
(State of incorporation) (Primary Standard Industrial (I.R.S. Employer
Classification Code Number) Identification No.)
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3350 PEACHTREE ROAD, N.E.
ATLANTA, GEORGIA 30326
(404) 842-8000
(Address and telephone number of Registrant's principal executive offices)
HUGH J. STEDMAN
SECRETARY
CERULEAN COMPANIES, INC.
3350 PEACHTREE ROAD, N.E.
ATLANTA, GEORGIA 30326
(404) 842-8000
(Name, address and telephone number of agent for service)
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THE COMMISSION IS REQUESTED TO MAIL COPIES OF ALL ORDERS, NOTICES AND
COMMUNICATIONS TO:
EDGAR H. SIMS, JR., ESQ.
LONG, ALDRIDGE & NORMAN, LLP
5300 ONE PEACHTREE CENTER
303 PEACHTREE STREET
ATLANTA, GEORGIA 30308-3201
(404) 527-4000
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APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after the effective date of this Registration Statement.
If any of the securities registered on this form are to be offered on a
delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. /X/
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. / /
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. / /
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. / /
CALCULATION OF REGISTRATION FEE
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PROPOSED
PROPOSED MAXIMUM
AMOUNT MAXIMUM AGGREGATE AMOUNT OF
TITLE OF SECURITIES TO BE OFFERING PRICE OFFERING REGISTRATION
TO BE REGISTERED REGISTERED PER SHARE(1) PRICE(1) FEE(1)
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Class A Convertible Common Stock, no par value per
share................................................... 800,000 Shares $0 $0 $100
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Common Stock, no par value per share to be issued upon
conversion of Class A Convertible Common Stock.......... 800,000 Shares N/A N/A $15,745
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(1) The securities being registered with this Registration Statement are being
offered without charge to Eligible Subscribers (as that term is defined in
the Registration Statement) and the filing fee represents the minimum
required by Section 6(b) of the Securities Act of 1933, and in the case of
the Common Stock issuable upon conversion of the Class A Convertible Common
Stock an amount calculated, for filing fee purposes only, in accordance with
Rule 457 under the Securities Act of 1933.
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THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THIS REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.
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CERULEAN COMPANIES, INC.
CROSS-REFERENCE SHEET PURSUANT TO ITEM 501(B) OF REGULATION S-K
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ITEM IN FORM S-1 LOCATION IN PROSPECTUS
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1. Forepart of the Registration Statement and Outside
Front Cover Page of Prospectus................... Outside Front Cover Page
2. Inside Front and Outside Back Cover Pages of
Prospectus....................................... Inside Front Cover Page; Available
Information
3. Summary Information, Risk Factors and Ratio of
Earnings to Fixed Charges........................ Prospectus Summary; Risk Factors
4. Use of Proceeds.................................... *
5. Determination of Offering Price.................... *
6. Dilution........................................... Risk Factors
7. Selling Security Holders........................... *
8. Plan of Distribution............................... Outside Front Cover Page;
Prospectus Summary -- The Offering
9. Description of Securities to be Registered......... Summary; Description of Capital
Stock
10. Interests of Named Experts and Counsel............. *
11. Information with Respect to the Registrant......... Prospectus Summary; Risk Factors;
Dividends; Capitalization;
Selected Financial Data;
Management's Discussion and
Analysis of Financial Condition
and Results of Operations;
Business; Management; Description
of Capital Stock; Financial
Statements
12. Disclosure of Commission Position on
Indemnification for Securities Act Liabilities... *
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* Not Applicable.
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800,000 SHARES
CERULEAN COMPANIES, INC.
CLASS A CONVERTIBLE COMMON STOCK
---------------------
Cerulean Companies, Inc. (the "Company") is a newly formed Georgia
corporation organized for the purpose of acting as the holding company for Blue
Cross and Blue Shield of Georgia, Inc. ("Georgia Blue") and its subsidiaries and
to engage in certain other health care related activities. Effective on February
2, 1996, Georgia Blue converted (the "Conversion") from a Georgia non-profit
corporation to a Georgia for-profit corporation and became a wholly-owned
subsidiary of the Company. See "THE CONVERSION."
As part of the Conversion, the Company (i) issued 800,000 shares of Class A
Convertible Common Stock (the "Class A Stock") to SunTrust Bank, Atlanta as
Escrow Agent for distribution to "Eligible Subscribers" as described herein and
(ii) is offering to each Eligible Subscriber five shares (the "Shares") of Class
A Stock at no cost to the Eligible Subscriber. An "Eligible Subscriber" is
defined in the Plan of Conversion approved by the Georgia Commissioner of
Insurance (the "Commissioner") as a person who was a subscriber of Georgia Blue
(within the meaning of the Georgia Insurance Code) on September 1, 1995 and who
remained a subscriber on February 1, 1996, and as to whom distribution of the
Shares (i) is exempt from registration under the state securities laws of the
applicable jurisdictions or (ii) does not violate any applicable law or
regulation.
Each Eligible Subscriber is requested to specify on the attached Stock
Election Form whether or not such Eligible Subscriber chooses to accept the
Company's offer for the Shares by no later than 5:00 p.m. Atlanta time on August
12, 1996 (the "Termination Time"). All Shares which an Eligible Subscriber has
rejected, or has been deemed to have rejected as described herein, at or prior
to the Termination Time, will be transferred by the Escrow Agent to the Company
for cancellation. ANY ELIGIBLE SUBSCRIBER WHO FAILS TO PROPERLY COMPLETE AND
SIGN THE STOCK ELECTION FORM ELECTING TO ACCEPT THE COMPANY'S OFFER OF THE
SHARES, OR WHOSE PROPERLY COMPLETED AND SIGNED STOCK ELECTION FORM IS NOT
RECEIVED BY THE ESCROW AGENT BY THE TERMINATION TIME, WILL BE DEEMED TO HAVE
REJECTED THE COMPANY'S OFFER OF THE SHARES. ANY ELIGIBLE SUBSCRIBER WHO REJECTS
THE COMPANY'S OFFER OF THE SHARES OR WHO IS DEEMED TO HAVE REJECTED THE
COMPANY'S OFFER WILL FORFEIT ALL OF HIS OR HER RIGHTS TO THE SHARES OFFERED
HEREBY, WILL HAVE NO RIGHTS AS A SHAREHOLDER OF THE COMPANY AND WILL HAVE NO
RIGHTS TO ANY SUBSEQUENT OFFERING OF THE COMPANY'S OR GEORGIA BLUE'S SECURITIES.
An Eligible Subscriber's election to accept or decline the Company's offer of
the Shares will not have any impact on such Eligible Subscriber's insurance
under any applicable Georgia Blue policy or plan.
THERE IS A RISK THAT EACH ELIGIBLE SUBSCRIBER WHO ACCEPTS THE OFFER OF THE
SHARES MAY BE REQUIRED TO RECOGNIZE TAXABLE INCOME (TO THE EXTENT OF THE VALUE
OF THE SHARES RECEIVED BY SUCH ELIGIBLE SUBSCRIBER) UPON RECEIPT OF THE SHARES
AND, AS A RESULT, MAY INCUR FEDERAL INCOME TAX LIABILITY IN CONNECTION WITH HIS
OR HER RECEIPT OF THE SHARES. THE COMPANY HAS OBTAINED AN OPINION OF ITS
CERTIFIED PUBLIC ACCOUNTANTS THAT ELIGIBLE SUBSCRIBERS WHO ACCEPT THE OFFER FOR
THE SHARES SHOULD NOT INCUR FEDERAL INCOME TAX LIABILITY IN CONNECTION WITH
THEIR RECEIPT OF THE SHARES; HOWEVER, BECAUSE THIS IS A UNIQUE TRANSACTION IN
WHICH THERE ARE NO PRECEDENTIAL AUTHORITIES OUTSTANDING, NO ASSURANCE CAN BE
GIVEN THAT THE INTERNAL REVENUE SERVICE WILL NOT CHALLENGE THIS POSITION. THE
COMPANY ENCOURAGES EACH ELIGIBLE SUBSCRIBER TO CONSULT HIS OR HER OWN TAX
ADVISOR WITH RESPECT TO THIS MATTER. SEE "CERTAIN FEDERAL INCOME TAX
CONSEQUENCES -- ISSUANCE OF CLASS A STOCK TO ELIGIBLE SUBSCRIBERS."
(Cover continued on next page)
SEE "RISK FACTORS" FOR CERTAIN INFORMATION THAT SHOULD BE CONSIDERED, INCLUDING
THE POSSIBLE ADVERSE TAX CONSEQUENCES OF ACCEPTANCE OF SHARES. THESE
SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR
HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE
SECURITIES COMMISSION PASSED UPON THE ACCURACY OR
ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION
TO THE CONTRARY IS A CRIMINAL OFFENSE.
ANY ELIGIBLE SUBSCRIBER WHO FAILS TO PROPERLY COMPLETE AND SIGN THE STOCK
ELECTION FORM ELECTING TO ACCEPT THE COMPANY'S OFFER OF THE SHARES OR WHOSE
PROPERLY COMPLETED AND SIGNED STOCK ELECTION FORM IS NOT RECEIVED BY THE ESCROW
AGENT BY THE TERMINATION TIME, WILL BE DEEMED TO HAVE REJECTED THE COMPANY'S
OFFER FOR THE SHARES. ANY ELIGIBLE SUBSCRIBER WHO REJECTS THE COMPANY'S OFFER OF
THE SHARES OR WHO IS DEEMED TO HAVE REJECTED THE COMPANY'S OFFER WILL FORFEIT
ALL OF HIS OR HER RIGHTS TO THE SHARES OFFERED HEREBY, WILL HAVE NO RIGHTS AS A
SHAREHOLDER OF THE COMPANY AND WILL HAVE NO RIGHTS TO ANY SUBSEQUENT OFFERING OF
THE COMPANY'S OR GEORGIA BLUE'S SECURITIES.
The date of this Prospectus is , 1996
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(Cover continued from previous page)
Each share of Class A Stock and the Company's Class B Convertible Preferred
Stock (the "Preferred Stock") will be convertible automatically into Common
Stock, no par value per share, of the Company (the "Common Stock") upon the
earlier of (i) December 1, 2001 or (ii) the closing date of a public offering of
Common Stock registered under the Securities Act of 1933, as amended (the
"Securities Act"). In addition, the Company may at any time, with the approval
of the holders of a majority of the then outstanding shares of Preferred Stock,
convert all, but no less than all, of the issued and outstanding shares of Class
A Stock and Preferred Stock into shares of Common Stock, with the Class A Stock
converted on the basis of one share of Common Stock for each share of Class A
Stock. Additionally, each share of Class A Stock will be converted into Common
Stock immediately preceding any liquidation, dissolution or winding up of the
Company if such conversion is approved by the holders of a majority of the then
outstanding shares of Preferred Stock. Upon any such conversion, the Class A
Stock will be converted into Common Stock on the basis of one share of Common
Stock for each share of Class A Stock, and the Preferred Stock will be converted
into Common Stock pursuant to the formula described herein under "DESCRIPTION OF
CAPITAL STOCK -- Class B Stock -- Conversion." See "DESCRIPTION OF CAPITAL
STOCK -- Class A Stock -- Conversion."
Upon the registration of shares in the names of Eligible Subscribers and
for so long as any shares of both Preferred Stock and Class A Stock are issued
and outstanding and no shares of Common Stock are issued and outstanding, the
holders of the outstanding shares of Class A Stock, voting as a separate class
and to the exclusion of all other classes and series of capital stock of the
Company, will be entitled to elect two Directors at each annual meeting of
shareholders as described herein, up to a total maximum of six Directors. The
remaining Directors, including two Directors nominated by the holders of
Preferred Stock and the remaining Directors nominated by the Nominating
Committee of the Board of Directors and approved by two-thirds of the Continuing
Directors (as defined under "PROSPECTUS SUMMARY -- Description of Class A
Stock -- Voting Rights") will be elected by the holders of Preferred Stock so
long as any shares of Preferred Stock are outstanding. On all other matters to
come before the shareholders other than the election of Directors, the holders
of Class A Stock will be entitled to vote as a separate class. If any shares of
Common Stock are issued and outstanding, holders of Class A Stock will have no
voting rights except as required by Georgia law. In the event no shares of
Common Stock or Preferred Stock are outstanding, all rights to vote will be
vested in the holders of the outstanding shares of Class A Stock or the Blank
Preferred Stock of the Company ("Blank Preferred Stock"). On the date of this
Prospectus, there are 49,901 shares of Preferred Stock outstanding and no shares
of Common Stock or Blank Preferred Stock outstanding. See "RISK
FACTORS -- Election of Directors," "DESCRIPTION OF CAPITAL STOCK -- Class A
Stock -- Voting" and "-- Preferred Stock -- Voting."
Shares of Class A Stock cannot be sold, transferred, encumbered, pledged or
otherwise disposed of prior to December 1, 1998, except by descent and
distribution, as required by judicial decree or by operation of law. Subject to
the limitations described below, during the period from December 1, 1998 to
December 1, 2001, if a holder of shares of Class A Stock desires to sell all or
any portion of such Class A Stock, the holder is first required to offer such
shares to the Company. The Company may exercise this right of first refusal to
acquire up to 2% of the issued and outstanding shares of Class A Stock in any
one calendar year, or such greater amount as may be approved by the holders of
at least a majority of the Preferred Stock then issued, outstanding and entitled
to vote. See "DESCRIPTION OF CAPITAL STOCK -- Class A Stock -- Restrictions on
Transfer."
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PROSPECTUS SUMMARY
The following summary is qualified in its entirety by and should be read in
conjunction with the more detailed information and financial statements and
related notes thereto appearing elsewhere in this Prospectus.
THE COMPANY
The Company is a newly formed Georgia corporation organized for the purpose
of acting as the holding company for Georgia Blue and its subsidiaries and to
engage in certain other health care related activities. Georgia Blue was
established in 1937 and through a series of business combinations and subsidiary
operations had, by 1985, the largest health insurance company market share in
Georgia. As of December 31, 1995, Georgia Blue had over 670,000 insurance and
administrative service contracts covering or administering benefits for over 1.4
million members. This represents more than 19% of the total Georgia population
and includes approximately 15% of the more than 3.2 million residents of the
metropolitan Atlanta area.
In connection with the Conversion, Georgia Blue issued all of its shares of
common stock to, and became a wholly-owned subsidiary of, the Company. Currently
the only business of the Company is the ownership and operation of Georgia Blue
and its subsidiaries. In this Prospectus, the term "Company" is sometimes used
to describe the Company and its subsidiaries as a single operation on a combined
basis.
Historically, Georgia Blue's primary source of revenues has come from
premiums for traditional indemnity health insurance and services. In response to
concerns regarding health care costs and changing trends in the health care
industry, beginning in 1992 Georgia Blue implemented a strategy to emphasize
managed care products and began to develop its model of integrated service
delivery systems called community health partnership networks ("CHPNs"). The
Company offers a comprehensive array of insurance products and services,
including managed care products and services offered through a health
maintenance organization (an "HMO"), a preferred provider organization (a "PPO")
and a point of service network plan (a "POS"). The Company's strategic plan
entails continued emphasis on and expansion of its managed care products. See
"BUSINESS," "BUSINESS -- Strategic Initiatives" and "BUSINESS -- Business Lines
and Products." The Company also offers traditional comprehensive indemnity
health coverage, third party administrator services and group life insurance
products. The Company's insurance and managed care products are offered directly
through Georgia Blue and through Georgia Blue's three wholly-owned subsidiaries,
HMO Georgia, Inc. ("HMO-Ga"), Greater Georgia Life Insurance Company, Inc.
("GGL") and Group Benefits of Georgia, Inc. ("GBG").
The Company has one of the largest PPO memberships in the State of Georgia,
serving over 290,000 members as of December 31, 1995. In addition, the Company
served over 130,000 members through HMO-Ga as of December 31, 1995, which
provides the Company's HMO and POS products. See "BUSINESS."
At present, HMO-Ga is licensed and operational as an HMO in seven markets
in Georgia, including Atlanta, Athens, Augusta, Columbus, Macon, Rome and
Savannah, which markets represent more than 4.7 million residents. While Atlanta
has an HMO market penetration of approximately 28%, Georgia as a whole currently
has one of the lowest HMO penetrations in the country, at 13%. Based on industry
sources, the five states with the highest HMO penetrations in the country each
have HMO penetration in excess of 35%.
The Company's HMO and POS products are serviced through networks of primary
care physicians, specialist physicians and hospitals that provide services under
contracts with HMO-Ga. Beginning on January 1, 1995, HMO-Ga's HMO and POS
products also began to be provided in the Atlanta market through contracts with
Georgia Blue's first CHPN, Atlanta Health Care Partners, Inc. ("CHPN-Atlanta").
As of December 31, 1995, CHPN-Atlanta provides services to approximately 96,000
people. CHPNs are locally based equity ventures between Georgia Blue and a local
physician group or hospital or both. It is anticipated that Georgia Blue, either
alone or with a contiguous state's Blue Cross/Blue Shield plan as a joint
venture partner, will own at least a 51% equity interest in each of its CHPNs
and the physician groups and hospitals will own the remaining equity interest.
Clinical services offered under a CHPN are provided by the physician group or
hospital partners as well as by other providers with which the CHPN maintains
contracts.
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Georgia Blue provides sales, management and administrative services to the CHPN,
including information systems and data management services, through service
contracts with the CHPN. Currently, CHPN-Atlanta is the only CHPN in which an
entity jointly owned by providers and Georgia Blue has been formed and
capitalized. However, in the six other Georgia markets serviced by HMO-Ga, HMO
and POS products are being offered through HMO-Ga in collaboration with local
providers in connection with the formation of CHPNs in those markets, thus
carrying out the CHPN framework. See "BUSINESS -- Strategic Initiatives --
CHPNs." Cerulean Companies, Inc. will derive revenue from dividends from its
subsidiaries (Georgia Blue and its subsidiaries as well as any new subsidiaries
which the Company may form to conduct new businesses), service and/or management
fee arrangements between the Company and its subsidiaries, as well as revenues
the Company may derive from other non-regulated services it may provide
customers directly in the future.
Pursuant to licenses from the Blue Cross and Blue Shield Association
("BCBSA"), a national trade association consisting of 63 Blue Cross and Blue
Shield licensees as of March 1, 1996, the Company has the exclusive right to do
business under the name "Blue Cross and Blue Shield of Georgia" and to use the
Blue Cross and Blue Shield names, trademarks and service marks for all of the
indemnity and managed health care products and services it offers in the State
of Georgia.
The Company's principal executive offices are located at 3350 Peachtree
Road, N.E., Atlanta, Georgia 30326, and its telephone number at that address is
(404) 842-8000.
THE CONVERSION
On February 2, 1996, Georgia Blue converted from a non-profit corporation
to a for-profit corporation and became a wholly-owned subsidiary of the Company
in accordance with a Plan of Conversion (the "Plan of Conversion") approved by
the Commissioner in an order issued December 27, 1995 (the "Commissioner's
Order"). The principal goal of the Conversion is to allow the Company access to
the equity capital markets in order to finance its strategic plan and to enhance
its competitive position. See "BUSINESS," "BUSINESS -- Strategic Initiatives"
and "BUSINESS -- Business Lines and Products" as well as "RISK
FACTORS -- Ability to Successfully Implement Strategic Plan" for a more detailed
discussion of the Company's Strategic Plan.
Simultaneously with the Conversion, the Company issued 49,901 shares of
Preferred Stock. The net proceeds to the Company from the sale of the Preferred
Stock were approximately $46.1 million, after deducting estimated offering
expenses and certain other expenses of the Conversion payable by the Company,
including reimbursement of certain expenses incurred by certain purchasers of
the Preferred Stock. The Company currently intends to use the net proceeds from
the sale of the Preferred Stock for general corporate purposes, which may
include strategic information systems development, medical access point
development, management services organization (MSO) acquisitions, other
strategic acquisitions and CHPN development and support. At the present time,
the Company has no agreement with, or intentions or plans to acquire, any other
specific company or entity, and is not in discussion with any company or entity
with respect to any such acquisition.
As part of the Conversion, the Company issued 800,000 shares of the Class A
Stock to SunTrust Bank, Atlanta as Escrow Agent, for distribution to Eligible
Subscribers as described herein and is offering to each Eligible Subscriber five
Shares of Class A Stock at no cost to the Eligible Subscriber. As of September
1, 1995, there were approximately 160,000 Eligible Subscribers.
THE OFFERING
General; the Commissioner's Order. As provided in the Plan of Conversion
approved by the Commissioner's Order, the Company is offering to each Eligible
Subscriber five Shares of Class A Stock at no cost to the Eligible Subscriber.
An "Eligible Subscriber" is defined in the Plan of Conversion as a person who
was a subscriber of Georgia Blue (within the meaning of the Georgia Insurance
Code) on September 1, 1995 and who remained a subscriber on February 1, 1996,
and as to whom distribution of the Shares (i) is exempt from registration under
the state securities laws of the applicable jurisdictions or (ii) does not
violate any applicable law or regulation. While the offering of the Class A
Stock is not generally exempt from the registration
2
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requirements of state securities laws, the Company has either qualified the
Class A Stock for distribution or has confirmed the availability of an exemption
for the distribution of the Class A Stock in all states in which there are
Eligible Subscribers. As a result, subscribers in states in which such an
exemption or qualification is unavailable are not Eligible Subscribers, will
have no rights to the Shares offered hereby, will have no rights as shareholders
of the Company and will have no rights to any subsequent offering of the
Company's or Georgia Blue's securities. See "RISK FACTORS -- Certain Federal
Income Tax Consequences" and "CERTAIN FEDERAL INCOME TAX CONSEQUENCES."
Terms of Offer; Method of Acceptance. As part of the Conversion, on
February 2, 1996, the Company issued a single certificate for 800,000 Shares to
SunTrust Bank, Atlanta as Escrow Agent for distribution to Eligible Subscribers.
Each Eligible Subscriber is requested to specify on the attached Stock Election
Form whether or not such Eligible Subscriber chooses to accept the Company's
offer for the Shares by no later than 5:00 p.m. Atlanta time on August 12, 1996
(as such date may be extended in the sole discretion of the Company, the
"Termination Time"). Pursuant to the terms of the Company's agreement with the
Escrow Agent, on the first day of each calendar month following the related
period during which a Stock Election Form is received, the Escrow Agent is
required to register or cause to be registered on the books and records of the
Company maintained by SunTrust Bank, Atlanta, as Transfer Agent (the "Transfer
Agent"), five shares of Class A Stock in the name of each Eligible Subscriber
who has delivered a proper Stock Election Form during such period. The Escrow
Agent shall not be obligated to register Class A Stock in the name of any
Eligible Subscriber if such Eligible Subscriber's Stock Election Form does not
conform in all respects to the form provided by the Company. On the first
calendar day of each month, the Escrow Agent shall send or cause the Transfer
Agent to send, to each new Class A Stockholder, a notification of such
registration by first-class mail, postage prepaid; no stock certificates will be
issued at any time for Class A Stock. Once registered, each Class A Stockholder
shall be deemed a stockholder from and after February 2, 1996, except with
respect to matters as to which Class A Stockholders had a right to vote during
the period between February 2, 1996 and the date of registration.
Georgia law governing the Conversion requires that a health care
corporation such as Georgia Blue that issues shares of its capital stock in
connection with an initial public offering must first offer the shares to its
subscribers. The Commissioner's Order held that the issuance of the Shares
offered hereby constitutes an initial public offering within the meaning of the
applicable Georgia law and that this offering of the Shares extinguishes all
such rights of subscribers under Georgia law. As a result, if either the Company
or Georgia Blue issues shares of capital stock in any future public offering, it
will not be required to offer any of such shares to its subscribers.
DESCRIPTION OF CLASS A STOCK
Securities Offered......... 800,000 shares of Class A Convertible Common Stock,
no par value per share.
Dividends.................. So long as any shares of the Company's Preferred
Stock are issued, outstanding and entitled to
vote, no dividends may be paid in cash, stock or
other property on the Class A Stock without the
approval of the Board of Directors of the Company
and of the holders of a majority of the shares of
Preferred Stock then issued, outstanding and
entitled to vote. If no shares of Preferred Stock
are issued, outstanding and entitled to vote,
dividends may be declared on the Class A Stock at
the discretion of the Board of Directors out of
funds legally available therefor.
On February 2, 1996, the Company issued, and there
are currently outstanding, 49,901 shares of
Preferred Stock. The Company presently
anticipates that shares of Preferred Stock will
be issued, outstanding and entitled to vote at
all times up to the date the Class A Stock is
converted to Common Stock. The Company does not
anticipate that any dividends will be paid on
Class A Stock.
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Voting Rights.............. Upon the registration of shares in the name of
Eligible Subscribers, and for so long as any
shares of both Preferred Stock and Class A Stock
are issued and outstanding, and no shares of
Common Stock are issued and outstanding, the
holders of outstanding shares of Class A Stock,
voting separately as a single class (with each
share being entitled to one vote) and to the
exclusion of all other classes and series of
capital stock of the Company, shall be entitled
to elect two Directors to each of the Company's
three classes of Directors ("Class A Designated
Directors") (for a total of six of the total of
21 members of the Board of Directors) as follows:
Beginning at or prior to the first annual
meeting of shareholders, a special nominating
committee composed of two Continuing Directors
(as defined below) and two Preferred Designated
Directors (as defined below) will nominate two
Class A Designated Directors to be voted on by
all of the holders of the Class A Stock at such
annual meeting.
At or prior to the annual meeting of
shareholders held in the following year, a
special nominating committee composed of two
Continuing Directors and the two Class A
Designated Directors would nominate two
additional Class A Designated Directors, again
to be voted on by all of the holders of Class A
Stock at such annual meeting.
At or prior to the annual meeting of
shareholders held in the next year, a
nominating committee composed of two Continuing
Directors and the four Class A Designated
Directors would nominate two additional Class A
Designated Directors, again to be voted on by
all of the holders of the Class A Stock at such
annual meeting.
At the annual meeting of shareholders held in
the next year and at each annual meeting until
the occurrence of a Stock Conversion (as
defined below), a special nominating committee
composed of the six Class A Designated
Directors would nominate, and the holders of
the Class A Stock would be entitled to elect,
two Class A Designated Directors each year to
replace the two Class A Designated Directors
whose terms expire during such year.
Notwithstanding any nomination by a special
nominating committee, the holders of the Class A
Stock shall be entitled to nominate and elect any
eligible individual as a Class A Designated
Director each year. "Continuing Directors" are
those individuals who: (i) are named as members
of the initial Board of Directors of the Company
(other than the Preferred Designated Directors),
together with any new Directors whose election or
nomination to the Board of Directors was approved
by a vote of two-thirds of the Directors then
still in office who were such Directors or whose
election or nomination was previously so
approved; (ii) are not beneficial owners of more
than five percent of the total shares of any
class of equity securities outstanding; and (iii)
were not nominated by such a beneficial owner
and, prior to such Director's election, did not
have any agreement, arrangement, or understanding
with any such beneficial owner with respect to
any action to be taken by such person as a
Director.
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Notwithstanding the foregoing, in the event shares
of Class A Stock and Common Stock are outstanding
at the same time, all rights to vote would be
vested in the holders of the Common Stock, except
(i) the rights of the holders of Preferred Stock
to elect Directors (see "DESCRIPTION OF CAPITAL
STOCK -- Preferred Stock -- Voting), and (ii)
such other voting rights as are provided by the
Georgia Business Corporation Code. Accordingly,
in the event the Company issues any shares of
Common Stock, the holders of Class A Stock will
have no voting rights (including the right to
elect Class A Designated Directors) except as
expressly provided by law. See "DESCRIPTION OF
CAPITAL STOCK -- Class A Common Stock -- Voting."
In the event no shares of Preferred Stock or Common
Stock are outstanding, all rights to vote will be
vested in the holders of the outstanding shares
of Class A Stock or the Blank Preferred Stock of
the Company ("Blank Preferred Stock"). The
Company anticipates that the Preferred Stock will
be outstanding during all periods the Class A
Stock is outstanding.
Conversion of Class A
Stock...................... Each share of Class A Stock and Preferred Stock
will be converted automatically into Common Stock
upon the earlier of (i) December 1, 2001 or (ii)
the closing date of a public offering of Common
Stock registered under the Securities Act of
1933, as amended (the "Securities Act"). In
addition, the Company may at any time with the
approval of the holders of a majority of the then
outstanding shares of Preferred Stock convert
all, but not less than all, of the issued and
outstanding shares of Class A Stock and Preferred
Stock into shares of Common Stock. Additionally,
each share of Class A Stock and Preferred Stock
will be converted into Common Stock immediately
preceding any liquidation, dissolution or winding
up of the Company, if such conversion is approved
by the holders of a majority of the then
outstanding shares of Preferred Stock. Upon any
such conversion, the Class A Stock shall be
converted into Common Stock on the basis of one
share of Common Stock for each share of Class A
Stock and the Preferred Stock shall be converted
into Common Stock pursuant to the formula
described herein under "DESCRIPTION OF CAPITAL
STOCK -- Class B Stock -- Conversion." See
"DESCRIPTION OF CAPITAL STOCK -- Class A Common
Stock -- Conversion."
Restrictions on Transfer;
Right of First Refusal... Shares of Class A Stock cannot be sold,
transferred, encumbered, pledged or otherwise
disposed of prior to December 1, 1998, except (i)
upon the death of the holder, to an heir taking
by law or pursuant to testamentary succession,
(ii) by operation of law, or (iii) as required by
a final judicial decree. Subject to the
limitations described below, during the period
from December 1, 1998 to December 1, 2001, if a
holder of shares of Class A Stock desires to sell
all or any portion of such Class A Stock, the
holder must first offer such shares to the
Company on the same terms and conditions as the
proposed sale. The Company may exercise this
right of first refusal to acquire up to 2% of the
issued and outstanding shares of Class A Stock in
any one calendar year, or such greater amount as
may be approved by the holders of more than a
majority of the Preferred Stock then issued,
outstanding
5
<PAGE> 10
and entitled to vote. See "DESCRIPTION OF CAPITAL
STOCK -- Class A Stock -- Restrictions on
Transfer."
Lock-up Agreement for
Conversion Stock......... In addition, Shares of Common Stock issued in
exchange for Class A Stock ( "Conversion Stock")
upon conversion of Class A Stock into Common
Stock, are subject to a "lock-up" arrangement.
Under the lock-up, no shares of any holder's
Conversion Stock may be transferred for a period
of six months following conversion and no more
than 50% of such holder's shares of Conversion
Stock may be transferred during the period
beginning six months following conversion and
ending on the date which is one year following
the conversion. See "DESCRIPTION OF CAPITAL
STOCK -- Class A Stock -- Restrictions on
Transfer; Right of First Refusal."
The shares of Conversion Stock have not been
registered under the Securities Act and until
such registration, if any, their transfer by
Eligible Subscribers would be subject to the
provisions of Rule 144 under the Securities Act.
Pursuant to Rule 144, persons receiving shares of
Conversion Stock upon conversion of their Class A
Stock may be required to hold such Conversion
Stock for a two-year period from the time of
Conversion or until the earlier registration, if
any, of the Conversion Stock.
FEDERAL INCOME TAX CONSEQUENCES
THERE IS A RISK THAT EACH ELIGIBLE SUBSCRIBER WHO ACCEPTS THE OFFER OF THE
SHARES MAY BE REQUIRED TO RECOGNIZE TAXABLE INCOME (TO THE EXTENT OF THE VALUE
OF THE SHARES RECEIVED BY SUCH ELIGIBLE SUBSCRIBER) UPON RECEIPT OF THE SHARES
AND, AS A RESULT, MAY INCUR FEDERAL INCOME TAX LIABILITY IN CONNECTION WITH HIS
OR HER RECEIPT OF THE SHARES. THE COMPANY HAS OBTAINED AN OPINION OF ITS
CERTIFIED PUBLIC ACCOUNTANTS THAT ELIGIBLE SUBSCRIBERS WHO ACCEPT THE OFFER OF
THE SHARES SHOULD NOT INCUR FEDERAL INCOME TAX LIABILITY IN CONNECTION WITH
THEIR RECEIPT OF THE SHARES; HOWEVER, BECAUSE THIS IS A UNIQUE TRANSACTION IN
WHICH THERE ARE NO PRECEDENTIAL AUTHORITIES OUTSTANDING, NO ASSURANCE CAN BE
GIVEN THAT THE INTERNAL REVENUE SERVICE WILL NOT CHALLENGE THIS POSITION. SEE
"CERTAIN FEDERAL INCOME TAX CONSEQUENCES -- ISSUANCE OF CLASS A STOCK TO
ELIGIBLE SUBSCRIBERS."
THE COMPANY ENCOURAGES EACH ELIGIBLE SUBSCRIBER TO CONSULT HIS OR HER OWN
TAX ADVISOR REGARDING THE SPECIFIC FEDERAL INCOME TAX CONSEQUENCES TO SUCH
SUBSCRIBER OF THE ACCEPTANCE OF THE COMPANY'S OFFER OF CLASS A STOCK, AS WELL AS
ANY TAX CONSEQUENCES TO SUCH SUBSCRIBER ARISING UNDER THE LAWS OF ANY STATE,
LOCALITY, FOREIGN COUNTRY OR OTHER JURISDICTION.
MARKET FOR CLASS A STOCK
There is no public trading market for the Class A Stock. Further, because
of the restrictions on transfer of the Class A Stock, it is not anticipated that
such a trading market will develop in the future.
6
<PAGE> 11
SUMMARY CONSOLIDATED FINANCIAL INFORMATION
The following is summary consolidated financial information of Georgia Blue
prior to the Conversion. The information presented below for the years ended as
of December 31 has been derived from the Consolidated Financial Statements of
Georgia Blue which have been audited by Ernst & Young LLP, independent auditors,
whose report for the three years ended December 31, 1995 appears elsewhere in
this Prospectus. The following data, prepared in accordance with generally
accepted accounting principles, should be read in conjunction with the
accompanying Consolidated Financial Statements, the related notes thereto and
"MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS" included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------------------------------
1991(1) 1992(1) 1993 1994 1995
-------- -------- -------- ---------- ----------
($ IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
STATEMENT OF INCOME DATA:
Revenues:
Premiums............................... $815,863 $914,406 $939,671 $1,038,397 $1,159,476
Investment and other income............ 9,527 8,815 8,524 9,462 11,980
Realized gains......................... 1,379 5,777 4,658 2,512 15,265
-------- -------- -------- ---------- ----------
Total revenues................. 826,769 928,998 952,853 1,050,371 1,186,721
Benefits expense......................... 731,875 831,795 832,908 914,277 1,039,095
Operating expenses....................... 78,135 79,171 89,284 111,012 126,077
-------- -------- -------- ---------- ----------
Operating Income......................... 16,759 18,032 30,661 25,082 21,549
Loss on building repurchase.............. -- -- (7,566) -- --
-------- -------- -------- ---------- ----------
Income before income taxes, minority
interest, extraordinary item and
cumulative effect of accounting
change................................. 16,759 18,032 23,095 25,082 21,549
Income taxes(2).......................... 3,127 3,559 4,796 5,621 3,857
Minority interest in CHPNs............... -- -- -- -- (282)
-------- -------- -------- ---------- ----------
Income before extraordinary item and
cumulative effect of a change in
accounting principle................... 13,632 14,473 18,299 19,461 17,410
Extraordinary item -- reduction of income
taxes arising from carryforward of
prior years' net operating losses...... 2,746 3,081 -- -- --
Cumulative effect of change in accounting
for income taxes....................... -- -- 5,449 -- --
-------- -------- -------- ---------- ----------
Net Income(3)............................ $ 16,378 $ 17,554 $ 23,748 $ 19,461 $ 17,410
======== ======== ======== ========= =========
</TABLE>
- ---------------
(1) Years prior to 1993 were restated to conform to the current year
presentation.
(2) The effective tax rate has been approximately 20% as a result of paying
taxes under the alternative minimum tax system. This is the result of a
deduction available under Section 833(b) of the Internal Revenue Code (see
"MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS -- Overview"). If the deduction were no longer available,
Georgia Blue would be subject to federal income taxes at the regular
corporate tax rate, which is currently 35%. See "CERTAIN FEDERAL INCOME TAX
CONSEQUENCES -- Section 833 of the Code."
(3) Earnings per share are omitted because such data are not meaningful at the
present time due to the likely dilutive events that will occur prior to the
conversion of the Class A Convertible Common Stock or the Class B
Convertible Preferred Stock (See "Description of Capital Stock").
7
<PAGE> 12
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------------------------------
1991(1) 1992(1) 1993 1994 1995
-------- -------- -------- ---------- ----------
($ IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
OPERATING DATA BY PRODUCT GROUP:
Premium Revenues by Product Group:
HMO and POS............................ $ 49,613 $ 58,553 $ 76,196 $ 87,532 $ 144,662
Indemnity and PPO...................... 759,799 849,510 857,167 944,156 1,006,524
Life & Other........................... 6,451 6,343 6,308 6,709 8,290
-------- -------- -------- ---------- ----------
Total premium revenues......... $815,863 $914,406 $939,671 $1,038,397 $1,159,476
======== ======== ======== ========= =========
As a Percentage of Premium Revenues:
HMO and POS............................ 6.1% 6.4% 8.1% 8.4% 12.5%
Indemnity and PPO...................... 93.1 92.9 91.2 90.9 86.8
Life and Other......................... 0.8 0.7 0.7 0.7 0.7
-------- -------- -------- ---------- ----------
Total premium revenues......... 100.0% 100.0% 100.0% 100.0% 100.0%
======== ======== ======== ========= =========
Percentage of Net Income:
HMO and POS............................ 1.6% (4.5)% (0.9)% 4.9% 40.0%
Indemnity and PPO...................... 89.6 94.2 92.8 88.4 49.5
Life and Other......................... 8.9 10.4 8.1 6.7 10.5
-------- -------- -------- ---------- ----------
Total.......................... 100.0% 100.0% 100.0% 100.0% 100.0%
======== ======== ======== ========= =========
Loss Ratio (Benefits Expense as a
Percentage of Premium Revenues):
HMO and POS............................ 92.1% 94.0% 93.2% 89.2% 83.7%
Indemnity and PPO...................... 89.9 91.1 88.5 88.2 90.7
Life and Other......................... 51.8 45.4 46.6 52.0 56.5
-------- -------- -------- ---------- ----------
Total loss ratio............... 89.7% 91.0% 88.6% 88.0% 89.6%
======== ======== ======== ========= =========
Operating Expense Ratio (Operating
Expenses as a Percentage of Premium
Revenues).............................. 9.6% 8.7% 9.5% 10.7% 10.9%
======== ======== ======== ========= =========
Combined Loss Ratio (Benefits Expense and
Operating Expenses as a Percentage of
Premium Revenues):
HMO and POS............................ 99.7% 101.7% 100.4% 98.3% 94.7%
Indemnity and PPO...................... 99.3 99.6 98.0 98.8 101.4
Life and Other......................... 92.3 88.1 92.1 94.8 94.9
-------- -------- -------- ---------- ----------
Total Combined Loss Ratio...... 99.3% 99.7% 98.1% 98.7% 100.5%
======== ======== ======== ========= =========
Effective Income tax rate(2)............. 18.7% 19.7% 20.8% 22.4% 17.9%
======== ======== ======== ========= =========
BALANCE SHEET DATA (AT PERIOD END):
Cash, equivalents and marketable
securities............................. $131,632 $153,711 $177,650 $ 201,976 $ 223,994
Total assets............................. 285,728 318,041 356,241 407,023 417,079
Total estimated benefit liabilities...... 156,454 161,290 153,881 167,895 175,846
Total liabilities........................ 197,291 212,050 226,502 258,353 244,040
Surplus.................................. 88,437 105,991 129,739 148,670 173,039
</TABLE>
- ---------------
(1) Years prior to 1993 were restated to conform to the current year
presentation.
(2) The effective tax rate has been approximately 20% as a result of paying
taxes under the alternative minimum tax system. This is the result of a
deduction available under Section 833(b) of the Internal Revenue Code (see
"MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS -- Overview"). If the deduction were no longer available,
Georgia Blue would be subject to federal income taxes at the regular
corporate tax rate, which is currently 35%. See "CERTAIN FEDERAL INCOME TAX
CONSEQUENCES -- Section 833 of the Code."
8
<PAGE> 13
RISK FACTORS
Each Eligible Subscriber's acceptance of shares of Class A Stock offered
hereby is subject to a number of risk factors that should be considered by such
Eligible Subscriber. In addition to the information set forth elsewhere herein,
Eligible Subscribers should consider the following information.
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
There is a risk that each Eligible Subscriber who accepts the offer of the
Shares may be required to recognize taxable income (to the extent of the value
of the Shares received by such Eligible Subscriber) upon receipt of the Shares
and, as a result, may incur federal income tax liability in connection with his
or her receipt of the Shares. The Company has obtained an opinion of its
certified public accountants that Eligible Subscribers who accept the offer for
the Shares should not incur federal income tax liability in connection with
their receipt of the Shares; however, because this is a unique transaction in
which there are no precedential authorities outstanding, no assurance can be
given that the Internal Revenue Service will not challenge this position. See
"CERTAIN FEDERAL INCOME TAX CONSEQUENCES -- Issuance of Class A Stock to the
Eligible Subscribers."
THE COMPANY ENCOURAGES EACH ELIGIBLE SUBSCRIBER TO CONSULT HIS OR HER OWN
TAX ADVISOR REGARDING THE SPECIFIC FEDERAL INCOME TAX CONSEQUENCES TO SUCH
SUBSCRIBER OF THE ACCEPTANCE OF THE COMPANY'S OFFER OF CLASS A STOCK, AS WELL AS
ANY TAX CONSEQUENCES TO SUCH SUBSCRIBER ARISING UNDER THE LAWS OF ANY STATE,
LOCALITY, FOREIGN COUNTRY OR OTHER JURISDICTION AND AS A RESULT OF ANY POTENTIAL
CHANGES IN APPLICABLE TAX LAWS.
Georgia Blue has paid federal income taxes under the alternative minimum
tax system, generally at a 20% rate, from 1987 through 1995 due to the
application of a special deduction available to certain Blue Cross and Blue
Shield plans under Section 833(b) of the Internal Revenue Code. If the deduction
provided under Section 833(b) were no longer available because of the
transactions described herein or for any other reason, the Company would be
subject to federal income taxes at the regular corporate tax rate, which is
currently 35%. The Company expects the Section 833 (b) deduction to be available
into the foreseeable future and therefore expects to be taxed under the
alternative minimum tax system. As a result the Company will be unable to
utilize approximately $65 million of regular tax net operating losses and other
temporary differences that otherwise would be available. For financial reporting
purposes, a valuation allowance has been recorded to reduce the deferred tax
assets to the amount expected to be realized. See "CERTAIN FEDERAL INCOME TAX
CONSEQUENCES -- Section 833 of the Code."
RESTRICTIONS ON TRANSFER; RIGHT OF FIRST REFUSAL; LACK OF LIQUIDITY
Shares of Class A Stock cannot be sold, transferred, encumbered, pledged or
otherwise disposed of prior to December 1, 1998, except (i) upon the death of
the holder of such shares, to an heir taking by law or pursuant to testamentary
succession, (ii) by operation of law or (iii) as required by a final judicial
decree. Pursuant to the Articles of Incorporation, subject to the limitations
described below, during the period from December 1, 1998 to December 1, 2001, if
a holder of shares of Class A Stock desires to sell all or any portion of such
Class A Stock, the holder must first offer the shares of Class A Stock to the
Company upon the same terms and conditions as the proposed sale. A holder of
Class A Stock who proposes to dispose of all or any portion of his or her shares
must give written notice (the "Notice") to the Company of his or her intention
to dispose of the shares, setting forth the type of disposition, the proposed
purchaser, the number of offered shares, the price per share and the terms of
payment. The Company may accept such offer with respect to all, but not less
than all, of the offered shares within thirty (30) days following receipt of the
Notice by giving notice of such exercise to the holder proposing to dispose of
the shares. If any of the consideration for the offered shares consists of
anything other than cash, the Company may substitute for such consideration the
cash equivalent as reasonably determined by the Company. The Company may
exercise this right of first refusal to acquire up to 2% of the issued and
outstanding shares of Class A Stock in any one calendar year, or such greater
amount as may be approved by the holders of more than a majority of the
Preferred Stock then
9
<PAGE> 14
issued, outstanding and entitled to vote. If the Company fails to exercise its
right of first refusal within thirty (30) days through no fault of the offeror,
the offeror may transfer the offered shares to the proposed purchaser, at the
price and on the terms and conditions set forth in the Notice; provided that
such transfer must be made within 30 days of the date the offeror became free to
transfer the shares or such right to transfer will expire.
LOCK-UP PROVISIONS AFFECTING CONVERSION STOCK
Transfers of Conversion Stock will be limited for a period of time
following a Stock Conversion (as defined herein) pursuant to certain "lockup"
provisions included in the Company's Articles of Incorporation. The lockup
provisions are intended to assist in the development of an orderly trading
market in the Common Stock, the development of an adequate investment research
following of the Company, and the promotion of institutional demand for the
Common Stock. Under the lock-up, no shares of Conversion Stock may be
transferred by any holder of Conversion Stock for a period of six months
following the Stock Conversion and no more than 50% of such holder's shares of
Conversion Stock may be transferred during the period beginning six months
following the Stock Conversion and ending on the date which is one year
following the Stock Conversion. See "DESCRIPTION OF CAPITAL STOCK -- Class A
Stock -- Restrictions on Transfer; Right of First Refusal."
NO MARKET FOR CLASS A STOCK; LIMITATION ON SHARES ELIGIBLE FOR FUTURE SALE
There has been no prior public market for the Class A Stock and there will
be no public market for the Class A Stock or any of the Company's other
securities; the Company does not intend that there will ever be a public market
for the Class A Stock; and there can be no assurance that a public market for
any of the Company's other securities (including the Common Stock) will develop
in the future. Accordingly, Eligible Subscribers will be unable to liquidate an
investment in the Class A Stock for an indefinite period. See "DESCRIPTION OF
CAPITAL STOCK -- Class A Stock -- Restrictions on Transfer; Right of First
Refusal" and "RISK FACTORS -- Restrictions on Transfer; Right of First Refusal;
Lack of Liquidity."
POSSIBLE DILUTION OF CLASS A STOCK
The Company's Articles of Incorporation do not contain any provisions
protecting holders of Class A Stock against dilution. While the Preferred Stock
has certain protection against dilution of the number of shares of Common Stock
into which the Preferred Stock may be converted, each share of Class A Stock
will still be convertible only into one share of Common Stock as described
herein. In the event the Company issues additional shares of Class A Stock, or
issues shares of Common Stock or Blank Preferred Stock convertible into Common
Stock or effects a stock split, stock dividend or other recapitalization of or
on its Common Stock, the then existing Class A Shareholders will be diluted.
Therefore, the Class A Stock is subject to substantial dilution. See
"CAPITALIZATION" and "DESCRIPTION OF CAPITAL STOCK -- Class A Stock --
Conversion of Class A Stock."
LIMITATION ON VOTING RIGHTS
As of the date of this Prospectus, 49,901 Shares of Preferred Stock are
issued and outstanding. So long as shares of Preferred Stock and Class A Stock
are issued and outstanding and no shares of Common Stock are issued and
outstanding, the holders of the outstanding shares of Class A Stock will be
entitled to elect two Class A Designated Directors at each annual meeting of
shareholders. The Company's Board of Directors is divided into three classes
with terms of three years each, and one class stands for election at each annual
meeting of shareholders. As a result, after the third annual meeting of
shareholders following the issuance of the Shares, six of the 21 Directors of
the Company will be Class A Designated Directors. So long as any shares of
Preferred Stock are issued, outstanding or entitled to vote, the holders of the
Preferred Stock, voting separately as a single class (with each share being
entitled to one vote) and to the exclusion of all other classes and series of
capital stock of the Company, will be entitled to elect all of the remaining
directors of the Company (other than the Class A Designated Directors). However,
pursuant to the terms of a Shareholders' Agreement among the holders of the
Preferred Stock, Georgia Blue and the Company (the "Shareholders' Agreement"),
so long as no shares of Common Stock are issued and outstanding, the holders of
the Preferred
10
<PAGE> 15
Stock will be obligated to vote their shares so that the Directors (other than
the Preferred Designated Directors and the Class A Designated Directors)
nominated by the Nominating Committee of the Company's Board of Directors and
approved by two-thirds of the Continuing Directors of the Company are elected
Directors of the Company. As a result, the current Board of Directors will have
the ability to designate a majority of the Directors of the Company.
IN THE EVENT ANY SHARES OF COMMON STOCK ARE ISSUED AND OUTSTANDING, THE
HOLDERS OF CLASS A STOCK SHALL HAVE NO VOTING RIGHTS, INCLUDING THE RIGHT TO
NOMINATE AND ELECT DIRECTORS, EXCEPT AS EXPRESSLY PROVIDED BY APPLICABLE LAW. NO
ASSURANCES CAN BE GIVEN THAT THE COMPANY WILL NOT ISSUE SHARES OF COMMON STOCK
IN THE FUTURE. SEE "DESCRIPTION OF CAPITAL STOCK -- CLASS A STOCK -- VOTING" AND
"DESCRIPTION OF CAPITAL STOCK -- PREFERRED STOCK -- VOTING."
DIVIDEND POLICY AND LIMITATIONS ON ABILITY TO PAY DIVIDENDS
So long as any shares of the Company's Preferred Stock are issued and
outstanding and entitled to vote, the Company cannot pay dividends in cash,
stock or other property on Class A Stock or Common Stock without the approval of
the Board of Directors and of the holders of a majority of the Preferred Stock
then issued, outstanding and entitled to vote. The Company presently anticipates
that shares of Preferred Stock will be issued, outstanding and entitled to vote
at all times up to the date the Class A Stock is converted to Common Stock. The
Company anticipates that no dividends will ever be paid on Class A Stock. The
ability of Georgia Blue and its subsidiaries to pay dividends to the Company is
also subject to certain provisions of the Georgia Insurance Code. See
"DIVIDENDS."
LIMITED RIGHTS IN LIQUIDATION
The Class A Stock participates in the liquidation of assets only after
payment in full of the Preferred Liquidation Amount with respect to the
Preferred Stock and then only on an equivalent basis (share for share) with any
Common Stock which may be issued and outstanding at the time of such
liquidation. In addition, the Board of Directors may, with the approval of
holders of a majority of shares of Preferred Stock, issue one or more series or
classes of Blank Preferred Stock which may include liquidation rights prior to
those of the Class A Stock. See "DESCRIPTION OF CAPITAL STOCK -- Class A
Stock -- Liquidation."
ABILITY TO SUCCESSFULLY IMPLEMENT STRATEGIC PLAN
CHPNs
The success of the Company's strategic plan is dependent upon the formation
and successful operation of CHPNs. Currently, only one CHPN, CHPN-Atlanta which
began operation on January 1, 1995, has been formed and capitalized. The Company
also offers HMO and POS products through HMO-Ga pursuant to contracts with
physicians and hospitals in Athens, Augusta, Columbus, Macon, Rome and Savannah,
Georgia, in connection with the formation of new CHPNs in those markets, thus
carrying out the CHPN framework. Due to the very limited operating history of
CHPNs and the fact that the CHPN model is largely untested, there can be no
assurance as to the future viability or profitability of CHPNs. Among the
potential risks of the CHPN strategy are the ability of (i) the Company to
provide adequate administrative support to the CHPNs, (ii) the CHPN owners to
operate favorably in a non-fee-for-services reimbursement environment, (iii) the
CHPNs to arrange for the delivery of cost-effective medical services, and (iv)
the CHPNs to respond to adverse regulation or legislation. Execution of the CHPN
strategy will require initial capital contributions to be made by the Company to
each CHPN upon its establishment and may require additional on-going capital
contributions to existing CHPNs. Accordingly, the Company may in the future find
it necessary to incur additional indebtedness or issue additional equity
securities in order to finance its CHPN strategy. See "MANAGEMENT'S DISCUSSION
AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS -- Liquidity and
Capital Resources" and "BUSINESS -- Strategic Initiatives -- CHPNs."
11
<PAGE> 16
Acquisitions
The Company may seek to expand its business in part through acquisitions.
There can be no assurance that the Company will successfully identify, complete
or integrate acquisitions or that any acquisitions, if completed, will perform
as expected or will contribute significant revenues or profits to the Company.
Furthermore, if competition for the acquisition of managed care companies
increases, the cost of such acquisitions may increase, making such companies
more difficult to acquire, as well as making their contributions to profits of
the Company more difficult to attain.
HEALTH CARE REFORM LAWS
As a result of the continued escalation of health care costs and the
inability of many individuals to obtain health care insurance, numerous
proposals relating to health care reform have been and may be introduced in the
United States Congress, the Georgia Legislature and the legislatures of the
other states in which the Company may seek to operate. The Company cannot
predict what effect, if any, such health care legislation or proposals will have
on the Company if and when enacted. The Company believes that the current
political environment in which it operates will result in continued legislative
scrutiny of health care laws, regulations and practices and may lead to
additional legislation, particularly in the small group or individual health
care insurance marketplace. While the Company does not anticipate that any of
the current legislative proposals of which it is aware may adversely impact its
present business or its strategic plan, no assurances can be given that
enactment of any federal or state health care reform legislation will not have a
material adverse effect on the Company's business.
ESCALATING HEALTH CARE COSTS AND THE HEALTH CARE INDUSTRY
The Company's profitability depends in large part on its ability to predict
and effectively manage health care costs and claims. According to the United
States Health Care Financing Administration statistics, from 1986 through 1993,
health care expenditures in the United States increased at an estimated average
annual rate of 9.6%, while the average annual rate of increase in the United
States Consumer Price Index during this period was 3.2%. The aging of the
population and other demographic characteristics and advances in medical
technology continue to contribute to rising health care costs. Government
imposed limitations on Medicare and Medicaid reimbursement have also caused the
private sector to bear a greater share of increasing health care costs. Changes
in health care practices, inflation, new technologies, major epidemics, natural
disasters and numerous other factors affecting the delivery and cost of health
care are beyond the Company's control and may adversely affect the Company's
ability to predict and control health care costs and claims.
Historically, competitive price pressures in the group health insurance
industry have resulted in pricing and profitability cycles. Although the length
and severity of these cycles have varied, the cycles generally have been six
years long and have been characterized by three years of profitability followed
by three years of losses. Some of the more significant causes of this cyclical
pattern are generally thought to be price competition, the entry and exit of
health care insurance companies from the marketplace, the rate of change in
provider pricing and consumer utilization of health care services, "cost
shifting" by facilities and physicians to private payors in response to certain
government program constraints, legislative changes and threatened legislative
changes. The extent to which structural changes in the managed health care and
health insurance industry have altered the cyclical pattern is uncertain.
Accordingly, there can be no assurance that a continuation of the cyclical
pattern or such structural changes will not adversely impact the Company's
profitability in the future.
CHANGING NATURE OF FINANCING AND SERVICING HEALTH CARE
Historically, traditional indemnity insurance has been the most common form
of health insurance offered in the United States. In recent years, the
developing trend has been away from traditional indemnity products and toward
managed care products such as PPO, HMO and POS products. The Company believes
that in the next three to five years this trend will continue. The result of a
continuation of this trend would be that sales of indemnity products will be
substantially reduced and could be less profitable. Historically, substantially
all of the Company's revenues and net income from insurance premiums have been
derived from its traditional
12
<PAGE> 17
indemnity and PPO products. In recent years however, the Company has increased
its involvement in its HMO and POS products. In 1995, revenues from indemnity
products were relatively flat and the Company derived a significant portion of
its net income from its HMO and POS products. There can be no assurance that the
Company can sustain or increase its revenues or net income from its indemnity
business and the Company has become increasingly dependent on its managed care
business. See "-- Ability to Successfully Implement Strategic Plan" above and
"MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS."
POTENTIAL NONRENEWAL OF ELIGIBLE SUBSCRIBER AND PROVIDER AGREEMENTS;
CONCENTRATION OF CONTRACTS
The Company's profitability is dependent upon its ability to obtain and
maintain contracts with employer groups and individual consumers. The Company's
agreements with employer groups generally are renewable annually. The Company's
profitability is also dependent, in large part, on its ability to contract on
favorable terms with hospitals, physicians and other health care providers for
the provision of services under the Company's managed care products. The
Company's contracts with physicians and hospitals generally are renewable
annually (other than contracts between the CHPN and its owner-providers, which
generally are longer term), but certain contracts may be terminated with 60 days
to 12 months prior written notice by either party.
The Company has contracts with certain employer groups that account for a
significant portion of the Company's business. For 1995, two employer groups
accounted for approximately 23% and 11%, respectively, of the Company's total
premium revenues. Additionally, the Company processes and pays claims as fiscal
intermediary for the Medicare Part A program and as administrative agent for the
State of Georgia Employee Health Benefit Plan and the BCBSA's Out-of-Area
Program. In 1995, claim payments for these agency programs exceeded $3.2 billion
dollars and are not included in either revenues or benefits expense in the
Company's statement of income. The Company receives fees from these federal and
state government programs for performing these services. Fees received from
these programs are deducted from operating expenses and are not included in
premium revenues. The Company's contract with the State of Georgia was renewed
for a seven-year term in July 1994. The State of Georgia program accounts for
over 33% of the Company's membership and plays an integral part in the
development of the Company's long-term provider network strategies. The
non-renewal or termination of any of the contracts with these employer groups
could have a material adverse effect on the Company's business, financial
condition and results of operations. See "BUSINESS -- Customers." There can be
no assurance that the subscribers or providers will renew their contracts or
enter into new contracts with the Company, or, in the case of provider
contracts, will not seek terms that are less favorable to the Company in
connection with any such renewal.
POTENTIAL ADVERSE AFFECTS OF THE CONVERSION
There can be no assurance that Georgia Blue's conversion to for-profit
status will not adversely affect the marketability of its products, because
Georgia Blue would be perceived less favorably by its customers and potential
customers and would more resemble its competitors. In addition, the Company
would experience increased costs of business were its tax treatment to change,
although the Company does not anticipate such change. See "Certain Federal
Income Tax Consequences."
GOVERNMENT REGULATION
The Company's business is subject to extensive federal, state and local
laws and regulations. Such regulations govern many aspects of the Company's
business, including, among other things, regulation of the amount of dividends
that the Company's insurance subsidiaries can pay to the Company without prior
regulatory approval, licenses to transact business, trade practices,
relationships with providers, premium rates, underwriting standards, policy
forms, claims payment, licensing of agents and brokers, the types of investments
that an insurance company may hold, including the formation of subsidiaries, and
minimum surplus and reserve requirements. See "DIVIDENDS" and
"BUSINESS -- Regulatory Environment."
13
<PAGE> 18
COMPETITION
The health care industry in Georgia is highly competitive on both a
regional and statewide basis and has undergone significant changes in recent
years. The Company has many competitors in its indemnity, PPO and HMO
operations, many of which have substantially greater financial and other
resources than the Company. Price competition among benefit plans in the
Company's markets, particularly the Atlanta metropolitan area, may intensify.
Because the Company's existing business operations are confined to markets
within the State of Georgia, the Company currently is not able to subsidize
losses in these markets with profits from other markets. The Company believes
that certain larger, national competitors are able to subsidize losses in the
Georgia market with profits from other markets in which they operate and may
pursue such a strategy in the Company's markets in an effort to increase their
market share. The national health care industry has recently seen a
consolidation of companies that offer health care insurance, including
traditional indemnity and managed care products. In addition to increased
competition, this consolidation may result in corporations with enhanced
financial resources, better positioned to pursue a strategy of subsidizing
losses to increase their market position in Georgia. Additionally,
provider-sponsored initiatives, through which certain hospital and physician
alliances compete with traditional means of health care financing, are
developing in some product segments.
Future legislation at the federal and state levels also may result in
increased competition in the Company's market. While the Company does not
anticipate that any of the current legislative proposals of which it is aware
would increase the competition it faces, future legislative proposals, if
enacted, might do so. See "RISK FACTORS -- Health Care Reform Laws." In
addition, competition may be increased by independent agents and brokers who
sell the Company's health care benefit plans as well as the benefit plans of
competitors. No assurances can be given that the Company will be able to compete
effectively in the future. See "BUSINESS -- Competition."
DEPENDENCE UPON KEY PERSONNEL
Georgia Blue recruited a new management team beginning in 1992. The new
management team is responsible for implementing the Company's strategic business
plan. The Company's future success depends in large part upon the continued
services of its current senior management and other key personnel, including its
Chief Executive Officer. The Company's success also depends upon its ability to
recruit and retain other management personnel. The loss of a significant group
of key personnel or the inability to attract and retain qualified employees
could have a material adverse effect on the Company. The Company currently has a
$5,000,000 "key-man" life insurance policy on its Chief Executive Officer.
Although the Company has implemented incentive programs to retain key personnel
and expects to implement other such programs in the future, the Georgia law
pursuant to which the Company converted to a for-profit corporation (the
"Conversion Statute") prohibits the payment of any option, warrants or fees to
officers or Directors of the Company in connection with the Conversion or in
regard to the offering of the Shares. See "MANAGEMENT."
DEPENDENCE ON SALES TO INDIVIDUALS
Sales of the Company's health care benefit products to individuals for 1995
comprised 13% of the premium income of the Company. The Company's overall
operating results could be adversely affected by a reduction in the relative
percentage of its business represented by products sold to individuals. There
can be no assurance that such percentage will not decrease or that the
profitability of this business will not decrease in the future, including as a
result of unanticipated increases in claims.
LICENSE TO USE OF BLUE CROSS AND BLUE SHIELD NAME AND RISK OF TERMINATION OF
SUCH LICENSE
Pursuant to its licenses from the BCBSA, the Company and certain of its
subsidiaries have the exclusive right to do business in Georgia under the name
"Blue Cross and Blue Shield" and to use the Blue Cross and Blue Shield names,
trademarks and service marks with respect to the Company's indemnity, PPO, HMO
and POS products. Unless waived by BCBSA, the licenses will automatically
terminate upon the occurrence of
14
<PAGE> 19
certain events, subject to the right of the Company to prevent such termination
within the applicable cure periods. Such a terminating event will be deemed to
have occurred if, among other things: (i) at any time while any shares of
Preferred Stock are outstanding, two-thirds ( 2/3) of the Continuing Directors
fail to approve a candidate for the Company's Board of Directors (other than
Preferred Designated Directors or Class A Designated Directors) in a manner
which obligates the holders of the Preferred Stock to vote for that candidate in
accordance with the terms of the Shareholders' Agreement; (ii) the Preferred
Stock for any reason shall be voted in a manner which fails to elect any
candidate approved by two-thirds of the Continuing Directors or which is
contrary to the terms of the Shareholders' Agreement; (iii) the Company shall
have failed to issue at least 50,000 shares of Class A Stock to Eligible
Subscribers prior to the earlier of (A) the record date for the first election
of Class A Designated Directors or (B) December 31, 1996; (iv) the Articles of
Incorporation of the Company for any reason shall not be applied to prevent
Common Stock beneficially owned by any particular person, including its
associates and affiliates, from being voted in any election or on any issue to
the extent such Common Stock exceeds 5% of the shares of Common Stock
outstanding at that time; (v) any person, including its associates and
affiliates, acquires more than 20% of the Common Stock of the Company and the
shares in excess of 20% of the outstanding shares of Common Stock are not
disposed of in accordance with the Company's Articles of Incorporation; (vi)
without the written consent of the BCBSA, the Board of Directors of the Company
shall act (or fail to act) if the consequence thereof would be to: (A) cause the
provisions of the Articles of Incorporation of the Company relating to the 5%
voting limitation or the 20% ownership limitation never to become applicable or
to cease to apply once such provisions become applicable; (B) establish the
Permissible Ownership Amount (as defined herein) applicable to any person under
the Company's Articles of Incorporation at a level higher than 20% of the
outstanding shares of Common Stock; or (C) establish the Permissible Voting
Amount under the Company's Articles of Incorporation at a level which could
(either absolutely or upon the occurrence of any default, event or contingency)
permit Common Stock beneficially owned by any particular person from being voted
in any election or on any issue to the extent such Common Stock exceeds 5% of
the total number of shares of Common Stock outstanding at that time; (vii) less
than 80% of the positions on the Board of Directors of the Company or Georgia
Blue shall be held by Continuing Directors; (viii) at any time after the earlier
of (A) December 1, 2001 or (B) such earlier date on which all Preferred Stock is
converted to Common Stock or redeemed in accordance with the Company's Articles,
the Company shall have any capital stock outstanding other than Common Stock;
(ix) the Company shall cease to have a majority ownership interest in or the
right to control the operations of Georgia Blue or any other enterprise under
which business or operations are conducted under the Blue Cross/Blue Shield
marks or (x) if the Company does not maintain certain financial standards. See
"DESCRIPTION OF COMMON STOCK -- Restrictions on Acquisition, Ownership and
Voting of Securities" for a description of certain limitations referenced above.
The Company believes that the well-recognized Blue Cross and Blue Shield
names, trademarks and service marks provide a significant marketing advantage in
its licensed service area, the loss of which would have a material adverse
affect on its business and results of operations. However, to the extent that
the Company continues to use these trademarks in marketing its products, there
can be no assurance that negative publicity concerning BCBSA and other BCBSA
licensees will not adversely impact their sales.
Following the Conversion, the Company became the primary licensee of BCBSA
in the State of Georgia. As a condition to the award of that license, the BCBSA
required that the Company guarantee certain obligations of each licensed
subsidiary.
THE CONVERSION
On February 2, 1996, Georgia Blue converted from a non-profit corporation
to a for-profit corporation and became a wholly-owned subsidiary of the Company
in accordance with the Plan of Conversion approved in the Commissioner's Order.
The principal goal of the Conversion is to allow the Company access to the
equity capital markets in order to finance its strategic plan and to enhance its
competitive position. The Company believes the Conversion will allow the Company
access to additional capital resources to continue Georgia Blue's mission to
provide access to quality health care at affordable prices to as many Georgians
as possible and to remain competitive in a changing health care environment.
15
<PAGE> 20
In connection with the Conversion, Georgia Blue issued all of its shares of
common stock to, and became a wholly-owned subsidiary of, the Company. Currently
the only business of the Company is the ownership and operation of Georgia Blue
and its subsidiaries.
Simultaneously with the Conversion, the Company issued 49,901 shares of
Preferred Stock. The net proceeds to the Company from the sale of the Preferred
Stock were approximately $46 million, after deducting estimated offering
expenses and certain other expenses of the Conversion payable by the Company.
The Company currently intends to use the net proceeds from the sale of the
Preferred Stock for general corporate purposes, which may include strategic
information systems development, medical access point development, management
services organization (MSO) acquisitions, other strategic acquisitions and CHPN
development and support.
As part of the Conversion, the Company issued 800,000 shares of the Class A
Stock to SunTrust Bank, Atlanta as Escrow Agent, for distribution to Eligible
Subscribers as described herein and pursuant to this Prospectus is offering to
each Eligible Subscriber five Shares of Class A Stock at no cost to the Eligible
Subscriber. As of September 1, 1995, there were approximately 160,000 Eligible
Subscribers. Under the Georgia Insurance Code, Georgia Blue was obligated to
first offer shares in connection with an initial public offering to its
subscribers on similar terms as such shares are offered to the public and
consistent with federal laws and regulations. The Commissioner's Order held that
the offer of the Shares to the Eligible Subscribers extinguishes such rights of
the subscribers.
DIVIDENDS
So long as any shares of Preferred Stock are issued, outstanding and
entitled to vote, no dividends may be paid on Class A Stock, Common Stock or any
other capital stock of the Company without the approval of the holders of a
majority of the Preferred Stock. There are presently 49,901 shares of Preferred
Stock issued and outstanding and the Company presently anticipates that shares
of Preferred Stock will be issued, outstanding and entitled to vote at all times
up to the date the Class A Stock is converted to Common Stock. The Company
anticipates that no dividends will ever be paid on Class A Stock. If no shares
of Preferred Stock are issued and outstanding, the Board of Directors, in its
discretion, may declare dividends on the Class A Stock or Common Stock out of
funds legally available therefor.
The Company's future ability to pay dividends on the Class A Stock,
Preferred Stock or the Common Stock is substantially dependent upon dividends
received by the Company from Georgia Blue and its subsidiaries. The ability of
Georgia Blue and its subsidiaries to pay dividends to the Company is subject to
certain restrictions of the Georgia Insurance Code. Specifically, under Georgia
law, Georgia Blue's surplus with regard to its policyholders following any
dividends or distributions to the Company must be reasonable in relation to
Georgia Blue's outstanding liabilities and adequate to meet its financial needs.
In determining whether Georgia Blue's surplus is reasonable in relation to its
outstanding liabilities and adequate to meet its financial needs, Georgia law
requires that the following factors, among others, be considered: (i) the size
of Georgia Blue as measured by its assets, capital and surplus, reserves,
premium writings, insurance in force, and other appropriate criteria; (ii) the
extent to which Georgia Blue's business is diversified among the several lines
of insurance; (iii) the number and size of risks insured in each line of
business; (iv) the extent of the geographical dispersion of Georgia Blue's
insured risks; (v) the nature and extent of Georgia Blue's reinsurance program;
(vi) the quality, diversification, and liquidity of Georgia Blue's investment
portfolio; (vii) the recent past and projected future trend in the size of
Georgia Blue's surplus as regards policyholders; (viii) the surplus with regard
to policyholders maintained by other comparable insurers, considering the above
described factors; (ix) the adequacy of Georgia Blue's reserves; (x) the quality
and liquidity of investments in affiliates; and (xi) the quality of Georgia
Blue's earnings and the extent to which reported earnings include extraordinary
items.
Georgia law further provides that Georgia Blue may not apply any
extraordinary dividend or make any other extraordinary dividend or make any
other extraordinary distribution to the Company until 30 days after the
Commissioner has received notice of the proposed declaration and has not within
such period disapproved such payment, or the Commissioner has approved such
payment within such 30 day period. An extraordinary
16
<PAGE> 21
dividend or distribution includes any dividend or distribution of cash or other
property, whose fair market value together with that of other dividends or
distributions made within the preceding 12 months exceeds the greater of 10% of
Georgia Blue's surplus with regard to policyholders as of the preceding December
31, or the net gain from operations of Georgia Blue, not including realized
capital gains, for the 12 month period ending the preceding December 31, but not
including pro rata distributions of any class of Georgia Blue's own securities.
Georgia insurance law provides that notwithstanding any other provision of law,
Georgia Blue may declare an extraordinary dividend or distribution which is
conditional upon the Commissioner's approval thereof, and such a declaration
confers no rights upon the Company until the Commissioner has approved the
payment of such a dividend or distribution or the Commissioner has not
disapproved such payment within such 30 day period.
Also, under Georgia insurance law, Georgia Blue may pay dividends to its
shareholders only out of unassigned surplus or upon special approval of the
Commissioner upon certain specified terms and conditions. Georgia insurance law
provides that notwithstanding any other provision of law, Georgia Blue may,
conditioned upon receipt of the Commissioner's approval, declare a dividend from
other than unassigned surplus; provided, however, that such declaration confers
no rights upon the security holders of Georgia Blue and Georgia Blue may not pay
such dividend until the Commissioner has approved the payment of such dividend
or not disapproved the payment of such dividend within 30 days after receipt of
notice from Georgia Blue. Georgia insurance law provides that the term
"unassigned surplus" means undistributed, accumulated surplus, including net
income and unrealized gains, since its organization.
Moreover, pursuant to the Conversion Statute, a dividend may be paid by
Georgia Blue only if such dividend would not cause the surplus funds of Georgia
Blue (as defined in the Conversion Statute) to be less than Georgia Blue's
surplus funds as of the date of the Conversion or if the Commissioner were to
find that such a dividend is in the public interest. As a result of this
provision, absent such a finding, Georgia Blue's dividend capacity after the
Conversion will be limited to the increase in its surplus funds, if any, after
September 30, 1995.
17
<PAGE> 22
CAPITALIZATION
The following table sets forth the capitalization of the Company at
December 31, 1995 and as adjusted to give effect to (1) the Conversion, the
formation of the Company, the sale of the Preferred Stock and the application of
the net proceeds from the sale of the Preferred Stock as if these transactions
occurred as of December 31, 1995 and (2) the distribution of the Class A Stock
and related costs of distribution of $836,000 as if the distribution occurred as
of December 31, 1995. This table should be read in conjunction with Georgia
Blue's Consolidated Financial Statements and the Notes thereto included
elsewhere in this Prospectus.
<TABLE>
<CAPTION>
DECEMBER 31, 1995
----------------------
ACTUAL AS ADJUSTED
-------- -----------
($ IN THOUSANDS)
<S> <C> <C>
Note payable............................................................ $ 2,000 $ 2,000
-------- -----------
Mandatorily redeemable preferred stock
Class B Convertible Preferred Stock, no par value; liquidation
preference, $1,000 per share; mandatory redemption, $900 per share.
Authorized, issued and outstanding, 49,901 shares.................. -- 46,073
-------- -----------
Shareholders' equity
Blank Preferred Stock, no par value.
Authorized and unissued 100,000,000 shares......................... -- --
Class A Convertible Common Stock, no par value, $0.01 stated value.
Authorized 50,000,000 shares; issued 800,000 shares................ -- 8
Common Stock, no par value.
Authorized and unissued 100,000,000 shares......................... -- --
Additional paid-in capital............................................ -- --
Net unrealized appreciation on securities............................. 6,428 6,428
Surplus............................................................... 166,611 --
Retained earnings..................................................... -- 165,767
-------- -----------
Total shareholders' equity.............................................. 173,039 172,203
-------- -----------
TOTAL CAPITALIZATION.................................................... $175,039 $ 220,276
======== =========
</TABLE>
18
<PAGE> 23
SELECTED CONSOLIDATED FINANCIAL AND OPERATING DATA
GEORGIA BLUE
The following is Selected Consolidated Financial and Operating Data of
Georgia Blue for the periods described therein prior to the Conversion. The
information presented for the years ended as of December 31 has been derived
from the Consolidated Financial Statements of Georgia Blue, which have been
audited by Ernst & Young LLP, independent auditors, whose report for the three
years ended December 31, 1995 appears elsewhere in this Prospectus. The
following data, prepared in accordance with generally accepted accounting
principles, should be read in conjunction with the accompanying Consolidated
Financial Statements, the related notes thereto, and "MANAGEMENT'S DISCUSSION
AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS" included
elsewhere in this Prospectus.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------------------------------
1991(1) 1992(1) 1993 1994 1995
-------- -------- -------- ---------- ----------
($ IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
STATEMENT OF INCOME DATA:
Revenues:
Premiums............................... $815,863 $914,406 $939,671 $1,038,397 $1,159,476
Investment and other income............ 9,527 8,815 8,524 9,462 11,980
Realized gains......................... 1,379 5,777 4,658 2,512 15,265
-------- -------- -------- ---------- ----------
Total revenues................. 826,769 928,998 952,853 1,050,371 1,186,721
Benefits expense......................... 731,875 831,795 832,908 914,277 1,039,095
Operating expenses....................... 78,135 79,171 89,284 111,012 126,077
-------- -------- -------- ---------- ----------
Operating Income......................... 16,759 18,032 30,661 25,082 21,549
Loss on building repurchase.............. -- -- (7,566) -- --
-------- -------- -------- ---------- ----------
Income before income taxes, minority
interest, extraordinary item and
cumulative effect of accounting
change................................. 16,759 18,032 23,095 25,082 21,549
Income taxes(2).......................... 3,127 3,559 4,796 5,621 3,857
Minority interest in CHPNs............... -- -- -- -- (282)
-------- -------- -------- ---------- ----------
Income before extraordinary item and
cumulative effect of a change in
accounting principle................... 13,632 14,473 18,299 19,461 17,410
Extraordinary item -- reduction of income
taxes arising from carryforward of
prior years' net operating losses...... 2,746 3,081 -- -- --
Cumulative effect of change in accounting
for income taxes....................... -- -- 5,449 -- --
-------- -------- -------- ---------- ----------
Net Income............................... $ 16,378 $ 17,554 $ 23,748 $ 19,461 $ 17,410
======== ======== ======== ========= =========
</TABLE>
- ---------------
(1) Years prior to 1993 were restated to conform to the current year
presentation.
(2) The effective tax rate has been approximately 20% as a result of paying
taxes under the alternative minimum tax system. This is the result of a
deduction available under Section 833(b) of the Internal Revenue Code (see
"MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS -- Overview"). If the deduction were no longer available,
Georgia Blue would be subject to federal income taxes at the regular
corporate tax rate, which is currently 35%. See "CERTAIN FEDERAL INCOME TAX
CONSEQUENCES -- Section 833 of the Code."
(3) Earnings per share are omitted because such data are not meaningful at the
present time due to the likely dilutive events that will occur prior to the
conversion of the Class A Convertible Preferred Stock or the Class B
Convertible Preferred Stock (See "DESCRIPTION OF CAPITAL STOCK")
19
<PAGE> 24
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------------------------------
1991(1) 1992(1) 1993 1994 1995
-------- -------- -------- ---------- ----------
($ IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
OPERATING DATA BY PRODUCT GROUP:
Premium Revenues by Product Group:
HMO and POS............................ $ 49,613 $ 58,553 $ 76,196 $ 87,532 $ 144,662
Indemnity and PPO...................... 759,799 849,510 857,167 944,156 1,006,524
Life & Other........................... 6,451 6,343 6,308 6,709 8,290
-------- -------- -------- ---------- ----------
Total premium revenues......... $815,863 $914,406 $939,671 $1,038,397 $1,159,476
======== ======== ======== ========= =========
As a Percentage of Premium Revenues:
HMO and POS............................ 6.1% 6.4% 8.1% 8.4% 12.5%
Indemnity and PPO...................... 93.1 92.9 91.2 90.9 86.8
Life and Other......................... 0.8 0.7 0.7 0.7 0.7
-------- -------- -------- ---------- ----------
Total premium revenues......... 100.0% 100.0% 100.0% 100.0% 100.0%
======== ======== ======== ========= =========
Percentage of Net Income:
HMO and POS............................ 1.6% (4.5)% (0.9)% 4.9% 40.0%
Indemnity and PPO...................... 89.6 94.2 92.8 88.4 49.5
Life and Other......................... 8.9 10.4 8.1 6.7 10.5
-------- -------- -------- ---------- ----------
Total.......................... 100.0% 100.0% 100.0% 100.0% 100.0%
======== ======== ======== ========= =========
Loss Ratio (Benefits Expense as a
Percentage of Premium Revenues):
HMO and POS............................ 92.1% 94.0% 93.2% 89.2% 83.7%
Indemnity and PPO...................... 89.9 91.1 88.5 88.2 90.7
Life and Other......................... 51.8 45.4 46.6 52.0 56.5
-------- -------- -------- ---------- ----------
Total loss ratio............... 89.7% 91.0% 88.6% 88.0% 89.6%
======== ======== ======== ========= =========
Operating Expense Ratio (Operating
Expenses as a Percentage of Premium
Revenues).............................. 9.6% 8.7% 9.5% 10.7% 10.9%
======== ======== ======== ========= =========
Combined Loss Ratio (Benefits Expense and
Operating Expenses as a Percentage of
Premium Revenues):
HMO and POS............................ 99.7% 101.7% 100.4% 98.3% 94.7%
Indemnity and PPO...................... 99.3 99.6 98.0 98.8 101.4
Life and Other......................... 92.3 88.1 92.1 94.8 94.9
-------- -------- -------- ---------- ----------
Total Combined Loss Ratio...... 99.3% 99.7% 98.1% 98.7% 100.5%
======== ======== ======== ========= =========
Effective Income tax rate(2)............. 18.7% 19.7% 20.8% 22.4% 17.9%
======== ======== ======== ========= =========
BALANCE SHEET DATA (AT PERIOD END):
Cash, equivalents and marketable
securities............................. $131,632 $153,711 $177,650 $ 201,976 $ 223,994
Total assets............................. 285,728 318,041 356,241 407,023 417,079
Total estimated benefit liabilities...... 156,454 161,290 153,881 167,895 175,846
Total liabilities........................ 197,291 212,050 226,502 258,353 244,040
Surplus.................................. 88,437 105,991 129,739 148,670 173,039
</TABLE>
- ---------------
(1) Years prior to 1993 were restated to conform to the current year
presentation.
(2) The effective tax rate has been approximately 20% as a result of paying
taxes under the alternative minimum tax system. This is the result of a
deduction available under Section 833(b) of the Internal Revenue Code (see
"MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS -- Overview"). If the deduction were no longer available,
Georgia Blue would
20
<PAGE> 25
be subject to federal income taxes at the regular corporate tax rate, which
is currently 35%. See "CERTAIN FEDERAL INCOME TAX CONSEQUENCES -- Section
833 of the Code."
SELECTED PRO FORMA FINANCIAL INFORMATION OF THE COMPANY
The Company was organized on February 2, 1996 for the purpose of acting as
a holding company for Georgia Blue and its subsidiaries and to engage in certain
other health care related activities and therefore has no results of operations
prior to that time. The pro forma impact (unaudited) on the Company's December
31, 1995 balance sheet is set forth below and assumes the Conversion, the
formation of the Company, the sale of the Preferred Stock and the application of
the related net proceeds and the distribution of the Class A stock occurred as
of December 31, 1995. The financial statements of the Company's subsidiary,
Georgia Blue, consolidated with Georgia Blue's other wholly-owned subsidiaries,
HMO-Ga, GBG and GGL, as well as its 51% owned subsidiary, CHPN-Atlanta, would
not be materially different from the pro forma financial statements of the
Company for each of the periods presented and have therefore been excluded from
this presentation. See "SELECTED CONSOLIDATED FINANCIAL AND OPERATING
DATA -- Georgia Blue" and "CAPITALIZATION."
<TABLE>
<CAPTION>
PRO FORMA
DECEMBER 31, 1995
-----------------
<S> <C>
Cash, equivalents & marketable securities.................................... $ 271,399
Total assets................................................................. 464,484
Total estimated benefit liabilities.......................................... 175,846
Total liabilities............................................................ 244,040
Mandatorily redeemable preferred stock....................................... 46,073
Shareholders' equity......................................................... 172,203
</TABLE>
21
<PAGE> 26
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
The Company was incorporated under the laws of the State of Georgia on
February 2, 1996 for the purpose of acting as the holding company for Georgia
Blue and its subsidiaries and to engage in certain other health care related
activities. The Company acquired all of the outstanding capital stock of Georgia
Blue following the Conversion on February 2, 1996. The holding company structure
provides flexibility for expansion and flexibility in terms of capital formation
and financing opportunities. Nevertheless, the primary activity of the Company
currently is the ownership and operation of Georgia Blue and its subsidiaries.
Because the Company was not organized until February 2, 1996 and did not become
the holding company for Georgia Blue until the Conversion on February 2, 1996,
the discussions below relate to the historical operation of Georgia Blue. As
used hereafter in this "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS," the term "Company" shall refer to Georgia
Blue and its subsidiaries for periods prior to the Conversion, and to the
Company, Georgia Blue and its subsidiaries for periods following the Conversion.
The Company, through its subsidiaries, has the largest health insurance
company market share in Georgia with over 670,000 insurance and administrative
service contracts covering or administering benefits for over 1.4 million
members as of December 31, 1995. The Company's current strategy centers around
the development of its managed care business, with a strong emphasis on
expansion through HMO-Ga.
The Company's revenues, through its subsidiaries, consist of premiums,
investment and other income and related realized gains or losses on the sales of
securities. Premium revenues include premiums and other revenues from (i)
managed care products and services offered through a health maintenance
organization ("HMO"), preferred provider organization ("PPO"), and a point of
service network plan ("POS"); (ii) traditional comprehensive indemnity health
coverage to employer groups and individuals; (iii) administrative services and
cost containment programs for certain self-funded employers; and (iv) group life
products. Investment and other income includes dividends and interest earnings
from the Company's investment portfolio. Portfolio yield computations represent
the sum of interest and dividend income and realized gains or losses as a
percentage of the Company's average invested assets.
The growth of revenues and earnings in recent years is the result of a
strategic shift in focus that began in 1992, following the recruitment of a new
management team. As a result of the new strategy, HMO and POS premiums have
grown from 6% of total premiums at the end of 1992 to 13% at the end of 1995.
HMO and POS membership has grown from 45,000 members at the end of 1992 to over
131,000 members at the end of 1995. The growth in the HMO and POS programs is
attributable to new sales and to migration of business from other traditional
indemnity products offered by the Company. The HMO and POS products sold in the
Atlanta market are serviced through CHPN-Atlanta, the Company's first
operational CHPN.
Historically, substantially all of the Company's premium revenues and net
income have been derived primarily from its traditional indemnity and PPO
business. For the four years prior to 1995, the indemnity and PPO products
represented between 91% and 93% of total premium revenues. The developing trend
is movement from traditional indemnity business and toward managed care products
such as HMO and POS plans. With the focus on HMO and POS products, including the
introduction of the CHPN strategy in 1995, indemnity and PPO premiums declined
to 87% of total premiums for the year ended December 31, 1995. In recent years,
enrollment in indemnity products has been flat, while enrollment in HMO and POS
programs has grown as a result of increasing customer interest in controlling
costs of health care. The Company believes that its HMO and POS business will
become an increasingly significant part of its future after tax earnings. After
tax earnings for HMO and POS business represented 40% of the total net income
reported by the Company in 1995.
Prudent management of the Company's investments has played a significant
role in developing and maintaining the Company's financial strength. Investment
earnings, including realized gains on sales of investments, have represented an
average of over 72% of pre-tax income during the period from January 1,
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1991 through December 31, 1995. In 1995, investment earnings, including realized
gains, represented 122% of pre-tax income reflecting substantially higher
realized gains and lower earnings from operations during 1995 compared to
previous years.
Benefits expense consists primarily of health care claims and payments to
physicians, hospitals and other health care providers. The Company's
profitability largely depends on the ability to accurately predict and
effectively manage these health care costs. The Company's loss ratio (the ratio
of benefits expense divided by premiums) improved from 91.0% in 1992 to 88.0%
for 1994 as the Company continued efforts to improve medical utilization
management in the delivery of medical services. The loss ratio for 1995
increased slightly to 89.6% as a result of an increase in medical costs for
indemnity products which started in the third quarter of 1994 and continued
through 1995. As a result of the increases in medical costs for indemnity
products during late 1994 and 1995, the Company experienced some decline in
gross margins for indemnity products during 1995.
The Company processes and pays claims as fiscal intermediary for the
Medicare Part A program and as an administrative agent for the State of Georgia
Employee Health Benefit Plan and the BCBSA's Out-of-Area Program. Claim payments
from these agency programs which are excluded from benefits expense amounted to
$3.2 billion in 1995. The Company receives administrative fees and
reimbursements for expenses incurred in performing these agency services. These
fees and reimbursements are deducted from operating expenses.
The Company's emphasis on managed care products, and the expenses
associated with the change in its infrastructure, is reflected in the increase
in its operating expense ratio (the ratio of operating expenses divided by
premiums), which grew from 8.7% in 1992 to 10.9% in 1995.
In the State of Georgia, insurers are required to pay a tax on insurance
premiums in lieu of a state income tax. Premium taxes are charged to operating
expenses as incurred.
The Company has paid federal income taxes under the alternative minimum tax
system because of a special deduction available to certain Blue Cross and Blue
Shield plans under Section 833(b) of the Internal Revenue Code. If the deduction
provided under Section 833(b) were no longer available, the Company would be
subject to federal income taxes at the regular corporate tax rate, which is
currently 35%. The Company expects the Section 833(b) deduction to be available
into the foreseeable future and therefore expects to be taxed under the
alternative minimum tax system. As a result the Company will be unable to
utilize approximately $65 million of regular tax net operating losses and other
temporary differences that otherwise would be available. For financial reporting
purposes, a valuation allowance has been recorded to reduce the deferred tax
assets to the amount expected to be realized. See "CERTAIN FEDERAL INCOME TAX
CONSEQUENCES."
Significant health care reform legislation has been, and continues to be,
proposed by the Congress. Any such legislation could have a material impact on
the Company's business. With or without legislation, consumers and employer
groups are expected to continue to exert pressure on pricing of health care
products. To meet these demands, more predictable, lower cost products will be
required.
Results of operations are directly affected by premium rate adequacy which
depends on pricing and underwriting decisions, the level of membership serviced
by and the quality of the Company's physician, hospital, pharmacy and ancillary
health care services networks (and since January 1995, by the Company's CHPNs),
estimates of medical benefits, health care utilization, estimates of health care
cost trends, effective administration of benefit payments, operating
efficiencies, investment returns and federal and state laws and regulations.
RESULTS OF OPERATIONS
1995 Compared to 1994
Premiums increased 12% to $1.2 billion in 1995 from $1.0 billion in 1994.
Premiums for HMO and POS products posted the strongest gains, up 65% to $144.7
million in 1995, reflecting a 98% growth in HMO
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and POS membership. New sales and, to a lesser extent, migration from other
traditional indemnity products of the Company, accounted for the membership
growth. HMO and POS products represented 13% of premiums during 1995 compared to
8% of premiums in 1994. Premiums for indemnity and PPO products totaled $1.0
billion in 1995, a 7% increase over 1994. Sales of new indemnity products were
flat during 1995 while sales of PPO products increased 18% in 1995 compared with
1994.
Investment and other income of $12.0 million in 1995 was up 27% over 1994
as a result of an increase in the Company's cash and investment portfolio. Other
income for 1995 also included $2.0 million related to the settlement of a lease
dispute.
Realized gains increased to $15.3 million in 1995 from $2.5 million in
1994, due primarily to the very strong performance of bond and stock markets in
1995. To take advantage of the strong market performance, during November 1995
the Company realized gains of $9.9 million on the sale of marketable securities,
which had a cost of $17.2 million. These results are not necessarily indicative
of results to be expected in the future.
Benefits expense increased 14% to $1.0 billion in 1995. HMO and POS
benefits expense increased 55% to $121.1 million in 1995 as compared to $78.1
million in 1994, as a result of the strong membership growth of 98%, which was
partially offset by a 7% reduction in medical cost per member per month. The
medical loss ratio for HMO and POS products improved significantly to 83.7% in
1995 compared to 89.2% in 1994. The medical loss ratio for the HMO and POS
products in 1995 has been favorably impacted by adjustments to medical costs for
prior periods. The medical loss ratio in 1995, excluding these favorable
adjustments, would be 85.0%, which still reflects significant improvement over
the medical loss ratio of 89.2% in 1994. The Company's continuing efforts to
improve medical and utilization management in the delivery of medical services
and efficiencies from the Company's first CHPN partnership in the Atlanta
market, CHPN-Atlanta, were the primary reasons for the improvement. During 1995,
its first year of operation, membership in CHPN-Atlanta increased from
approximately 50,000 members at January 1 to approximately 96,000 members at
December 31.
While the loss ratio experience in HMO and POS products continued to
improve during 1995, experience in the indemnity and PPO lines of business
declined. Benefits expenses for indemnity products increased 10%, while
enrollment increased only 7%, generating a higher loss ratio for indemnity and
PPO products of 90.7% in 1995 compared to 88.2% in 1994. Additionally, the
Company identified increasing medical cost trends in all markets of its
indemnity products in the second quarter of 1995 which related to the third and
fourth quarters of 1994. As a result, the Company recorded an additional $6.2
million in benefits expense in 1995. Furthermore, this upward trend in medical
costs for indemnity products has continued throughout 1995. The combination of
these factors resulted in the Company's total loss ratio increasing to 89.6% in
1995 from 88.0% in 1994.
The Company's infrastructure changed significantly in the last half of 1994
as it expanded its managed care administration and information systems,
increased its product development and marketing capabilities and enhanced its
medical and utilization management. Additionally, the Company adopted FASB No.
106, "Employers' Accounting for Postretirement Benefits Other Than Pensions"
during 1995. The effect of the change in accounting for certain postretirement
benefits increased operating expenses by $1.6 million in 1995. As a result of
the infrastructure changes and the FASB No. 106 accounting change, operating
expenses increased 14% in 1995 to $126.1 million from $111.0 million in 1994.
As a percentage of net income, after tax earnings of the HMO and POS
products offered through HMO-Ga represented 40% of total net income in 1995.
1994 Compared to 1993
In 1994, premiums were approximately $1.0 billion, an 11% increase over
$939.7 million in 1993. Growth was strongest in HMO and POS products with
premiums increasing to $87.5 million from $76.2 million in 1993, a 15% increase.
HMO and POS membership grew 25% during 1994, while premiums per member per month
for HMO and POS products were 7% lower during 1994 as compared to 1993 as a
result of medical cost management actions implemented in late 1993 and 1994,
allowing for HMO and POS products to be
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offered at lower prices in 1994. Also included in the pricing decline is the
impact of shifts in product mix as the Company focused on the small group (under
100 in size) segment which has lower than average pricing. Premiums from
traditional indemnity and PPO products totaled $944.2 million in 1994, a 10%
increase over $857.2 million in revenues for those products in 1993. This
increase principally resulted from a 9% growth in enrollment.
Investment and other income in 1994 was $9.5 million, up from 1993
investment and other income of $8.5 million, due to a general rise in interest
rates as well as an increase in the Company's cash and investment portfolio. The
dollar value of the Company's investment portfolio increased 10% over the prior
year; however, the portfolio yield declined to 6.7% in 1994 from 7.6% in 1993
due to the performance of the capital markets in 1994, particularly the
performance of the bond market, as realized gains decreased 46% to $2.5 million
in 1994 from $4.7 million in 1993.
Benefits expense increased 10% to $914.3 million in 1994 from $832.9
million in 1993 as a result of a 10% increase in indemnity and HMO and POS
membership. HMO and POS products experienced a 25% growth in membership during
1994, yet total medical expenses for HMO and POS products increased only 10%,
causing the improvement in the HMO and POS medical loss ratio to 89.2% in 1994,
down from 93.2% in 1993. The decrease in the loss ratio reflects the Company's
efforts to manage the inflationary trend of health care expenses by negotiating
favorable rates with providers, and improving utilization and medical
management.
Lower medical loss ratios also were experienced in the traditional
indemnity and PPO products which showed a slight improvement to 88.2% for 1994
compared to 88.5% in 1993. In mid-1994, Georgia Blue entered into a statewide
pharmacy network agreement which decreased pharmacy costs for indemnity
products. In addition, the national health care reform debate in late 1993 and
early 1994, which centered around spiraling costs, caused downward pressure on
the growth in medical costs.
Operating expenses for 1994 increased 24% to $111.0 million in 1994 from
$89.3 million in 1993, reflecting a higher level of operating costs for the
Company's managed care administration and information systems and an increase in
the number of employees required to support increased business volumes, changes
in product mix and increased medical management, product development and
marketing capabilities. The operating expense ratio increased to 10.7% in 1994
from 9.5% in 1993, reflecting an upward trend consistent with the industry as
managed care capabilities are enhanced. The higher level of operating costs was
the primary reason for the Company's decrease in operating income to $25.1
million in 1994 from $30.7 million in 1993.
In 1993, the Company incurred a $7.6 million loss on the repurchase of its
former headquarters property for which the Company was required to make payments
as the loan guarantor when a third party defaulted.
The Company also implemented FASB Statement No. 109, "Accounting for Income
Taxes" in 1993. The cumulative effect of changing a different method of
accounting for income taxes resulted in a benefit of $5.4 million in 1993.
LIQUIDITY AND CAPITAL RESOURCES
Liquidity
The Company has both short-term and long-term liquidity needs and has
structured its investment portfolios accordingly. Short-term liquidity needs to
fund its operating costs as well as the payment obligations to its customers are
met from funds invested primarily in institutional money market accounts. These
funds, the internal portfolio, are managed by Georgia Blue's management staff as
described below at "BUSINESS -- Investment Portfolio". The allocation of total
investments to the internal portfolio is based on average monthly dollars paid
out for benefits in underwritten business over the last twelve months or 15% of
the total investment portfolio, whichever is less. The average internal
portfolio allocation at the end of 1995 was $21 million.
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Assets not required for short-term liquidity needs are transferred to an
externally managed portfolio for investment in the fixed income and equity
markets. This portfolio, which provides reserves for future payment obligations
and funds for long-term liquidity needs, is managed by several independent
advisory firms. See "CAPITAL RESOURCES" below.
The Company's investment policies are designed to provide liquidity to meet
anticipated payment obligations, preserve capital and maximize yield in
conformance with all regulatory requirements. At December 31, 1995, cash and
investments were $224.0 million or 54% of total assets. The allocation of the
Company's investment portfolio has been consistently maintained with over 65% in
fixed maturities, all of which are investment grade, and the balance in equity
securities. Corporate and government bonds are in issues with ratings of "A" or
better by Moody's Investors Service and Standard & Poor's Rating Group, and
investments in equity securities are in domestic dividend paying companies. The
Company's portfolio currently does not contain any derivative securities or
instruments, or any real estate investments or equity investments in
corporations engaged solely in real estate activities. Management believes that
its conservative investment portfolio contributes to its financial stability.
The Company's balance sheet has improved steadily since 1991 with total
assets growing to $417.1 million at December 31, 1995, up from $285.7 million at
December 31, 1991. Over half of the increase was a result of growth in the
Company's cash and investment portfolio as it invested excess cash generated
from operating activities and investment earnings. The Company also increased
property and equipment as part of the infrastructure investments to improve
managed care capabilities with capital expenditures of over $9.4 million in 1993
and $14.0 million in 1994, which included $8.2 million and $11.2 million,
respectively, for managed care administration processing capability, mainframe
upgrades, imaging equipment and expansion of personal computer applications.
Capital expenditures for 1995 totaled $10.1 million.
The Company has historically satisfied its ordinary cash requirements from
operations; however, net cash provided by operating activities decreased to $8.6
million for the year ended December 31, 1995 from $35.4 million for the year
ended December 31, 1994. This was primarily the result of an increase in claim
payouts, costs related to its conversion activities and a onetime payout in
January 1995 for unused vacation accumulated for prior years. The Company
believes its future cash resources will be adequate to meet its operating
requirements.
The Company has available a $5,500,000 line of credit with a bank to
finance its working capital needs. Interest accrues on amounts advanced at the
prime rate. There were no borrowings on this line of credit in 1993, 1994 or
1995.
In April, 1996, Georgia Blue obtained a $55 million insolvency line of
credit with a group of banks. The insolvency line of credit may be drawn on
solely in the event of an insolvency of Georgia Blue to pay authorized insurance
policy claims. The insolvency line of credit is designed to satisfy certain
financial standards of the BCBSA. The Company does not anticipate making draws
under the insolvency line of credit.
The National Association of Insurance Commissioners ("NAIC") adopted the
Risk-Based Capital for Life and/or health Insurers Model Act ("RBC Model Act"),
effective December 31, 1993, to evaluate the adequacy of statutory capital and
surplus in relation to investment and insurance risk associated with (i) asset
quality, (ii) mortality and morbidity, (iii) asset and liability matching, and
(iv) other business factors. As of the date of this Prospectus, the RBC Model
Act has not been adopted in Georgia nor does it apply to Blue Cross and Blue
Shield plans. The NAIC currently is engaged in a study of the adoption of
risk-based capital rules for Blue Cross and Blue Shield plans. Using the RBC
Model Act, the Company's risk-based capital position at December 31, 1995 is
226% of the NAIC company action level requirement. With $140.9 million in
statutory surplus at December 31, 1995, Georgia Blue exceeded the Georgia
statutory capital requirement of $1.0 million. Consolidated GAAP surplus at
December 31, 1995 totaled $173.0 million, a 16% increase over the 1994 level of
$148.7 million. Included in consolidated GAAP surplus amounts are $7.0 million
in unrealized gains at December 31, 1995 and $0.5 million in unrealized losses
at December 31, 1994 as required by FASB No. 115 "Accounting for Certain
Investments in Debt and Equity Securities."
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Capital Resources
The Company anticipates that the principal elements of its future capital
requirements are (i) information technology needs, (ii) equity contributions to
the CHPNs, (iii) potential medical access point developments, (iv) strategic
acquisitions, and (v) product development.
The Company anticipates that total capital outlays during the 1996-1998
period for information technology acquisitions, purchases and operating leases,
will be approximately $30 million.
Equity contributions to form a CHPN in markets other than metropolitan
Atlanta average $.5 million. In March 1994, Georgia Blue obtained a $25 million
revolving loan facility with a group of banks for the purpose of capitalizing
CHPNs. Loans under the credit facility convert to term loans in September 1999.
Interest accrues on amounts advanced at a variable rate tied to the LIBOR rate.
At December 31, 1995 $2.0 million was outstanding under the credit facility.
Medical access point development could occur if the CHPNs are not able to
adequately cover the geography or range of services desired. The solution to
these access needs could take the form of physician practice acquisition, the
establishment of urgent care, 24-hour, or primary care clinic facilities, or
physician recruitment or relocation costs. The capital cost to develop a medical
access point varies, because of differing factors such as available facilities
and extent of existing infrastructure. The Company anticipates that the
development of a single medical access point could cost in the range of $.5
million to $2.0 million. To date, no CHPN has produced an access need that has
translated into additional capital requirements.
At the present time, the Company has no agreement with, or intentions or
plans to acquire, any other specific company or entity, and is not in discussion
with any company or entity with respect to any strategic acquisitions.
The Company believes that long-term capital requirements can be met with a
combination of (i) the Company's current resources (including the proceeds of
the sale of the Preferred Stock), (ii) cash flow from operations and (iii)
potential debt or equity offerings.
OPERATING RESULTS FOR THREE MONTHS ENDED MARCH 31, 1996
Within 45 days of the date of this Prospectus, the Company will report
operating results for the three months ended March 31, 1996 on Form 10-Q to the
Securities and Exchange Commission. As of the date of this Prospectus, the
Company anticipates the report will reflect continuations of the trends and, in
general, results of implementation of the Company's strategies reflected in this
Prospectus. Management expects to report an increase in premium revenues in
first quarter 1996 over the same period in 1995 as a result of volume growth in
HMO, POS and PPO products. Offsetting this growth is an expected decline in
enrollment in traditional indemnity products due principally to migration to
managed care products. Management expects to report that medical loss ratios for
all products are not materially different in the first quarter of 1996 from the
fourth quarter of 1995, although they are slightly higher than the first quarter
1995 and that realized gains on the sale of marketable securities are lower by
$1.8 million in the first quarter 1996 compared to the same quarter in 1995 due
to higher gains realized in the prior year period; management expects that
together these two items will result in a decrease in income before income taxes
of approximately $2 million from the prior year period. Management expects to
report a higher effective tax rate in the first quarter 1996 than for 1995 due
to adjustments at year-end 1995 correcting overaccruals in prior periods,
together with the anticipated effect of deferred taxes and permanent differences
in 1996. The report on 10-Q will reflect that the Company's financial position
at March 31, 1996 includes the proceeds of the Preferred Stock offering and does
not differ materially from the pro forma balance sheet data reflected in the
Selected Pro Forma Financial Information of the Company.
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BUSINESS
INDUSTRY OVERVIEW
The health care industry in the United States has grown from a $12 billion
industry in 1950 to approximately $998 billion in 1993, according to the United
States Health Care Financing Administration, and represented more than 15% of
the United States Gross Domestic Product in 1994. Several factors have
contributed to the dramatic increase in health care expenditures, including the
aging of the population, increased use of high-technology treatments and tests,
the rising cost of malpractice insurance and higher operating costs for
hospitals, physicians and other health care providers. Prior to the development
of managed health care, most health insurers offered health care benefit plans
known as indemnity, or fee for service, plans which do not typically provide
incentives to use particular providers for the provision of care or include
other cost-containment features.
Due to the escalating cost of health care services, customers (both groups
and individuals) began to demand lower cost alternatives to traditional
indemnity insurance plans. Managed health care plans were developed to attempt
to provide quality health care services in an affordable manner. Typically, HMO
and PPO plans develop networks of health care providers to deliver health care
at favorable rates that incorporate health care quality and utilization
management, and other cost control measures. An important factor in controlling
costs is the number of members (i.e., enrolled health care consumers) that a
managed care benefit plan can direct to providers. Under many managed care
plans, providers are reimbursed based on either capitation (a fixed monthly fee
per member regardless of frequency of use, generally used by HMOs for physicians
and ancillary medical services such as laboratory services) or a negotiated per
diem (daily rates, generally used for hospitals) or limited fee schedules
(generally used for specialty physicians). Managed health care plans also
feature a variety of methods of health care utilization management to control
the type, quantity and setting of services obtained. Utilization management
programs are designed to provide economic incentives to encourage providers to
deliver medically necessary and cost-effective care.
Different types of health care utilization management and cost control
methods generally differentiate managed health care plans. HMOs generally
require members to use network providers exclusively except in very limited
cases, and to consult with a primary care physician prior to obtaining treatment
from specialists. HMOs generally include capitated payment arrangements with
network providers and charge members only modest copayments in addition to
regular monthly premiums. POS plans provide members with an HMO service option
for network coverage and also permit the member, at the time medical service is
required, to choose a provider that is not a member of the HMO or PPO networks.
POS plans may require the use of a primary care physician within the network to
coordinate health care services for the members while PPO plans do not. PPO and
POS plans also provide members with the option of using non-network providers
under indemnity-type coverage terms which require substantial coinsurance
payments by members and high deductibles. These member payments are generally
limited to an out-of-pocket maximum. Coinsurance and higher deductible
requirements for non-network care in POS and PPO plans are designed to encourage
greater utilization of network care by members, thereby reducing costs. See
"BUSINESS -- Business Lines and Products."
GENERAL
The Company, through its subsidiaries, has the largest health insurance
company market share in Georgia, with over 670,000 insurance and administrative
service contracts covering or administering benefits for over 1.4 million
members as of December 31, 1995 (including HMO, PPO and POS members). This
represents over 19% of the total Georgia population. The Company has one of the
State's largest PPO memberships, serving over 290,000 members as of December 31,
1995, and serves an additional 130,000 members through its health maintenance
organization, HMO-Ga, which also offers the Company's POS products. The Company
has two other subsidiaries, GGL and GBG. GGL offers group life, accident and
disability insurance products that are sold in conjunction with the Company's
health products. GGL has an A- rating from A.M. Best and is licensed to offer
its products in South Carolina, North Carolina, Alabama, Mississippi, Tennessee
and Georgia. GBG is a general insurance agency that principally sells life,
accidental
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death and dismemberment, and disability coverage to complement health insurance
products. Cerulean Companies, Inc. will derive revenue from dividends from its
subsidiaries (Georgia Blue and its subsidiaries as well as any new subsidiaries
which the Company may form to conduct new businesses), service and/or management
fee arrangements between the Company and its subsidiaries, as well as revenues
the Company may derive from other non-regulated services it may provide
customers directly in the future.
The Company's core business products are its traditional indemnity products
and its HMO, POS and PPO products. See "BUSINESS -- Business Lines and
Products." The Company's current business strategy centers around the belief
that development of managed care products, with a strong HMO at the core,
represents the most prudent response to both current market place demands as
well as longer range health care reform. Where possible, the Company is
attempting to convert non-managed care contracts to managed care products. In
areas where there is no managed care, the Company's strategy is to solidify its
market presence through PPO network expansion, favorable changes in provider
reimbursement, and benefit design alterations that meet employers' needs.
The Company offers its traditional indemnity products and its HMO, POS and
PPO products exclusively within the boundaries of the State of Georgia. Although
the Company and certain of its subsidiaries are licensed by the BCBSA to refer
to themselves under the name of Blue Cross and Blue Shield only in the State of
Georgia, there are only limited BCBSA restrictions on the conduct of business by
the Company or its subsidiaries outside the State of Georgia under a different
name.
The Company has a comprehensive quality management program which focuses on
assessment, management and methodology for maintaining inpatient and ancillary
services. The quality management program monitors, collects data on and
evaluates inpatient and outpatient medical care, inclusive of preventive and
mental health services, as well as the level of customer service provided to its
members by physicians and other medical providers. Georgia Blue has an extensive
credentialing policy and function which monitors the recruitment and retention
of its provider panels throughout the state. HMO-Ga has applied for
accreditation of its quality management programs by the National Committee for
Quality Assurance, a nationwide organization which evaluates quality assurance
programs for HMOs.
The Georgia marketplace is extremely diverse, ranging from the major
metropolitan area of Atlanta, with a 1990 population in excess of 2.9 million,
to several mid-sized cities, including Augusta, Columbus, Macon and Savannah, to
smaller cities, including Rome, Cartersville, Gainesville and Athens, to very
rural areas. The southern half of the State of Georgia is primarily an agrarian
economy.
The metropolitan Atlanta area has an HMO market penetration of
approximately 28%; however, Georgia as a whole currently has one of the lowest
HMO penetrations in the country, at 13%. Based on industry sources, the five
states with the highest HMO penetration in the country each have penetration in
excess of 35%.
At present, HMO-Ga is licensed and operational as an HMO in seven markets
in Georgia representing more than 4.7 million residents, including Atlanta.
HMO-Ga's HMO and POS products are serviced through a network of primary care
physicians, specialist physicians and hospitals. Beginning January 1995, HMO-Ga
also began delivering its products through CHPNs. See "THE COMPANY" and "RISK
FACTORS -- Ability to Successfully Implement Strategic Plan."
ORGANIZATIONAL STRUCTURE
The Company's primary operating subsidiary, Georgia Blue, is organized in a
Business Unit, a Support Unit, and a Governance Unit structure. Business Units
have responsibility to sell products, at appropriate prices, and to manage the
effective delivery of product benefits at acceptable levels. Support Units
manage the delivery of administrative services to individual or multiple
Business Units within defined cost parameters, while meeting customer service
expectations. The Governance Units establish policy, provide direction for
Georgia Blue, and monitor compliance.
Within the Individual Business Unit, health insurance products are sold to
individuals (or individual families) under age 65, or to persons over age 65 who
are Medicare eligible. Local Market Business Units
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offer a full line of health insurance products for employer groups. The
Major/National Business Unit offers a full line of health products to employer
groups with 500 or more covered employees, and the National Par Business Unit
supports participating plan accounts of Georgia employees of national employers
sold though other Blue Cross and Blue Shield plans.
STRATEGIC INITIATIVES
CHPNs
As a result of concern with rising health care costs and changing trends in
the health care industry, the Company determined to develop its own integrated
delivery system for managed health care products. The Company's community health
partnership networks, or CHPNs, are the cornerstone of this strategy. The
Company believes CHPNs will facilitate the introduction of its HMO and POS
products into new markets and address group customer demand for lower cost
health care while providing more predictable revenue.
CHPNs are locally based equity ventures between Georgia Blue and a local
physician group and/or hospital, which owns the remaining equity interests in
the CHPN. The Company anticipates that Georgia Blue, either alone or with a
contiguous state's Blue Cross/Blue Shield plan as a joint venture partner, will
own at least 51% of the equity interests in each CHPN it organizes. Clinical
services are provided by the physician or hospital partners as well as other
providers with which the CHPN maintains contracts, and Georgia Blue provides
sales, management and administrative services, including information systems and
data management services through service contracts with the CHPNs. Premium and
fee revenues are received from subscribers by HMO-Ga which keeps a flat
percentage as a contribution to surplus. After deduction for premium taxes and
administrative retention by Georgia Blue, the remaining premium revenue is used
for payment of medical expenses and for contribution to the CHPN's retained
earnings.
Georgia Blue has taken several actions to support the CHPNs, including (i)
hiring experienced managers to oversee sales, medical network management and
financial performance in the local markets, (ii) providing dedicated claims
processing and membership services, (iii) developing a strategic information
systems plan that addresses the information requirements, applications needs and
systems architecture necessary to support the CHPNs and (iv) enhancing medical
management activities and continued development of National Commission on
Quality Assurance ("NCQA") processes and Health Plan Employer Data and
Information Set ("HEDIS") reporting.
CHPN-Atlanta (which operates in the Atlanta metropolitan area and
surrounding counties) was the first CHPN to become operational. During 1995, its
first year of operation, membership in CHPN-Atlanta increased from approximately
50,000 members at January 1 to approximately 96,000 members at December 31.
CHPN-Atlanta is the only CHPN to date jointly owned by health care providers and
Georgia Blue which has been formed and capitalized. However, in the six other
Georgia markets serviced by HMO-Ga, HMO and POS products are being offered
through HMO-Ga in collaboration with local providers in connection with the
formation of CHPNs in those markets.
Information Technology
In 1995, the Company completed a Strategic Information Systems Plan
("SISP") which addresses specific information systems and network requirements
for the future. The Company has since embarked on the execution of the SISP and
expects to complete its implementation in the 1998-1999 timeframe. The SISP is
comprehensive and provides an assessment of the extent and cost of its
development and implementation. It identifies the capital, equipment, software
and intellectual property necessary to employ and support traditional kinds of
systems effectively in an expanding, for-profit environment. It also details new
technologies that will support and enable the Company to embark on major new
strategic business initiatives, such as CHPN's.
The Company believes the strategies outlined in the SISP will result in
more cohesive and efficiently interrelated uses of information technology, both
through systems targeted to specific uses, and through the
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<PAGE> 35
use of networks to deploy solutions Company-wide. The Company expects to obtain
substantial improvements in productivity and expense reduction as a result of
these new strategies.
Currently, the Company uses a mixture of systems and processing platforms
to meet its requirements. As provided in the SISP, the principal system is GTE's
Q/Care product, as modified for the Company. The primary modules have been
completed and installed. The Company is currently migrating both data and
applications from other systems, principally a claims processing system which
was internally developed, onto the Q/Care system. The predecessor systems will
then be retired. The Company expects implementation of the SISP to require three
to four years. When complete, the Company expects to have established a
technical infrastructure providing highly available, reliable and responsive
business and clinical systems that position the Company to excel in the dynamic
health care marketplace.
The Company anticipates that total capital outlays during the 1996-1998
period for information technology acquisitions, purchases and operating leases,
will be approximately $30 million. Approximately $18-22 million of the $30
million of capital outlays will be reflected in the financial statements during
this period in depreciation and lease payments. In addition to the capital
outlays, the Company expects to spend an additional $8 million in implementation
of SISP during this period for increases in information technology personnel and
outside vendors, such as consultants and software developers.
The Company also performs paperless claim clearinghouse/electronic data
interchange activities. The recent addition of on-line eligibility, claims
status, and preauthorization/referral processing options to providers as well as
online access by groups to their eligibility and claims information has
strengthened the Company's position for health care electronic commerce.
BUSINESS LINES AND PRODUCTS
Overview
The Company is a full service provider of health benefit programs in the
Georgia marketplace. The Company markets life, health and disability insurance
products to employer groups and individuals. The overall product portfolio
available includes standard indemnity insurance, PPO, HMO and POS health
benefits plans, life insurance products and ancillary products including dental
insurance, a vision affinity product, vision insurance and specialty products
for mental health and pharmacy.
Various funding arrangements are available for each health benefit product.
These arrangements range from fully insured to administrative services only
("ASO")/cost plus. Under a fully insured arrangement, Georgia Blue assumes the
full risk (subject to deductibles and other adjustments) with direct payment by
Georgia Blue generally to the provider. In an ASO/Cost Plus arrangement, Georgia
Blue administers the health insurance program for its customer and is
compensated according to the terms of the contract for its services by a fee in
excess of those amounts that are disbursed to providers. The formula for
compensation in cost plus arrangements varies from contract to contract, but
conceptually in such arrangements Georgia Blue receives reimbursement for
benefit payments processed and related administrative fees. ASO/Cost Plus
funding is generally utilized by employers with at least 500 covered
subscribers. Some employers may choose individual member or aggregate
reinsurance to protect against catastrophic losses.
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<PAGE> 36
Shown below is certain information on each of the Company's major product
lines.
PERFORMANCE BY PRODUCT
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31, 1995
AT DECEMBER 31, 1995 -----------------------
---------------------- REVENUES MEDICAL
PRODUCT CONTRACTS MEMBERS(2) ($000S) LOSS RATIO
- ---------------------------------------------------- --------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Indemnity........................................... 233,331 443,995 $ 575,588 88.7%
PPO................................................. 134,356 295,583 430,936 93.4
HMO................................................. 47,583 100,467 100,238 81.4
POS................................................. 14,186 31,159 44,423 88.9
Life and Other...................................... -- -- 8,291 56.5
Other Enrollment(1)................................. 243,657 536,045 -- --
--------- ---------- ----------
All Products........................................ 673,113 1,407,249 $1,159,476 89.6%
======= ========= =========
</TABLE>
- ---------------
(1) Includes Administrative Services Only (ASO), Third Party Administrator
(TPA), and National Service Only Services.
(2) Actuals for HMO and POS. Estimates for other products.
HMO and POS
The Company's HMO product has been offered through HMO-Ga since 1986. From
1986 through 1993, the product did not experience substantial growth. However,
in 1994 new management and an increased emphasis on sales of managed care
products dramatically increased HMO-Ga's products market acceptance. HMO-Ga's
HMO and POS products are now the Company's fastest growing products, due in
large part to the Company's CHPN initiatives.
At present, HMO-Ga is licensed and operational as an HMO in seven separate
markets in Georgia, including Atlanta, Athens, Augusta, Columbus, Macon, Rome
and Savannah, representing more than 4.7 million residents. On June 30, 1995,
HMO-Ga was the fourth largest provider of managed health care services in the
State of Georgia based on number of members.
HMO-Ga's HMO and POS products are offered to group subscribers as "Blue
Choice Healthcare Plan," which is a prepaid coverage and preventive care
product, and "Blue Choice Options," which is a point-of-service product that
allows members to choose between HMO-Ga network providers and out-of-network
providers. Premiums are collected on a monthly basis from employers. If offered
by employers, members can elect at annual enrollment whether they wish to be in
the "Blue Choice Healthcare Plan" or the "Blue Choice Options." The HMO and POS
products are currently not offered to individuals.
Under the Company's HMO product, HMO members select a primary care
physician who provides basic medical care for the member pursuant to a contract
with HMO-Ga. The primary care physician coordinates all of the medical and
health care for each HMO member, including physical examinations, specialist
care and hospitalization. Each primary care provider is credentialed and
periodically re-credentialed by the Company to maintain physician network
standards. The primary care physician coordinates with the member and the
Company to promote the delivery of quality care in a cost-effective manner. HMO
benefit plans require varying copayments for health care services. Coverage for
hospitalization services requires prior approval by the member's primary care
physician and must be provided in network facilities, except in cases of medical
emergency. HMO benefit plans also provide coverage for preventive treatment and
wellness programs. Benefits such as dental services, pharmacy services and
vision care may be purchased as options to the basic benefit plan with a variety
of copayment levels.
Blue Choice Options members are required to use a primary care physician
for basic medical services and pre-certification of specialist services whether
performed by network or non-network providers. Non-network services and services
obtained without primary care physician approval are subject to deductibles and
significant coinsurance requirements. Network hospitalization is fully covered.
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<PAGE> 37
PPO
The Company's PPO was first introduced in Georgia in the mid-1980s and
began being offered as "Blue Choice PPO" in 1995. The Company's PPO is one of
five largest statewide provider networks in Georgia, with more than 290,000
members as of December 31, 1995.
The Company's PPO products deliver health care at lower costs than
traditional indemnity products due to benefit design, favorable pricing
arrangements with network providers and utilization management and other cost
control arrangements with network providers. Typically, the cost of services
through the PPO network are 80% to 100% covered by the Company's PPO benefit
plans. Non-network services are generally covered at 60% to 70%, subject to
generally higher deductible requirements. In addition, by the end of 1996, the
Company anticipates that all of the Company's PPO networks will utilize a fee
schedule rather than a traditional discount from charges, which will further
enhance the cost effectiveness of this product.
Full coverage is provided after a member has paid a specified annual
out-of-pocket maximum. The Company offers a broad range of PPO benefit plans
which enables the employer to choose the mix of benefits that is suited to its
employee's needs. Higher deductibles, coinsurance and out-of-pocket maximums and
other financial incentives encourage subscribers to use network provider
services. The Company's PPO also offers preventive health benefit coverage, such
as health assessments, immunizations and prenatal visits. Premiums for the
Company's PPO product are collected monthly from employers.
Indemnity
The Company's traditional indemnity product line includes benefit options
for both the individual and group markets on products that reimburse providers
on a fee for service basis. Premiums for this product are collected on a monthly
basis and calculated at annual renewals for both group customers and those in
the individual product line. The traditional indemnity products utilize the
state wide networks that the Company has established for physicians, hospitals
and pharmacies. The majority of new business opportunities for traditional
indemnity group business are in the rural markets where, the Company believes,
the flexibility of its indemnity products, in terms of plan design, is an
advantage.
The Company's indemnity products are offered to group subscribers as "New
CHIP," the traditional indemnity insurance product with certain managed care
features. Indemnity products are offered to individual subscribers as (i) "Flex
Plus," a comprehensive major medical product for people under age 65 that
provides the full range of benefits related to hospital, surgical, pharmacy and
other associated medical expenses with varying benefit designs for deductible
and coinsurance amounts, (ii) "hospital/surgical," a lower cost product than
"Flex Plus," which insures only catastrophic, non-routine services associated
with a more serious medical condition related to a surgical procedure or
in-patient hospital stay, and which is also offered to people over 65, and (iii)
"65 PLUS," a guaranteed issue plan that acts as a supplement to the federally
insured Medicare program.
Life Insurance
GGL offers group life and disability products to employers of all sizes and
is licensed to do business in six states throughout the Southeast. While GGL
offers its products in each of these states, 90% of its revenues are derived
from business in the State of Georgia. Term life insurance is commonly offered
with accidental death and dismemberment ("AD&D") for all groups with less than
100 employees. For larger groups, the life product may be offered with health
insurance. In addition to the standard term life and AD&D products, GGL also
offers a contributory, voluntary life insurance product as well as a dependent
life insurance product. GGL offers a variety of plan designs and coverage
amounts. GGL also offers both short and long term disability insurance.
Ancillary and Specialty Network Benefits
The Company offers a variety of ancillary and specialty network benefits to
enhance the Company's competitive position by ensuring that members have access
to a full range of health care products and is
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<PAGE> 38
developing other such products. Offering an array of ancillary products and
specialty networks permits the Company to capitalize on its name recognition and
to appeal to employer groups that are increasingly seeking a variety of benefit
options. Currently, these ancillary and specialty network benefits are offered
in conjunction with the Company's medical benefit plan designs.
Dental. The Company has offered dental insurance since 1982, which is
similar to that offered by major commercial carriers. Dental insurance is
typically offered as a benefit enhancement that may be purchased in conjunction
with group products. A number of major commercial carriers and other entities
are offering managed dental care, although Georgia Blue does not currently offer
such a product.
Miscellaneous. The Company also offers vision, mental health/substance
abuse and pharmacy benefits as part of certain of its medical plan designs.
These benefits have not been designed as stand-alone products and are not sold
separately from medical products.
Workers Compensation
The Company is developing a managed care workers compensation product and
plans to enter the workers compensation market in 1996 to provide administrative
services to customers. The Company believes that by focusing on its core
business of network management, medical review and provider reimbursement it
will be able to successfully assemble and market networks and generate revenue
through access and related management fees. The Company plans to enter the
market for self-insured employers by utilizing third party administrators as its
distribution channel and by exploring a partnership with a major workers
compensation insurer, potentially on an exclusive basis.
MARKETING AND SALES
General
The Company's marketing operations vary depending upon the segment at which
sales efforts are directed; individuals (i.e., direct pay), small employer
groups (defined as groups of two to 99 employees), large employer groups
(defined as groups of 100 or more employees), and major national groups (defined
as groups of 500 or more employees). The Company's marketing efforts are
coordinated by local market managers in each of the established local market
regions as well as by an Assistant Vice-President of Major/National Accounts and
a Director of Individual Sales. Each of these individuals is overseen by the
Executive Vice-President of Market Operations.
From a competitive perspective, the Company's market is segmented generally
by geography, product and customer group size. Significant competition exists in
the Atlanta market for managed care products, while outside the Atlanta
metropolitan area the majority of competition has been for either traditional
indemnity or PPO products, although new market entrants with managed care
capabilities are beginning to penetrate these areas.
Because the Company believes that the majority of marketing opportunities
exist in the small group market, it has sought to become more active and
competitive in this area. The Company has pioneered cooperative buying programs
as an enhancement to its existing distribution channels. Cooperative programs
offer an exclusive endorsement of the Company's products and the opportunity for
reduction in sales costs. The Company believes that these cooperative programs
provide product access to additional small group customers. Cooperative programs
are currently active in Atlanta, Cartersville, Rome and Athens, Georgia.
Internal Sales and Service Force
The Company employs an internal sales staff of account executives and group
sales representatives to sell and service all of the Company's group product
lines. The sales force works with other members of the distribution channel,
including independent agents and brokers, and the Chamber of Commerce programs,
and makes direct calls on selected target accounts. Each geographic area has a
local market manager and a sales manager directly responsible for the results of
the unit. In addition, a centralized communications department develops direct
mail advertising and promotional material that targets specific audiences for
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<PAGE> 39
potential distribution of products. Service representatives are assigned
specific accounts and work directly with the internal sales force and the
independent agents and brokers. Service representatives become the principal
administrative contact for employers and their benefit managers. Their duties
include conducting on-site meetings, providing health data reports, and
resolving any potential service issues.
The Company also maintains an additional fully-commissioned staff of sales
employees who sell the Company's individual indemnity insurance products (other
than the Medicare supplement). The Medicare supplement is sold by a
telemarketing staff.
Independent Insurance Agents and Brokers
The Company also markets its health insurance and managed care products
through independent agents, brokers and consultants who are paid commissions
from the premiums received by the Company. Brokers who meet selected production
and underwriting criteria are also eligible for a "Preferred Producer" bonus.
These independent agents and brokers are responsible for a significant portion
of the Company's enrollment growth over the past two years. This growth and the
anticipated growth in ensuing calendar years will also be dependent on the
Company's ability to continue productive relationships with these independent
agents and brokers.
The independent agents and brokers are not salaried employees of any
insurance company or managed care company and are free to sell multiple products
from multiple insurance firms. Some agents and brokers are career agents of
other insurance companies whom they represent and for whom they may be required
to maintain product exclusivity for a given type of product but are able to sell
group health insurance and managed care products from a number of carriers,
including the Company. The distribution channel for insurance products in the
Georgia market is dominated by independent agents and brokers, particularly in
rural areas, and most insurance companies utilize them to distribute their
products.
UNDERWRITING
In determining whether to accept groups and to establish appropriate rates
for its plans, the Company uses specific underwriting criteria based on its
accumulated actuarial data, with adjustments for factors such as claims
experience, member mix and industry differences, to evaluate anticipated health
care costs. The risk selection criteria utilized by the Company employ generally
accepted risk characteristics and a flexible underwriting formula to generate
new business and renewal rates. Rates and the rating process are monitored
monthly with any appropriate adjustments made on at least a quarterly basis. New
business ratings for all groups are accomplished through the use of an automated
proposal system with rates and risk selection criteria establishment being
implemented by field sales personnel. Additional levels of rating authority are
granted only to underwriters. For employer groups with 100 or more employees,
all ratings are determined by underwriting management who utilize the same
screening of risk characteristics that is conducted for employer groups of
smaller size but also attempt to blend in actual claim experience (utilizing a
flexible credibility formula and underwriting intervention) in order to
establish an appropriate rate level based on the Company's desired competitive
position.
Rates for groups smaller than 50 are regulated by Georgia law.
CUSTOMERS
The Company has contracts with certain employer groups that account for a
significant portion of the Company's business. For 1995, two employer groups
accounted for approximately 23% and 11%, respectively, of the Company's total
premium revenues. Additionally, the Company processes and pays claims as fiscal
intermediary for the Medicare Part A program and as administrative agent for the
State of Georgia Employee Health Benefit Plan and the BCBSA's Out-of-Area
Program. In 1995, claim payments for these agency programs exceeded $3.2 billion
dollars and are not included in either revenues or benefits expense in the
Company's statement of income. The Company receives fees from these federal and
state government programs for performing these services. Fees received from
these programs are deducted from operating expenses and are not included in
premium revenues. The Company's contract with the State of Georgia was
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<PAGE> 40
renewed for a seven-year term in July 1994. The State of Georgia program
accounts for over 33% of the Company's membership and plays an integral part in
the development of the Company's long-term provider network strategies. The
non-renewal or termination of any of the contracts with these employer groups
could have a material adverse effect on the Company's business, financial
condition and results of operations.
INVESTMENT PORTFOLIO
Georgia Blue's investment discretion is limited by the Georgia Insurance
Code. Georgia Blue's conservative management of the investment process has
played an integral role in developing and maintaining Georgia Blue's financial
strength. Earnings from the investment portfolio have contributed significantly
to the profits of Georgia Blue. Over the five-year period from January 1, 1991
to December 31, 1995, investment income plus gains realized on sales of
investments represented 72% of Georgia Blue's consolidated pre-tax income. Such
income and gains represented 124% of Georgia Blue's consolidated pre-tax income
in 1995. The increase in the percentage of investment income and realized gains
on sales of investments to pre-tax income is primarily the result of the
increase in realized gains to $15.3 million in 1995 from $2.5 million in 1994
coupled with the decrease in net income to $17.4 million in 1995 from $19.5
million in 1994.
Georgia Blue has established a two-tiered investment portfolio. Georgia
Blue's liquidity needs are met through an internally managed investment
portfolio (the "Internal Portfolio") and those assets not required for liquidity
are transferred to three external money managers for long term investment in the
fixed income and equity markets (the "External Portfolio").
The Internal Portfolio is invested primarily in institutional money market
accounts. The assets in the External Portfolio are held in custody by
NationsBank of Georgia. All bonds in both of the Company's investment portfolios
must have quality ratings of "A" or higher, by Moody's Investors Service and
Standard & Poors' Ratings Group. The equity investments in the Company's
investment portfolios are highly diversified and limited to high quality
domestic equity securities. There are no derivative securities or instruments in
the Company's investment portfolios.
Georgia Blue's investment portfolio represented 80.0% of the Company's
consolidated investment portfolio at December 31, 1995. During 1995, the
External Portfolio gained 21.3%, and the Internal Portfolio gained 5.6%. For the
five-year period from January 1, 1991 through December 31, 1995, the total
investment portfolio recorded an annualized return of approximately 11.0%.
The Internal Portfolio is managed by Georgia Blue's management staff, who
report to Georgia Blue's Treasurer and Chief Financial Officer ("CFO"). The
External Portfolio is managed by a number of independent advisory firms and is
subject to the review of Georgia Blue's CFO. The Finance Committee of the Board
of Directors of Georgia Blue meets with the CFO and reviews and approves Georgia
Blue's investment related activities at least quarterly. Investment performance
is then routinely reported by the Finance Committee to the Board of Directors of
Georgia Blue.
The investment process is dynamic and continually reviewed for improvements
and refinements. The CFO monitors the performance of Georgia Blue's investment
managers and compares their performance on a monthly basis to predetermined
benchmarks. The Finance Committee of the Board of Directors of Georgia Blue
formally reviews performance of each investment manager on a quarterly basis.
Performance also is calculated quarterly by an outside consultant, Alex Brown &
Sons Incorporated, including benchmarking to an extensive universe of other
professionally managed investment portfolios.
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<PAGE> 41
Shown below are Georgia Blue's consolidated invested assets by category.
The following tables should be read in conjunction with Georgia Blue's
Consolidated Financial Statements and the Notes thereto included elsewhere in
this Prospectus.
INVESTMENTS BY CATEGORY
<TABLE>
<CAPTION>
AS OF AS OF
DECEMBER 31, 1994 DECEMBER 31, 1995
------------------- -------------------
% OF % OF
CARRYING CARRYING CARRYING CARRYING
VALUE VALUE VALUE VALUE
-------- -------- -------- --------
($ IN MILLIONS)
<S> <C> <C> <C> <C>
Fixed maturities:
Available for sale securities............................. $115.0 65.1% $131.1 75.0%
Held-to-maturity securities............................... 13.4 7.6 -- --
Equity securities........................................... 46.6 26.4 42.7 24.5
Short-term investments...................................... 1.5 .9 .9 .5
-------- -------- -------- --------
Total investments................................. $176.5 100.0% $174.7 100.0%
====== ====== ====== ======
</TABLE>
Georgia Blue's consolidated portfolio is comprised primarily of highly
liquid investment securities. Georgia Blue's fixed maturities consist of United
States Government securities and corporate securities. At December 31, 1995, all
of Georgia Blue's fixed maturities consisted of instruments bearing fixed,
rather than variable, rates of interest. The following summarizes Georgia Blue's
fixed maturities by category.
FIXED MATURITIES BY CATEGORY
<TABLE>
<CAPTION>
AS OF
DECEMBER 31, 1995
-------------------
% OF
CARRYING CARRYING
VALUE VALUE
-------- --------
($ IN MILLIONS)
<S> <C> <C>
U.S. Treasury securities and obligations of U.S. government agencies........ $109.6 83.6%
Corporate securities........................................................ 21.5 16.4
-------- --------
Total fixed maturities............................................ $131.1 100.0%
====== ======
</TABLE>
The following table summarizes Georgia Blue's fixed maturities by
contractual maturity. Expected maturities will differ from contractual
maturities because borrowers may have the right to call or prepay obligations
with or without a call or repayment premium.
FIXED MATURITIES BY MATURITY CATEGORY
<TABLE>
<CAPTION>
AS OF
DECEMBER 31, 1995
-------------------
% OF
CARRYING CARRYING
VALUE VALUE
-------- --------
($ IN MILLIONS)
<S> <C> <C>
Due in one year or less..................................................... $ 7.7 5.9%
Due after one year through five years....................................... 63.7 48.6
Due after five years through ten years...................................... 53.4 40.7
Due after ten years......................................................... 6.3 4.8
-------- --------
Total fixed maturities............................................ $131.1 100.0%
====== ======
</TABLE>
COMPETITION
The market for each of the Company's products in Georgia is highly
competitive on both a regional and statewide basis and has undergone significant
changes in recent years. From a competitive perspective, the market is segmented
generally by geography, product and employer group size. Significant competition
exists
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<PAGE> 42
in the metropolitan Atlanta market for managed care products, while outside of
the metropolitan Atlanta area the majority of competition currently is for
either traditional indemnity or PPO products, although new market entrants with
managed care capabilities are beginning to penetrate these areas. The Company
has many competitors in its indemnity, PPO and HMO operations, many of which
have substantially greater financial and other resources than the Company.
However, based upon current data available in publications circulated generally
and within the health care industry the Company does not consider any one of its
competitors to be dominant in any of the Company's markets.
Price competition among benefit plans in the Company's markets,
particularly the Atlanta metropolitan area, may intensify. As of January, 1996,
92% of the Atlanta HMO and POS market was held by the Company and four national
competitors, according to public information, of which the Company's share was
11% and the largest competitor's share was 22%. Since January, 1996, three
additional national competitors have entered the Atlanta HMO and POS market.
Because the Company's existing business operations are confined to markets
within the State of Georgia, the Company currently is unable to subsidize losses
in these markets with profits from other markets. The Company believes that
certain larger, national competitors are able to subsidize losses in the Georgia
market with profits from other markets in which they operate and may pursue such
a strategy in the Company's markets in an effort to increase market share. The
national health care industry has recently seen a consolidation of companies
that offer health care insurance, including traditional indemnity and managed
care products. In addition to intensifying competition, this consolidation may
result in corporations with enhanced financial resources, positioned to pursue
such a strategy of subsidizing losses to increase their market position in
Georgia.
Further, future legislation at the federal and state levels may also result
in increased competition in the Company's market. Competition may also be
affected by independent agents and brokers who sell the Company's health care
benefit plans as well as the benefit plans of the Company's competitors.
Additionally, provider-sponsored initiatives, through which certain hospital and
physician alliances compete with traditional means of health care financing, are
developing in some product segments. No assurance can be given that the Company
will be able to compete effectively with such competition in the future.
FACILITIES
The Company's corporate headquarters occupy approximately 240,000 square
feet of leased space in a 17-story building located in Atlanta, Georgia and its
main claims operations center occupies approximately 176,000 square feet of
owned space in a four-story building located in Columbus, Georgia. Both
facilities are in excellent condition, are suitable for the Company's existing
needs and are in desirable and accessible locations. The Company leases space in
25 other buildings in communities throughout Georgia for a variety of corporate
purposes. None of these leases has a remaining term of more than five years.
EMPLOYEES
The Company had 2,012 employees at December 31, 1995. No Company employees
are represented by any union, and the Company believes that its relations with
its employees are satisfactory.
GOVERNMENT REGULATION
Holding Company Regulation
The Company will be an insurance holding company and as such will be
subject to regulation by the Georgia Insurance Department (the "Department").
Georgia regulations require the filing of financial and other information
concerning the operations and interrelationships of entities within an insurance
holding company system. Such regulations extend to contracts, loans, dividends,
distributions, management agreements and other transactions between holding
company entities. Such agreements must be submitted to the Department for
approval, based on concepts of fair and reasonable terms; reasonable charges and
fees; and that following any such related party transaction the insurer's
surplus with regard to policyholders shall be reasonable in relation to the
insurer's outstanding liabilities and adequate to its financial needs.
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<PAGE> 43
Regulation of Insurance Subsidiaries
Georgia Blue's insurance business is subject to comprehensive regulation.
The Department has broad authority to regulate, among other things: licenses to
transact the business of insurance; investment activity of insurers; premium
rates for certain insurance products; trade practices of insurers; agent
licensing; policy forms; insurance underwriting and claims practices; and
insurer reserve adequacy and solvency. Georgia Blue is required to file a
detailed annual report with the Department, and its business and accounts are
subject to periodic examination by the Department, which also regulates
insurance holding company systems, including the acquisition and sale of
licensed entities, payment of dividends by regulated entities, the terms of
affiliate transactions and other related matters. HMO-Ga is a licensed "health
maintenance organization" under Georgia insurance law. Pursuant to Georgia law,
HMOs are considered insurers, and, except as specifically provided to the
contrary, are regulated by the same provisions and in the same manner as
described above with respect to Georgia Blue.
Change or Acquisition of Control
Georgia insurance law requires the Commissioner's prior approval of any
transaction affecting change of control of, or other acquisition of, a domestic
insurer, or of any person or entity that controls a domestic insurer. In
general, a presumption of control exists if any person or entity beneficially
owns or controls 10% or more of the voting securities of a domestic insurer or
of a person that controls a domestic insurer. Any direct or indirect change in
control of a domestic insurer or an entity which controls a domestic insurer, is
subject to the approval of the Commissioner, following a public hearing.
Examinations
Georgia Blue, HMO-Ga and GGL are each subject to examination of their
affairs by the Department. The Department periodically conducts an examination
of insurance companies and HMOs domiciled in Georgia. The most recent
examination of Georgia Blue, HMO-Ga and GGL by the Department was completed
during the last quarter of 1995 and covered the period from January 1, 1992
through December 31, 1994. As a result of the most recent examination, no
matters were raised by the Department that would have a material impact upon the
statutory financial statements of either Georgia Blue, HMO-Ga or GGL.
TRADE NAMES, TRADE MARKS, SERVICE MARKS AND LICENSES
Pursuant to licenses from the BCBSA, the Company has the exclusive right to
do business under the name Blue Cross and Blue Shield of Georgia and to use the
Blue Cross and Blue Shield names, trademarks and service marks for all of the
indemnity and managed health care products and services it offers in all 159
counties in Georgia. The Company believes that the well-recognized Blue Cross
and Blue Shield names, trademarks and service marks will continue to provide a
significant marketing advantage in its licensed service area, particularly as
competitive pressures narrow differences among health care benefit plans. The
licenses from BCBSA are terminable in certain events described under "RISK
FACTORS -- Use of Blue Cross and Blue Shield Name." The Company cannot do
business using the Blue Cross and Blue Shield names, trademarks and service
marks outside of its licensed service area.
LEGAL PROCEEDINGS
The Company and its subsidiaries from time to time are parties to legal
proceedings arising out of, and incidental to, the Company's normal course of
business. In the opinion of the Company, adequate provision has been made for
losses which may result from these actions and, accordingly, the outcome of
these proceedings is not expected to have a material adverse effect on the
financial condition of the Company.
39
<PAGE> 44
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The following table sets forth certain information as of March 1, 1996
regarding each of the Directors of the Company and the executive officers of the
Company and Georgia Blue. Each Director of the Company also serves as a Director
of Georgia Blue.
<TABLE>
<CAPTION>
NAME AGE TITLE
- ---------------------------- --- -----------------------------------------------------------
<S> <C> <C>
James L. LaBoon, Jr......... 59 Chairman of the Board of Directors of the Company and
Georgia Blue
Fred L. Tolbert, Jr......... 66 Vice Chairman of the Board of Directors of the Company and
Georgia Blue
Richard D. Shirk............ 50 Chief Executive Officer, President and Director of the
Company and Georgia Blue
James E. Albright........... 59 Director
W. Daniel Barker............ 69 Director
Elizabeth W. Camp........... 44 Director
Louis H. Felder, M.D........ 73 Director
Edward M. Gillespie......... 60 Director
Joseph D. Greene............ 55 Director
Mel H. Gregory, Jr.......... 59 Director
Frank J. Hanna, III......... 34 Director
R. Pierce Head, Jr.......... 68 Director
Charles H. Keaton........... 58 Director
James H. Leigh, Jr., M.D.... 53 Director
Julia L. Mitchell-Ivey...... 63 Director
Charles R. Underwood, M.D... 69 Director
W. Jerry Vereen............. 55 Director
A. Max Walker............... 73 Director
Dan H. Willoughby, M.D...... 72 Director
Joe M. Young................ 67 Director
John B. Zellars............. 72 Director
Raymond J. Colleran......... 53 Executive Vice President, Market Operations of Georgia Blue
John A. Harris.............. 45 Treasurer of the Company, Executive Vice President, Finance
& Strategic Planning of Georgia Blue
Mark Kishel, M.D............ 49 Executive Vice President, Chief Medical Officer of Georgia
Blue
Richard A. Steinhausen...... 52 Executive Vice President, Service Operations and
Information Systems of Georgia Blue
R. Neil Vannoy.............. 49 Executive Vice President, Community Operations of Georgia
Blue
</TABLE>
James L. LaBoon, Jr., is Chairman and President of Athens First Bank and
Trust Company, an affiliate of Synovus Financial Corporation, in Athens,
Georgia. Prior to joining Athens Bank and Trust, Mr. LaBoon was Vice President
of Finance and Chief Financial Officer of Wilkins Industries, Inc. He presently
serves as a Director of Athens First Bank & Trust Company, Synovus Mortgage
Corp., Athens Y.M.C.A. and Athens Symphony, Inc. Mr. LaBoon has been Chairman of
the Board of Directors of Georgia Blue since 1994 and a Director since 1984. He
has also served as a Director of the Company since its organization in February
1996, and as its Chairman since March 22, 1996. He is also a member of the Board
of Directors of GBG.
Fred L. Tolbert, Jr., is retired as President of Albany First Federal
Savings and Loan in Albany, Georgia. He currently operates his own real estate
investment company in Albany, Georgia. Mr. Tolbert is a Trustee of the Darton
College Foundation. He has been a Director of Georgia Blue since 1983 and Vice
Chairman of the Board since 1994. He has been Vice Chairman of the Board and a
Director of the Company since its
40
<PAGE> 45
organization in February 1996, and as its Vice Chairman since March 22, 1996. He
also serves as Chairman of the Board of GBG.
Richard D. Shirk joined Georgia Blue as President and Chief Executive
Officer on April 1, 1992 and has been a Director of Georgia Blue since that
date. He has been President, Chief Executive Officer and a Director of the
Company since its organization in February 1996, and has been Chairman of GGL
since 1992. Mr. Shirk has more than 25 years of experience in employee benefits
and managed care. He was a key senior officer of Equicor in its formation in
1986 serving as President of the Southern Region. When Equicor combined business
operations with CIGNA in 1990, Mr. Shirk was named Senior Vice President of the
Central Region and coordinated the integration of managed care operations of the
companies. Mr. Shirk is a board member of the Georgia Coalition for Health, the
National Institute of Health Care Management and The Georgia Caring Program for
Children Foundation. He is a board member of Central Atlanta Progress, and
serves as Chairman of the Georgia U.S.O.C. Steering Committee, as well as on the
board of directors of the Georgia Chamber of Commerce and the board of Seven
Seas Mutual Fund, Equitable Real Estate Hyperion Mortgage Opportunity Fund, Inc.
and Equitable Real Estate Hyperion High-Yield Commercial Mortgage Fund, Inc. He
is a director of the Buckhead Coalition and Metropolitan Atlanta Chapter of the
American Red Cross.
James E. Albright is a Partner with Albright & Fortenberry, Certified
Public Accountants, an accounting firm he founded in Columbus, Georgia, in 1971.
Prior to beginning his own firm, Mr. Albright was a Partner in the firm of Henry
& Albright, Certified Public Accountants. Mr. Albright is currently an officer
and Director of Darbyshire, Inc., Signature Construction, Inc., Presidential
Management, Inc. and Pine Mountain Trail Association, Inc. Mr. Albright has been
a Director of Georgia Blue since 1980 and a Director of the Company since its
organization in February 1996. He is also a member of the Board of Directors of
HMO-Ga.
W. Daniel Barker is retired from Emory University, where he held the
positions of Director of Hospitals for the Woodruff Health Sciences Center,
Executive Director of Emory University Hospital and Hospital Administrator of
Crawford Long Hospital of Emory University. Mr. Barker is currently on the Board
of Trustees at Wesley Woods Geriatric Hospital, a member of the Advisory
Committee at Carlyle Fraser Heart Center at Crawford Long Hospital, a member of
the Board of Directors of American Red Cross Blood Services/Southern Region, a
Trustee of the Luther C. Fischer Foundation, and a member of the Boards of
Directors of Allegiant Physician Services, Inc. and the United Network for Organ
Sharing. Previously, Mr. Barker served as President of Georgia Hospital
Association, Chairman of the American Hospital Association, Chairman of American
Hospital Publishing, Inc. and a member of the Board of Commissioners of the
Joint Commission of Accreditation of Health Care Organizations. Mr. Barker has
been a Director of Georgia Blue since 1962 and a Director of the Company since
its organization in February 1996.
Elizabeth W. Camp, is President of Camp Oil Company in Rome, Georgia. Prior
to joining Camp Oil, Ms. Camp held positions as an attorney at Silver, Freedman
& Taff, attorneys in Washington, D.C., and as an accountant at Arthur Andersen,
LLP in Atlanta, Georgia. Ms. Camp is a member of the Boards of Directors of
Citizens First Bank in Rome, Camp Oil Company, Inc. and Sav-A-Ton Oil. She is a
member and past Chairman of the Board of Alumni Advisors for the Terry School of
Business at the University of Georgia. She is also a member of the Board of
Trustees of Darlington School in Rome. She has been a Director of Georgia Blue
since 1993 and a Director of the Company since its organization in February
1996. Ms. Camp is also a member of the Board of Directors of HMO-Ga.
Louis H. Felder, M.D., is an internal medicine physician in Atlanta,
Georgia, where he has his own practice. Dr. Felder was previously Chief of Staff
at Piedmont Hospital in Atlanta. He is also a fellow in infectious diseases and
pathology at Emory University Hospital. Dr. Felder is currently a member of the
Board of Directors of Quality Care Providers, Inc. and Healthcare Partnership
Consultants. He has been a Director of Georgia Blue since 1974 and a Director of
the Company since its organization in February 1996. On March 22, 1996, Mr.
Felder tendered his resignation from the Board of Directors of the Company and
Georgia Blue effective upon election of a successor. The Company cannot predict
the identity of Mr. Felder's successor or when such appointment will be made.
41
<PAGE> 46
Edward M. Gillespie is retired from University Hospital in Augusta,
Georgia, where he served as President and Executive Director until 1991. Prior
to joining University Hospital, Mr. Gillespie held various hospital
administrative positions including Hospital Administrator of Rochester Methodist
Hospital in Rochester, Minnesota. Mr. Gillespie serves on the Boards of
Directors of Bankers First Savings Bank of Augusta, Bankers First Corporation,
Walton Rehabilitation Hospital and Brandon Wilde retirement community. He is
also President of Health Advance, a health care consulting organization. Mr.
Gillespie has been a Director of Georgia Blue since 1980 and a Director of the
Company since its organization in February 1996.
Joseph D. Greene is a professor of Business Administration for the School
of Business at Augusta College in Augusta, Georgia. Before joining Augusta
College, Mr. Greene was employed by Pilgrim Health and Life Insurance Company,
where he retired as Executive Vice President after 32 years of employment with
the company. Mr. Greene is past Chairman of the Georgia Board of Regents. He
currently serves on the Boards of Directors of McDuffie Bank & Trust of Thomson,
the Georgia Academy for Children, the Greater Augusta Community Foundation, the
National Science Center Discovery, the Minority Business Development Corporation
and the University of Georgia Terry College of Business. Mr. Greene has been a
Director of Georgia Blue since 1993 and a Director of the Company since its
organization in February 1996. He is also a member of the Board of Directors of
HMO-Ga.
Mel H. Gregory, Jr. is retired, following a 35 year career in executive
insurance positions with The Equitable Companies. He held positions as Executive
Vice President, Agency Operations; President and Chief Operating Officer,
Equitable Variable Life Insurance Company; Chief Executive Officer, Equico
Securities; and as a member of The Equitable's Executive Committee. Mr. Gregory
is also a Director of GGL.
Frank J. Hanna, III is, and has been since 1993, the Chief Executive
Officer of HBR Capital, Ltd., an investment firm based in Atlanta, Georgia. HBR
Capital makes a variety of investments in the Financial Services and Healthcare
industries. Prior to his work with HBR Capital, Mr. Hanna served as President of
A.P. Management, Inc. Mr. Hanna began his career in Atlanta as a corporate
attorney with Troutman Sanders. Mr. Hanna is also extensively involved in
education, including serving as a founding member of the Board of Directors of
the Archbishop Donellen School in Atlanta. Mr. Hanna is a graduate of the
University of Georgia and the University of Georgia School of Law. Mr. Hanna
became a director of each of the Company and Georgia Blue in February, 1996.
R. Pierce Head, Jr., is a retired Senior Vice President of Georgia Power
Company, where he worked for 40 years in various capacities in the risk
management, employee benefits, information systems, general services and labor
relations areas. While at Georgia Power, Mr. Head chaired several task forces
and received a number of awards, including a Presidential Citation for hiring
the physically challenged. Mr. Head has been a Director of Georgia Blue since
1981 and a Director of the Company since its organization in February 1996.
Charles H. Keaton, is President and Chief Executive Officer of Hughston
Sports Medicine Hospital in Columbus, Georgia. Previously, Mr. Keaton was
Administrator and Chief Executive Officer of Doctors Hospital in Columbus and
Chester County Hospital in South Carolina. Mr. Keaton is past Chairman and a
current member of the Board of Directors of Georgia Hospital Association and the
Federation of American Hospitals and a member of the Board of Governors of the
American Hospital Association. He has been a Director of Georgia Blue since 1983
and a Director of the Company since its organization in February 1996. He also
serves as a member of the Board of Directors of HMO-Ga.
James H. Leigh, Jr., M.D., is a surgeon in Gainesville, Georgia, where he
has a private practice. He is a member of the Northeast Georgia Medical Center
staff and the Lanier Park Hospital consultant staff. Dr. Leigh is currently a
member of the Board of Directors of Longstreet Clinic. Dr. Leigh is also past
Chief of Surgery and Chief of Staff at Northeast Georgia Medical Center. Dr.
Leigh served as an Assistant Professor of Surgery at the University of Tennessee
College of Medicine. Dr. Leigh was a member of the Board of Directors of the
Northeast Georgia Health Association and an Alternate Director of the Medical
Association of Georgia. He has been a Director of Georgia Blue since 1975 and a
Director of the Company since its organization in February 1996.
42
<PAGE> 47
Julia L. Mitchell-Ivey, is a consultant and former Vice President and
Assistant Corporate Secretary at First Union National Bank of Georgia.
Previously, she held various positions at Decatur Federal Savings and Loan
Association including Corporate Treasurer, Corporate Secretary and Division Vice
President. Ms. Mitchell-Ivey is the immediate past Chairperson of the Board of
Directors of Metropolitan Atlanta Rapid Transit Authority (MARTA) and Chairman
of the Board of Directors of Private Colleges and Universities Authority, and a
member of the Board of Directors of the Y.W.C.A. and the DeKalb Chamber of
Commerce. She has been a Director of Georgia Blue since 1980 and a director of
the Company since its organization in February 1996. She is Chairman of the
Board of Directors of HMO-Ga.
Charles R. Underwood, M.D., is President of Surgical Arts, P.C. in
Marietta, Georgia, where he practices general surgery. He is also past Chief of
Surgery and past Chief of Staff at Kennestone Hospital in Marietta, Georgia. He
served as a Clinical Associate Professor of Surgery at Emory University School
of Medicine and Instructor of Surgery at Washington University School of
Medicine in St. Louis, Missouri. Dr. Underwood is a member of the Board of
Trustees of Georgia Hospital Association and a member of the Board of the
American Cancer Society/Georgia Division. He has been a Director of Georgia Blue
since 1973 and a Director of the Company since its organization in February
1996. He served as Chairman of the Board of Directors of Georgia Blue from 1991
to 1994.
W. Jerry Vereen is President and Chief Executive Officer of Riverside
Manufacturing Company in Moultrie, Georgia and is acting Chairman of the Board
of Directors of Riverside Manufacturing Company and all of its subsidiary
corporations. Mr. Vereen serves on the Boards of Directors of Georgia Power
Company, Georgia Chamber of Commerce, Gerber Scientific, Inc., American Apparel
Manufacturers Association and the Textile Clothing Technological Corporation and
is an Advisory Director of NationsBank of Georgia, National Association Southern
Region. Mr. Vereen is a member of the Board of the Governor's Development
Council. He has been a Director of Georgia Blue since 1993 and a Director of the
Company since its organization in February 1996.
A. Max Walker is a financial consultant and a Director and Chairman of the
Board of the following investment companies: Hatteras Income Securities, Nations
Fund, Nations Fund Trust, Nations Government Income Term Trust 2003, Nations
Government Income Term Trust 2004, Nations Balanced Target Maturity Fund,
Nations Institutional Reserves, and Nations Portfolios, Inc. Previously, he was
Vice President and Treasurer of Southern Bell Telephone and Telegraph Company
and an investment banker with Merrill Lynch Pierce Fenner & Smith. Mr. Walker
has been a Director of Georgia Blue since 1975 and a Director of the Company
since its organization in February 1996.
Dan H. Willoughby, M.D. owns a private practice in internal medicine in
Savannah, Georgia. He was twice the Chief of Staff at Candler General Hospital
and a member of the Board of Trustees of Candler Health Services and Candler
General Hospital. He was also Chief of Medical Staff at St. Joseph Hospital and
President of Georgia Medical Society as well as a member of the House of
Delegates of the Medical Association of Georgia. Dr. Willoughby has been a
Director of Georgia Blue since 1980 and a director of the Company since its
organization in February 1996. He is also a member of the Board of Directors of
HMO-Ga.
Joe M. Young is the General Manager of LOR, Inc. and Rollins Investment
Fund, two entities which manage the holdings of the family of the late O. Wayne
Rollins. His service with LOR, Inc. commenced in 1979 and with Rollins
Investment Fund at its inception in 1988. He also serves as an officer and
director of several other related entities and as a Trustee of several Rollins
Family Foundations and Trusts. Since 1992 he has been a director of Valley
Systems, Inc. a public company traded on the NASDAQ Exchange. Mr. Young became a
director of each of the Company and Georgia Blue as of February 1996.
John B. Zellars is the retired Chairman, President and CEO of Georgia
Federal Bank, where he was employed for 38 years. He has been a Director of GGL
since 1982. Mr. Zellars is also a director of Finance Institutions Insurance
Group, Inc. and Douglas Federal Bank. Mr. Zellars is a graduate of Emory
University and Emory University Law School, and a member of the State Bar of
Georgia.
Raymond J. Colleran joined Georgia Blue in February 1993, as Executive Vice
President, Market Operations. Prior to February 1993 Mr. Colleran for the
previous years held a number of key management
43
<PAGE> 48
positions with Equitable Life, Equicor, and CIGNA. These included Regional
Financial Officer and Regional Account Vice President with Equitable Life; Vice
President in Charge of Sales and Accounts for Equicor; President of the East
Central Region for Equicor; and most recently, Senior Vice President in Charge
of Sales for the East Central Region for CIGNA. Mr. Colleran is an active member
of the Blue Cross and Blue Shield Association National Labor Office Board and
the Buckhead Chamber of Commerce Executive Committee.
John A. Harris has served as Georgia Blue's Executive Vice-President,
Finance and Strategic Planning since January 1993. He has served as Treasurer of
the Company since its organization in February 1996. Prior to joining Georgia
Blue, he worked in the health care industry for 10 years, primarily in managed
care companies, but also with multi-line carriers. His positions included Chief
Financial Officer, Western Market Group, for the Employee Benefits Division of
Lincoln National; Assistant Corporate Controller for Financial Planning,
Reporting and Analysis for Equicor; President, VIP Health Plan (an IPA model HMO
in California); and Vice-President, Finance for CIGNA Health plans for Southern
California.
Mark Kishel, M.D., has been Executive Vice President and Chief Medical
Officer of Georgia Blue since October 1993. Prior to joining Georgia Blue for
the previous years, he developed staff, group and IPA model HMOs, as well as
PPOs, for major carriers and other managed care organizations including
Travelers, Lincoln National, and Health America. His management experience
includes capitated Medicaid, managed workers compensation, POS, and HMO
networks. Dr. Kishel has developed quality management and utilization management
programs for various start-up companies and consulted in physician hospital
organizations and university-sponsored health plan development. As a practicing
pediatrician and family physician for 11 years, Dr. Kishel assisted in the
development of a model primary care system that addressed the needs of the
indigent and uninsured in Arizona. He is a Director of the Atlanta Boys and
Girls Clubs, Inc.
Richard A. Steinhausen joined Georgia Blue in August 1995 as Executive Vice
President, Service Operations and Information Systems. Mr. Steinhausen has more
than 30 years of health care industry experience. Most recently, he served as
Vice President Employee Benefits Division of Washington National. Previously, he
was a Senior Vice President of Equicor, and President of its National Benefits
Sector. He also served as a Regional Vice President, Claims for Equitable Life
Assurance Society.
R. Neil Vannoy joined Georgia Blue as Senior Vice President of Public
Affairs and Product Development in July 1992. In 1994, he was appointed
Executive Vice President of Community Operations of Georgia Blue and is
responsible for community healthcare partnership developments, legislative
affairs, government programs and product development and communications. Prior
to joining Georgia Blue, Mr. Vannoy served in management positions with
Prudential Insurance Company for 16 years, including Vice President, Group
Corporate at Prudential's New Jersey headquarters, Vice President in charge of
the company's Southern Group Operations, Vice President of Florida Group
Operations and Vice President of Group Marketing and Sales at the New York City
group office. Mr. Vannoy is a member of the Boards of Directors of Atlanta
Health Alliance, and The Georgia Caring Program for Children Foundation. He
serves on the Professional Advisory Council of Mission New Hope in Atlanta,
supported the development of the Georgia Coalition for Health as a member of the
steering committee, serves on the technical advisory committee of the Georgia
Health Policy Center and is co-chair of the Research Demonstration Committee of
the Atlanta Regional Commission's Health Collaborative. Mr. Vannoy earned a
bachelor's degree from the University of Kentucky and a master's degree from
Central Michigan University.
INFORMATION REGARDING THE BOARD OF DIRECTORS
The Company's Articles of Incorporation provide that the Board of Directors
shall consist of up to 21 members with the actual number of Directors to be
fixed from time to time by the Board of Directors. The Board of Directors of the
Company has fixed the number of directors at 21. The Articles of Incorporation
provide for the classification of the Company's directors into three classes,
with each class containing approximately the same number of Directors and the
term of one class expiring each year. At each Annual Meeting of Shareholders,
the Directors of one class are elected by the shareholders entitled to vote
thereon to hold office for a term expiring at the third Annual Meeting following
their election and until their successors
44
<PAGE> 49
are elected and qualified. Set forth below is the name of each Director, the
class in which he or she serves and the year in which his or her current term
expires.
Class One -- Term Expires at the 1996 Annual Meeting of Shareholders
James E. Albright
Elizabeth W. Camp
Mel H. Gregory, Jr.
James L. LaBoon, Jr.
James H. Leigh, Jr., M.D.
Julia L. Mitchell-Ivey
John B. Zellars
Class Two -- Term Expires at 1997 Annual Meeting of Shareholders
Louis H. Felder, M.D.
Edward M. Gillespie
Joseph D. Greene, CLU
W. Jerry Vereen
A. Max Walker
Dan H. Willoughby, M.D.
Joe M. Young*
Class Three -- Term Expires at 1998 Annual Meeting of Shareholders
W. Daniel Barker
Frank J. Hanna, III*
R. Pierce Head, Jr.
Charles H. Keaton
Richard D. Shirk
Fred L. Tolbert, Jr.
Charles R. Underwood, M.D.
- ---------------
* Messrs. Hanna and Young are Preferred Designated Directors.
Pursuant to the Articles of Incorporation, so long as shares of Preferred
Stock are issued, outstanding and entitled to vote and no Common Stock is
outstanding, the holders of the outstanding shares of Class A Stock, voting
separately as a class, will be entitled to elect up to six of the Company's
Directors (referred to as the Class A Designated Directors), with two of such
Directors serving in each class of Directors. The holders of shares of Preferred
Stock, voting separately as a class, are entitled to elect the remaining
Directors, including two Preferred Designated Directors nominated by the holders
of the outstanding Preferred Stock. If no shares of Preferred Stock and Common
Stock are issued, outstanding and entitled to vote, all rights to vote in the
election of Directors are vested in the holders of outstanding Class A Stock and
Blank Preferred Stock. Pursuant to the Shareholders' Agreement, each of the
holders of Preferred Stock has agreed to vote for the election of the two
Preferred Designated Directors and all of the persons nominated for election as
Directors by the Nominating Committee of the Board of Directors and approved by
two-thirds of the Continuing Directors of the Company. As a result, the current
Board of Directors will have the ability to designate a majority of the
Directors of the Company. For further information regarding the Board of
Directors, and the election of Directors by holders of Preferred Stock and Class
A Stock, see "DESCRIPTION OF CAPITAL STOCK -- Class A Stock -- Voting" and
"Preferred Stock -- Voting."
DIRECTOR COMPENSATION
Non-employee Directors each receive an annual Director's fee of $12,000,
plus Director's fees for attendance at Board and committee meetings, which in
1995 totaled from $6,750 to $13,000. In addition, the
45
<PAGE> 50
Chairman, the Vice Chairman and each Committee Chairman receive additional
annual fees of $7,500, $3,500 and $2,000, respectively. Each non-employee
Director may defer his or her Director fees pursuant to certain of Georgia
Blue's non-qualified, deferred compensation plans. Directors also are reimbursed
for reasonable expenses incurred in connection with the performance of their
duties.
EXECUTIVE COMPENSATION
General
The following table presents certain information concerning compensation
paid or accrued by Georgia Blue for services rendered in all capacities during
the fiscal year ended December 31, 1995, for the Chief Executive Officer and
four most highly compensated executive officers whose total annual salary and
bonus in 1995 exceeded $100,000 (collectively, the "Named Executive Officers").
TABLE 1: SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
PAYOUTS
-----------------
ANNUAL COMPENSATION ALL
----------------------------------------- OTHER
OTHER ANNUAL LTIP COMPEN-
COMPENSATION PAYOUTS SATION
NAME AND PRINCIPAL POSITION SALARY($)(1) BONUS($)(2) ($)(3) ($)(4) ($)(5)
- ----------------------------------------- ------------ ----------- ------------ ------- -------
<S> <C> <C> <C> <C> <C>
Richard D. Shirk......................... $425,000 $ -- $ 54,002 $ -- $ 5,087
Chief Executive Officer, President and
Director
Mark Kishel, M.D......................... 203,750 -- -- 91,000 3,130
Executive Vice President and Chief
Medical Officer
Raymond J. Colleran...................... 194,250 -- -- 87,360 4,909
Executive Vice President, Market
Operations
R. Neil Vannoy........................... 192,750 -- -- 84,630 801
Executive Vice President of Community
Operations
John A. Harris........................... 187,500 -- -- 53,625 2,803
Executive Vice President, Finance and
Strategic Planning
</TABLE>
- ---------------
(1) Includes amounts deferred at the election of the officers pursuant to the
Company's 401(k) Retirement Savings Program and other deferred compensation
plans. See "MANAGEMENT -- Executive Compensation -- Deferred Compensation
Plan" and "-- 401(k) Retirement Savings Program" below.
(2) Threshold financial performance criteria pursuant to the Annual Incentive
Program was not achieved for 1995; no bonuses were earned for the period.
(3) Includes $26,054 paid for vacation earned in prior years. Perquisites for
other named executive officers were less than 10% of their total salary for
the period.
(4) Includes payments in 1995 to the named executives for long-term incentive
awards for the 1992-1994 performance period, except for Mr. Shirk whose
award for the 1992-1994 performance period was deferred by the Compensation
Committee until 1996.
(5) Reflects contributions to the Retirement Savings Program in 1995: Mr. Shirk,
$3,186; Dr. Kishel, $2,375; Mr. Colleran, $2,375; and Mr. Harris, $2,375;
and premium payments on group term life insurance in 1995: Mr. Shirk,
$1,901; Dr. Kishel, $755; Mr. Colleran, $1,184; Mr. Vannoy, $801; and Mr.
Harris, $428.
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<PAGE> 51
Long-Term Incentive Plan
The Compensation Committee of the Board of Directors is responsible for the
administration and governance of the Company's Long-Term Incentive Plan
("LTIP"), including identification of participants, determination of specific
goals and performance measure categories. The LTIP is designed to reward
participants for their contributions to the successful achievement of specific
goals related to the Company's long-term business strategy. Specific financial
(60%), market share (20%), and customer service (20%) goals based on the
Company's long-term business strategy are established for three-year performance
periods. The LTIP has minimum threshold, target and maximum performance levels.
Participants must be employed by the Company on the last day of the performance
period. At the end of 1995, long-term incentive award opportunities had been
established for three performance period cycles, the 1993-1995 performance
period, the 1994-1996 performance period and the 1995-1997 performance period.
The Compensation Committee makes the final award determination related to the
achievement of the defined goals for each performance period.
The long-term incentive award opportunities granted by Georgia Blue to
Named Executive Officers during 1995 for the 1995-1997 performance period are
reflected in Table 2. Final award determinations by the Compensation Committee
for this performance cycle would be made in fiscal 1998.
TABLE 2: LONG-TERM INCENTIVE PLAN -- AWARDS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
ESTIMATED FUTURE PAYOUTS UNDER
PERFORMANCE NON-STOCK PRICE-BASED PLANS
PERIOD UNTIL -------------------------------
NAME MATURATION OR PAYOUT THRESHOLD TARGET MAXIMUM
- ---------------------------------------------- -------------------- --------- -------- --------
<S> <C> <C> <C> <C>
Richard D. Shirk.............................. 1995-1997 $ 106,250 $212,500 $425,000
Chief Executive Officer, President and
Director
Mark Kishel, M.D. ............................ 1995-1997 41,000 82,000 164,000
Executive Vice President and Chief Medical
Officer
Raymond J. Colleran........................... 1995-1997 39,000 78,000 156,000
Executive Vice President, Market Operations
R. Neil Vannoy................................ 1995-1997 39,000 78,000 156,000
Executive Vice President of Community
Operations
John A. Harris................................ 1995-1997 39,000 78,000 156,000
Executive Vice President, Finance and
Strategic Planning
</TABLE>
Retirement Plan
Table 3 reflects the estimated annual lifetime benefits calculated on a
straight-life annuity basis and payable under the terms of the Non-Contributing
Retirement Program for Certain Employees of Blue Cross and Blue Shield of
Georgia (the "Retirement Plan"), as currently in effect, to persons in specified
compensation and years of service classifications upon retirement at age 65.
Benefit amounts as reflected in the table are after reductions for a portion of
Social Security benefits.
TABLE 3: PENSION PLAN TABLE
<TABLE>
<CAPTION>
5 YEAR YEARS OF SERVICE
AVERAGE -------------------------------------
EARNINGS 15 20 25 30
- ---------------------------------------------------------- ------- ------- ------- -------
<S> <C> <C> <C> <C>
$100,000.................................................. $33,756 $45,012 $56,268 $64,512
150,000.................................................. 41,268 55,000 68,772 82,512
</TABLE>
47
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The Retirement Plan is a qualified defined benefit pension plan that covers
all employees of Georgia Blue and its participating affiliate companies, who
have attained age 21 and have completed 1,000 hours of service in a 12-month
period after their date of hire, or who complete 1,000 hours of service in any
calendar year thereafter. Benefits under the Retirement Plan are based upon
length of service with Georgia Blue, with varying provisions for employees who
are terminated or take early, normal or deferred retirement. The annual
retirement benefit is calculated according to a specific formula, called the
Final Average Salary formula. The benefit is 60% of the Final Average Salary
(i.e., the average of the highest five consecutive years of annual salaries out
of the last 10 years of credited service) reduced by 50% of the participant's
Social Security Benefit. If the participant has less than 30 years service, the
result is multiplied by a service fraction. The fraction is the years of
credited service up to 30 divided by 30. A participant becomes fully vested
after five years of service or the attainment of age 62, whichever occurs first.
Generally, upon retirement, participants can elect to receive their benefits in
the form of a lump sum payment, lifetime only pension, lifetime pension with a
guaranteed payout period (10 or 20 years) or 50%, 66 2/3% or 100% joint
pensions. Actuaries hired by the Retirement Program determine the amount to be
contributed to the Retirement Program by Georgia Blue to fund benefits for its
employees. All contributions are held in trust. Benefits under the Retirement
Program are insured by the Pension Benefit Guaranty Corporation.
The compensation covered by the Retirement Plan includes generally the base
rate of annual earnings actually paid to a participant by Georgia Blue up to
$150,000, the maximum amount of compensation that may be recognized under
qualified pension plans; for each Named Executive Officer, the compensation in
the Summary Compensation Table exceeds this maximum amount. The Retirement Plan
also provides, subject to certain conditions, for the payment of vested benefits
of a deceased employee to his or her spouse during such spouse's lifetime.
Georgia Blue makes contributions to the Retirement Plan to fund the
benefits which accrue thereunder. Annual contribution amounts are determined
actuarially. Participant contributions are not permitted.
The amounts shown in the Summary Compensation Table above do not include
Georgia Blue's contributions in connection with the Retirement Plan for the
Named Executive Officers. Such amounts are not and cannot be readily separated
or individually calculated. Georgia Blue made a contribution of $3,893,692 to
the Retirement Plan for the plan year ended December 31, 1995.
As of the plan year ended December 31, 1995, Messrs. Shirk, Colleran,
Kishel, Harris and Vannoy had 3 years, 9 months; 2 years, 11 months; 2 years, 3
months; 3 years; and 3 years, 5 months years of service, respectively.
The Retirement Plan is administered by the Blue Cross and Blue Shield
Association. Bankers Trust Company serves as Trustee to the Retirement Plan.
401(K) RETIREMENT SAVINGS PROGRAM
The 401(k) Retirement Savings Program (the "Savings Program") is sponsored
by Georgia Blue, and GGL and HMO-Ga participate. The Savings Program is a
tax-deferred savings plan designed to help participants build long-term savings
for the future. Generally, all employees are eligible to participate after they
complete 30 days of service and have attained age 21. A participant may
contribute to the Savings Program on a before-tax basis from 1% to 15% of pay up
to the maximum dollar contribution amount ($9,240 in 1995). The employer will
match $.050 for every dollar the participant contributes up to $500 (maximum
$250). For the remaining contribution, the employer will add $0.25 for each
dollar the participant contributes. Participants become 25% vested in all
employer matching contributions after two years, 50% vested after three years,
75% vested after four years, and 100% vested once they complete five years of
service. Lump sum distributions generally may be made from the Savings Program
upon termination of employment or attainment of age 50 1/2. Participants may
also obtain a hardship withdrawal or borrower money from their account. All
contributions to the Savings Program and investment earnings are held in trust
for the exclusive benefit of participants and their beneficiaries. The name of
the trust is The National 401(k) Master Trust. The trustee is INVESCO Trust
Company.
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DEFERRED COMPENSATION PLANS
Georgia Blue offers certain Directors and employees the opportunity to
defer income pursuant to Georgia Blue's "Deferred Compensation Plan for Select
Management." Qualified Directors and employees may elect to defer payment of all
or any portion of such person's compensation during any year for a period of
three years or more. At the election of the qualified Director or employee, such
deferred compensation may be paid in a lump sum or in monthly installments over
a period from 5 to 20 years. Approximately 33 Directors and employees
participate in these arrangements, and become general creditors of Georgia Blue
thereunder. Georgia Blue's total obligation to these participants, which is
unsecured, was less than $2.2 million as of December 31, 1995.
COMPENSATION COMMITTEE
The Compensation Committee is comprised of Directors Tolbert (Chair),
Barker, Hanna, Underwood, Vereen and Young. (Messrs. Hanna and Young are new
members of the Committee in 1996.) Mr. LaBoon sits with the Committee ex
officio. The Committee meets quarterly. The Compensation Committee sets the
compensation for the Chief Executive Officer and the other Named Executive
Officers at a meeting early in each fiscal year after reviewing, in each case,
the performance targets established for the prior year in comparison to the
prior year's actual performance. At this meeting the Committee also sets
performance targets for the new fiscal year as well as any targets for
additional compensation plans pursuant to which the Chief Executive Officer and
the other Named Executive Officers may earn compensation with respect to that
fiscal year and sets annual salaries in accordance with the same considerations.
All elements of compensation for the fiscal year ended December 31, 1995 for all
the Named Executive Officers were set in the same manner.
EXECUTIVE OR OTHER SEVERANCE AGREEMENTS
Georgia Blue is a party to an Employment Agreement dated March 4, 1992 with
Richard D. Shirk, President and Chief Executive Officer. This agreement
contemplates an ever-renewing 24-month term, and, under certain conditions of
termination, a 24-month continuation of salary and certain other benefits.
Additionally, Dr. Kishel is a party to a letter agreement which, under certain
limited termination circumstances, provides for a twelve month salary
continuation.
STOCK OWNERSHIP
Currently, no shares of Common Stock are outstanding or beneficially owned
by any person and no shares of Blank Preferred Stock are outstanding or
beneficially owned by any person.
All of the issued shares of Class A Stock are held by the Escrow Agent for
distribution to Eligible Subscribers. No directors or officers of the Company or
of Georgia Blue own any shares of capital stock of the Company except Frank J.
Hanna, III. Georgia Strategic Healthcare, LLC owns approximately 80% of the
Preferred Stock. Frank J. Hanna, III, Frank J. Hanna, Jr. and David Hanna share
sole voting and dispositive power with regard to all of the shares of Preferred
Stock owned by Georgia Strategic Healthcare, LLC. (The address of Georgia
Strategic Healthcare, LLC is Suite 1750, Two Ravinia Drive, Atlanta, Georgia
30346.)
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
The following discussion summarizes certain federal income tax consequences
to Georgia Blue and the Company with respect to the Conversion and the formation
of the Company and to the Eligible Subscribers with respect to their acceptance
of the Shares of Class A Stock. This summary does not discuss any tax
consequences arising under the laws of any state, locality, foreign country or
other jurisdiction. This discussion is based upon currently existing provisions
of the Code, existing and temporary United States Treasury regulations
promulgated thereunder and current administrative rulings and court decisions,
all of which are subject to change or different interpretations so as to result
in tax consequences different from those discussed below.
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THE DISCUSSION SET FORTH BELOW IS INCLUDED FOR GENERAL INFORMATION ONLY. IT
DOES NOT ADDRESS THE STATE, LOCAL OR FOREIGN TAX ASPECTS OF AN ELIGIBLE
SUBSCRIBER'S ACCEPTANCE OF THE COMPANY'S OFFER OF CLASS A STOCK AND DOES NOT
REPRESENT ADVICE REGARDING THE FEDERAL TAX CONSEQUENCES TO ELIGIBLE SUBSCRIBERS
OF ACCEPTANCE OF THE COMPANY'S OFFER OF, THE CLASS A STOCK. THE COMPANY
ENCOURAGES EACH ELIGIBLE SUBSCRIBER TO CONSULT HIS OR HER OWN TAX ADVISOR
REGARDING THE SPECIFIC FEDERAL INCOME TAX CONSEQUENCES TO SUCH SUBSCRIBER OF THE
ACCEPTANCE OF THE COMPANY'S OFFER OF CLASS A STOCK, AS WELL AS ANY TAX
CONSEQUENCES TO SUCH SUBSCRIBER ARISING UNDER THE LAWS OF ANY STATE, LOCALITY,
FOREIGN COUNTRY OR OTHER JURISDICTION.
ISSUANCE OF CLASS A STOCK TO THE ELIGIBLE SUBSCRIBERS
There is a risk that each Eligible Subscriber who accepts the offer of the
Shares of Class A Stock may be required to recognize taxable income (to the
extent of the value of the Shares of Class A Stock received by such Eligible
Subscriber) upon receipt of the Shares of Class A Stock and, as a result, may
incur federal income tax liability in connection with his or her receipt of the
Shares of Class A Stock. The Company has obtained an opinion from Ernst & Young
LLP, certified public accountants, to the effect that the Eligible Subscribers
who accept the offer for the Shares of Class A Stock should not incur federal
income tax liability in connection with their receipt of the Shares of Class A
Stock; however, because this is a unique transaction in which there are no
precedential authorities outstanding, no assurance can be given that the
Internal Revenue Service will not challenge this position. The opinion of Ernst
& Young LLP is based upon the representations and assumptions provided by the
Company. These representations and assumptions have not been independently
verified by Ernst & Young LLP. In addition, Ernst & Young LLP has undertaken no
obligation to update this opinion for changes in facts or law subsequent to the
date of issuance.
TAX CONSEQUENCES TO THE COMPANY OF THE CONVERSION
There is a risk that the Conversion of Georgia Blue to a "for profit"
corporation and the issuance of its stock to the Company will be viewed as a
taxable exchange or a taxable event. The Company has concluded that the
Conversion and the issuance of Georgia Blue stock to the Company was tax free
both to Georgia Blue and to the Company and will prepare its tax returns
accordingly.
SECTION 833 OF THE CODE
Since January 1, 1987, Georgia Blue has been treated for federal income tax
purposes as an organization to which Section 833 of the Code applies. An
organization to which Section 833 applies is entitled to certain tax benefits,
including a deduction for federal income tax purposes pursuant to Section 833(b)
of the Code. Such deduction is equal to the excess of (a) 25% of (i) the sum of
the claims incurred during the taxable year and (ii) the expenses incurred
during the taxable year in connection with the administration, adjustment or
settlement of claims, over (b) the adjusted surplus at the beginning of the tax
year. For calendar year 1994, Georgia Blue's deduction under Section 833(b) was
$15,981,317 and for calendar year 1995 is estimated to be $15,321,000. An
organization will no longer be entitled to the benefits of Section 833 for a
particular taxable year, including the deduction pursuant to Section 833(b), if
a material change has occurred in the operation of such organization or in its
structure after August 16, 1986 and before the close of that taxable year. There
is a risk that the Conversion, the amendment to the Articles of Incorporation of
Georgia Blue to those of a for profit corporation as permitted by Georgia law,
the formation of the Company and/or the acquisition by the Company of Georgia
Blue stock may be considered as a material change in the operations or structure
of Georgia Blue, which would result in the loss of the benefits under Section
833 (including the loss of the Section 833(b) deduction) and, accordingly, the
payment of federal income taxes at a higher effective rate in the future. The
Company has concluded that a material change in operations or structure did not
occur, for purposes of Section 833, upon the acquisition by the Company of
Georgia Blue's newly issued stock and will
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take the deduction. No assurance can be given that the Internal Revenue Service
will not challenge this deduction.
USE OF GEORGIA BLUE'S NET OPERATING LOSS
Net operating loss carryforward to the calendar year 1995 was $72,723,583
and is estimated to be $64,962,000 to the calendar year 1996. However, there is
a risk that the Internal Revenue Service could assert that Georgia Blue does not
have a net operating loss carryforward. In addition, even if it is determined
that Georgia Blue has a net operating loss carryforward, the utilization of such
net operating loss subsequent to the formation of the Company may be limited
annually pursuant to Section 382 of the Code to an amount equal to the product
of the federal long term tax exempt rate multiplied by the value of Georgia Blue
immediately before the formation of the Company. Furthermore, the consolidated
return rules of the Code and the regulations thereunder may further limit the
use of Georgia Blue's net operating loss in the future.
DESCRIPTION OF CAPITAL STOCK
Set forth below is a description of the material terms and provisions of
the capital stock of the Company. The following description does not purport to
be complete and is subject to and qualified in its entirety by reference to the
Articles of Incorporation of the Company (the "Articles of Incorporation") and
to the Bylaws of the Company (the "Bylaws"). The Articles of Incorporation and
Bylaws are filed as exhibits to the Registration Statement of which this
Prospectus forms a part.
GENERAL
The authorized capital stock of the Company consists of (i) 50,000,000
shares of Class A Convertible Common Stock, no par value per share (the Class A
Stock), (ii) 49,901 shares of Class B Convertible Preferred Stock, no par value
per share (the Preferred Stock), (iii) 100,000,000 shares of Common Stock, no
par value per share, and (iv) 100,000,000 shares of Blank Preferred Stock (the
Blank Preferred Stock) that may be issued in one or more series with such voting
powers, designations, preferences, rights, qualifications, limitations and
restrictions as shall be specified by the Board of Directors of the Company. On
February 2, 1996, the Company issued into escrow 800,000 shares of Class A Stock
to be distributed in the manner described in this Prospectus and had issued and
outstanding 49,901 shares of Preferred Stock held by 18 shareholders of record
(including one share of Preferred Stock issued to Georgia Blue), but no shares
of Common Stock and no shares of Blank Preferred Stock. See "CAPITALIZATION."
CLASS A STOCK
Voting
So long as any shares of Preferred Stock and Class A Stock are issued and
outstanding and no shares of Common Stock are issued and outstanding, the
holders of outstanding shares of Class A Stock, voting separately as a single
class (with each share being entitled to one vote) and to the exclusion of all
other classes and series of capital stock of the Company, shall be entitled to
elect two Class A Designated Directors to each of the Company's three classes of
Directors as follows: (i) at or prior to the first annual meeting of
shareholders, a special nominating committee composed of two Continuing
Directors and the two Preferred Designated Directors will nominate two persons
for election as Class A Designated Directors to be voted on by the holders of
the Class A Stock at such first annual meeting to serve for a three year term;
(ii) at or prior to the annual meeting of shareholders held in the second year
following the issuance of the Shares, a special nominating committee composed of
two Continuing Directors and the two Class A Designated Directors will nominate
two additional persons for election as Class A Designated Directors to be voted
on by the holders of the Class A Stock at such second annual meeting to serve
for a three year term; (iii) at or prior to the annual meeting of shareholders
held in the third year following the issuance of the Shares, a nominating
committee composed of two Continuing Directors and the four Class A Designated
Directors will nominate two additional persons for election as Class A
Designated Directors to be voted on by the holders of Class A Stock at such
third annual meeting to serve for a three year term; and (iv) at each annual
meeting of shareholders
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thereafter, a special nominating committee composed of the six Class A
Designated Directors will nominate two persons for election as Class A
Designated Directors to replace the two Class A Designated Directors whose term
expires at that annual meeting. Notwithstanding any nomination by a special
nominating committee, the holders of the Class A Stock shall be entitled to
nominate and elect any eligible individual as a Class A Designated Director each
year.
Notwithstanding the foregoing, in the event shares of Class A Stock and
Common Stock are outstanding at the same time, all rights to vote would be
vested in the holders of the Common Stock, except (i) the rights of the holders
of Preferred Stock to elect Preferred Designated Directors (see "DESCRIPTION OF
CAPITAL STOCK -- Preferred Stock -- Voting"), and (ii) such other voting rights
as are provided to the holders of the Class A Stock as provided by the Georgia
Business Corporation Code. Accordingly, in the event the Company issues any
shares of Common Stock, the holders of Class A Stock will have no voting rights
(including the right to elect Class A Designated Directors) except as expressly
provided by law. See "DESCRIPTION OF CAPITAL STOCK -- Class A Stock -- Voting."
If no Preferred Stock and no Common Stock are outstanding, all rights to
vote will be vested in the holders of the outstanding shares of Class A Stock or
the Blank Preferred Stock. The Company anticipates that Preferred Stock will be
outstanding during all periods the Class A Stock is outstanding.
Dividends
So long as any shares of the Company's Preferred Stock are issued,
outstanding and entitled to vote, no dividends may be paid in cash, stock or
other property on the Class A Stock without the approval of the Board of
Directors of the Company and of the holders of a majority of the shares of
Preferred Stock then issued, outstanding and entitled to vote. If no shares of
Preferred Stock are issued and outstanding, dividends may be declared on the
Class A Stock at the discretion of the Board of Directors of the Company out of
funds legally available therefor. See "DIVIDENDS."
Liquidation
So long as shares of Class A Stock and Preferred Stock are outstanding, but
no shares of Common Stock are outstanding, the holders of shares of Class A
Stock will be entitled to receive any distributions of the Company's assets upon
the liquidation, dissolution or winding up of the Company, but only after and on
the condition that all the holders of issued and outstanding shares of Preferred
Stock, if any, shall have received an amount of such assets equal to $1,000 per
share of Preferred Stock, plus all accrued and unpaid dividends (the "Preferred
Liquidation Amount"). Upon any dissolution, liquidation or winding up of the
affairs of the Company, the assets of the Company shall be distributed ratably
among the holders of Preferred Stock in proportion to the sum of their
respective Preferred Liquidation Amount, until payment in full of the full
Preferred Liquidation Amount. After payment or distribution to all holders of
Preferred Stock of the full Preferred Liquidation Amount, all of the remaining
assets of the Company available for distribution to shareholders shall be
distributed ratably among the holders of the Class A Stock then issued and
outstanding. In the event no Class A Stock or Preferred Stock is issued and
outstanding at the time of a dissolution, liquidation or winding up, the assets
of the Company available for distribution to stockholders will be distributed
ratably among the holders of the Common Stock then issued and outstanding. In
addition, the Class A Stock could be subject to a priority in liquidation
created by the Company in any future class or series of Blank Preferred Stock.
See "DESCRIPTION OF CAPITAL STOCK -- Preferred Stock -- Liquidation Preference"
and "DESCRIPTION OF CAPITAL STOCK -- Blank Preferred Stock."
Conversion of Class A Stock
General. Shares of Class A Stock and Preferred Stock will be converted
into shares of Common Stock pursuant to a Discretionary Conversion, an Automatic
Conversion or a Preliquidation Conversion, each as described below (each a
"Stock Conversion"). In the event of a Stock Conversion, each share of Class A
Stock will be converted into one share of Common Stock.
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Discretionary Conversion. The Company may, upon approval of the holders of
a majority of the then issued and outstanding shares of Preferred Stock entitled
to vote, convert all, but not less than all, of the issued and outstanding
shares of Class A Stock and Preferred Stock by delivering written notice of
conversion to the holders of such shares, whereupon each share of such Class A
Stock and Preferred Stock automatically shall be converted into Common Stock on
the date determined by the Board of Directors. Such a conversion is referred to
herein as a "Discretionary Conversion."
Automatic Conversion. On the earlier of (i) December 1, 2001 or (ii) the
closing date of the first public offering of Common Stock registered under the
Securities Act, each issued and then outstanding share of Class A Stock and
Preferred Stock shall automatically be converted into Common Stock, without
further action on the part of the Company or its shareholders. Such a conversion
is referred to herein as an "Automatic Conversion."
Preliquidation Conversion. Immediately preceding any liquidation,
dissolution or winding up of the Company and upon approval of the holders of a
majority of the then issued and outstanding shares of Preferred Stock entitled
to vote, all of the issued and outstanding shares of Class A Stock and Preferred
Stock shall automatically be converted into Common Stock without further action
on the part of the Company or the shareholders. Such a conversion is referred to
herein as a "Preliquidation Conversion."
Restrictions on Transfer; Right of First Refusal
Transfer Restrictions on Class A Stock; Right of First Refusal. Shares of
Class A Stock may not be sold, transferred, encumbered, pledged or otherwise
disposed of prior to December 1, 1998, except (i) upon the death of the holder
of such shares, in which case such shares may be transferred by such holder's
estate to an heir taking by law or pursuant to testamentary succession, (ii) by
operation of law or (iii) as required by a final judicial decree. Pursuant to
the Articles of Incorporation and subject to the limitations described below,
during the period from December 1, 1998 to December 1, 2001, if a holder of
shares of Class A Stock desires to sell all or any portion of such Class A
Stock, the holder must first offer the shares of Class A Stock to the Company
upon the same terms and conditions as the proposed sale. A holder of Class A
Stock who proposes to dispose of all or any portion of his or her shares must
give written Notice to the Company of his or her intention to dispose of the
shares, setting forth the type of disposition, the proposed purchaser, the
number of offered shares, the price per share and the terms of payment. The
Company may accept such offer with respect to all, but not less than all, of the
offered shares within thirty (30) days following receipt of the Notice by giving
notice of such exercise to the holder proposing to dispose of the shares. If any
of the consideration for the offered shares consists of anything other than
cash, the Company may substitute for such consideration the cash equivalent as
reasonably determined by the Company. The Company may exercise this right of
first refusal to acquire up to 2% of the issued and outstanding shares of Class
A Stock in any one calendar year, or such greater amount as may be approved by
the holders of more than a majority of the Preferred Stock then issued,
outstanding and entitled to vote. If the Company declines to exercise its right
of first refusal or if the purchase by the Company is not consummated through no
fault of the offeror, the offeror may transfer the offered shares to the
proposed purchaser, at the price and on the terms and conditions set forth in
the Notice, provided that such transfer must be made within 30 days of the date
the offeror became free to transfer the shares or such right to transfer will
expire.
Registration of, Transfer of, and Transfer Restrictions on Common Stock
Issued in a Stock Conversion. The shares of Conversion Stock have not been
registered under the Securities Act and until such registration, if any, their
transfer by Eligible Subscribers would be subject to the provisions of Rule 144
under the Securities Act. In addition, pursuant to Rule 144, Eligible
Subscribers receiving shares of Conversion Stock upon conversion of their Class
A Stock may be required to hold such Conversion Stock for a two-year period from
the time of Conversion or until the earlier registration, if any, of the
Conversion Stock. Sales of Conversion Stock (i.e., Common Stock issued in
exchange for Class A Stock upon a Stock Conversion) will be limited for a period
of time following the Stock Conversion pursuant to certain "lockup" provisions
included in the Company's Articles of Incorporation. The lockup provisions are
intended to assist in the development of an orderly trading market in the Common
Stock, the development of an adequate investment research following of the
Company, and the promotion of institutional demand for the Common Stock.
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The Conversion Stock will be subject to a lockup (a "Lockup") for the
following periods (each a "Lockup Period"), during which periods such Common
Stock shall, as described below, be issued in uncertificated form and will be
subject to the restrictions on sale, pledge or other transfer described below.
The first Lockup Period (the "First Lockup Period") will terminate on the
six-month anniversary of the Stock Conversion date. The second Lockup Period
(the "Second Lockup Period") will terminate on the twelve-month anniversary of
the Stock Conversion date. One-half of all the Conversion Stock will be released
from the restrictions of the Lockup at the termination of the First Lockup
Period, and the remaining one-half of all the Conversion Stock will be released
from the restriction of the Lockup at the termination of the Second Lockup
Period.
Except as set forth in the next sentence, the Company will not recognize
during a Lockup Period any sale, pledge or other transfer of any right or
interest in or to any Conversion Stock or other securities subject to the Lockup
nor shall any such attempted transaction be valid or binding. During a Lockup
Period, the Company will recognize only the following transfer of rights or
interests in or to the Conversion Stock subject to the Lockup: (i) the death of
the holder of such shares, in which case such shares may be transferred by such
holder's estate to an heir taking by law or pursuant to testamentary succession,
(ii) a transfer by operation of law or (iii) as required by a final judicial
decree.
All distributions of Conversion Stock, or of securities convertible into or
exchangeable for Conversion Stock, as dividends or distributions on account of
such Conversion Stock subject to the Lockup may, at the discretion of the
Company, also be subject to the same Lockup, and for the same Lockup Period, as
the Conversion Stock in respect of which it is distributed.
No Stock Certificates
Class A Stock and Conversion Stock will be issued in uncertified form
pursuant to the Georgia Business Corporation Code (the "GBCC"). An appropriate
notice will be sent to each holder in compliance with GBCC. No certificates will
be issued for any such Stock at any time.
PREFERRED STOCK
Voting
So long as any shares of Preferred Stock are issued and outstanding and
entitled to vote, the holders of the Preferred Stock (the "Preferred
Shareholders"), voting separately as a single class (with each share being
entitled to one vote) and to the exclusion of all other classes and series of
capital stock of the Company, will be entitled to nominate and elect two
Directors of the Company who shall be designated "Preferred Designated
Directors." Under the Shareholders' Agreement, the Preferred Shareholder holding
the largest number of shares of Preferred Stock (the "Large Holder") shall
nominate one director and the Preferred Shareholders have agreed under the
Shareholders' Agreement to vote for such nominee. The Large Holder shall have
the ability to replace such Preferred Designated Director and shall be entitled
to nominate his successor, and all of the Preferred Shareholders are obligated
under the Shareholders' Agreement to vote for the individual so nominated by the
Large Holder. The second Preferred Designated Director shall be selected by the
Large Holder and at least a majority of the then issued and outstanding
remaining shares of Preferred Stock entitled to vote. For so long as any shares
of Preferred Stock of the Company are issued and outstanding, a Preferred
Designated Director may be removed only by a vote of the Preferred Shareholders,
but such removal may be made only in the manner provided in the Shareholders'
Agreement for the election of such Preferred Designated Director to be so
removed. For so long as any shares of Preferred Stock of the Company are issued
and outstanding, if any Preferred Designated Director resigns, does not stand
for reelection or otherwise ceases to serve as a member of the Board of
Directors for any reason, including the expiration of his term, the Preferred
Shareholders, and only the Preferred Shareholders, may designate another person
to serve as a Preferred Designated Director, but only upon approval of such
successor in the manner provided in the Shareholders' Agreement for the election
of such Preferred Designated Director.
In addition, for so long as any shares of Preferred Stock are issued and
outstanding and entitled to vote, the Preferred Shareholders, voting separately
as a single class (with each share being entitled to one vote) and
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to the exclusion of all other classes and series of capital stock of the
Company, will be entitled to elect the remaining directors of the Company (other
than the Class A Designated Directors). However, pursuant to the Shareholders'
Agreement, so long as no shares of Common Stock are issued and outstanding, the
Preferred Shareholders are obligated to vote their shares so that the persons
(other than the Preferred Designated Directors and the Class A Designated
Directors) nominated by the Nominating Committee of the Company's Board of
Directors and approved by two-thirds of the Continuing Directors of the Company
are elected as Directors of the Company. On all matters to come before the
shareholders other than the election of Directors, the Preferred Shareholders
will be entitled to vote as a class and each share of Preferred Stock which is
issued, outstanding and entitled to vote will have one vote. No vote of the
Preferred Shareholders will be deemed the vote of the class unless there has
been an affirmative vote or consent of the holders of a majority of the shares
of Preferred Stock then issued, outstanding and entitled to vote.
Liquidation Preference
In the event of any liquidation, dissolution or winding up of the Company,
the holders of shares of Preferred Stock are entitled to receive out of the
assets of the Company available for distribution to shareholders, before any
distribution of assets is made to holders of Class A Stock or Common Stock or of
any other shares of capital stock of the Company, the Preferred Liquidation
Amount (i.e., liquidating distributions in the amount of $1,000 per share plus
accrued and unpaid dividends). After payment of such Preferred Liquidation
Amount, the holders of shares of Preferred Stock will not be entitled to any
further participation in any distribution of assets of the Company.
If upon any liquidation, dissolution or winding up of the affairs of the
Company, the assets of the Company distributable as aforesaid among the holders
of the Preferred Stock are insufficient to permit the payment to them of the
full Preferred Liquidation Amount, then the entire assets of the Company to be
so distributed will be distributed ratably among the holders of the Preferred
Stock in proportion to the sum of their respective Preferred Liquidation Amount,
including all accrued and unpaid dividends, until payment in full of such
Preferred Liquidation Amount.
Dividends
The holders of the Preferred Stock will be entitled to receive, out of
funds at the time legally available therefor, dividends at the rate of $60.00
per annum per share on and prior to December 1, 1998 and $100.00 per annum per
share after December 1, 1998, which will be fully cumulative and will accrue
without interest from the date of original issuance. Dividends are payable in
cash annually in arrears on December 1 of each year commencing December 1, 1996
(each a "Dividend Due Date") to the holders of Preferred Stock of record on a
record date fixed by the Board of Directors, which will be not more than 60 nor
less than 10 days preceding each Dividend Due Date. If any Dividend Due Date is
not a business day, then such dividend will be payable on the next business day
following such Dividend Due Date, provided that, for the purposes of computing
such dividend payment, no interest or sum in lieu of interest will accrue from
such Dividend Due Date. Dividends on account of dividends in arrears for any
past dividend period may be declared at any time and paid on any business day,
without reference to any regular Dividend Due Date. The amount of dividends
payable for the initial dividend period and any period shorter than a full
annual dividend period will be computed on the basis of a 360-day year of twelve
30-day months. Dividends paid on shares of Preferred Stock in an amount less
than the total amount of such dividends at the time accumulated and payable on
such shares will be allocated pro rata among all such shares at the time issued,
outstanding and entitled to vote.
So long as any shares of the Company's Preferred Stock are issued and
outstanding and entitled to vote, the Company cannot pay dividends in cash,
stock or other property on Class A Stock or Common Stock without the approval of
the Board of Directors and of the holders of a majority of the Preferred Stock
then issued, outstanding and entitled to vote. The Company presently anticipates
that shares of Preferred Stock will be issued, outstanding and entitled to vote
at all times up to the date the Class A Stock is converted to Common Stock. The
Company anticipates that no dividends will ever be paid on Class A Stock. See
"DIVIDENDS."
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<PAGE> 60
Conversion of Preferred Stock
Shares of Preferred Stock shall be converted into shares of Common Stock
pursuant to a Discretionary Conversion, an Automatic Conversion or a
Preliquidation Conversion upon the same terms and conditions (other than the
number of shares of Common Stock issuable upon conversion of Preferred Stock) as
Class A Stock. See "DESCRIPTION OF CAPITAL STOCK -- General -- Conversion of
Class A Stock."
Upon a Stock Conversion, each share of Preferred Stock shall convert into
the number of fully paid and nonassessable shares of Common Stock equal to
0.0004446420631%, as adjusted from time to time as described below (such
percentage, as adjusted, is referred to herein as, the "Preferred Conversion
Percentage") of the number of shares of Common Stock issuable upon conversion of
all outstanding Class A Stock and Preferred Stock (the "Fully Diluted Share
Number"), in each case calculated immediately prior to the time the Preferred
Stock is converted into Common Stock, but giving effect to any adjustments
described below immediately after such time of conversion.
For purposes of determining the Preferred Conversion Percentage, the
Conversion Price will initially be equal to the quotient of (i) 49,900,000 (the
"Stated Value") divided by (ii) 0.285142857142857 of the number of shares of
Class A Stock issued and outstanding immediately after distribution of the
shares of Class A Stock to the Eligible Subscribers entitled to the same and
will be adjusted from time to time as described below. In case the Company
issues shares of Common Stock at a price, or Rights (as defined herein), having
an Exercise Price (as defined below) per share less than the Conversion Price on
the date such shares or Rights are issued, the Conversion Price in effect at the
opening of business on the day following the date on which such shares or Rights
are issued shall be reduced by multiplying the Conversion Price on the date such
shares or Rights are issued by a fraction (i) the numerator of which shall be
(A) the number of shares of Common Stock issuable upon conversion of all then
outstanding Class A Stock and upon exercise of Rights outstanding immediately
prior to the time at which such shares or Rights are issued plus (B) the number
of shares of Common Stock which the aggregate of the offering price of the total
number of shares of Common Stock so issued, or the number of shares of Common
Stock which the aggregate of the Exercise Price of such Rights so issued, would
purchase at such Conversion Price and (ii) the denominator of which shall be the
sum of (A) the number of shares of Common Stock issuable upon conversion of all
then outstanding Class A Stock and upon exercise of Rights outstanding
immediately prior to the time at which such shares or Rights are issued plus (B)
the number of shares of Common Stock so issued or the number of shares of Common
Stock issuable upon the exercise of such Rights so issued, such reduction to
become effective immediately after the opening of business on the day following
the date on which such shares or Rights are issued. "Exercise Price" of any
Rights is the total amount received or receivable by the Company as
consideration for the issue or sale of such Rights plus the minimum aggregate
amount of additional consideration, if any, payable to the Company upon exercise
thereof. In case part or all of the subscription or purchase price for the
Company's Common Stock shall be in a form other than cash, the value of such
consideration shall be as determined in good faith by the vote of the Board of
Directors of the Company.
Upon each such adjustment of the Conversion Price, the Preferred Conversion
Percentage shall be adjusted so that the Preferred Conversion Percentage
immediately after such adjustment shall be equal to (i) the product of (A) the
Preferred Conversion Percentage immediately prior to such adjustment times (B)
the Fully Diluted Share Number immediately prior to such adjustment times (C)
the Adjustment Factor (as defined below) divided by (ii) the sum of (A) the
number of shares of Common Stock issuable upon conversion of all outstanding
Class A Stock plus (B) the quotient of (x) the aggregate Stated Value of all
outstanding shares of Preferred Stock divided by (y) the Conversion Price, as so
adjusted. As used herein, with respect to any adjustment, the "Adjustment
Factor" shall be equal to the quotient of (i) the Conversion Price immediately
prior to such adjustment divided by (ii) the Conversion Price immediately after
such adjustment.
Upon the issuance of any shares of Class A Stock after the distribution of
shares of Class A Stock, the Conversion Price shall be adjusted so that the
Conversion Price immediately after such adjustment shall be equal to the
quotient of (i) the product of (A) 175,000,000 multiplied by (B) the Conversion
Price immediately prior to such adjustment divided by (ii) the sum of (A) the
product of (x) the number of shares
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<PAGE> 61
of Class A Stock so issued multiplied by (y) the Conversion Price immediately
prior to such adjustment plus (B) 175,000,000.
No such adjustment in the Conversion Price (and, therefore, no adjustment
in the number of shares of Common Stock issuable upon conversion of shares of
Preferred Stock) shall be required unless such adjustment would require a change
of at least one half of one percent (0.5%) in such price; provided, however,
that any such adjustments which are not so required to be made shall be carried
forward and taken into account in determining any subsequent adjustment. All
calculations shall be made to the nearest one-hundredth of a cent.
Notwithstanding the foregoing, no adjustment to the Conversion Price shall
be made (i) on account of the grant of any option pursuant to a stock option
plan of the Company approved by the holders of a majority of the then issued and
outstanding shares of Preferred Stock entitled to vote by written consent or at
a meeting or (ii) on account of any shares of Common Stock or Rights as to which
holders of Preferred Stock exercise their preemptive rights.
Upon the repurchase or redemption of any Class A Stock by the Company, the
Preferred Conversion Percentage as adjusted shall be further adjusted such that
the adjusted Preferred Conversion Percentage shall be equal to the Preferred
Conversion Percentage times the quotient of (i) Post-Adjustment Valuation
(defined below) divided by (ii) Post-Adjustment Valuation less Class A
Repurchases (defined below). As used herein, "Post-Adjustment Valuation" shall
equal the sum of (i) $175,000,000 plus (ii) the number of shares of Preferred
Stock issued and outstanding at time of such adjustment times $1,000. As used
herein, "Class A Repurchases" shall be equal to the total cumulative dollar
value of Class A Stock repurchased or redeemed by the Company as of the time of
such adjustment.
Redemption of Preferred Shares
Each holder of Preferred Stock will have the option to require the Company
to redeem for cash any or all of such holder's outstanding shares of Preferred
Stock (i) after the effective date of a "Change in Control" (as defined below),
provided, however, that a majority of the members of the Board of Directors
shall have approved such Change in Control or (ii) on December 1, 2001 (a
"Conversion Redemption"). If the effective date of a Change in Control or
Conversion Redemption is also the effective date of a Stock Conversion, the
holders of Preferred Stock, in lieu of such redemption, may at their option have
their shares of Preferred Stock converted to Common Stock on the Redemption Date
(described below). The holders of the Preferred Stock may exercise the right to
have shares of Preferred Stock so redeemed by providing written notice to the
Company no later than 15 days prior to the Redemption Date specifying the number
of shares of Preferred Stock to be redeemed. The "Redemption Date" is (i) in the
case of a Change in Control, the date established by the Board of Directors,
which may be not less than thirty or more than sixty days after the effective
date of the Change in Control, or (ii) in the case of the Conversion Redemption,
December 1, 2001. The Company shall pay to each holder who has given such
redemption notice an amount per share (in cash) equal to $1,250, or in the case
of a Conversion Redemption, $900 per share, plus accrued and unpaid dividends to
the Redemption Date. The Company will be required to notify the holders of the
Preferred Stock in writing (i) of the occurrence of a Change in Control and the
related Redemption Date within fifteen days after the effective date of a Change
in Control and (ii) of a Conversion Redemption no later than November 1, 2001. A
"Change in Control" will be deemed to have occurred at such time as any person
(including any syndicate or group deemed to be a "person" under Section 13(d)(3)
of the Exchange Act other than the Company, any subsidiary of the Company or any
employee benefit plan of the Company), is or becomes the beneficial owner,
directly or indirectly, through a purchase, merger or other acquisition
transaction or series of transactions, of shares of capital stock of the Company
entitling such person to exercise 50% or more of the total voting power of
capital stock of the Company entitled to vote generally in the election of
directors.
Preemptive Rights
First Registered Offering of Common Stock. Except for this distribution of
Class A Stock to Eligible Subscribers, if the Company proposes to issue, grant
or sell shares of Common Stock or Rights pursuant to the
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first offering of Common Stock which is registered under the Securities Act or
any corresponding securities laws of any foreign jurisdiction (the "Foreign
Laws"), the Company shall first give to each holder of the Preferred Stock a
notice (i) setting forth the information required or permitted to be included
therein by Rule 134 or other applicable provisions under the Securities Act or
the Foreign Laws, and (ii) including the range of prices within which the
Company anticipates offering such shares. Each holder of Preferred Stock shall
have the preemptive right, exercisable by notice to the Company no later than
fifteen days after receipt by such holder of the Company's notice, to purchase
such holder's "Common Proportionate Share" (as defined below), or any portion
thereof, of such shares or Rights for the same price and on the same terms as
offered to the public purchasers of such Common Stock. A holder's "Common
Proportionate Share" means the quotient which results when (i) the sum of (A)
the number of shares of Common Stock then issuable upon conversion of all shares
of both the Class A Stock and the Preferred Stock then held by such holder, plus
(B) the number of shares of Common Stock then held by such holder, is divided by
(ii) the sum of (A) the total number of shares of Common Stock issuable upon
conversion of all shares of both the Class A Stock and the Preferred Stock
issued, outstanding and entitled to vote, plus (B) the number of shares of
Common Stock issued and outstanding at that time.
Other Common Stock or Rights. If the Company proposes to issue, grant or
sell shares of Common Stock or Rights to acquire Common Stock other than as
described in the previous paragraph, the Company shall first give to each holder
of the Preferred Stock a notice setting forth in reasonable detail the price and
other terms on which such shares of Common Stock or Rights are proposed to be
issued, granted or sold, and the amount thereof proposed to be issued, granted
or sold. Each holder of Preferred Stock shall have the preemptive right,
exercisable by notice to the Company no later than 30 days after receipt by such
holder of the Company's notice, to purchase such holder's "Common Proportionate
Share" (as defined above), or any portion thereof, of such shares of Common
Stock or Rights for the same price and on the same terms as set forth in the
Company's notice.
Preferred Stock or Rights. If the Company proposes to issue, grant or sell
shares of its Preferred Stock or Rights to acquire shares of its Preferred
Stock, the Company shall first give to each holder of the Preferred Stock a
notice setting forth in reasonable detail the price and other terms on which
such shares of Preferred Stock or Rights are proposed to be issued, granted or
sold, and the amount thereof proposed to be issued, granted or sold. Each holder
of Preferred Stock shall have the preemptive right, exercisable by notice to the
Company no later than 30 days after receipt by such holder of the Company's
notice, to purchase such holder's "Preferred Proportionate Share" (as defined
below), or any portion thereof, of such shares of Preferred Stock or Rights for
the same price and on the same terms as set forth in the Company's notice. A
holder's "Preferred Proportionate Share" means the quotient which results when
the number of shares of Preferred Stock then held by such holder is divided by
the total number of shares of Preferred Stock issued, outstanding and entitled
to vote at that time.
Preemptive Rights Inapplicable. These preemptive rights will not apply to
(i) the grant of stock options or shares of the Company's stock issued pursuant
to stock ownership, stock purchase or other similar plans approved by the Board
of Directors of the Company, (ii) the issuance of shares of capital stock upon
the exercise of any stock options granted pursuant to a plan described in (i)
above, (iii) the issuance of shares of capital stock pursuant to any Rights as
to the issuance, granting or sale of which the holders of Preferred Stock were
previously extended preemptive rights in accordance with the Company's Articles
of Incorporation, (iv) the issuance of any shares to effect any approved merger,
consolidation or other acquisition of any business, division or assets, (v) the
issuance of shares for consideration other than cash as a part of a transaction
involving the purchase, leasing (as lessee) or licensing (as licensee) by the
Company of goods, services, equipment or intellectual property rights that are
to be used by the Company or its subsidiaries for bona fide operating purposes,
(iv) the issuance of shares of Class A Stock in accordance with the Plan of
Conversion filed in connection with the Conversion and approved by the Georgia
Department of Insurance or (vii) shares issued to holders of Class A Stock and
Preferred Stock as a result of a Stock Conversion.
Rights Defined. As used above, "Rights" means any options, warrants or
rights exercisable for, or otherwise giving the holder thereof the right to
acquire, or securities (other than Class A Stock and Preferred Stock)
convertible into or exchangeable for, directly or indirectly, any capital stock
or any other such options,
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warrants or rights or any instrument the value of which is measured by reference
to the value of the shares of the Company's capital stock.
Registration Rights
If, at any time after a Registration Event (as defined below) occurs, the
initial purchasers of the Preferred Stock (or their successors or assignees)
holding or entitled to at least 45% of the then outstanding Common Stock issued
or issuable upon conversion of such Preferred Stock propose to dispose of at
least 20% of such Common Stock then outstanding, then such holders will have the
right, on no more than two occasions, to cause the Company to use its best
efforts to register such holder's shares of Common Stock under a registration
statement filed with the Securities and Exchange Commission. In addition, such
holders of Common Stock will, subject to certain exceptions and limitations,
have the right to include their shares of Common Stock in a registration
statement filed by the Company to register Common Stock for sale for its own
account or for the account of any other person, other than in connection with
the Company's first public offering of Common Stock. For purposes of the
foregoing, "Registration Event" means the first occurrence of a Stock
Conversion, except a Preliquidation Conversion.
Transfer Restrictions
Pursuant to the Shareholders' Agreement, holders of shares of Preferred
Stock have agreed that during the term of the Shareholders' Agreement, such
holders will not sell, transfer, give, encumber, pledge or otherwise dispose of
any shares of Preferred Stock except (i) upon the death of such Preferred
Shareholder, in which case such Preferred Stock may be transferred by such
Preferred Shareholder's estate to an heir taking by law or pursuant to
testamentary succession, (ii) by operation of law, (iii) as required by a final
judicial decree, (iv) if a majority of the Continuing Directors have first
approved such action, or (v) to an entity controlling, controlled by or subject
to common control with such Preferred Shareholder, in each case for no
consideration. No sale, transfer, gift, encumbrance, pledge or other disposition
of any Preferred Stock shall be valid unless and until the proposed transferee
shall have agreed in writing to be bound by the terms and conditions of the
Shareholders' Agreement, in form and substance satisfactory to the Company.
COMMON STOCK
Voting Rights
Except for the rights of the holders of Preferred Stock and Blank Preferred
Stock, and except as otherwise provided by the GBCC or the Articles of
Incorporation of the Company, upon issuance of Common Stock, all rights to vote
shall be vested in the holders of Common Stock. Each outstanding share of Common
Stock is entitled to one vote.
Dividends
Subject to the restrictions imposed by the terms of the Preferred Stock,
dividends may be declared for distribution from time to time to the holders of
shares of Common Stock at the discretion of the Board of Directors of the
Company. See "DESCRIPTION OF CAPITAL STOCK -- Preferred Stock -- Dividends."
Liquidation
In the event no Class A Stock or Preferred Stock is issued and outstanding
at the time of a liquidation, dissolution or winding up of the affairs of the
Company, the entire assets of the Company available for distribution to
stockholders will be distributed pro rata among the holders of the Common Stock
then issued and outstanding. See "DESCRIPTION OF CAPITAL STOCK -- Class A
Stock -- Liquidation" and "DESCRIPTION OF CAPITAL STOCK -- Preferred
Stock -- Liquidation."
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Restrictions on Acquisition, Ownership and Voting of Securities
Unless approved by two-thirds of the Continuing Directors, so long as
Common Stock is issued and outstanding and no Preferred Stock is issued and
outstanding: (i) no person, including all of such person's affiliates and
associates, may, directly or indirectly, whether through merger, consolidation
or otherwise, acquire or hold the beneficial ownership of more than the
Permissible Ownership Amount (as defined below) of the outstanding shares of any
class of equity securities of the Company; and (ii) that portion of shares of a
class of equity securities of the Company the beneficial ownership of which is
held or acquired by any person, including all of such person's affiliates and
associates, which are in excess of the Permissible Voting Amount (as defined
below) shall not be entitled to vote.
The portion of any shares of a class of outstanding equity securities
beneficial ownership of which is held or acquired by any person, including its
affiliates and associates, which are in excess of the Permissible Ownership
Amount shall be deemed to be "Excess Shares." If notwithstanding such
prohibition, a person, including its affiliates and associates, becomes the
owner (a "Purported Owner") of Excess Shares, then, among other things: (i) the
Excess Shares of such Purported Owner shall, within twenty days following the
discovery of the Purported Owner's ownership of the Excess Shares, be
transferred to and held in an escrow account, or other similar arrangement,
administered by an escrow agent (the "Escrow Agent") for the benefit of such
Purported Owner and pursuant to which such Purported Owner does not have the
right to vote the Excess Shares; (ii) subject to all applicable securities and
other laws, within 90 days following the placement of the Excess Shares with the
Escrow Agent (the "Sales Period"), the Escrow Agent shall use its reasonable
best efforts to sell, or cause to be sold, the Excess Shares at the highest
available price and in a commercially reasonable manner; provided, however, that
if such a sale cannot take place within the Sales Period due to restrictions
imposed by any applicable securities, stock exchange or other laws, rules,
regulations or orders, such Sales Period shall be automatically extended until
90 days following the expiration of all such restrictions; and (iii) cash
dividends, distributions, property, sales and other proceeds received by the
Escrow Agent with respect to such Excess Shares shall be distributed to the
Purported Owner promptly upon the Escrow Agent's receipt thereof, less the
Escrow Agent's reasonable fee.
"Permissible Ownership Amount" means 20% of the total shares of Common
Stock outstanding at the time such term is applied; provided, however, that the
Permissible Ownership Amount then in effect shall be increased to greater than
20% under either or both of the following circumstances: (i) if a majority of
the Continuing Directors shall determine in their reasonable judgment that
setting the Permissible Ownership Amount then in effect at a percentage greater
than the Permissible Ownership Amount then in effect does not have the effect of
causing the Company to lose its licenses from the BCBSA (i.e., the Blue Cross
and Blue Shield Association) or causing a Terminating Event under the License
Addendum between the Company and the BCBSA as constituted from time to time (the
"License Addendum"), then the Board of Directors shall have the right to change,
and shall change, the Permissible Ownership Amount then in effect to such
greater amount; and (ii) if the references to 20% in Section 2.1 in the License
Addendum between the Company and the BCBSA shall be changed to a percentage
higher than the Permissible Ownership Amount then in effect, then the
Permissible Ownership Amount then in effect shall automatically change to that
new percentage.
"Permissible Voting Amount" means 5% of the total shares of Common Stock
outstanding at the time this term is applied; provided, however that the
Permissible Voting Amount then in effect shall be increased to greater than 5%
under either or both of the following circumstances: (i) if a majority of the
Continuing Directors shall determine in their reasonable judgment that setting
the Permissible Voting Amount then in effect at a percentage greater than the
Permissible Voting Amount then in effect does not have the effect of causing the
Company to lose its licenses from the BCBSA or causing a Terminating Event under
the License Addendum, then the Board of Directors shall have the right to
change, and shall change, the Permissible Voting Amount then in effect to such
greater amount; and (ii) if the references to 5% in Section 2.1 in the License
Addendum between the Company and the BCBSA shall be changed to a percentage
higher than the Permissible Voting Amount then in effect, then the Permissible
Voting Amount then in effect shall automatically change to that new percentage.
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ADDITIONAL ANTI-TAKEOVER PROTECTION
In addition to the protections described above, the Company's Bylaws
contain provisions that are designed to encourage persons who might attempt to
acquire control of the Company to negotiate with the Board of Directors and to
make it more difficult for such a person to complete an acquisition transaction
that is not approved in advance by the Board of Directors as being in the best
interests of the Company and its shareholders. In this way, the Board of
Directors' ability to negotiate on behalf of the Company and its shareholders
with regard to the proposed acquisition is maximized. Additionally, the Articles
of Incorporation provide for the classification of the Company's Board of
Directors into three classes with one being elected each year and the members of
each class serving three year terms. Such provisions discourage and make more
difficult a change in control of the Company or the removal of incumbent
management, even if favorable to the Company's shareholders.
BLANK PREFERRED STOCK
In its Articles of Incorporation, the Company has authorized 100,000,000
shares of Blank Preferred Stock. None of such shares has been issued. The
Articles provide that the Board of Directors may from time to time issue such
shares in such series or classes with such terms, preferences and other
provisions as the Board shall determine, provided that such issuance is approved
by a majority of the holders of the Preferred Stock then issued, outstanding and
entitled to vote.
LIMITATION OF PERSONAL LIABILITY OF DIRECTORS
As permitted by the GBCC, the Company's Articles of Incorporation contain
provisions that eliminate the personal liability of Directors for monetary
damages to the Company or its shareholders for breach of their fiduciary duties
as directors, except to the extent such elimination of liability is prohibited
by the GBCC. In accordance with the GBCC, these provisions do not limit the
liability of any Director (i) for any appropriation of a business opportunity of
the Company in violation of the Director's duty; (ii) for acts or omissions
which involve intentional misconduct or a knowing violation of law; (iii) for
any dividend payment, stock repurchase, stock redemption or distribution in
liquidation that is prohibited under Georgia law; or (iv) for any transaction
from which the Director derived an improper personal benefit. These provisions
do not limit or eliminate the rights of the Company or any shareholder to seek
an injunction or any other non-monetary relief in the event of a breach of a
Director's fiduciary duty.
The Company's Articles of Incorporation also provide for indemnification of
Directors against expenses and liability (including amounts paid in settlement)
arising out of third-party proceedings as well as proceedings brought by or in
the right of the Company, provided only that the liability has not been incurred
in a proceeding in which the Director is adjudged liable to the Company, or is
subjected to injunctive relief in favor of the Company, (i) for any
appropriation, in violation of the Director's duties, of any business
opportunity of the Company; (ii) for acts or omissions which involve intentional
misconduct or a knowing violation of law; (iii) for the types of liability
involving unlawful distributions to shareholders of the Company; or (iv) for any
transaction in which the Director received an improper personal benefit.
The purpose of these provisions is to assist the Company in retaining
qualified individuals to serve as Directors by limiting their exposure to
personal liability for serving as such. The Company has applied for directors
and officers liability insurance and expects to maintain coverages which are
usual for companies of similar size and in similar circumstances in its
industry.
LEGAL MATTERS
Certain legal matters in connection with the shares of Class A Stock
offered hereby will be passed upon for the Company by Long, Aldridge & Norman,
LLP, Atlanta, Georgia.
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EXPERTS
The consolidated financial statements of Blue Cross and Blue Shield of
Georgia, Inc. as of December 31, 1994 and 1995, and for each of the three years
in the period ended December 31, 1995 and the balance sheet of Cerulean
Companies, Inc. as of February 2, 1996, appearing in this Prospectus and
Registration Statement have been audited by Ernst & Young LLP, independent
auditors, as set forth in their reports thereon appearing elsewhere herein and
in the Registration Statement, and are included in reliance upon such reports
given upon the authority of such firm as experts in accounting and auditing.
ADDITIONAL INFORMATION
This Prospectus constitutes a part of a Registration Statement on Form S-1
(the "Registration Statement") filed by the Company with the Securities and
Exchange Commission (the "Commission") under the Securities Act with respect to
the Class A Stock offered hereby. As permitted by the rules and regulations of
the Commission, this Prospectus does not contain all the information set forth
in the Registration Statement and the exhibits and schedules thereto. The
Registration Statement and the exhibits and schedules thereto can be inspected
and copied at the public reference facilities and regional offices of the
Commission referred to below.
As a result of the offering of the Class A Stock, the Company will become
subject to the informational requirements of the Securities Exchange Act of
1934, as amended, and in accordance therewith will file periodic reports and
other information with the Commission. The Registration Statement and such
reports and other information filed by the Company with the Commission may be
inspected at the public reference facilities maintained by the Commission at 450
Fifth Street, N.W., Room 1024, Washington, D.C. 20549, and at the regional
offices of the Commission located at 7 World Trade Center, 13th Floor, New York,
New York 10048, and Northwest Atrium Center, 500 West Madison Street, Suite
1400, Chicago Illinois 60621. Copies of such materials can also be obtained from
the Public Reference Section of the Commission at Judiciary Plaza, 450 Fifth
Street, N.W., Washington, D.C. 20549 at prescribed rates.
The Company intends to furnish its shareholders with annual reports
containing audited financial statements and notes thereto, together with an
opinion thereon expressed by an independent accounting firm.
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INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
The Company was organized on February 2, 1996 for the purpose of acting as
a holding company for Georgia Blue and its subsidiaries and to engage in certain
other health care related activities and therefore has no results of operations
prior to that time. As a result, the Consolidated Financial Statements contained
herein are the Consolidated Financial Statements of Georgia Blue. See "SELECTED
CONSOLIDATED FINANCIAL AND OPERATING DATA -- Selected Pro Forma Financial
Information of the Company."
<TABLE>
<CAPTION>
PAGE
NUMBER
------
<S> <C>
BLUE CROSS AND BLUE SHIELD OF GEORGIA, INC.
Report of Independent Auditors.................................................... F-2
Consolidated Balance Sheets as of December 31, 1994 and 1995...................... F-3
Consolidated Statements of Income for the years ended December 31, 1993, 1994 and
1995........................................................................... F-4
Consolidated Statements of Cash Flows for the years ended December 31, 1993, 1994
and 1995....................................................................... F-5
Notes to Consolidated Financial Statements........................................ F-6
CERULEAN COMPANIES, INC.
Report of Independent Auditors.................................................... F-20
Balance Sheet as of February 2, 1996.............................................. F-21
Notes to Balance Sheet............................................................ F-22
</TABLE>
F-1
<PAGE> 68
REPORT OF INDEPENDENT AUDITORS
Board of Directors
Blue Cross and Blue Shield of Georgia, Inc.
We have audited the accompanying consolidated balance sheets of Blue Cross and
Blue Shield of Georgia, Inc. and subsidiaries as of December 31, 1994 and 1995,
and the related consolidated statements of income, surplus and cash flows for
each of the three years in the period ended December 31, 1995. 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 in accordance with generally accepted auditing
standards. Those standards 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. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Blue Cross and
Blue Shield of Georgia, Inc. and subsidiaries at December 31, 1994 and 1995, and
the consolidated results of their operations and their cash flows for each of
the three years in the period ended December 31, 1995, in conformity with
generally accepted accounting principles.
As discussed in Notes 7, 2, and 11 to the financial statements, in 1993, 1994
and 1995 the Company changed its method of accounting for income taxes,
investments in debt and equity securities and post retirement benefits other
than pensions, respectively.
ERNST & YOUNG LLP
Atlanta, Georgia
February 7, 1996
F-2
<PAGE> 69
BLUE CROSS AND BLUE SHIELD OF GEORGIA, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31
---------------------------
1994 1995
------------ ------------
<S> <C> <C>
ASSETS
Investments (Note 3):
Fixed maturities:
Available-for-sale, at fair value (amortized cost:
$119,942,417; $126,115,087) $114,947,239 $131,055,098
Held-to-maturity, at amortized cost (fair value: $13,361,809;
$-0-) 13,366,533 -
Equity securities, at fair value (cost: $42,309,265;
$39,657,474) 46,642,536 42,729,087
Short-term investments, at fair value (cost: $1,535,000;
$932,958) 1,535,000 905,383
------------ ------------
Total investments 176,491,308 174,689,568
Cash and cash equivalents 25,484,560 49,304,688
Reimbursable portion of estimated benefit liabilities 99,261,300 102,132,300
Accounts receivable (Note 4) 30,213,582 36,063,899
FEP assets held by agent 30,709,084 12,137,107
Property and equipment (Note 5) 32,386,518 33,952,436
Other assets 12,477,090 8,798,587
------------ ------------
Total assets $407,023,442 $417,078,585
=========== ===========
LIABILITIES AND SURPLUS
Liabilities:
Estimated benefit liabilities (Note 8) $167,895,476 $175,846,250
Unearned premiums 5,039,667 7,289,126
FEP stabilization reserve 30,709,084 12,137,107
Accounts payable and accrued expenses 20,416,622 16,635,534
Payables to other plans 3,875,957 2,442,748
Other liabilities 28,416,273 27,688,394
Note payable (Note 6) 2,000,000 2,000,000
------------ ------------
Total liabilities 258,353,079 244,039,159
Surplus 148,670,363 173,039,426
------------ ------------
Total liabilities and surplus $407,023,442 $417,078,585
=========== ===========
</TABLE>
See accompanying notes.
F-3
<PAGE> 70
BLUE CROSS AND BLUE SHIELD OF GEORGIA, INC.
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
----------------------------------------------
1993 1994 1995
------------ -------------- --------------
<S> <C> <C> <C>
Revenues (Note 2):
Premiums $939,670,647 $1,038,397,310 $1,159,475,955
Investment and other income 8,524,434 9,462,343 11,980,241
Realized gains 4,657,562 2,512,078 15,265,396
------------ -------------- --------------
Total revenues 952,852,643 1,050,371,731 1,186,721,592
Benefits expense (Note 8) 832,907,684 914,277,412 1,039,095,566
Operating expenses, net of expense reimbursements
of $46,930,981 in 1993, $55,028,004 in 1994, and
$68,986,042 in 1995 (Note 9) 89,283,634 111,012,554 126,076,519
------------ -------------- --------------
Operating income 30,661,325 25,081,765 21,549,507
Loss on building repurchase (Note 13) (7,566,171) - -
------------ -------------- --------------
Income before income taxes, minority interest and
cumulative effect of a change in accounting
principle 23,095,154 25,081,765 21,549,507
Income taxes (Note 7) 4,796,000 5,621,000 3,857,000
Minority interest - - (282,061)
------------ -------------- --------------
Income before cumulative effect of a change in
accounting principle 18,299,254 19,460,765 17,410,446
Cumulative effect on prior years (to January 1,
1993) of changing to a different method of
accounting for income taxes (Note 7) 5,449,000 - -
------------ -------------- --------------
Net income $ 23,748,154 $ 19,460,765 $ 17,410,446
=========== ============= =============
</TABLE>
CONSOLIDATED STATEMENTS OF SURPLUS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
------------------------------------------
1993 1994 1995
------------ ------------ ------------
<S> <C> <C> <C>
Surplus at beginning of year $105,990,686 $129,738,840 $148,670,363
Net income 23,748,154 19,460,765 17,410,446
Unrealized appreciation (depreciation) of
available-for-sale securities, net of income tax
benefit of $132,665 in 1994 and income taxes of
$1,692,063 in 1995 -- (529,242) 6,958,617
------------ ------------ ------------
Surplus at end of year $129,738,840 $148,670,363 $173,039,426
=========== =========== ===========
</TABLE>
See accompanying notes.
F-4
<PAGE> 71
BLUE CROSS AND BLUE SHIELD OF GEORGIA, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
---------------------------------------------
1993 1994 1995
------------- ------------- -------------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income $ 23,748,154 $ 19,460,765 $ 17,410,446
Adjustments to reconcile net income to net cash
provided by operating activities:
Items that did not use cash:
Depreciation 4,666,807 6,207,710 8,451,468
Building write-down 700,000 - -
Amortization 602,713 652,741 424,299
Provision for uncollectible receivables 263,524 282,268 659,361
Gain on sale of investments (4,657,562) (2,512,078) (15,265,396)
Loss (gain) on sale of property and equipment (81,516) 404,265 33,183
Decrease (increase) in certain assets:
Accounts receivable 2,389,287 (6,770,727) (9,380,679)
Other assets (2,156,754) (5,802,463) 1,991,162
Increase (decrease) in certain liabilities:
Estimated benefit liabilities (7,410,225) 14,015,702 7,950,774
Unearned premiums (1,232,666) (1,182,457) 2,249,459
Accounts payable and accrued expenses 4,996,311 981,118 (3,781,088)
Payables to other plans (907,936) (643,822) (1,433,209)
Other liabilities 8,201,385 10,287,409 (727,878)
------------- ------------- -------------
Net cash provided by operating activities 29,121,522 35,380,431 8,581,902
INVESTING ACTIVITIES
Investments purchased (137,382,293) - -
Investments sold or matured 109,188,401 - -
Investments available-for-sale:
Investments purchased - (106,836,313) (197,281,258)
Investments sold or matured 97,473,024 210,596,136
Investments held-to-maturity:
Investments purchased - (17,020,558) (149,844)
Investments matured - 6,691,372 12,123,761
Proceeds from sale of building - 4,200,000 -
Property and equipment purchased (9,427,267) (14,794,935) (10,068,720)
Property and equipment sold 890,047 542,460 18,151
------------- ------------- -------------
Net cash provided by (used in) investing
activities (36,731,112) (29,744,950) 15,238,226
FINANCING ACTIVITIES
Proceeds from note payable - 2,000,000 -
------------- ------------- -------------
Net cash provided by financing activities - 2,000,000 -
------------- ------------- -------------
Net increase (decrease) in cash and cash
equivalents (7,609,590) 7,635,481 23,820,128
Cash and cash equivalents at beginning of year 25,458,669 17,849,079 25,484,560
============ ============ ============
Cash and cash equivalents at end of year $ 17,849,079 $ 25,484,560 $ 49,304,688
============ ============ ============
</TABLE>
See accompanying notes.
F-5
<PAGE> 72
BLUE CROSS AND BLUE SHIELD OF GEORGIA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1995
1. ORGANIZATION
At December 31, 1995, Blue Cross and Blue Shield of Georgia, Inc. (the
"Company") operated as a not-for-profit corporation under Georgia law. House
Bill 699 passed during the 1995 session of the Georgia General Assembly
permitted the Company to pursue a change to for-profit status subject to a plan
of conversion approved by the Georgia Commissioner of Insurance. On February 2,
1996, the Company converted from a not-for-profit corporation to a for-profit
corporation and became a wholly owned subsidiary of Cerulean Companies, Inc.
("Cerulean") pursuant to a Plan of Conversion approved by the Georgia
Commissioner of Insurance on December 27, 1995. Cerulean is a newly formed
Georgia corporation organized for the purpose of acting as the holding company
for the Company. In connection with the conversion, Cerulean issued 49,900
shares of Class B Convertible Preferred Stock ("Preferred Stock") to raise $49.9
million in capital. In addition, pursuant to the plan of conversion, Cerulean
will distribute Class A Convertible Common Stock ("Class A Stock") to more than
160,000 estimated subscribers of the Company as of September 1, 1995, the record
date, who remain subscribers at the time of the issuance of Class A Stock. The
distribution of the shares of Class A Stock will follow an effective
registration of those securities with the Securities and Exchange Commission.
The net proceeds to Cerulean from the sale of the Preferred Stock totaled
approximately $46.1 million after deducting estimated offering expenses.
Cerulean currently intends to use the proceeds for general corporate purposes,
which may include strategic information systems development, medical access
point development, medical service organization and other strategic
acquisitions.
The Company and its subsidiaries operate principally in the health and life
insurance business and offer a comprehensive array of insurance products,
including managed care products and services offered through a health
maintenance organization ("HMO"), preferred provider organization ("PPO"), and a
point of service network plan ("POS"), traditional comprehensive indemnity
health coverage to employer groups and individuals, administrative services and
cost containment programs for self-funded employers and group life insurance
products.
2. SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
The accompanying consolidated financial statements of the Company and its
majority-owned subsidiaries have been prepared in conformity with generally
accepted accounting principles ("GAAP") and require the use of management's
estimates. As to the Company's managed care, health and life insurance
operations, GAAP varies in some respects from statutory accounting practices
permitted or prescribed by insurance regulatory authorities. The Company, its
health maintenance organization and its life insurance subsidiary are subject to
regulation by the Georgia Insurance Department including minimum capital and
surplus requirements and restrictions on payment of dividends.
PRINCIPLES OF CONSOLIDATION
The accompanying consolidated financial statements include the accounts of the
Company and its wholly-owned health maintenance and life insurance subsidiaries,
a non-insurance subsidiary and community health partnership network joint
ventures ("CHPNs") in which the Company has a majority interest. All significant
intercompany transactions and balances have been eliminated in consolidation.
INVESTMENTS
In 1993, the Financial Accounting Standards Board ("FASB") issued Statement 115,
Accounting for Certain Investments in Debt and Equity Securities. Statement 115
requires that fixed maturity securities are to be classified as either
"held-to-maturity", "available-for-sale", or "trading". The Company adopted
State-
F-6
<PAGE> 73
BLUE CROSS AND BLUE SHIELD OF GEORGIA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
ment 115 as of January 1, 1994, with no effect on net income and a $7,589,000
increase in surplus (net of deferred taxes of $1,897,000).
Management determines the appropriate classification of its fixed maturity
securities at the time of purchase and reevaluates such designation as of each
balance sheet date. Fixed maturity securities are classified as held-to-maturity
when the Company has the positive intent and ability to hold them to maturity.
Held-to-maturity securities are stated at amortized cost, adjusted for
amortization of premiums and accretion of discounts to maturity. Such
amortization as well as interest earned is included in investment income.
Fixed maturity and equity securities not classified as held-to-maturity are
classified as available-for-sale. Available-for-sale securities are carried at
fair value, with the unrealized gains and losses, net of tax, reported in a
separate component of surplus. The amortized cost of debt securities in this
category is adjusted for amortization of premiums and accretion of discounts to
maturity. Such amortization and interest earned is included in investment
income. The cost of securities sold is based on the specific identification
method. At December 31, 1995, the Company classified all of its fixed maturity
and equity securities as available-for-sale. The Company's investment portfolio
is not significantly concentrated in any particular industry or geographic
region.
CASH AND CASH EQUIVALENTS
Cash equivalents are liquid, short-term investments with maturities of three
months or less at the time of purchase and are combined with cash account
balances. These investments are stated at cost, which approximates fair value.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost less accumulated depreciation.
Depreciation is computed using the straight-line method over the estimated
useful lives of the respective assets, which are 40 years for building and
building improvements, 7 years for furniture and equipment and 5 years for
autos.
ESTIMATED BENEFIT LIABILITIES
The Company provides for claims reported but unpaid and for claims incurred but
unreported and the cost of adjudicating claims based primarily on past
experience, membership demographics, claims run-off patterns and other current
medical trend information, using accepted actuarial methods. Estimates are
adjusted as changes in these factors occur and such adjustments are reported in
the year of determination. Portions of the Company's estimated benefit
liabilities are reimbursable due to the nature of certain self-funded and rate
stabilization reserve programs. Offsetting receivables have been recorded in the
balance sheet.
PREMIUM REVENUES
Premiums are generally billed to subscribers in advance of coverage. Income is
recognized ratably over the related period of coverage. Unearned premiums, which
represents the portion of premiums that will be earned in future periods, is
reflected as a liability in the balance sheet.
Premium income (or the equivalent) and any related administrative fees from
cost-plus business, including dues from the FEP program and certain national
groups, are recognized at the time the related claims are incurred.
F-7
<PAGE> 74
BLUE CROSS AND BLUE SHIELD OF GEORGIA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
RATE STABILIZATION RESERVES
The Company has entered into agreements with certain groups whose subscription
fees are based on experience rating. On each group's anniversary date, the gain
or loss resulting from its experience is determined.
Accumulated net gains which represent the accumulated excess of subscription
income over claims incurred and retention for administrative expenses are
recorded as a rate stabilization reserve liability. Under the terms of these
agreements, groups may utilize these excess funds to reduce prospective rates,
leave the excess funds on deposit with the Company or receive a refund. The
accumulated excess of claims incurred and retention for administrative expenses
over subscription income is generally expensed by the Company. However, in a few
shared risk arrangements, net losses are recorded as receivables to the extent
they are recoverable from the respective groups.
NATIONAL ACCOUNTS
The Company participates in the underwriting of certain national (multiple-plan)
groups. Claims paid plus certain administrative expenses are reimbursed by a
control plan. The Company's share of underwriting gains or losses on these
national groups is recognized when settlements are rendered by the control plan,
which is typically between 6 and 18 months after the expiration of the contract
period.
FEDERAL EMPLOYEE PROGRAM
The Company and other Blue Cross and Blue Shield plans participate in the
Federal Employee Program (FEP) which underwrites a voluntary health insurance
contract for employees (and their dependents) of the federal government. The
Blue Cross and Blue Shield Association has been designated as the contract
agent. A premium stabilization reserve liability (FEP stabilization reserve) and
an offsetting asset (FEP assets held by agent) have been recorded in the balance
sheet, and subscription income, investment income and operating expenses,
including FEP operations center expenses, have been recorded in the statement of
income to recognize the Company's portion of the FEP's results.
RISKS AND UNCERTAINTIES
The Company primarily conducts business in the State of Georgia, and a
significant portion of its customer base is concentrated with companies that are
located in the metropolitan Atlanta area. As a percentage of premium revenues,
the Company's largest customer represented 24% of premium revenues in 1993 and
1994 and 23% in 1995; and the second largest customer represented 12% and 11% of
premium revenues in 1994 and 1995, respectively.
Results of operations are directly affected by premium rate adequacy which
depends on pricing and underwriting decisions, the level of membership serviced
by the Company's physician, hospital, pharmacy and other networks (and since
January 1995, by the Company's CHPNs), estimates of medical benefits, health
care utilization, estimates of health care cost trends, effective administration
of benefit payments, operating efficiencies, investment returns and federal and
state laws and regulations.
RECLASSIFICATIONS
Certain prior year balances have been reclassified to conform to the current
year presentation.
F-8
<PAGE> 75
BLUE CROSS AND BLUE SHIELD OF GEORGIA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
3. INVESTMENTS
Investments at December 31, 1994 and December 31, 1995 are as follows:
<TABLE>
<CAPTION>
DECEMBER 31, 1994
AVAILABLE-FOR-SALE SECURITIES
---------------------------------------------------------------------
COST OR GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR CARRYING
COST GAINS LOSSES VALUE VALUE
------------ ---------- ----------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Fixed Maturities:
U.S. Treasury securities and
obligations of U. S.
government agencies $ 99,102,329 $ 93,318 $(3,890,600) $ 95,305,047 $ 95,305,047
Foreign governments 1,007,744 - (103,544) 904,200 904,200
Corporate securities 19,832,344 49,077 (1,143,429) 18,737,992 18,737,992
------------ ---------- ----------- ------------ ------------
Total fixed maturities 119,942,417 142,395 (5,137,573) 114,947,239 114,947,239
Equity Securities:
Preferred stocks 1,000,000 - - 1,000,000 1,000,000
Common stocks 41,309,265 6,477,894 (2,144,623) 45,642,536 45,642,536
------------ ---------- ----------- ------------ ------------
Total equity securities 42,309,265 6,477,894 (2,144,623) 46,642,536 46,642,536
------------ ---------- ----------- ------------ ------------
Total available-for-sale
securities $162,251,682 $6,620,289 $(7,282,196) $161,589,775 $161,589,775
=========== ========= ========== =========== ===========
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, 1994
HELD-TO-MATURITY SECURITIES
-----------------------------------------------------------------
COST OR GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR CARRYING
COST GAINS LOSSES VALUE VALUE
----------- ---------- ---------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Fixed Maturities:
U.S. Treasury securities and
obligations of U. S. government
agencies $11,591,113 $ - $ (4,724) $11,586,389 $11,591,113
Corporate securities 1,775,420 - - 1,775,420 1,775,420
----------- ---------- ---------- ----------- -----------
Total fixed maturities 13,366,533 - (4,724) 13,361,809 13,366,533
Short-term investments 1,535,000 - - 1,535,000 1,535,000
----------- ---------- ---------- ----------- -----------
Total held-to-maturity securities $14,901,533 $ - $ (4,724) $14,896,809 $14,901,533
========== ========== ========== ========== ==========
</TABLE>
F-9
<PAGE> 76
BLUE CROSS AND BLUE SHIELD OF GEORGIA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
3. INVESTMENTS (CONTINUED)
<TABLE>
<CAPTION>
DECEMBER 31, 1995
AVAILABLE-FOR-SALE SECURITIES
------------------------------------------------------------------------
COST OR GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR CARRYING
COST GAINS LOSSES VALUE VALUE ------
------------ ---------- ---------- ------------
<S> <C> <C> <C> <C> <C>
Fixed Maturities:
U.S. Treasury securities
and obligations of U. S.
government agencies $105,204,549 $4,419,820 $ (59,147 ) $109,565,222 $109,565,222
Corporate securities 20,910,538 641,086 (61,748 ) 21,489,876 21,489,876
------------ ---------- ---------- ------------ ------------
Total fixed maturities 126,115,087 5,060,906 (120,895 ) 131,055,098 131,055,098
Equity Securities:
Preferred stocks 1,000,000 - - 1,000,000 1,000,000
Common stocks 38,657,474 3,824,858 (753,245 ) 41,729,087 41,729,087
------------ ---------- ---------- ------------ ------------
Total equity securities 39,657,474 3,824,858 (753,245 ) 42,729,087 42,729,087
Short-term investments 932,958 - (27,575 ) 905,383 905,383
------------ ---------- ---------- ------------ ------------
Total available-for-sale
securities $166,705,519 $8,885,764 $(901,715 ) $174,689,568 $174,689,568
=========== ========== ========== =========== ===========
</TABLE>
Fair values for fixed maturities and short-term investments are based on quoted
market prices, where available. For fixed maturities not actively traded, fair
values are estimated using values obtained from independent pricing services.
The fair values for common stocks are based on quoted market prices.
Substantially, all of the Company's investments in equity securities at December
31, 1994 and 1995 are comprised of stocks in industrial companies.
The amortized cost and fair values of fixed maturities at December 31, 1995, by
contractual maturity, are shown below. Expected maturities 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>
DECEMBER 31, 1995
AVAILABLE-FOR-SALE SECURITIES
-------------------------------
AMORTIZED FAIR
COST VALUE
------------ ------------
<S> <C> <C>
Due in one year or less $ 7,600,238 $ 7,716,239
Due after one year through five years 62,144,021 63,665,990
Due after five years through ten years 50,135,697 53,342,559
Due after ten years 6,235,131 6,330,310
------------ ------------
Total fixed maturity securities $126,115,087 $131,055,098
=========== ===========
</TABLE>
Bonds, certificates of deposit and money market funds carried at a value of
$710,000 and $802,000 were on deposit with insurance regulatory authorities at
December 31, 1994 and 1995, respectively, in accordance with statutory
requirements.
F-10
<PAGE> 77
BLUE CROSS AND BLUE SHIELD OF GEORGIA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
3. INVESTMENTS (CONTINUED)
Investment and other income for the years ended December 31, 1993, 1994 and 1995
is summarized as follows:
<TABLE>
<CAPTION>
1993 1994 1995
---------- ----------- -----------
<S> <C> <C> <C>
Fixed maturities $6,567,460 $ 7,253,006 $ 8,231,507
Equity securities 1,074,195 1,118,939 1,711,034
Short-term investments and cash equivalents 1,370,029 2,203,227 1,827,176
---------- ----------- -----------
Interest and dividend income 9,011,684 10,575,172 11,769,717
Less investment expenses (855,284) (667,694) (785,327)
---------- ----------- -----------
Net investment income 8,156,400 9,907,478 10,984,390
Other income (loss) 368,034 (445,135) 995,851
---------- ----------- -----------
Investment and other income $8,524,434 $ 9,462,343 $11,980,241
========= ========== ==========
</TABLE>
The other income (loss) amount for the year ended December 31, 1995 includes the
receipt of $2 million related to the settlement of a lease dispute. Some terms
in the Company's primary lease for its headquarters building were modified to
the benefit of the landlord and the Company was paid for giving up its rights to
those terms.
Realized and unrealized investment gains and losses for the years ended December
31, 1993, 1994 and 1995 were as follows:
<TABLE>
<CAPTION>
1993 1994 1995
---------- ------------ -----------
<S> <C> <C> <C>
Realized gains:
Fixed maturities $2,586,685 $ 342,379 $ 1,487,683
Equity securities 2,610,471 3,644,722 15,406,816
---------- ------------ -----------
Total gains 5,197,156 3,987,101 16,894,499
Realized losses:
Fixed maturities (22,173) (406,314) (529,914)
Equity securities (517,421) (1,068,709) (1,099,189)
---------- ------------ -----------
Total losses (539,594) (1,475,023) (1,629,103)
---------- ------------ -----------
Net realized investment gains 4,657,562 2,512,078 15,265,396
Changes in unrealized gains (losses):
Fixed maturities 494,838 (9,065,045) 9,939,912
Equity securities 120,394 (2,045,746) (1,261,656)
Short-term investments - - (27,576)
---------- ------------ -----------
Net unrealized gains (losses) 615,232 (11,110,791) 8,650,680
---------- ------------ -----------
Total realized and unrealized gains (losses) $5,272,794 $ (8,598,713) $23,916,076
========= =========== ==========
</TABLE>
F-11
<PAGE> 78
BLUE CROSS AND BLUE SHIELD OF GEORGIA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
4. ACCOUNTS RECEIVABLE
Accounts receivable consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31
-----------------------------
1994 1995
----------- -----------
<S> <C> <C>
Groups and subscribers $17,217,949 $20,902,147
Other Blue Cross and Blue Shield plans 4,170,282 5,270,938
Federal Employee Program 1,539,271 1,541,541
Inter-Plan Bank 555,885 427,718
Other 8,595,309 10,446,030
Less: Allowance for doubtful accounts (1,865,114) (2,524,475)
----------- -----------
$30,213,582 $36,063,899
========== ==========
</TABLE>
5. PROPERTY AND EQUIPMENT
Property and equipment consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31
-------------------------------
1994 1995
------------ ------------
<S> <C> <C>
Land $ 1,131,528 $ 1,131,528
Building & improvements 11,857,657 12,824,077
Furniture & equipment 52,338,689 60,667,142
------------ ------------
65,327,874 74,622,747
Less accumulated depreciation (32,941,356) (40,670,311)
------------ ------------
$ 32,386,518 $ 33,952,436
=========== ===========
</TABLE>
Depreciation expense was $4,666,807, $6,207,710 and $8,451,468 for 1993, 1994
and 1995, respectively, including $386,670 in 1993, $418,813 in 1994 and
$746,113 in 1995 for building improvements.
6. LINES OF CREDIT
The Company has available a $5,500,000 line of credit with a bank to finance its
working capital needs. Interest accrues on amounts advanced at the prime rate.
There were no borrowings on this line of credit in 1993, 1994 or 1995.
In 1994, the Company entered into a revolving credit loan agreement with a group
of banks to finance its community health partnership networks and other related
costs. Under terms of the agreement, the Company can borrow up to $25,000,000.
Interest accrues on amounts advanced at a variable rate tied to the LIBOR rate.
Borrowings outstanding under the revolving credit loan agreement totaled
$2,000,000 at December 31, 1994 and 1995. The weighted average interest rate on
amounts outstanding for 1994 and 1995 was 6% and 6.8%, respectively.
F-12
<PAGE> 79
BLUE CROSS AND BLUE SHIELD OF GEORGIA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
7. INCOME TAXES
Effective January 1, 1993, the Company changed its method of accounting for
income taxes from the deferred method to the liability method required by FASB
Statement No. 109, Accounting for Income Taxes. Deferred income taxes reflect
the net tax effects of temporary differences between the carrying amounts of
assets and liabilities for financial reporting purposes and the amounts used for
income tax purposes. The significant components of the deferred tax asset, which
is included in other assets in the balance sheet, are as follows:
<TABLE>
<CAPTION>
DECEMBER 31
-------------------------------
1994 1995
------------ ------------
<S> <C> <C>
Deferred tax asset:
Regular tax operating loss carryforwards $ 25,017,000 $ 22,737,000
Other temporary differences 6,812,000 6,259,000
Alternative minimum tax credit 1,005,000 3,107,000
Unrealized investment losses 132,665 -
------------ ------------
Total deferred tax asset 32,966,665 32,103,000
Valuation allowance for deferred tax asset (30,573,000) (29,805,000)
------------ ------------
Deferred tax asset, net of valuation allowance
Deferred tax liability: 2,393,665 2,298,000
Unrealized investment gains - 1,692,063
------------ ------------
Total deferred tax liability - 1,692,063
=========== ===========
Net deferred tax asset $ 2,393,665 $ 605,937
=========== ===========
</TABLE>
The other temporary differences consist principally of differences between tax
and generally accepted accounting principles related to estimated benefit
liabilities and accounting accruals.
At December 31, 1995, the Company has net operating loss carryforwards of
$64,962,000 for regular income tax purposes that expire in the years 2001
through 2003. No benefit for these carryforwards has been recognized in the
financial statements. The Company pays federal income taxes under the
alternative minimum tax system because of a special deduction under the regular
tax system available to certain Blue Cross and Blue Shield plans under Section
833(b) of the Internal Revenue Code. The Company expects to be taxed under the
alternative minimum tax system into the foreseeable future and therefore the
regular tax net operating loss carryforwards and other temporary differences
will most likely not be utilized. For financial reporting purposes, a valuation
allowance has been recorded to reduce the deferred tax assets to the amount
expected to be realized.
The significant components of the provision for income taxes are as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
--------------------------------------------
1993 1994 1995
---------- ---------- ----------
<S> <C> <C> <C>
Current tax expense $1,429,000 $5,793,000 $3,895,000
Utilization of alternative minimum tax net
operating loss carryforwards 4,120,000 - -
Deferred tax benefit from other temporary
differences (753,000) (172,000) (38,000)
---------- ---------- ----------
Total tax expense $4,796,000 $5,621,000 $3,857,000
========= ========= =========
</TABLE>
F-13
<PAGE> 80
BLUE CROSS AND BLUE SHIELD OF GEORGIA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
7. INCOME TAXES (CONTINUED)
Reconciliation of the statutory federal income tax rate to the Company's
effective tax rate is as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
---------------------------------
1993 1994 1995
----- ----- -----
<S> <C> <C> <C>
Statutory federal income tax rate 35.0% 35.0% 35.0%
Increases (reductions) in tax rate resulting from:
Alternative minimum tax (15.0)% (15.0)% (15.0)%
Utilization of alternative minimum tax
net operating loss carryforwards 1.3 - -
Other (0.5)% 2.4% (2.1)%
----- ----- -----
Effective tax rate 20.8% 22.4% 17.9%
===== ===== =====
</TABLE>
The Company and its wholly-owned subsidiaries file a consolidated federal income
tax return. Income tax expense in 1993, 1994 and 1995 consisted primarily of
federal alternative minimum tax. Federal income taxes paid during 1993, 1994 and
1995 were $834,000, $4,800,000 and $3,300,000, respectively.
8. ESTIMATED BENEFIT LIABILITIES
The following table provides a reconciliation of the beginning and ending
estimated benefit liabilities including claims adjudication expenses, net of
reimbursable reserves and life reserves, for 1993, 1994 and 1995:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
--------------------------------------------------
1993 1994 1995
------------ ------------ ------------
<S> <C> <C> <C>
Balance at January 1 $161,289,999 $153,879,774 $167,895,476
Less: Reimbursable reserves and life reserves 105,357,244 98,196,291 105,931,261
------------ ------------ ------------
Net balance at January 1 55,932,755 55,683,483 61,964,215
Plus incurred related to:
Current year 273,726,010 283,484,304 340,152,289
Prior year (7,660,336) (5,027,504) 4,669,051
------------ ------------ ------------
Total incurred 266,065,674 278,456,800 344,821,340
Less paid related to:
Current year 219,728,708 219,754,710 276,661,685
Prior year 46,586,238 52,421,358 62,881,094
------------ ------------ ------------
Total paid 266,314,946 272,176,068 339,472,779
------------ ------------ ------------
Net balance at December 31 55,683,483 61,964,215 67,312,776
Plus: Reimbursable reserves and life reserves 98,196,291 105,931,261 108,533,474
------------ ------------ ------------
Balance at December 31 $153,879,774 $167,895,476 $175,846,250
=========== =========== ===========
</TABLE>
The provision for claims decreased by $7,727,975 in 1993 and $4,727,849 in 1994
because of lower-than-anticipated health care trends for both periods and
increased by $5,171,051 in 1995 due to higher than anticipated utilization and
claims costs.
F-14
<PAGE> 81
BLUE CROSS AND BLUE SHIELD OF GEORGIA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
8. ESTIMATED BENEFIT LIABILITIES (CONTINUED)
A reconciliation of the Company's incurred expense to total benefits expense as
shown in the Consolidated Statements of Income is as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
--------------------------------------------------------
1993 1994 1995
------------ ------------ --------------
<S> <C> <C> <C>
Incurred related to current and prior
year................................. $266,065,674 $278,456,800 $ 344,821,340
Benefits expense related to life
insurance claims and claims
reimbursed by employee groups........ 566,842,010 635,820,612 694,274,226
------------ ------------ --------------
Total benefits expense....... $832,907,684 $914,277,412 $1,039,095,566
=========== =========== =============
</TABLE>
9. AGENCY CONTRACTS
The Company processes and pays claims as fiscal intermediary for the Medicare
Program and as an administrative agent for the State of Georgia and the
Inter-Plan Bank. Claims from these programs, which are excluded from the
accompanying statement of income, are as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
----------------------------------------------------
1993 1994 1995
-------------- -------------- --------------
<S> <C> <C> <C>
Claims processed for:
Medicare $1,873,379,182 $2,120,785,277 $2,431,829,705
State of Georgia 624,082,406 687,321,822 757,743,385
Inter-Plan Bank 22,596,123 19,316,104 56,311,783
-------------- -------------- --------------
$2,520,057,711 $2,827,423,203 $3,245,884,873
============= ============= =============
</TABLE>
The Company receives reimbursement for administrative expenses incurred in
performing these services. These expense reimbursements have been included in
reimbursements deducted from operating expenses in the accompanying statement of
income.
The operating expense reimbursements in connection with processing Medicare
claims have been audited through 1992 by government representatives. Management
is of the opinion that no significant adjustments will be made affecting cost
reimbursement through December 31, 1995.
10. OPERATING LEASES
The Company has an operating lease arrangement for its home office facility. The
term of the lease is ten years, with two five-year renewal options. Annual
rental includes base rental plus pro-rated real estate taxes and operating
expenses.
F-15
<PAGE> 82
BLUE CROSS AND BLUE SHIELD OF GEORGIA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
10. OPERATING LEASES (CONTINUED)
In addition, the Company leases other office space and data processing
equipment. Future minimum lease obligations (including estimated real estate
taxes and operating expenses) under all noncancellable operating leases are as
follows:
<TABLE>
<S> <C>
1996 $10,263,929
1997 5,714,754
1998 5,119,007
1999 4,408,739
2000 683,022
Thereafter -
-----------
$26,189,451
-----------
-----------
</TABLE>
Rent expense amounted to approximately $9,710,000 in 1993, $9,014,000 in 1994
and $9,933,000 in 1995.
11. EMPLOYEE BENEFITS
PENSION PLAN
The Company and its subsidiaries participate in a multi-employer noncontributory
defined benefit pension plan covering substantially all of its employees. The
benefits are based on years of service and the employee's compensation during
those years. The Company's funding policy is to contribute amounts sufficient to
meet the minimum funding requirements set forth in the Employee Retirement
Income Security Act of 1974. Contributions are intended to provide not only for
benefits attributed to service to date but also for those expected to be earned
in the future. The Projected Unit Credit Method is used to determine funding
requirements and pension expense.
The following table presents the funded status and amounts recognized in the
consolidated financial statements at the respective dates:
<TABLE>
<CAPTION>
DECEMBER 31
------------------------------
1994 1995
----------- ------------
<S> <C> <C>
Actuarial present value of benefit obligations:
Accumulated benefit obligation, including vested benefits of
$22,769,577 in 1994 and $28,999,214 in 1995 $27,004,395 $ 34,768,974
========== ===========
Actuarial present value of projected benefit obligation for
service rendered to date $38,161,237 $ 53,243,916
Plan assets at fair value, primarily short-term investments,
listed stocks, corporate bonds and U.S. government securities 29,232,920 39,807,076
----------- ------------
Plan assets (less than) projected benefit obligation (8,928,317) (13,436,840)
Unrecognized net loss 7,568,876 9,885,573
Unrecognized transition asset (1,202,645) (1,068,272)
Unrecognized prior service cost (48,550) 2,960,032
----------- ------------
Accrued pension liability $(2,610,636) $ (1,659,507)
========== ===========
</TABLE>
F-16
<PAGE> 83
BLUE CROSS AND BLUE SHIELD OF GEORGIA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
11. EMPLOYEE BENEFITS (CONTINUED)
The net pension cost includes the following components:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
1993 1994 1995
----------- ----------- -----------
<S> <C> <C> <C>
Service cost-benefits earned during the
period $ 1,815,453 $ 2,026,435 $ 2,367,130
Interest cost on projected benefit
obligation 2,468,774 2,697,487 3,296,580
Actual return on Plan assets (2,947,678) (252,295) (7,348,111)
Net amortization and deferral 291,200 (2,715,148) 4,626,964
----------- ----------- -----------
Net pension cost $ 1,627,749 $ 1,756,479 $ 2,942,563
========== ========== ==========
</TABLE>
The following assumptions were used in the pension calculations:
<TABLE>
<CAPTION>
DECEMBER 31
----------------------------
1993 1994 1995
---- ----- -----
<S> <C> <C> <C>
Weighted-average discount rate 8.5 % 8.0% 8.5%
Rate of increase in future compensation 4.5 % 3.5-7% 3.5-7%
Expected long-term rate of return on assets 9 % 9% 9%
</TABLE>
DEFINED CONTRIBUTION PLAN
The Company offers a defined contribution plan ("401(k) plan") covering
substantially all employees. Under this plan, employees can contribute up to 15%
of their base compensation, subject to certain maximum limitations. The Company
matches 50% of the employees' first $500 contributed and 25% thereafter, up to a
maximum of 6% of the employees' annual compensation. The Company's matching
contributions vest 25% per year commencing at the end of the second year of
participation. Employee contributions vest immediately. The Company contributed
$568,000 to this 401(k) plan during 1993, $720,000 during 1994 and $878,000
during 1995.
POSTRETIREMENT PLAN
The Company sponsors a Defined Dollar Benefit Plan that provides postretirement
health, dental, vision and life insurance benefits to full-time associates with
at least ten years of service or part-time associates with the equivalent of ten
years full-time employment. These benefits are also available to spouses.
Credits based on length of service are provided to retirees annually to be used
towards the cost of postretirement benefits. Spouses of retirees receive one
half of the credits received by retirees. For those who retired prior to January
1, 1995, insurance is provided by the Company at no cost to the retiree.
Additionally, a group of associates who meet the "rule of 80" (those who were at
least age 55 with ten years of service, and whose combined years of service plus
age equaled 80 or greater) by December 31, 1994, are grandfathered and will
receive postretirement benefits at no cost whenever they retire.
Effective January 1, 1995, the Company changed its method of accounting for such
benefits from a pay-as-you-go method to a full accrual method and adopted FASB
Statement of Financial Accounting Standards No. 106, Employers' Accounting for
Postretirement Benefits Other Than Pensions ("FASB Statement No. 106"). This
Statement requires that the projected future cost of providing postretirement
benefits, such as health care and life insurance, be recognized as an expense as
employees render service instead of when the benefits are paid. The
implementation required the recognition of a transition obligation (as defined
in the Statement) representing the unfunded obligation attributable to prior
employee service. The Company has elected to amortize the transition obligation
over a period of 20 years. The effect of the change for 1995 was to increase net
periodic postretirement benefit cost by $1,986,664 and decrease net income by
$1,589,331.
F-17
<PAGE> 84
BLUE CROSS AND BLUE SHIELD OF GEORGIA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
11. EMPLOYEE BENEFITS (CONTINUED)
Postretirement benefit costs for 1993 and 1994, which were recorded on a
pay-as-you-go basis, have not been restated. The cost of providing
postretirement benefits to retirees in 1993 and 1994 was not separable from the
cost of providing these benefits to the Company's active employees.
The following table presents the plan's funded status reconciled with amounts
recognized in the Company's balance sheet:
<TABLE>
<CAPTION>
JANUARY 1, 1995 DECEMBER 31, 1995
--------------- -----------------
<S> <C> <C>
Accumulated postretirement benefit obligation:
Retirees $ (10,556,100) $ (10,656,900)
Fully eligible active plan participants (111,200) (117,100)
Other active plan participants (5,433,600) (6,511,300)
--------------- -----------------
(16,100,900) (17,285,300)
Fair value of plan assets - -
--------------- -----------------
Accumulated postretirement benefit obligation in
excess of plan assets (16,100,900) (17,285,300)
Unrecognized transition obligation 16,100,900 15,295,800
Unrecognized gain (loss) - 2,836
--------------- -----------------
Accrued postretirement benefit cost $ - $ (1,986,664)
============== =================
</TABLE>
The net periodic postretirement benefit cost includes the following components:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
1995
-----------------------
<S> <C>
Service cost $ 405,900
Interest cost 1,284,600
Amortization of transition obligation over 20 years 805,100
-----------------------
Net periodic postretirement benefit cost $ 2,495,600
-----------------------
-----------------------
</TABLE>
The valuation is based on census information as of January 1, 1995 and claims
development based on the benefits provided. The discount rate assumed is 7.75%,
the salary increase rate assumed is 5.0% and the health care cost trend rate is
assumed to be 9.5% in 1995, decreasing .5% each year to an ultimate rate of
6.0%. The health care cost trend rate assumption has a significant effect on the
amounts reported. For example, increasing the assumed health care cost trend
rates by one percentage point each year would increase the accumulated
postretirement benefit obligation as of December 31, 1995 by $1,348,300 and the
aggregate of the estimated service and interest cost components of net periodic
postretirement benefit cost for 1995 by $113,700.
12. COMMITMENTS AND CONTINGENCIES
In the normal course of business, the Company is involved in and subject to
claims, contractual disputes and other uncertainties. Management, after
reviewing with legal counsel all actions and proceedings, believes that the
aggregate losses, if any, will not have a material effect on the Company's
financial position or results of operations.
13. LOSS ON BUILDING REPURCHASE
In 1993, the Company incurred a loss of $7,566,171 related to the repurchase of
the Company's former home office property. In a prior year, when the Company
relocated its home office, it guaranteed repayment of a loan
F-18
<PAGE> 85
BLUE CROSS AND BLUE SHIELD OF GEORGIA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
13. LOSS ON BUILDING REPURCHASE (CONTINUED)
to a financial institution by a third party. During 1993, the third party failed
to make required payments and the Company, as guarantor, satisfied the loan
obligation to the financial institution in the amount of $6,841,000 including
accrued interest. In addition, the Company regained title to the former home
office property in foreclosure proceedings and recorded the building at its fair
value. In 1994, the building was sold for $4,200,000.
14. STATUTORY FINANCIAL INFORMATION AND ACCOUNTING PRACTICES
The Company and its two insurance subsidiaries, HMO Georgia, Inc. and Greater
Georgia Life Insurance Company, are domiciled in the state of Georgia and
prepare their statutory financial statements in accordance with accounting
principles and practices prescribed by the Georgia Insurance Department.
Prescribed statutory accounting practices include state laws, regulations and
general administrative rules, as well as a variety of publications of the
National Association of Insurance Commissioners ("NAIC"). Permitted statutory
accounting practices encompass all accounting practices that are not prescribed;
such practices may differ from state to state, may differ from company to
company within a state and may change in the future. The NAIC currently is in
the process of recodifying statutory accounting practices, the result of which
is expected to constitute the only source of prescribed statutory accounting
practices. Accordingly, when that project is completed, it will likely change,
to some extent, prescribed statutory accounting practices and may result in
changes to the accounting practices that the Company and its insurance
subsidiaries use to prepare their statutory financial statements. The Company
and its insurance subsidiaries do not have permitted practices which would
require authorization by the Georgia Insurance Department.
The following table presents the amount of statutory capital and surplus for the
Company and its insurance subsidiaries.
<TABLE>
<CAPTION>
DECEMBER 31
-------------------------------
1994 1995
------------ ------------
<S> <C> <C>
Blue Cross and Blue Shield of Georgia, Inc. $126,139,088 $140,902,860
HMO Georgia, Inc. 4,416,456 10,452,691
Greater Georgia Life Insurance Company 15,413,874 17,682,483
</TABLE>
The following table presents the amount of statutory net income (loss) for the
Company and its insurance subsidiaries.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
----------------------------------------------
1993 1994 1995
----------- ----------- ----------
<S> <C> <C> <C>
Blue Cross and Blue Shield of Georgia, Inc. $20,085,154 $19,736,121 $9,533,254
HMO Georgia, Inc. (203,035) 1,668,520 6,174,947
Greater Georgia Life Insurance Company 1,533,075 1,341,264 1,865,264
</TABLE>
The minimum amount of statutory capital and surplus necessary to satisfy
regulatory requirements of the Georgia Insurance Department is $1,000,000 for
the Company and $3,000,000 each for HMO Georgia, Inc. and Greater Georgia Life
Insurance Company. The Company and its insurance subsidiaries may distribute
dividends only out of realized profits (undistributed, accumulated, net earnings
since organization) or upon special approval by the State of Georgia Insurance
Commissioner.
F-19
<PAGE> 86
REPORT OF INDEPENDENT AUDITORS
Board of Directors
Cerulean Companies, Inc.
We have audited the accompanying balance sheet of Cerulean Companies, Inc. as of
February 2, 1996. This balance sheet is the responsibility of the Company's
management. Our responsibility is to express an opinion on this balance sheet
based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the balance sheet is free of material misstatement. An
audit includes examining, on a test basis, evidence supporting the amounts and
disclosures in the balance sheet. An audit also includes assessing the
accounting principles used and significant estimates made by management, as well
as evaluating the overall balance sheet presentation. We believe that our audit
provides a reasonable basis for our opinion.
In our opinion, the balance sheet referred to above presents fairly, in all
material respects, the financial position of Cerulean Companies, Inc. at
February 2, 1996 in conformity with generally accepted accounting principles.
ERNST & YOUNG LLP
Atlanta, Georgia
May 6, 1996
F-20
<PAGE> 87
CERULEAN COMPANIES, INC.
BALANCE SHEET
<TABLE>
<CAPTION>
FEBRUARY 2, 1996
----------------
<S> <C>
ASSETS
Cash in bank $1,000
-----------
Total assets $1,000
-----------
-----------
LIABILITIES AND SHAREHOLDER'S EQUITY
Mandatorily Redeemable Preferred Stock
Class B Convertible Preferred Stock, no par value; liquidation
preference, $1,000 per share; mandatory redemption, $900 per share.
Authorized 49,901 shares, issued and outstanding, 1 share. $1,000
Shareholder's Equity
Class A Convertible Common Stock, no par value, $.01 stated value.
Authorized 50,000,000 shares; none issued and outstanding -
-----------
Total liabilities and shareholder's equity $1,000
-----------
-----------
</TABLE>
See accompanying notes.
F-21
<PAGE> 88
CERULEAN COMPANIES, INC.
NOTES TO FINANCIAL STATEMENTS
AS OF FEBRUARY 2, 1996
1. SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION AND BASIS OF PRESENTATION
Cerulean Companies, Inc. ("Cerulean") was incorporated on February 2, 1996 by
Blue Cross and Blue Shield of Georgia, Inc. ("Georgia Blue") as part of a plan
of conversion approved by the Georgia Commissioner of Insurance for Georgia Blue
to convert from a not-for-profit corporation to a for-profit corporation. The
sole purpose of Cerulean is to act as the holding company for Georgia Blue and
its subsidiaries. As a result, Cerulean has not conducted any business
activities to date. Subsequent to incorporation, Georgia Blue became a
wholly-owned subsidiary of Cerulean.
As part of the conversion plan and subsequent to its incorporation, Cerulean
raised $49.9 million in capital through the issuance of 49,900 shares of Class B
Convertible Preferred Stock ("Preferred Stock"). Also as part of the conversion
plan and subsequent to its incorporation, Cerulean issued 800,000 shares of
Class A Convertible Common Stock ("Class A Stock") in escrow for distribution
upon an effective registration of those shares with the Securities and Exchange
Commission to subscribers of Georgia Blue as of September 1, 1995 who remain
subscribers at the time of distribution of Class A Stock.
MANDATORILY REDEEMABLE PREFERRED STOCK
There were 49,901 authorized shares of Preferred Stock, of which one share has
been issued as of incorporation. The Preferred Stock has a liquidation
preference of $1,000 per share and a mandatory redemption value of $900 per
share. On February 5, 1996 and subsequent to conversion, Cerulean received $49.9
million in proceeds related to the issuance of 49,900 shares of Preferred Stock.
The net proceeds to Cerulean from the sale of Preferred Stock totaled
approximately $46.1 million after deducting estimated offering costs.
SHAREHOLDER'S EQUITY
There are 50,000,000 shares of Class A Convertible Common Stock authorized. None
were issued at incorporation. Subsequent to incorporation, but as part of the
conversion plan, Cerulean issued 800,000 shares of Class A Stock in escrow for
distribution upon an effective registration of those share with the Securities
and Exchange Commission to subscribers of Georgia Blue as of September 1, 1995
who remain subscribers at the time of the distribution of Class A Stock.
F-22
<PAGE> 89
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATION NOT CONTAINED IN THIS PROSPECTUS AND, IF GIVEN OR MADE, SUCH
INFORMATION OR REPRESENTATION MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED
BY THE COMPANY. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A
SOLICITATION OF AN OFFER TO BUY ANY OF THE SECURITIES OFFERED HEREBY IN ANY
JURISDICTION TO ANY PERSONS TO WHOM IT IS UNLAWFUL TO MAKE SUCH OFFER IN SUCH
JURISDICTION. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY OFFER MADE
HEREUNDER SHALL UNDER ANY CIRCUMSTANCES CREATE AN IMPLICATION THAT THE
INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO THE DATE
HEREOF OR THAT THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF THE COMPANY SINCE SUCH
DATE.
---------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary.................... 1
Risk Factors.......................... 9
The Conversion........................ 15
Dividends............................. 16
Capitalization........................ 18
Selected Consolidated Financial and
Operating Data...................... 19
Management's Discussion and Analysis
of Financial Condition and Results
of Operations....................... 22
Business.............................. 28
Management............................ 40
Stock Ownership....................... 49
Certain Federal Income Tax
Consequences........................ 49
Description of Capital Stock.......... 51
Legal Matters......................... 61
Experts............................... 62
Additional Information................ 62
Index to Consolidated Financial
Statements.......................... F-1
Index to Financial Statement
Schedules...........................
Index of Exhibits.....................
</TABLE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
800,000 SHARES
CERULEAN COMPANIES, INC.
CLASS A CONVERTIBLE COMMON STOCK
-------------------------
PROSPECTUS
-------------------------
, 1996
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE> 90
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
Estimated expenses of the offering are:
<TABLE>
<S> <C> <C>
Securities and Exchange Commission registration fee............ $ 15,845
Blue sky fees and expenses..................................... 20,000
Printing and engraving expenses................................ 200,000
Legal fees and expenses........................................ 150,000
Accounting fees and expenses................................... 60,000
Miscellaneous expenses......................................... 495,000
Postage................................................... 480,000
Other..................................................... 15,000
--------
Total................................................ $940,845
========
</TABLE>
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Section 14-2-202(b)(4) of the Georgia Business Corporation Code (the
"Code") enables a corporation in its articles of incorporation to eliminate or
limit the personal liability of a director to the corporation or its
stockholders for monetary damages for breach of duty of care or other duty as a
director. This section also provides, however, that no such provision may
eliminate or limit the liability of a director (i) for any appropriation, in
violation of his duties, of any business opportunity of the corporation, (ii)
for acts or omissions involving intentional misconduct or a knowing violation of
law, (iii) for certain other types of liability involving unlawful distributions
to stockholders and (iv) for transactions from which the director received an
improper personal benefit. Article XI of the Company's Articles of Incorporation
contains a provision eliminating or limiting the personal liability of a
director of the Company to the full extent authorized by Section 14-2-202(b).
Consequently, the stockholders' potential recourse for monetary damages against
the Company's directors is limited to situations in which one of the four
exceptions noted above is applicable.
In addition, Section 14-2-856 of the Code provides for indemnification of
directors of a corporation for liability and expenses incurred by them in
connection with any threatened, pending or completed action, suit or proceeding,
whether civil, criminal, administrative or investigative and whether formal or
informal (including civil actions brought as derivative actions by or in the
right of a corporation), in which they may become involved by reason of being a
director of a corporation. This section permits a corporation to indemnify or
obligate itself to indemnify a director made a party to any such proceeding,
provided that a corporation may not indemnify a director for any liability
incurred in a proceeding in which the director is adjudged liable to the
corporation or is subjected to injunctive relief in favor of the corporation (i)
for any appropriation, in violation of his duties, of any business opportunity
of the corporation; (ii) for acts or omissions which involve intentional
misconduct or a knowing violation of law; (iii) for certain types of liability
involving unlawful distributions to stockholders; or (iv) for any transaction
from which he received an improper personal benefit.
Section 14-2-856 also permits a corporation to advance or reimburse
expenses in advance of final disposition of a proceeding if the director
furnishes the corporation a written affirmation of his good faith belief that
his conduct does not constitute behavior of the kind described above, and the
director furnishes the corporation a written undertaking, executed personally or
on his behalf, to repay any advances if it is ultimately determined that he is
not entitled to indemnification. This section also provides such indemnification
for persons who, at the request of the corporation, act as directors or officers
of other companies in which the corporation is a stockholder or creditor or is
otherwise interested.
II-1
<PAGE> 91
Section 14-2-857 provides that a corporation may indemnify or advance
expenses to an officer of the corporation who is not a director, to the extent
consistent with public policy, as provided in the corporation's articles of
incorporation, bylaws or by specific action of the board of directors.
Article VIII of the Company's Bylaws provides that the Company shall
indemnify its directors and officers, among certain other persons, to the
fullest extent permitted under applicable law.
Blue Cross and Blue Shield of Georgia, Inc. has primary director and
officer liability coverage with Glen Falls Insurance Company in the amount of
$10,000,000 and excess layer director and officer liability coverage with Great
American Insurance Company in the amount of $10,000,000. The total amount of
director and officer liability is $20,000,000 and the policies expire on
September 1, 1996.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES.
On February 2, 1996, the Company issued and sold an aggregate of 49,901
shares of Class B Convertible Preferred Stock (the "Preferred Stock") to 18
persons (including one share issued to Georgia Blue), each of whom is an
"accredited investor" as defined in Rule 501(a) of Regulation D of the rules and
regulations of the Securities and Exchange Commission. The Robinson-Humphrey
Company, Inc. acted as Placement Agent in connection with the sale of certain of
the shares of the Preferred Stock. The aggregate offering price of the shares of
Preferred Stock to the investors was $49,900,000. The Company paid an aggregate
of $16,539 in Placement Agent fees. The shares of Preferred Stock were sold
pursuant to the exemption from registration provided by Section 4(2) of the
Securities Act of 1933, as amended, and Regulation D (Rule 506) promulgated by
the Securities and Exchange Commission thereunder.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) EXHIBITS. The following exhibits are filed as part of this
Registration Statement:
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------ ----------------------------------------------------------------------------------
<C> <C> <S>
*2.1 -- Blue Cross and Blue Shield of Georgia, Inc. Plan of Conversion, filed with the
Insurance Department of the State of Georgia, October 30, 1995.
*2.2 -- Form A Statement regarding the Acquisition of Control of or Merger with a Domestic
Insurer filed with respect to Blue Cross and Blue Shield of Georgia by Cerulean on
October 30, 1995, as amended and supplemented.
*2.3 -- Conversion Order dated December 27, 1995 from Georgia Insurance Commissioner.
*3.1 -- Articles of Incorporation of Cerulean Companies, Inc.
*3.2 -- Bylaws of Cerulean Companies, Inc.
*4.1 -- Stock Escrow Agreement among Cerulean Companies, Inc., Blue Cross and Blue Shield
of Georgia, Inc. and SunTrust Bank, Atlanta.
*4.2 -- Specimen Form of Class A Convertible Common Stock (uncertificated stock).
*5 -- Opinion of Long, Aldridge & Norman, LLP.
*10.1 -- Administrative Services Agreement between the State Personnel Board and Blue Cross
and Blue Shield of Georgia, Inc., dated July 1, 1994.
*10.2 -- $25,000,000 Revolving Loan Facility Among Blue Cross and Blue Shield of Georgia,
Inc., as Borrower, Wachovia Bank of Georgia, N.A., Bank South, N.A., Trust Company
Bank, as Banks and Wachovia Bank of Georgia, N.A., as Agent, dated March 21, 1994,
as amended.
*10.3 -- Plaza Lease Capital Plaza Associate ("Landlord") and Blue Cross and Blue Shield of
Georgia, Inc. ("Tenant") dated December 23, 1986.
*10.4 -- Executive Compensation Plans and Arrangements.
(a) Employment Agreement between Blue Cross and Blue Shield of Georgia, Inc. and
Richard D. Shirk dated March 4, 1992.
</TABLE>
II-2
<PAGE> 92
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------ ----------------------------------------------------------------------------------
<C> <C> <S>
(b) Employment Agreement between Blue Cross and Blue Shield of Georgia, Inc. and
Mark Kishel, M.D., dated September 23, 1993.
(c) Deferred Compensation Plan.
(d) Annual Executive Incentive Plan.
(e) Long-Term Incentive Plan.
*10.5 -- $55,000,000 Insolvency Credit Agreement dated as of April 18, 1996 among Blue
Cross and Blue Shield of Georgia, Inc. the Banks Listed Herein and Wachovia Bank
of Georgia, N.A., as agent.
11 -- Not Applicable.
*21 -- Subsidiaries of the registrant.
*23.1 -- Consent of Long, Aldridge & Norman, LLP (included in the opinion to be filed as
Exhibit 5).
23.2 -- Consent of Ernst & Young LLP.
*24. -- Powers of attorney.
99.1 -- Form of Eligible Subscriber Election.
*99.2 -- Initial Letter from CEO to Eligible Subscribers.
*99.3 -- Follow-Up Letter to Eligible Subscribers.
*99.4 -- Final Letter to Eligible Subscribers.
*99.5 -- Script for Telephone Communication with Eligible Subscribers (Georgia only).
</TABLE>
- ---------------
* Previously filed
(b) FINANCIAL STATEMENT SCHEDULES. Not applicable.
ITEM 17. UNDERTAKINGS
(a) RULE 415 OFFERING. The undersigned registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being
made, a post-effective amendment to this registration statement:
(i) To include any prospectus required by section 10(a)(3) of the
Securities Act of 1993;
(ii) To reflect in the prospectus any facts or events arising after
the effective date of the registration statement (or the most recent
post-effective amendment thereof) which, individually or in the
aggregate, represent a fundamental change in the information set forth
in the registration statement. Notwithstanding the foregoing, any
increase or decrease in volume of securities offered (if the total
dollar value of securities offered would not exceed that which was
registered) and any deviation from the low or high end of the estimated
maximum offering range may be reflected in the form of prospectus filed
with the Commission pursuant to Rule 424(b) if, in the aggregate, the
changes in volume and price represent no more than a 20% change in the
maximum aggregate offering price set forth in the "Calculation of
Registration Fee" table in the effective registration statement.
(iii) To include any material information with respect to the plan
of distribution not previously disclosed in the registration statement
or any material change to such information in the registration
statement.
(b) ACCELERATION OF EFFECTIVENESS. Insofar as indemnification for
liabilities arising under the Securities Act of 1933 may be permitted to
directors, officers and controlling persons of the Registrant pursuant to the
foregoing provisions, or otherwise, the Registrant has been advised that in the
opinion of the Securities and Exchange Commission such indemnification is
against public policy as expressed in the Act and is, therefore, unenforceable.
In the event that a claim for indemnification against such liabilities (other
than the payment by
II-3
<PAGE> 93
the Registrant of expenses incurred or paid by a director, officer or
controlling person of the Registrant in the successful defense of any action,
suit or proceeding) is asserted by such director, officer or controlling person
in connection with the securities being registered, the Registrant will, unless
in the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the Act and
will be governed by the final adjudication of such issue.
II-4
<PAGE> 94
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
has duly caused this Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Atlanta, State of
Georgia, on May 14, 1996.
CERULEAN COMPANIES, INC.
(Registrant)
By: /s/ RICHARD D. SHIRK
------------------------------------
Richard D. Shirk
President and Principal Executive
Officer
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities indicated on May 14, 1996.
<TABLE>
<CAPTION>
SIGNATURE TITLE
- --------------------------------------------- --------------------------------------------
<C> <S>
/s/ RICHARD D. SHIRK President and Principal Executive Officer
- --------------------------------------------- and Director
Richard D. Shirk
/s/ JOHN A. HARRIS Treasurer (Principal Financial and
- --------------------------------------------- Accounting Officer)
John A. Harris
/s/ JAMES E. ALBRIGHT Director
- ---------------------------------------------
James E. Albright
/s/ W. DANIEL BARKER Director
- ---------------------------------------------
W. Daniel Barker
/s/ ELIZABETH W. CAMP Director
- ---------------------------------------------
Elizabeth W. Camp
/s/ LOUIS H. FELDER, M.D. Director
- ---------------------------------------------
Louis H. Felder, M.D.
/s/ EDWARD M. GILLESPIE Director
- ---------------------------------------------
Edward M. Gillespie
/s/ JOSEPH D. GREENE Director
- ---------------------------------------------
Joseph D. Greene
/s/ MEL H. GREGORY, JR. Director
- ---------------------------------------------
Mel H. Gregory, Jr.
/s/ FRANK J. HANNA, III Director
- ---------------------------------------------
Frank J. Hanna, III
/s/ R. PIERCE HEAD, JR. Director
- ---------------------------------------------
R. Pierce Head, Jr.
</TABLE>
II-5
<PAGE> 95
<TABLE>
<CAPTION>
SIGNATURE TITLE
- --------------------------------------------- --------------------------------------------
<C> <S>
/s/ CHARLES H. KEATON Director
- ---------------------------------------------
Charles H. Keaton
/s/ JAMES L. LABOON, JR. Director
- ---------------------------------------------
James L. LaBoon, Jr.
/s/ JAMES H. LEIGH, JR., M.D. Director
- ---------------------------------------------
James H. Leigh, Jr., M.D.
/s/ JULIA L. MITCHELL-IVEY Director
- ---------------------------------------------
Julia L. Mitchell-Ivey
/s/ RICHARD D. SHIRK Director
- ---------------------------------------------
Richard D. Shirk
/s/ FRED L. TOLBERT, JR. Director
- ---------------------------------------------
Fred L. Tolbert, Jr.
/s/ CHARLES R. UNDERWOOD, M.D. Director
- ---------------------------------------------
Charles R. Underwood, M.D.
/s/ W. JERRY VEREEN Director
- ---------------------------------------------
W. Jerry Vereen
/s/ A. MAX WALKER Director
- ---------------------------------------------
A. Max Walker
/s/ DAN H. WILLOUGHBY, M.D. Director
- ---------------------------------------------
Dan H. Willoughby, M.D.
/s/ JOE M. YOUNG Director
- ---------------------------------------------
Joe M. Young
/s/ JOHN B. ZELLARS Director
- ---------------------------------------------
John B. Zellars
</TABLE>
II-6
<PAGE> 96
INDEX OF EXHIBITS
The following exhibits are filed as part of this Registration Statement:
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION PAGE
- ------ ------------------------------------------------------------------------------ ----
<C> <C> <S> <C>
*2.1 -- Blue Cross and Blue Shield of Georgia, Inc. Plan of Conversion, filed with the
Insurance Department of the State of Georgia, October 30, 1995.
*2.2 -- Form A Statement regarding the Acquisition of Control of or Merger with a
Domestic Insurer filed with respect to Blue Cross and Blue Shield of Georgia
by Cerulean on October 30, 1995, as amended and supplemented.
*2.3 -- Conversion Order dated December 27, 1995 from Georgia Insurance Commissioner.
*3.1 -- Articles of Incorporation of Cerulean Companies, Inc.
*3.2 -- Bylaws of Cerulean Companies, Inc.
*4.1 -- Stock Escrow Agreement among Cerulean Companies, Inc., Blue Cross and Blue
Shield of Georgia, Inc. and SunTrust Bank, Atlanta.
*4.2 -- Specimen Form of Class A Convertible Common Stock (uncertificated stock).
*5 -- Opinion of Long, Aldridge & Norman, LLP.
*10.1 -- Administrative Services Agreement between the State Personnel Board and Blue
Cross and Blue Shield of Georgia, Inc., dated July 1, 1994.
*10.2 -- $25,000,000 Revolving Loan Facility Among Blue Cross and Blue Shield of
Georgia, Inc., as Borrower, Wachovia Bank of Georgia, N.A., Bank South, N.A.,
Trust Company Bank, as Banks and Wachovia Bank of Georgia, N.A., as Agent,
dated March 21, 1994, as amended.
*10.3 -- Plaza Lease Capital Plaza Associate ("Landlord") and Blue Cross and Blue
Shield of Georgia, Inc. ("Tenant") dated December 23, 1986.
*10.4 -- Executive Compensation Plans and Arrangements.
(a) Employment Agreement between Blue Cross and Blue Shield of Georgia, Inc.
and Richard D. Shirk dated March 4, 1992.
(b) Employment Agreement between Blue Cross and Blue Shield of Georgia, Inc.
and Mark Kishel, M.D., dated September 23, 1993.
(c) Deferred Compensation Plan.
(d) Annual Executive Incentive Plan.
(e) Long-Term Incentive Plan.
*10.5 -- $55,000,000 Insolvency Credit Agreement dated as of April 18, 1996 among Blue
Cross and Blue Shield of Georgia, Inc. the Banks Listed Herein and Wachovia
Bank of Georgia, N.A., as agent.
11 -- Not Applicable.
*21 -- Subsidiaries of the registrant.
*23.1 -- Consent of Long, Aldridge & Norman, LLP (included in the opinion to be filed
as Exhibit 5).
23.2 -- Consent of Ernst & Young LLP.
*24 -- Powers of attorney.
99.1 -- Form of Eligible Subscriber Election.
*99.2 -- Initial Letter from CEO to Eligible Subscribers.
*99.3 -- Follow-Up Letter to Eligible Subscribers.
*99.4 -- Final Letter to Eligible Subscribers.
*99.5 -- Script for Telephone Communication with Eligible Subscribers (Georgia only).
</TABLE>
- ---------------
* Previously filed
<PAGE> 1
EXHIBIT 23.2
CONSENT OF INDEPENDENT AUDITORS
We consent to the reference to our firm under the captions "Summary Consolidated
Financial Information", "Selected Consolidated Financial and Operating Data",
"Issuance of Class A Stock to the Eligible Subscribers" and "Experts" and to the
use of our reports on the consolidated financial statements of Blue Cross and
Blue Shield of Georgia, Inc. dated February 7, 1996 and the balance sheet of
Cerulean Companies, Inc. dated May 6, 1996, in the Registration Statement on
Form S-1 and related Prospectus of Cerulean Companies, Inc. for the registration
of 800,000 shares of its Class A Convertible Common Stock.
ERNST & YOUNG LLP
Atlanta, Georgia
May 13, 1996
<PAGE> 1
EXHIBIT 99.1
CERULEAN COMPANIES, INC. /X/ Please mark
a Georgia corporation your choice
CLASS A CONVERTIBLE COMMON STOCK as this
No Par Value
TO: SUNTRUST ATLANTA, ESCROW AGENT
Mark an "X" in the
appropriate box The undersigned has received the Prospectus of Cerulean
YES Companies, Inc. (the "Company") dated ________, 1996 and
/ / elects:
YES: To accept the offer described in the Prospectus to
receive 5 shares of Class A Convertible Common Stock of
the Company (the "Shares").
NO
/ / NO: Not to accept such offer.
I have read the information on
the reverse side of this card.
Signature(s)
------------------
Please sign this card exactly
as your name appears in the
lower left hand corner.
THIS OFFER ENDS AT 5:00 P.M. ATLANTA TIME ON _______________, 1996. IF THIS
FORM, PROPERLY EXECUTED, IS NOT RECEIVED BY THE ESCROW AGENT BY THAT TIME THE
OFFER WILL BE CONSIDERED REJECTED BY YOU AND THE SHARES WILL BE RETURNED BY THE
ESCROW AGENT TO THE COMPANY FOR CANCELLATION.
(CONTINUED ON REVERSE SIDE.)
<PAGE> 2
IN MAKING MY DECISION I HAVE CONSIDERED THE INFORMATION CONTAINED IN THE
PROSPECTUS, INCLUDING THE INFORMATION CONCERNING INCOME TAX UNDER "CERTAIN
FEDERAL INCOME TAX CONSEQUENCES" THEREIN.
I understand that the shares of Class A Stock are subject to restrictions on
their transfer (as described in the Prospectus in "Risk Factors - Prohibitions
on Transfer; Lack of Liquidity" and in "Description of Capital Stock - Class A
Stock - Restrictions on Transfer; Right of First Refusal" at and that I cannot
sell, pledge, or otherwise dispose of the Shares under any circumstances except
as described in the Prospectus and then only as described in the Prospectus.
I represent that I have no present intent to transfer, pledge, distribute or
otherwise dispose of the Shares and am receiving them with the intent to hold
them for investment and with no intent for their further distribution. I
understand that the Company is relying on this statement of intent in the
Company's actions in complying with applicable securities laws.
