<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington D.C. 20549
FORM 10-Q
{x} Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the period ended MARCH 31, 1996
or
{ } Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from to .
------------- -------------
Commission File Number : 333-2796
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CERULEAN COMPANIES, INC.
(Exact name of registrant as specified in its charter)
Georgia 58-2217138
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
3350 Peachtree Road, N.E., Atlanta, Georgia 30326
(Address of principal executive offices) (Zip Code)
(404) 842-8000
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
YES X NO
-------- --------
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Class: Class A Convertible Common Stock, no par value, $0.01 stated value.
Outstanding as of June 27, 1996 - 800,000 shares
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CERULEAN COMPANIES, INC.
FORM 10-Q
MARCH 31, 1996
INDEX
<TABLE>
<CAPTION>
PAGE
NUMBER
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<S> <C> <C>
PART I. FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements
Consolidated Balance Sheets as of
March 31, 1996 and December 31, 1995 Page 3
Consolidated Statements of Income for the three months
ended March 31, 1996 and 1995 Page 4
Consolidated Statements of Cash Flows for the three
months ended March 31, 1996 and 1995 Page 5
Notes to Consolidated Financial Statements Page 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations Page 7
PART II. OTHER INFORMATION
Item 1. Legal Proceedings Page 9
Item 2. Changes in Securities Page 9
Item 3. Defaults Upon Senior Securities Page 9
Item 4. Submission of Matters to a Vote of Security Holders Page 9
Item 5. Other Information Page 9
Item 6. Exhibits and Reports on Form 8-K Page 9
Signatures Page 10
</TABLE>
2
<PAGE> 3
PART I - FINANCIAL INFORMATION
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS
CERULEAN COMPANIES, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
March 31, December 31,
1996 1995
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(Unaudited)
<S> <C> <C>
ASSETS
Investments:
Fixed maturities:
Available-for-sale, at fair value (amortized cost: $135,304,133
$126,115,087) $136,404,259 $131,055,098
Equity securities, at fair value (cost: $50,655,611; $39,657,474) 56,616,148 42,729,087
Short-term investments, at fair value (cost: $625,000; $932,958) 585,606 905,383
------------ ------------
Total investments 193,606,013 174,689,568
Cash and cash equivalents 70,869,546 49,304,688
Reimbursable portion of estimated benefit liabilities 105,479,300 102,132,300
Accounts receivable 48,151,226 36,063,899
FEP assets held by agent 12,137,107 12,137,107
Property and equipment 33,181,163 33,952,436
Other assets 7,571,072 8,798,587
------------ ------------
Total assets $470,995,427 $417,078,585
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Estimated benefit liabilities $180,934,631 $175,846,250
Unearned premiums 5,900,718 7,289,126
FEP stabilization reserve 12,137,107 12,137,107
Accounts payable and accrued expenses 19,513,850 16,635,534
Payables to other plans 2,472,125 2,442,748
Other liabilities 26,803,628 27,688,394
Note payable 2,000,000 2,000,000
------------ ------------
Total liabilities 249,762,059 244,039,159
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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, 49,900
shares 46,633,000 -
------------ ------------
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 and outstanding 800,000 - -
shares Common Stock, no par value.
Authorized and unissued 100,000,000 shares - -
Net unrealized appreciation on securities 5,669,897 6,429,375
Retained earnings 168,930,471 166,610,051
------------ ------------
Total shareholders' equity 174,600,368 173,039,426
------------ ------------
Total liabilities and shareholders' equity $470,995,427 $417,078,585
============ ============
</TABLE>
See accompanying notes.
3
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CERULEAN COMPANIES, INC.
CONSOLIDATED STATEMENTS OF INCOME
UNAUDITED
<TABLE>
<CAPTION>
Three months ended March 31,
-------------------------------
1996 1995
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<S> <C> <C>
Revenues:
Premiums $324,005,012 $280,846,117
Investment and other income 3,197,305 2,852,373
Realized gains 89,707 1,755,247
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Total revenues 327,292,024 285,453,737
Benefits expense 289,037,972 249,910,706
Operating expenses, net of expense reimbursements of $20,448,840 in
1996 and $16,134,025 in 1995 34,453,574 29,972,032
------------ ------------
Income before income taxes and minority interest 3,800,478 5,570,999
Income taxes 814,822 1,659,125
Minority interest (182,869) -
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Net income $ 2,802,787 $ 3,911,874
============ ============
</TABLE>
See accompanying notes.
4
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CERULEAN COMPANIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
UNAUDITED
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31,
----------------------------------
1996 1995
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<S> <C> <C>
OPERATING ACTIVITIES
Net income $ 2,802,787 $ 3,911,874
Adjustments to reconcile net income to net cash used in
operating activities:
Items that did not use cash:
Depreciation 2,244,503 1,963,612
Amortization 87,577 111,265
Provision for uncollectible receivables 803,376 160,000
Gain on sale of investments (89,707) (1,755,247)
Loss on sale of property and equipment 29,979 24,085
Decrease (increase) in certain assets:
Reimbursable portion of estimated benefit liabilities (3,347,000) (4,151,000)
Accounts receivable (12,890,704) (10,060,325)
Other assets 1,432,150 10,894
Increase (decrease) in certain liabilities:
Estimated benefit liabilities 5,088,381 2,950,478
Unearned premiums (1,388,408) 3,300,092
Accounts payable and accrued expenses 2,398,488 (5,737,092)
Payables to other plans 29,377 (786,491)
Other liabilities (884,766) (1,255,550)
------------ ------------
Net cash used in operating activities (3,683,967) (11,313,405)
INVESTING ACTIVITIES
Investments available-for-sale:
Investments purchased (33,403,016) (38,659,320)
Investments sold or matured 13,522,050 34,928,888
Investments held-to-maturity:
Investments purchased - (5,277,750)
Investments matured - 7,977,269
Property and equipment purchased (2,061,266) (1,703,577)
Property and equipment sold 558,057 -
------------ ------------
Net cash used in investing activities (21,384,175) (2,734,490)
FINANCING ACTIVITIES
Proceeds from the issuance of preferred stock 46,633,000 -
------------ ------------
Net cash provided by financing activities 46,633,000 -
Increase (decrease) in cash and cash equivalents 21,564,858 (14,047,895)
Cash and cash equivalents at beginning of period 49,304,688 25,484,560
------------ ------------
Cash and cash equivalents at end of period $ 70,869,546 $ 11,436,665
============ ============
</TABLE>
See accompanying notes
5
<PAGE> 6
CERULEAN COMPANIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1996
UNAUDITED
1. SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION
Cerulean Companies, Inc. (the "Company") was incorporated under the laws of the
State of Georgia on February 2, 1996 to act as the holding company for Blue
Cross and Blue Shield of Georgia, Inc. ("Georgia Blue") and its subsidiaries,
and for other lawful purposes. On February 2, 1996 the Company acquired all of
the outstanding capital stock of Georgia Blue, following Georgia Blue's
conversion from a not-for-profit corporation to a for-profit corporation
pursuant to a Plan of Conversion approved by the Georgia Commissioner of
Insurance on December 27, 1995 (the "Conversion"). In connection with the
Conversion, the Company issued 49,900 shares of Class B Convertible Preferred
Stock ("Preferred Stock") to raise $49.9 million in capital. After deducting
offering costs, the net proceeds to the Company were $46.6 million.
Although the Company did not become a holding company for Georgia Blue until
the Conversion on February 2, 1996, the consolidated results of operations
include the historical operations of Georgia Blue and its subsidiaries prior to
February 2, 1996 and the Company (including Georgia Blue and its subsidiaries
on a consolidated basis) from the period February 2, 1996 to March 31, 1996.
Effective May 14, 1996, the Company completed the registration of its Class A
Convertible Common Stock (the "Class A Stock") with the Securities and Exchange
Commission. As part of the Conversion, the Company agreed to offer to each of
Georgia Blue's approximately 160,000 eligible subscribers five shares of Class
A Stock at no cost. The Company issued 800,000 shares of Class A Stock to an
Escrow Agent for distribution to eligible subscribers. All shares which
eligible subscribers have rejected, or which have been deemed to be rejected,
at the termination of the offer will be transferred by the Escrow Agent to the
Company for cancellation. Currently, the Class A Stock is not publicly traded.
BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements of the Company
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's health care plan subsidiary,
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.
These statements should be read in conjunction with the Company's Prospectus
dated May 14, 1996 (which is a part of the Registration Statement filed on Form
S-1, Registration No. 333-2796, filed on March 27, 1996, and subsequent
amendments). Because of the nature of the Company's operations, the results
for interim periods are not necessarily indicative of results expected for the
entire year. In the opinion of management, all material adjustments necessary
for a fair presentation of the financial position and results of operations for
the interim periods have been made. All such adjustments are of a normal
recurring nature.
PRINCIPLES OF CONSOLIDATION
The accompanying consolidated financial statements include the accounts of the
Company, Georgia Blue and its wholly- owned health maintenance and life
insurance subsidiaries, a non-insurance subsidiary and community health
partnership network joint ventures ("CHPNs") in which Georgia Blue has a
majority interest. All significant intercompany transactions and balances have
been eliminated in consolidation.
2. EARNINGS PER SHARE
Earnings per share are omitted because such data are not meaningful at the
present time; there is presently no market for Class A Stock or any equity
securities of the Company and the Company does not anticipate development of
such a market in the foreseeable future.
6
<PAGE> 7
CERULEAN COMPANIES, INC.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW
Cerulean Companies, Inc. (the "Company") was incorporated under the laws of the
State of Georgia on February 2, 1996 to act as the holding company for Blue
Cross and Blue Shield of Georgia, Inc. ("Georgia Blue") and its subsidiaries,
and for other lawful purposes. On February 2, 1996 the Company acquired all of
the outstanding capital stock of Georgia Blue, following Georgia Blue's
conversion from a not-for-profit corporation to a for-profit corporation
pursuant to a Plan of Conversion approved by the Georgia Commissioner of
Insurance on December 27, 1995 (the "Conversion"). In connection with the
Conversion, the Company issued 49,900 shares of Class B Convertible Preferred
Stock ("Preferred Stock") to raise $49.9 million in capital. After deducting
offering costs, the net proceeds to the Company were $46.6 million.
On May 14, 1996, the Company completed the registration of its Class A
Convertible Common Stock (the "Class A Stock") with the Securities and Exchange
Commission allowing its offering to each of certain eligible subscribers of
Georgia Blue five shares of Class A Stock at no cost. The initial offering
period ends August 12, 1996.
Because the Company was not organized until February 2, 1996 and did not become
a holding company for Georgia Blue and its subsidiaries until the Conversion on
February 2, 1996, the discussions below relate to the historical operations of
Georgia Blue prior to February 2, 1996 and to the Company (including Georgia
Blue and its subsidiaries on a consolidated basis) from the period February 2,
1996 to March 31, 1996.
RESULTS OF OPERATIONS
Three Months Ended March 31, 1996 Compared to Three Months Ended March 31, 1995
Premium revenues increased 15% to $324.0 million for the three months ended
March 31, 1996 from $280.8 million for the three months ended March 31, 1995.
Premium revenues for Indemnity and PPO products increased $15.6 million to
$266.4 million for the three months ended March 31, 1996, as the result of a
15% increase in membership. HMO and POS premiums increased 93% to $54.6
million for the first three months of 1996 compared to $28.4 million for the
first three months of 1995 resulting from a 93% increase in enrollment. New
sales, in group growth, and to a lesser extent migrations from traditional
indemnity products into HMO and POS products continued to drive HMO and POS
membership growth to 162,000 members at March 31, 1996 from 84,000 members at
March 31, 1995.
Investment and other income increased 12% to $3.2 million for the three months
ended March 31, 1996 from $2.9 million for the same period in 1995 as a result
of an increase in the Company's cash and investment portfolio from proceeds
relating to the issuance of the Preferred Stock.
Realized gains on the sale of marketable securities of $90,000 in the first
quarter of 1996 were lower by $1.7 million compared to the same quarter in
1995.
The medical loss ratio (benefits expense as a percentage of premium revenues)
increased slightly to 89.2% for the three months ended March 31, 1996 compared
to 89.0% for the 1995 period. This was primarily the result of an increase in
the loss ratio for HMO and POS products to 86.4% for the first quarter of 1996
from 83.9% for the first quarter of 1995 due to high medical cost experience in
two markets where the Company's integrated delivery networks through its CHPN
joint ventures are not yet formed.
The effective tax rate for the three months ended March 31, 1996 was 21%
compared to 30% for the same period in 1995 as the result of adjustments in the
latter part of 1995 correcting over accruals in prior periods, together with
the anticipated effect of deferred taxes and permanent differences in 1996.
As a result of the foregoing factors, net income decreased 28% to $2.8 million
for the three months ended March 31, 1996 from $3.9 million for the three
months ended March 31, 1995.
7
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CERULEAN COMPANIES, INC.
LIQUIDITY AND CAPITAL RESOURCES
Three Months Ended March 31, 1996 Compared to Three Months Ended March 31, 1995
In February 1996, the Company received $46.6 million in connection with its
Preferred Stock offering, net of estimated offering costs of $3.3 million.
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.
Assets not required for short-term liquidity needs are transferred to a
portfolio of investments in the fixed income and equity markets. These
investments provide for reserves for future payment obligations and funds for
long-term liquidity needs. 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.
Net cash used in operating activities amounted to $3.7 million for the three
months ended March 31, 1996 and $11.3 million for the same period in 1995
principally resulting from higher levels of accounts receivable. Growth in
accounts receivable is related to the significant growth in enrollment in HMO
and POS products from the end of 1994 to March 31, 1996, an increase of over
140%. In addition, cash used in operations was higher in the 1995 period due
to a onetime payout in January 1995 for unused vacation accumulated for prior
years. Because of the nature of the Company's business, the cash flows from
operations for interim periods are not necessarily indicative of cash flows
from operations expected for the entire year. Furthermore, the Company
believes that its long-term capital requirements can be met with its current
resources, including proceeds from the sale of the Preferred Stock.
See accompanying notes.
8
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PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
None
ITEM 2. CHANGES IN SECURITIES
None
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
ITEM 5. OTHER INFORMATION
The Company's Directors elected John A. Harris as a Director to replace Louis
H. Felder, M.D., effective May 22, 1996 upon Dr. Felder's resignation.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
<TABLE>
<CAPTION>
Exhibit
Number Description
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<S> <C>
27 Financial Data Schedule (for SEC use only)
</TABLE>
(b) Reports on Form 8-K
None
9
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
CERULEAN COMPANIES, INC.
Registrant
Date: June 27, 1996 By: /s/ Richard D. Shirk
----------------------------------
Richard D. Shirk, President and
Chief Executive Officer
Date: June 27, 1996 By: /s/ John A. Harris
----------------------------------
John A. Harris, Treasurer
10
<TABLE> <S> <C>
<ARTICLE> 7
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM CERULEAN
COMPANIES, INC. ON FORM 10-Q FOR THE QUARTER ENDED MARCH 31, 1996 AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> MAR-31-1996
<DEBT-HELD-FOR-SALE> 136,404,259
<DEBT-CARRYING-VALUE> 0
<DEBT-MARKET-VALUE> 0
<EQUITIES> 56,616,148
<MORTGAGE> 0
<REAL-ESTATE> 0
<TOTAL-INVEST> 193,606,013
<CASH> 70,869,546
<RECOVER-REINSURE> 0
<DEFERRED-ACQUISITION> 0
<TOTAL-ASSETS> 470,995,427
<POLICY-LOSSES> 180,934,631
<UNEARNED-PREMIUMS> 5,900,718
<POLICY-OTHER> 12,137,107
<POLICY-HOLDER-FUNDS> 0
<NOTES-PAYABLE> 2,000,000
46,633,000
0
<COMMON> 0
<OTHER-SE> 174,600,368
<TOTAL-LIABILITY-AND-EQUITY> 470,995,427
324,005,012
<INVESTMENT-INCOME> 3,197,305
<INVESTMENT-GAINS> 89,707
<OTHER-INCOME> 0
<BENEFITS> 289,037,972
<UNDERWRITING-AMORTIZATION> 34,453,574
<UNDERWRITING-OTHER> 0
<INCOME-PRETAX> 3,800,478
<INCOME-TAX> 814,822
<INCOME-CONTINUING> 2,802,787
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,802,787
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
<RESERVE-OPEN> 0
<PROVISION-CURRENT> 0
<PROVISION-PRIOR> 0
<PAYMENTS-CURRENT> 0
<PAYMENTS-PRIOR> 0
<RESERVE-CLOSE> 0
<CUMULATIVE-DEFICIENCY> 0
</TABLE>
