<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 quarterly period ended SEPTEMBER 30, 1997
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
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 October 31, 1997 - 351,535 shares.
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CERULEAN COMPANIES, INC.
FORM 10-Q
SEPTEMBER 30, 1997
INDEX
<TABLE>
<CAPTION>
PAGE
NUMBER
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PART I. FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements
Consolidated Balance Sheets as of
September 30, 1997 and December 31, 1996 Page 3
Consolidated Statements of Income for the three months
and nine months ended September 30, 1997 and 1996 Page 4
Consolidated Statements of Cash Flows for the nine months
ended September 30, 1997 and 1996 Page 5
Notes to Consolidated Financial Statements Page 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations Page 8
Item 3. Quantitative and Qualitative Disclosure About Market Risk Page 11
PART II. OTHER INFORMATION
Item 1. Legal Proceedings Page 11
Item 2. Changes in Securities Page 11
Item 3. Defaults Upon Senior Securities Page 11
Item 4. Submission of Matters to a Vote of Security Holders Page 11
Item 5. Other Information Page 11
Item 6. Exhibits and Reports on Form 8-K Page 12
Signatures Page 13
</TABLE>
2
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PART I - FINANCIAL INFORMATION
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS
CERULEAN COMPANIES, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1997 1996
------------ ------------
(UNAUDITED)
<S> <C> <C>
ASSETS
Investments:
Fixed maturities:
Available-for-sale, at fair value (amortized cost: $201,851,001;
$156,949,004) $203,345,907 $157,637,412
Equity securities, at fair value (cost: $44,281,727; $50,969,299) 56,737,318 60,104,421
Short-term investments, at fair value (cost: $12,673,083; $475,000) 12,673,083 423,788
------------ ------------
Total investments 272,756,308 218,165,621
Cash and cash equivalents 48,865,617 89,024,410
Reimbursable portion of estimated benefit liabilities 100,674,300 101,645,300
Accounts receivable 55,121,399 45,110,456
FEP assets held by agent 22,715,241 22,715,241
Property and equipment 31,687,223 31,264,521
Other assets 17,208,250 11,808,667
------------ ------------
Total assets $549,028,338 $519,734,216
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Estimated benefit liabilities $199,989,239 $181,718,093
Unearned premiums 7,715,864 8,983,956
FEP stabilization reserve 22,715,241 22,715,241
Accounts payable and accrued expenses 30,448,998 31,519,728
Payables to other plans 1,309,099 2,633,307
Other liabilities 42,339,953 34,449,321
Note payable 3,500,000 3,500,000
------------ ------------
Total liabilities 308,018,394 285,519,646
------------ ------------
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 46,645,042 46,645,042
------------ ------------
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 351,525 and
350,615 shares, respectively 3,515 3,506
Common Stock, no par value
Authorized and unissued 100,000,000 shares -- --
Net unrealized appreciation on securities 11,267,497 7,886,318
Retained earnings 183,093,890 179,679,704
------------ ------------
Total shareholders' equity 194,364,902 187,569,528
------------ ------------
Total liabilities and shareholders' equity $549,028,338 $519,734,216
============ ============
</TABLE>
See accompanying notes.
3
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CERULEAN COMPANIES, INC.
CONSOLIDATED STATEMENTS OF INCOME
UNAUDITED
<TABLE>
<CAPTION>
THREE MONTHS ENDED SEPTEMBER 30, NINE MONTHS ENDED SEPTEMBER 30,
1997 1996 1997 1996
------------- ------------- --------------- -------------
<S> <C> <C> <C> <C>
Revenues:
Premiums $ 377,349,234 $ 331,291,694 $ 1,116,277,830 $ 980,044,809
Investment and other income 4,065,139 3,878,136 12,074,011 10,399,223
Realized gains 5,329,668 1,831,692 11,116,690 2,732,042
------------- ------------- --------------- -------------
Total revenues 386,744,041 337,001,522 1,139,468,531 993,176,074
Benefits expense 342,465,693 292,608,422 1,011,509,901 871,659,861
Operating expenses, net of expense
reimbursements of $15,841,288, $15,519,908,
$46,038,883 and $43,016,148, respectively 43,117,134 34,483,613 125,315,572 102,831,588
------------- ------------- --------------- -------------
Operating income 1,161,214 9,909,487 2,643,058 18,684,625
Non-operating income -- -- 1,275,000 1,275,000
------------- ------------- --------------- -------------
Income before income taxes and
minority interest 1,161,214 9,909,487 3,918,058 19,959,625
Income tax expense (benefit) (Note 4) (1,017,000) 1,951,000 (915,000) 3,898,000
Minority interests 487,058 (173,080) 826,638 (477,089)
------------- ------------- --------------- -------------
Net income $ 2,665,272 $ 7,785,407 $ 5,659,696 $ 15,584,536
============= ============= =============== =============
</TABLE>
See accompanying notes.
4
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CERULEAN COMPANIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
UNAUDITED
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30,
1997 1996
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<S> <C> <C>
OPERATING ACTIVITIES
Net income $ 5,659,696 $ 15,584,536
Adjustments to reconcile net income to net cash provided
by operating activities:
Non-cash and non-operating items:
Depreciation 7,198,286 6,641,666
Amortization 216,188 241,458
Uncollectible receivables 298,832 1,217,350
Gain on sale of investments (11,116,690) (2,732,042)
(Gain) loss on sale of property and equipment (11,098) 60,371
Non-operating income (1,275,000) (1,275,000)
Decrease (increase) in certain assets:
Reimbursable portion of estimated benefit liabilities 971,000 (141,000)
Accounts receivable (10,309,775) (12,057,763)
Other assets (6,196,583) (587,671)
Increase (decrease) in certain liabilities:
Estimated benefit liabilities 18,271,146 8,245,609
Unearned premiums (1,268,092) (137,372)
Accounts payable and accrued expenses (1,070,730) 7,893,938
Payables to other plans (1,324,208) 673,123
Other liabilities 5,645,131 2,019,134
Minority interest in sale of stock by a subsidiary (1,225,000) (1,225,000)
------------- -------------
Net cash provided by operating activities 4,463,103 24,421,337
INVESTING ACTIVITIES
Investments purchased (159,857,716) (100,952,562)
Investments sold or matured 120,345,710 60,620,598
Property and equipment purchased (7,780,290) (5,486,967)
Property and equipment sold 170,400 754,095
------------- -------------
Net cash used in investing activities (47,121,896) (45,064,836)
FINANCING ACTIVITIES
Proceeds from note payable -- 1,500,000
Proceeds from the issuance of preferred stock -- 46,633,000
S-1 registration costs -- 663,907
Sale of stock by a subsidiary 2,500,000 2,500,000
------------- -------------
Net cash provided by financing activities 2,500,000 51,296,907
------------- -------------
(Decrease) increase in cash and cash equivalents (40,158,793) 30,653,408
Cash and cash equivalents at beginning of period 89,024,410 49,304,688
------------- -------------
Cash and cash equivalents at end of period $ 48,865,617 $ 79,958,096
============= =============
</TABLE>
See accompanying notes.
5
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CERULEAN COMPANIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1997
UNAUDITED
1. 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. ("BCBSGA") and its subsidiaries, and for
other lawful purposes. On February 2, 1996, the Company acquired all of the
outstanding capital stock of BCBSGA, following BCBSGA'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 BCBSGA until the
Conversion on February 2, 1996, the consolidated results of operations include
the historical operations of BCBSGA and its subsidiaries prior to February 2,
1996 and the Company (including BCBSGA and its subsidiaries on a consolidated
basis) from the period February 2, 1996 to September 30, 1996 and thereafter.
Effective May 14, 1996, the Company's registration under the Securities Act of
1933 of the public offering of its Class A Convertible Common Stock, no par
value (the "Class A Stock") with the Securities and Exchange Commission became
effective. The registration of the Class A Stock under section 12(g) of the
Securities Exchange Act of 1934 became effective on June 30, 1997. As of October
31, 1997, 351,535 shares of Class A Stock were issued and outstanding.
Currently, the Class A Stock is not publicly traded.
2. SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
The Company's accompanying unaudited consolidated financial statements 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. 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 Company's accompanying consolidated financial statements include the
accounts of the Company, BCBSGA and its wholly-owned health maintenance and life
insurance subsidiaries, a non-insurance subsidiary and community health
partnership network joint ventures ("CHPNs") in which BCBSGA has a majority
interest. All significant intercompany transactions and balances have been
eliminated in consolidation.
ACCOUNTING FOR A SALE OF STOCK BY A SUBSIDIARY
Gains arising from a subsidiary issuing its own stock to a third party are
recorded as non-operating income and are presented as a separate line item in
the consolidated statements of income.
RECLASSIFICATIONS
Certain prior year balances have been reclassified to conform to the current
year presentation.
6
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CERULEAN COMPANIES, INC.
3. EARNINGS PER SHARE
Earnings per share are omitted because such data are not meaningful at the
present time due to likely dilutive events that will occur prior to the
conversion of the Class A Convertible Common Stock or the Class B Convertible
Preferred Stock. Presently there is no market for the Class A Stock or any
equity securities of the Company.
4. INCOME TAXES
The Company increased the net value of certain long-lived assets which will
provide an estimated additional tax benefit of $2.1 million in 1997 of which
$1.6 million was recognized during the nine months ended September 30, 1997.
Additionally, the Company recorded a tax benefit of $1.5 million as the result
of a change in estimate in the amount of deferred tax assets for its CHPN
subsidiaries that are expected to be realized.
5. CONTINGENCIES
On September 3, 1997, a lawsuit was filed in the Superior Court of Fulton County
by nine groups on behalf of themselves and a class putatively composed of all
other 501(c)(3) organizations in Georgia seeking, among other things, to
invalidate a Georgia statute upon which certain aspects of Cerulean Companies,
Inc.'s formation was based. The complaint names Blue Cross and Blue Shield of
Georgia, Inc., Cerulean Companies, Inc. and the Commissioner of Insurance of the
State of Georgia as defendants. An additional, similar request for declaratory
ruling was filed with the Georgia Insurance Department on September 3, 1997. On
October 2, 1997, the Georgia Insurance Department denied the plaintiffs' request
for declaractory ruling, which decision the plaintiffs have appealed.
The plaintiffs' claims relate to the conversion of BCBSGA from a nonprofit
entity to a for-profit entity which occurred as part of a Plan of Conversion
submitted to a public hearing November 21, 1995, and approved by the Georgia
Commissioner of Insurance in an order dated December 27, 1995. The complaint
seeks to have the fair market value of the assets of BCBSGA as of December 27,
1995, including but not limited to the surplus, plus interest from December 27,
1995, placed in a public trust for the use and benefit of a class of nonprofit
charitable organizations.
The Company believes that the plaintiffs' claims are without substantive merit
and intends to vigorously defend the lawsuit.
6. RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
During 1997, the Financial Accounting Standards Board ("FASB") issued Statement
No. 129, Disclosure of Information about Capital Structure, Statement No. 130,
Reporting Comprehensive Income and Statement No. 131, Disclosures about Segments
of an Enterprise and Related Information. Statement No. 129 establishes
standards for disclosing information about an entity's capital structure and is
effective for periods ending after December 15, 1997. Statement No. 130
establishes standards for reporting and display of comprehensive income and its
components in a full set of general-purpose financial statements. This statement
is effective for fiscal years beginning after December 15, 1997. Statement No.
131 establishes standards for the way that public business enterprises report
information about operating segments in annual financial statements and requires
that those enterprises report selected information about operating segments in
interim financial reports issued to shareholders. It also establishes standards
for related disclosures about products and services, geographic areas and major
customers. This statement is effective for financial statements for periods
beginning after December 15, 1997. Management of the Company has not determined
the effect that these new standards will have on the Company's current financial
statements and footnote disclosures.
7
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CERULEAN COMPANIES, INC.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the consolidated
financial statements and notes thereto. The Company's actual future results
could differ materially from its historical results, depending on, among other
factors, changing rates of utilization of medical services by its enrollees,
and changing rates of medical service costs.
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. ("BCBSGA") and its subsidiaries, and for
other lawful purposes. On February 2, 1996 the Company acquired all of the
outstanding capital stock of BCBSGA, following BCBSGA'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 BCBSGA until the
Conversion on February 2, 1996, the consolidated results of operations include
the historical operations of BCBSGA and its subsidiaries prior to February 2,
1996 and the Company (including BCBSGA and its subsidiaries on a consolidated
basis) from the period February 2, 1996 to September 30, 1996 and thereafter.
Effective May 14, 1996, the Company's registration under the Securities Act of
1933 of the public offering of its Class A Convertible Common Stock, no par
value (the "Class A Stock") with the Securities and Exchange Commission became
effective. The registration of the Class A Stock under section 12(g) of the
Securities Exchange Act of 1934 became effective on June 30, 1997. As of October
31, 1997, 351,535 shares of Class A Stock were issued and outstanding.
Currently, the Class A Stock is not publicly traded.
RESULTS OF OPERATIONS
Three Months Ended September 30, 1997 Compared to Three Months Ended
September 30, 1996
Premium revenues increased 14% to $377.3 million for the three months ended
September 30, 1997 from $331.3 million for the three months ended September 30,
1996. Premium revenues for Indemnity and PPO products increased $4.2 million to
$263.9 million for the three months ended September 30, 1997. The Company
experienced lower enrollment of 2% on the average in its indemnity and PPO
products during the 1997 third quarter compared to the same period in 1996. HMO
and POS premiums increased to $109.5 million for the three months ended
September 30, 1997 from $68.8 million for the three months ended September 30,
1996. 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 320,000 members at September 30, 1997 from 209,000
members at September 30, 1996.
Investment and other income increased 5% to $4.1 million for the three months
ended September 30, 1997 from $3.9 million for the three months ended September
30, 1996 as a result of growth in the Company's investment portfolio.
Realized gains on the sale of marketable securities increased to $5.3 million
for the three months ended September 30, 1997 from $1.8 million for the three
months ended September 30, 1996. These results are not necessarily indicative of
results to be expected in the future. The magnitude of realized gains in any
quarter can fluctuate due to fixed and equity market performance, as well as
timing of individual sale transactions, which are subject to decisions made by
the Finance Committee of the Company's Board of Directors or by individual
investment portfolio managers.
The Company's total loss ratio (benefits expense as a percentage of premium
revenues) increased to 90.8% for the three months ended September 30, 1997 from
88.3% for the three months ended September 30, 1996 as the Company experienced
increasing medical cost trends and higher utilization in its indemnity and PPO
products in all markets, and higher cost trends and utilization in all of its
managed care networks. Accordingly, the loss ratio for indemnity and PPO
products increased to 91.6% for the third quarter of 1997 from 90.4% for the
third quarter of 1996 and the loss ratio for HMO and POS products increased to
90.4% for the third quarter of 1997 from 81.9% for the third quarter of 1996.
The loss ratio for HMO and POS products was favorably impacted by risk sharing
settlements during the three month period ending September 30, 1996. Excluding
the impact of these settlements, the loss ratio for the three months ended
September 30, 1996 would be 84.1%.
8
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CERULEAN COMPANIES, INC.
Operating expenses increased 25% to $43.1 million for the third quarter of 1997
from $34.5 million for the third quarter of 1996, principally due to growth in
the Company's infrastructure necessary to support its Medicare Risk product
development, information technology development costs and the increased HMO and
POS membership base. As a result, the operating expense ratio (operating
expenses as a percentage of premium revenues) increased to 11.4% for the three
months ended September 30, 1997, from 10.4% for the three months ended September
30, 1996.
The Company recorded a net tax benefit of $1.0 million for the three months
ended September 30, 1997 compared to tax expense of $2.0 million for the three
months ended September 30, 1996. The 1997 net tax benefit relates to an increase
during 1997 in the net value of certain long-lived tax assets and a change in
estimate in the amount of deferred tax assets for its CHPN subsidiaries that are
expected to be realized. As a result of the change in estimate in the amount of
deferred tax assets for its CHPN subsidiaries, the Company recorded a deferred
tax benefit of $1.5 million.
As a result of the foregoing factors, net income for the three months ended
September 30, 1997 was $2.7 million compared to net income of $7.8 million for
the three months ended September 30, 1996.
Nine Months Ended September 30, 1997 Compared to Nine Months Ended
September 30, 1996
Premium revenues increased 14% to $1,116.3 million for the nine months ended
September 30, 1997 from $980.0 million for the nine months ended September 30,
1996. Premium revenues for Indemnity and PPO products increased $11.4 million to
$803.2 million for the nine months ended September 30, 1997. Enrollment for
Indemnity and PPO products decreased 3% as of September 30, 1997 compared to
September 30, 1996. HMO and POS premiums increased $122.1 million to $302.0
million for the nine months ended September 30, 1997, resulting from a 54%
increase in membership. 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 320,000 members at September
30, 1997 from 209,000 members at September 30, 1996.
Investment and other income increased 16% to $12.1 million for the nine months
ended September 30, 1997 from $10.4 million for the nine months ended September
30, 1996 as a result of growth in the Company's investment portfolio.
Realized gains of $11.1 million on the sale of marketable securities for the
nine months ended September 30, 1997 were $8.4 million higher than gains
realized in the nine months ended September 30, 1996. These results are not
necessarily indicative of results to be expected in the future. The magnitude of
realized gains in any period can fluctuate due to fixed and equity market
performance, as well as timing of individual sale transactions, which are
subject to decisions made by the Finance Committee of the Company's Board of
Directors or by individual investment portfolio managers.
The Company's total loss ratio (benefits expense as a percentage of premium
revenues) increased to 90.6% for the nine months ended September 30, 1997 from
88.9% for the nine months ended September 30, 1996 as the Company experienced
increasing medical cost trends and higher utilization in its indemnity and PPO
products in all markets, and higher cost trends and utilization in all of its
managed care networks. Accordingly, the loss ratio for indemnity and PPO
products increased to 91.8% for the 1997 nine month period from 90.3% for the
same period in 1996 and the loss ratio for HMO and POS products increased to
88.9% for the first nine months of 1997 from 84.7% for the 1996 period. The loss
ratio for HMO and POS products was favorably impacted by risk sharing
settlements during the nine month period for both years. Excluding the impact of
these settlements, the loss ratio for the nine months ended September 30, 1997
and 1996 would be 89.1% and 85.6%, respectively.
Operating expenses increased 22% to $125.3 million for the nine months ended
September 30, 1997 from $102.8 million for the nine months ended September 30,
1996, principally due to growth in the Company's infrastructure necessary to
support its Medicare Risk product development, information technology
development costs and the increased HMO and POS membership base. As a result,
the operating expense ratio increased to 11.2% for the nine months ended
September 30, 1997, from 10.5% for the nine months ended September 30, 1996.
On May 23, 1996, a hospital purchased a 5% interest in one of BCBSGA's CHPN
subsidiaries. On January 1, 1997, another hospital purchased a 5% interest in
the same CHPN subsidiary. These transactions were recorded as non-operating
income for the nine months ending September 30, 1996 and 1997, respectively.
9
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CERULEAN COMPANIES, INC.
In 1997, the Company increased the net value of certain long-lived assets which
will provide an estimated additional tax benefit of $2.1 million for 1997 of
which $1.6 million was recognized during the nine months ended September 30,
1997. Additionally, the Company recorded a tax benefit of $1.5 million as the
result of a change in estimate in the amount of deferred tax assets for its CHPN
subsidiaries that are expected to be realized. As a result of the foregoing, the
Company recorded a tax benefit of $0.9 million for the nine months ended
September 30, 1997 compared to tax expense of $3.9 million for the same period a
year ago.
As a result of the foregoing factors, net income decreased to $5.7 million
for the nine months ended September 30, 1997 from $15.6 million for the nine
months ended September 30, 1996.
LIQUIDITY AND CAPITAL RESOURCES
Nine Months Ended September 30, 1997 Compared to Nine Months Ended
September 30, 1996
The Company has both short-term and long-term liquidity needs and has structured
its investment portfolios accordingly. Over $174.2 million of the Company's
investment portfolio is held at BCBSGA and is subject to limitations prescribed
by Georgia insurance statutes. The Company's 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 invested in the fixed income and
equity markets. These investments provide 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, to preserve capital and to maximize yield in conformity with all
regulatory requirements.
Net cash provided by operating activities amounted to $4.5 million for the nine
months ended September 30, 1997 compared to $24.4 million for the same period in
1996. This was primarily the result of lower operating earnings in the 1997 nine
month period and the payment in 1997 of certain obligations incurred in 1996.
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. The Company believes its future cash resources
will be adequate to meet its operating requirements.
The Company experienced higher claim payouts during the period ended September
30, 1997 compared to the period ended September 30, 1996. To maintain its
short-term working funds at an appropriate level, approximately $15.0 million of
fixed income and equity securities were sold during the second quarter of 1997
and reinvested in short-term securities.
In February 1996, the Company received $46.6 million in connection with its
Preferred Stock offering, net of offering costs of $3.3 million.
The Company believes that its long-term capital requirements can be met with a
combination of (i) its current resources, including proceeds from the sale of
the Preferred Stock, (ii) cash flows from operations and (iii) potential debt or
equity offerings.
CONTINGENCIES
See the description under the same caption in Note 5 of the Notes to
Consolidated Financial Statements, which description is incorporated herein by
reference.
YEAR 2000 COMPUTER SOFTWARE MODIFICATION COSTS
All companies that operate on mature computer software programs face the
difficult task of how to reprogram or replace their existing systems, which have
protocols that address dates in terms of the 20th century (19xx) only. The
Company has analyzed its systems and has formulated an action plan to either
modify or replace its existing programs. The project's impact on the operating
results of the Company is estimated to be $10.0 million over the next 5 years
and are expected to be funded through operating cash flows. Modification costs
will be expensed as incurred, while the costs of new software will be
capitalized and amortized over the software's useful life.
10
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CERULEAN COMPANIES, INC.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
Not required.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Note 5 to the Consolidated Financial Statements in Part I, Item 1 regarding the
lawsuit filed on September 3, 1997 in the Superior Court of Fulton County by
nine groups on behalf of themselves and a class putatively composed of all other
501(c)(3) organizations in Georgia is incorporated herein by reference.
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
None
11
<PAGE> 12
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
EXHIBIT
NUMBER DESCRIPTION
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.(1)
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, Inc. by Cerulean Companies, Inc. on October 30, 1995, as
amended and supplemented.(1)
2.3 Conversion Order dated December 27, 1995 from Georgia Insurance
Commissioner.(1)
3.1 Articles of Incorporation of Cerulean Companies, Inc.(1)
3.2 Bylaws of Cerulean Companies, Inc.(1)
4.1 Stock Escrow Agreement among Cerulean Companies, Inc., Blue Cross and
Blue Shield of Georgia, Inc. and SunTrust Bank, Atlanta.(1)
4.2 Specimen form of Class A Convertible Common Stock certificate.(1)
10.1 Administrative Services Agreement between the State Personnel Board and
Blue Cross and Blue Shield of Georgia, Inc., dated July 1, 1994.(1)
10.2 Plaza Lease Capital Plaza Associate ("Landlord") and Blue Cross and
Blue Shield of Georgia, Inc. ("Tenant") dated December 23, 1986.(1)
10.3 Executive Compensation Plans and Arrangements.
(a) Employment Agreement between Blue Cross and Blue Shield of
Georgia, Inc. and Mark Kishel, M.D., dated September 23,
1993.(1)
(b) Deferred Compensation Plan.(1)
(c) Annual Executive Incentive Plan.(1)
(d) Long-Term Incentive Plan.(1)
(e) Employment Agreement between Blue Cross and Blue Shield of
Georgia, Inc. and Richard D. Shirk dated January 1, 1997.(2)
(f) Performance Unit Plan, effective as of February 2, 1996.*
10.4 $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.(1)
10.5 $9,000,000 Credit Facility Between Blue Cross and Blue Shield of
Georgia, Inc., as Borrower and Wachovia Bank of Georgia, N.A., as
Agent, dated December 19, 1996.(3)
27 Financial Data Schedule (for SEC use only).*
(b) Reports on Form 8-K
The Company filed a report on Form 8-K dated September 3, 1997. This filing was
made in connection with the lawsuit described in Note 5 to the Consolidated
Financial Statements in Part I, Item 1 which is incorporated herein by
reference.
- ----------
* This exhibit is filed herewith.
1 This exhibit to Form S-1, Registration No. 333-2796, filed on March 27,
1996 and subsequent amendments is incorporated herein by reference.
2 This exhibit to Form 10-Q filed on May 15, 1997 is incorporated herein by
reference.
3 This exhibit to Form 10-K filed on March 31, 1997 is incorporated herein by
reference.
12
<PAGE> 13
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: November 11, 1997 By: /s/ Richard D. Shirk
---------------------------
Richard D. Shirk, President and
Chief Executive Officer
Date: November 11, 1997 By: /s/ John A. Harris
---------------------------
John A. Harris, Treasurer
13
<PAGE> 1
PERFORMANCE UNIT PLAN
Whereas, Cerulean Companies, Inc. ("the Company") desires to provide a greater
linkage between the compensation of certain key managers of the Company and the
interests of the Company's stockholders; and
Whereas, it has been determined by the Board of Directors that to effect this
purpose at least one management incentive plan should reward those key managers
based upon increases in the value of the organization;
Now, therefore, the Company hereby establishes the 1996 Cerulean Companies, Inc.
Performance Unit Plan effective February 2, 1996.
1. DEFINITIONS
For the purposes of this Plan, the following terms mean:
a) BEGINNING COMPANY VALUE - the value of the Company at the effective date
of this Plan is considered to be $221,100,000.
b) CHANGE IN CONTROL
1. An acquisition by any Person (as used in sections 13(d) and 14 (d) of
the Securities Exchange Act of 1934) of Beneficial Ownership as
defined in Rule 13d-3 under the Securities Exchange Act of 1934) of the
securities of the Company that are then outstanding and entitled to
vote generally in the election of directors ("Voting Securities
Outstanding"); provided, however, that such acquisition of Beneficial
Ownership would result in the Person's Beneficially Owning fifty
percent (50%) or more of the combined voting power of Voting Securities
Outstanding; and provided further, that immediately prior to such
acquisition such Person was not a direct or indirect Beneficial Owner
of fifty percent (50%) or more of the combined voting power of Voting
Securities Outstanding; or
2. The termination of service as directors, for any reason other than
death, disability or retirement from the Board, during any period of
two consecutive years or less, of individuals who at the beginning of
such period constituted a majority of the Board, unless the election of
or nomination for election of each new director during such period was
approved by a vote of at least two-thirds of the continuing directors
as defined under the Articles of Incorporation.
1
<PAGE> 2
3. The approval by the shareholders of the Company of any merger or
consolidation or statutory share exchange as a result of which the
Voting Securities Outstanding shall be changed, converted, or exchanged
(other than a merger or share exchange with a wholly-owned subsidiary
of the Company) or liquidation of the Company or any sale or
disposition of fifty percent (50%) or more of the assets or earning
power of the Company; or
4. The approval by the shareholders of the Company of any merger or
consolidation or statutory share exchange to which the Company is a
party, as a result of which the persons who were shareholders of the
Company immediately before the effective date of the merger,
consolidation, or statutory share exchange shall have Beneficial
Ownership (as defined in Rule 13d-3 under the Securities Exchange Act
of 1934) of less than fifty percent (50%) of the Voting Securities
Outstanding of the surviving corporation following the effective date
of such merger, consolidation, or statutory share exchange.
No Change in Control shall occur as a result of any acquisition of Voting
Securities Outstanding by any subsidiary of the Company or by an employee
benefit plan (or related trust) sponsored by the Company or a current
affiliate.
c) COMMITTEE - the Compensation Committee of the Company's Board of
Directors, which has been designated by that Board to manage and administer
this Plan.
d) COMPANY - Cerulean Companies Inc., a Georgia company and any successor to
that company;
e) COMPANY VALUE - the Company Value may be determined by calculating the
Market Value at the time of a market event that creates a definite value of
the Company and results in liquidity. The Board will determine when this
event occurs until such time as the Company's common stock is listed or
traded on a recognized United States exchange.
f) DISABILITY - total disability as determined by the terms of the Company's
long-term disability plan currently in effect.
g) EMPLOYEE - any person who is employed by the Company or one of its
divisions or subsidiary corporations.
h) FINANCIAL PLAN - the business plan that is approved by the Board of
Directors of the Company, as described in the Bylaws.
i) MEASUREMENT PERIOD - the period for assessing a Unit Value will begin on
February 2, 1996 and will end on the date when Company Value is first
determinable in accordance with e) Company Value, as defined in this
Section 1.
2
<PAGE> 3
j) PARTICIPANT - each key Employee who is so designated by the Committee.
Participation in this Plan shall be limited to a select group of management
and highly compensated employees.
k) PERFORMANCE HURDLE - the average of 1-Year Treasury Bill yield, as
indicated in the Wall Street Journal on the published date nearest to the
end of each quarter for the preceding year, compounded over the Measurement
Period.
l) PLAN OR PUP - the Cerulean Companies, Inc. Performance Unit Plan first
effective as of February 2, 1996, as amended from time to time.
m) UNIT - an accounting unit awarded by the Committee to measure the benefit
payable under this Plan. 1,000,000 have been approved for distribution by
the Committee during the first Measurement Period.
n) UNIT VALUE - the value of a unit. This value is determined by dividing
10,000,000 into Company Value.
2. UNIT AWARDS
The Committee will award Units to each Participant in amounts the Committee
deems appropriate. A Unit will be outstanding once it is awarded if it has not
been canceled as provided herein.
3. BEGINNING UNIT VALUE
The beginning Unit Value of each Unit awarded as of February 2, 1996 is $22.11.
4. VESTING
A Participant's units will be 100% vested and non-forfeitable upon the
occurrence of the earliest of the following events:
- A Change in Control
- Death
- Disability
- Retirement under the Company's qualified retirement plan
- The end of the Measurement Period
- December 31, 1999
3
<PAGE> 4
5. AWARD MEASUREMENT
The award to a Participant (measured at the end of the Measurement Period) shall
be equal to any increased Unit Value (Unit Value at the end of the Measurement
Period less Beginning Unit Value in accordance with 3.) multiplied by the number
of units awarded. If the growth in Company Value over the Measurement Period is
less than the Performance Hurdle, the award will be zero.
6. AWARD PAYMENTS
Awards will be paid to Participants at the end of the Measurement Period. If a
Change in Control shall occur first, however, payment will be made as soon as
practical after the Change in Control.
At the Committee's sole discretion, a Plan award (as measured under Section 5)
may be paid either (A) in cash, in a lump sum, (B) in the Company's stock; or
(C) in any combination of cash and Company stock.
If the Company or its subsidiaries are holders of a valid judgment against any
Participant at the time when benefit payments or installments are due, the
Committee is entitled to direct any portion or all of a benefit to be applied to
the debt.
Before any benefit is paid in the Company's stock, the Participant must sign any
agreements which the Committee deems appropriate. These can include an
Employee-Shareholder Agreement or an Employee-Management Shareholder Agreement.
Any Participant who is unwilling to enter into such agreements will forfeit any
Plan benefits otherwise payable. If the Committee decides to pay a benefit
wholly or partly in the Company's common stock, no fractional shares will be
issued.
The Committee will direct Plan benefits to be paid as soon as practicable after
the end of the later of: (1) when Vesting occurs, or (2) at the end of the
Measurement Period.
7. WITHHOLDING OF BENEFIT PAYMENTS
The Company is entitled to withhold from benefit payments any amounts due or
required to be withheld under applicable state or federal tax law or by the
valid order of any court at the time such payment is due.
8. BENEFICIARY
Each Participant may designate in writing, delivered to the Committee, a
beneficiary(ies) who will be paid benefits, if any, in the event of the
Participant's death. The beneficiary designation is not effective until received
by the Committee or its representative. If a deceased Participant has not
designated a beneficiary(ies) - or if the beneficiary does not survive the
Participant - then the Committee will pay any Plan benefit to a Participant's
4
<PAGE> 5
survivors in this order (within 30 days of the Participant's date of death):
(1) surviving lawful spouse, (2) equally to surviving children, (3) to the
Participant's estate.
9. COMMITTEE
The Committee has the authority, in the sole and absolute exercise of its
discretion, to:
- approve Participants as recommended by the Chief Executive Officer,
- approve the number of Units awarded to each Participant,
- determine the form of benefit payment under this Plan,
- make any equitable adjustments to the number of outstanding Units or
to the provision for the payment of benefits in the Company's stock,
- interpret the terms of this Plan, and
- make such other decisions as the Committee deems appropriate in
connection with the management and administration of this Plan.
No member of the Committee is eligible to vote on a decision affecting him/her
individually as a Participant. If a Committee member is designated as a
Participant, the other Committee members will decide how many Units will be
awarded, the form of benefit payments, and any other issue respecting the member
individually as a Participant.
10. LIMITATION ON CLAIM FOR BENEFITS
Any claim under this Plan is solely the obligation of the Company. No member of
the Committee nor any director, officer, employee or agent of the Company is
liable as an individual to any person for the payment of a benefit or any other
claim under this Plan.
All cash payments under this Plan are made from the Company's general assets. No
claim for payment under this Plan will be superior to any unsecured claim of a
general creditor of the Company.
11. POSSIBLE ADDITIONAL CONDITIONS
The Company and the Committee reserve the right to require a Participant or a
beneficiary to sign any documents deemed appropriate, including the release of
the Company and the Committee from any laws which control the payment of
benefits to a minor or to an incompetent person.
12. NOT A CONTRACT OF EMPLOYMENT
Participation in this Plan does not give any person the right to be retained as
an Employee. Upon the termination of employment, the Participant does not have
any interest or right or claim other than as expressly provided in this Plan.
5
<PAGE> 6
13. ALIENATION, ASSIGNMENT OR OTHER RIGHTS
Neither a Participant nor a designated beneficiary has any right to anticipate
or assign any benefit or payment due under this Plan. Furthermore, no
Participant or beneficiary has any rights which are either legally or
customarily associated with the rights of a holder of the Company's stock,
including the right of access to any financial information regarding the
Company.
14. AMENDMENT AND TERMINATION
The Company reserves the right to amend this Plan from time to time through
action of its Board of Directors. The Company is entitled to terminate this Plan
as of any December 31, and that date becomes the end of the Measurement Period
for determining benefits. In such event, all Participants will be fully vested
as of the termination date.
MISCELLANEOUS
a) This Plan will be construed in accordance with the laws of the State of
Georgia.
b) If any provision of this Plan is invalid or unenforceable, it will not
affect the other provisions. This Plan will remain in effect as though
the invalid or unenforceable provision were omitted.
In witness whereof, Cerulean Companies, Inc., has caused this Plan to be
executed on this _________ day _______________, 1997.
CERULEAN COMPANIES, INC.
By
---------------------------------
ATTEST
- ---------------------------------
6
<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 SEPTEMBER 30, 1997, AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> SEP-30-1997
<EXCHANGE-RATE> 1
<DEBT-HELD-FOR-SALE> 203,345,907
<DEBT-CARRYING-VALUE> 0
<DEBT-MARKET-VALUE> 0
<EQUITIES> 56,737,318
<MORTGAGE> 0
<REAL-ESTATE> 0
<TOTAL-INVEST> 272,756,308
<CASH> 48,865,617
<RECOVER-REINSURE> 0
<DEFERRED-ACQUISITION> 0
<TOTAL-ASSETS> 549,028,338
<POLICY-LOSSES> 199,989,239
<UNEARNED-PREMIUMS> 7,715,864
<POLICY-OTHER> 22,715,241
<POLICY-HOLDER-FUNDS> 0
<NOTES-PAYABLE> 3,500,000
46,645,042
0
<COMMON> 3,515
<OTHER-SE> 194,361,387
<TOTAL-LIABILITY-AND-EQUITY> 549,028,338
1,116,277,830
<INVESTMENT-INCOME> 12,074,011
<INVESTMENT-GAINS> 11,116,690
<OTHER-INCOME> 0
<BENEFITS> 1,011,509,901
<UNDERWRITING-AMORTIZATION> 125,315,572
<UNDERWRITING-OTHER> 0
<INCOME-PRETAX> 3,918,058
<INCOME-TAX> (915,000)
<INCOME-CONTINUING> 5,659,696
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 5,659,696
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
<RESERVE-OPEN> 0
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</TABLE>
