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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, 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
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CERULEAN COMPANIES, INC.
(Exact name of registrant as specified in its charter)
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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)
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(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 April 30, 1997 - 351,915 shares
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CERULEAN COMPANIES, INC.
FORM 10-Q
MARCH 31, 1997
INDEX
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PAGE
NUMBER
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PART I. FINANCIAL INFORMATION
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Item 1. Consolidated Financial Statements
Consolidated Balance Sheets as of
March 31, 1997 and December 31, 1996 Page 3
Consolidated Statements of Income for the three months
ended March 31, 1997 and 1996 Page 4
Consolidated Statements of Cash Flows for the three months
ended March 31, 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 9
PART II. OTHER INFORMATION
-----------------
Item 1. Legal Proceedings Page 10
Item 2. Changes in Securities Page 10
Item 3. Defaults Upon Senior Securities Page 10
Item 4. Submission of Matters to a Vote of Security Holders Page 10
Item 5. Other Information Page 10
Item 6. Exhibits and Reports on Form 8-K Page 10
Signatures Page 12
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2
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PART I - FINANCIAL INFORMATION
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS
CERULEAN COMPANIES, INC.
CONSOLIDATED BALANCE SHEETS
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MARCH 31, DECEMBER 31,
1997 1996
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(UNAUDITED) ------------
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ASSETS
Investments:
Fixed maturities:
Available-for-sale, at fair value (amortized cost: $174,584,442;
$156,949,004) $ 172,515,397 $157,637,412
Equity securities, at fair value (cost: $51,245,925; $50,969,299) 59,274,367 60,104,421
Short-term investments, at fair value (cost: $7,188,469; $475,000) 7,188,469 423,788
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Total investments 238,978,233 218,165,621
Cash and cash equivalents 67,385,328 89,024,410
Reimbursable portion of estimated benefit liabilities 101,635,300 101,645,300
Accounts receivable 45,400,731 42,606,134
FEP assets held by agent 22,715,241 22,715,241
Property and equipment 31,098,485 31,264,521
Other assets 13,854,435 11,808,667
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Total assets $ 521,067,753 $517,229,894
============= ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Estimated benefit liabilities $ 186,692,267 $181,718,093
Unearned premiums 10,616,133 8,983,956
FEP stabilization reserve 22,715,241 22,715,241
Accounts payable and accrued expenses 28,048,099 31,519,728
Payables to other plans 2,350,884 2,633,307
Other liabilities 33,397,429 31,944,999
Note payable 3,500,000 3,500,000
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Total liabilities 287,320,053 283,015,324
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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. 46,645,042 46,645,042
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Authorized, issued and outstanding, 49,900 shares
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 351,025 and
350,615 shares, respectively 3,510 3,506
Common Stock, no par value.
Authorized and unissued 100,000,000 shares - -
Net unrealized appreciation on securities 4,861,299 7,886,318
Retained earnings 182,237,849 179,679,704
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Total shareholders' equity 187,102,658 187,569,528
Total liabilities and shareholders' equity ------------- ------------
$ 521,067,753 $517,229,894
============= ============
</TABLE>
See accompanying notes.
3
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CERULEAN COMPANIES, INC.
CONSOLIDATED STATEMENTS OF INCOME
UNAUDITED
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THREE MONTHS ENDED MARCH 31,
1997 1996
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Revenues:
Premiums $362,614,748 $324,005,012
Investment and other income 3,646,145 3,197,305
Realized gains 1,915,247 89,707
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Total revenues 368,176,140 327,292,024
Benefits expense 323,783,964 289,037,972
Operating expenses, net of expense reimbursements
of $25,941,231 and $20,448,840, respectively 41,673,485 34,453,574
------------ ------------
Operating income 2,718,691 3,800,478
Non-operating income (Note 3) 1,275,000 -
------------ ------------
Income before income taxes and minority interest 3,993,691 3,800,478
Income tax expense 619,025 814,822
Minority interests (68,017) (182,869)
------------ ------------
Net income $ 3,306,649 $ 2,802,787
============ ============
</TABLE>
See accompanying notes.
4
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CERULEAN COMPANIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
UNAUDITED
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THREE MONTHS ENDED MARCH 31,
1997 1996
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OPERATING ACTIVITIES
Net income $ 3,306,649 $ 2,802,787
Adjustments to reconcile net income to net cash provided by (used in)
operating activities:
Non-cash and non-operating items:
Depreciation 2,339,909 2,244,503
Amortization 80,184 87,577
Uncollectible receivables (255,992) 803,376
Gain on sale of investments (1,915,247) (89,707)
(Gain) loss on sale of property and equipment (8,325) 29,979
Non-operating income (1,275,000) -
Decrease (increase) in certain assets:
Reimbursable portion of estimated benefit liabilities 10,000 (3,347,000)
Accounts receivable (2,538,605) (12,890,704)
Other assets (1,257,865) 1,432,150
Increase (decrease) in certain liabilities:
Estimated benefit liabilities 4,974,174 5,088,381
Unearned premiums 1,632,177 (1,388,408)
Accounts payable and accrued expenses (3,471,629) 2,880,855
Payables to other plans (282,423) 29,377
Other liabilities 1,452,429 (884,766)
Minority interest in sale of stock by a subsidiary (1,225,000) -
-------------- ------------
Net cash provided by (used in) operating activities 1,565,436 (3,201,600)
INVESTING ACTIVITIES
Investments purchased (44,643,879) (33,403,016)
Investments sold or matured 21,853,409 13,522,050
Property and equipment purchased (2,173,873) (2,061,266)
Property and equipment sold 8,325 558,057
-------------- ------------
Net cash used in investing activities (24,956,018) (21,384,175)
FINANCING ACTIVITIES
Proceeds from the issuance of preferred stock - 46,633,000
Dividends accrued (748,500) (482,367)
Sale of stock by a subsidiary 2,500,000 -
-------------- ------------
Net cash provided by financing activities 1,751,500 46,150,633
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(Decrease) increase in cash and cash equivalents (21,639,082) 21,564,858
Cash and cash equivalents at beginning of period 89,024,410 49,304,688
-------------- ------------
Cash and cash equivalents at end of period $ 67,385,328 $ 70,869,546
============== ============
</TABLE>
See accompanying notes.
5
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CERULEAN COMPANIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1997
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. ("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 March 31, 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 (the "Class
A Stock") with the Securities and Exchange Commission became effective. As of
April 30, 1997 eligible subscribers had accepted 351,915 shares of no par value
Class A Stock. Currently, the Class A Stock is not publicly traded.
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 third parties are
recorded as non-operating income and are presented as a separate line item in
the consolidated statements of income.
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CERULEAN COMPANIES, INC.
2. EARNINGS PER SHARE
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. Presently there is no market for the 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.
3. NON-OPERATING INCOME
CHPNs are market-based service entities to support HMO and POS products.
BCBSGA owns a 51% interest, and local physician and/or hospital groups,
own the remaining equity interests in the CHPNs. Clinical services are
provided by the physician or hospital partners as well as other providers with
which the CHPNs maintain contracts, and BCBSGA provides sales, management and
administrative services, including information systems and data management
services, through service contracts with the CHPNs.
On January 1, 1997, a hospital purchased a 5% interest in one of BCBSGA's CHPN
subsidiaries for $2.5 million and received in exchange 7.2815 shares of Class C
common stock of the CHPN subsidiary. In accordance with the CHPN formation
agreement, BCBSGA's 51% equity interest in the CHPN subsidiary was not diluted
as a result of the transaction. BCBSGA recorded non-operating income of $1.3
million for the gain related to its portion of this transaction and increased
the minority interest liability for this CHPN by $1.2 million. After deducting
deferred income taxes of $0.3 million, net income was favorably impacted by
$1.0 million.
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.
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 (the "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 March 31, 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 (the "Class
A Stock") with the Securities and Exchange Commission became effective. As of
April 30, 1997 eligible subscribers had accepted 351,915 shares of no par value
Class A Stock. Currently, the Class A Stock is not publicly traded.
RESULTS OF OPERATIONS
Three Months Ended March 31, 1997 Compared to Three Months Ended March 31, 1996
Premium revenues increased 12% to $362.6 million for the three months ended
March 31, 1997 from $324.0 million for the three months ended March 31, 1996.
Premium revenues for Indemnity and PPO products increased $1.9 million to
$268.3 million for the three months ended March 31, 1997. Enrollment for
Indemnity and PPO products decreased 2% as of March 31, 1997 compared to March
31, 1996 while the average price per contract increased 3% over the same
period. HMO and POS premiums increased $36.5 million to $91.2 million for the
three months ended March 31, 1997 resulting from a 75% increase in membership.
New business volume for fully insured HMO and POS products, and to a lesser
extent, migrations from traditional indemnity products into HMO and POS
products, continued to drive HMO and POS membership growth to 284,000 members
at March 31, 1997 from 162,000 members at March 31, 1996.
Investment and other income increased 14% to $3.6 million for the three months
ended March 31, 1997 from $3.2 million for the three months ended March 31,
1996. A substantial portion of the increase was a result of growth in the
Company's investment portfolio. A $0.4 million accrual related to an
arbitration award against the Company's health maintenance organization
provided an offset to other income in the 1997 period.
Realized gains on the sale of marketable securities of $1.9 million for the
three months ended March 31, 1997 were $1.8 million higher compared to the
three months ended March 31, 1996. These results can vary based on actions by
the Company's external money managers.
The Company's total loss ratio (benefits expense as a percentage of premium
revenues) increased to 89.3% for the three months ended March 31, 1997 from
89.2% for the three months ended March 31, 1996. This was primarily the result
of an increase in the loss ratio for indemnity and PPO products to 90.7% for
the first quarter of 1997 from 90.1% for the first quarter of 1996. Per
contract benefits expense incurred for these products in the 1997 period
increased 4% on the average compared to benefits incurred for the comparable
quarter in 1996.
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CERULEAN COMPANIES, INC.
Operating expenses increased 21% to $41.7 million for the first quarter of 1997
from $34.5 million for the first quarter of 1996, principally due to growth in
the Company's infrastructure necessary to support both product development 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
11.5% for the three months ended March 31, 1997, from 10.6% for the three
months ended March 31, 1996.
Non-operating income of $1.3 million for the three months ended March 31, 1997
related to a gain on the sale of a 5% interest in one of the Company's CHPN
subsidiaries to a third party.
The effective income tax rate of 16% for the three months ended March 31, 1997
decreased from the effective income tax rate of 21% for the three months ended
March 31, 1996, principally due to an increase in the valuation of certain
long-lived tax assets for which tax deductions will occur in the future.
As a result of the foregoing factors, net income increased to $3.3 million for
the three months ended March 31, 1997 from $2.8 million for the three months
ended March 31, 1996.
LIQUIDITY AND CAPITAL RESOURCES
Three Months Ended March 31, 1997 Compared to Three Months Ended March 31, 1996
The Company has both short-term and long-term liquidity needs and has
structured its investment portfolios accordingly. Over $178.0 million of the
Company's investment portfolio is held at BCBSGA and is subject to limitations
prescribed by Georgia insurance statutes. 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 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, to preserve capital and to maximize yield in conformance with all
regulatory requirements.
Net cash provided by operating activities amounted to $1.5 million for the
three months ended March 31, 1997 compared to net cash used in operating
activities of $3.7 million for the same period in 1996. During the first
quarter of 1996 there were higher levels of accounts receivable related to the
significant growth in HMO and POS product enrollment, from the end of 1994 to
March 31, 1996, which resulted in an increase of over 140%. 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.
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 operation and (iii) potential debt or
equity offerings.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
Not required.
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CERULEAN COMPANIES, INC.
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
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
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EXHIBIT
NUMBER DESCRIPTION
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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 Crossand 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)
</TABLE>
______________________________
(1) This exhibit to Form S-1, Registration No. 333-2796, filed on March 27, 1996
and subsequent amendments is incorporated herein by reference.
10
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CERULEAN COMPANIES, INC.
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Exhibit
Number DESCRIPTION
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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.(3)
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.(2)
27 Financial Data Schedule (for SEC use only).
</TABLE>
(b) Reports on Form 8-K
None
- -----------------------
(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-K filed on March 31, 1997 is incorporated herein
by reference.
(3) This exhibit is filed herewith.
11
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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: May 12, 1997 By: /s/ Richard D. Shirk
---------------------------------
Richard D. Shirk, President and
Chief Executive Officer
Date: May 12, 1997 By: /s/ John A. Harris
---------------------------------
John A. Harris, Treasurer
12
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EXHIBIT 10.3 (e)
EMPLOYMENT AGREEMENT
THIS AGREEMENT, made this 1st day of January, 1997, between BLUE
CROSS AND BLUE SHIELD OF GEORGIA, INC., a Georgia corporation ("Blue Cross"),
CERULEAN COMPANIES, INC., a Georgia corporation ("Cerulean") and RICHARD D.
SHIRK, a resident of Atlanta, Fulton County, Georgia. Cerulean and Blue Cross
are sometimes referred to herein collectively as "Employer."
RECITALS
WHEREAS, Employer desires to employ and retain the unique experience,
ability and services of Employee and to prevent any other competitive business
from securing his services and utilizing his experience, background and
know-how; and,
WHEREAS, the terms, conditions and undertakings of this Agreement were
submitted to and duly approved and authorized by the Compensation Committees of
the Boards of Directors of each of Blue Cross and Cerulean at meetings held on
December 6, 1996, and by the Boards of Directors of Blue Cross and Cerulean at
meetings held on December 7, 1996.
NOW, THEREFORE, in consideration of the mutual covenants hereinafter
set forth and the good and valuable services tendered by the Employee to the
Employer in the past and future, the parties hereto agree as follows:
1. EMPLOYMENT; DUTIES.
Each of Cerulean and Blue Cross hereby employs Employee as its
President and Chief Executive Officer and Employee hereby accepts and agrees to
such employment pursuant to the terms and conditions of this Agreement.
Employee shall devote his full time to such employment as President and Chief
Executive Officer of Employer, and, if elected, shall serve as a Director and
Officer of any of Employer's subsidiaries and affiliates and shall perform
duties customarily incident to such offices and such other duties as may from
time to time be assigned to him by the Board of Directors; provided, however,
that Employee shall be permitted to serve as a member of the Board of Directors
of companies that do not compete with Employer so long as such directorships do
not affect the performance of his duties under this Agreement. In addition, so
long as the Bylaws of Employer so provide, or if otherwise selected, Employee
shall serve as a member of Employer's Board of Directors.
2. TERM.
The initial term of this Agreement shall be for a period commencing
January 1, 1997, and terminating on December 31,1998, provided that the terms
of this Agreement shall be extended automatically on the first day of each
month for one additional month so that this
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Agreement shall always be for a full two (2) year period unless the Board of
Directors of either Cerulean or Blue Cross shall affirmatively decide and
notify Employee to the contrary in writing, in which event the Agreement shall
terminate at the end of the two (2) year period commencing on the first day of
the month following such notice.
3. COMPENSATION.
Employee shall be paid a base salary in the amount of Four Hundred and
Twenty-Five Thousand Dollars ($425,000) per annum. The amount of such base
salary shall be fixed by the Boards of Directors or the Compensation Committees
of Cerulean and Blue Cross from time to time; provided, however, that such
compensation shall always be equal, at a minimum, to the base salary rate in
effect during the immediately preceding year during the term of this Agreement.
The base salary shall be paid to Employee with the same frequency and in the
same manner as other executives of Employer. Cerulean and Blue Cross shall be
jointly and severally obligated as Employer under this Agreement.
4. EMPLOYEE INCENTIVES.
Employee shall be allowed to participate in any and all Incentive
Compensation Plans, whether annual or long term, cash or non-cash, established
by Employer for any other executives of the Employer or its subsidiaries on a
basis consistent with the position of Employee, but, in any event, not less
than on an equal basis with any other executives of the Employer or its
subsidiaries.
5. COMPENSATION CONTINUATION UPON TERMINATION.
(a) If, at any time during the term of this Agreement, the
Employee's employment is terminated by the Employer for any reason other than
For Cause, as hereinafter defined, or by Employee for Good Reason, as
hereinafter defined, then all payments under this Agreement shall continue at
the same rate as in effect at the time of such involuntary termination for a
period of two (2) years; provided, however that if such termination occurs
after notice has been given to Employee, pursuant to Paragraph 2 of this
Agreement, that the Agreement will not be extended, such payments shall only
continue for the remaining term of this Agreement.
(b) If, at any time, the Employee's employment is terminated by
the Employer For Cause, as hereinafter defined, the Employee shall not, except
for such benefits as may be vested, be entitled to any compensation whatsoever
from Employer after the effective date of termination.
(c) If, at any time during the term of this Agreement, Employee
voluntarily terminates his employment without Good Reason, then Employee shall
not, except for such benefits as may be vested, be entitled to any compensation
whatsoever after the effective date of such termination.
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<PAGE> 3
(d) As used in the preceding subparagraphs of this Paragraph 5,
the term "all payments" shall include, in addition to vested benefits, salary
payments, the payment by the Employer of all sums necessary to continue the
health care plan then in effect for Employee, his spouse and his dependents,
and the life insurance program covering the life of Employee. The term "all
payments" shall also include Employee's automobile allowance and annually, on
March 15th of each year, an Incentive Compensation Plan award equal to the
average of the last two annual Incentive Compensation Plan awards received by
Employee, including only years in which Incentive Compensation Plan awards were
generally paid. At the conclusion of the two (2) year payout period, Employee
and his dependents shall be entitled to receive retiree health benefits.
(e) Termination "For Cause" shall be such cause involving (i) the
willful engaging by Employee in conduct, or the taking by Employee of any
action, which is materially injurious to Employer, (ii) the willful and
repeated failure by Employee to substantially perform his duties hereunder; or
(iii) gross misconduct or conduct involving moral turpitude. Such cause shall
be determined first by the Governance Committees of the Boards of Directors of
Blue Cross and Cerulean and then approved by a majority of all of the members
the Board of Directors of both Cerulean and Blue Cross (not just a majority of
the members present and voting); provided, however, that in no event shall
differences in management philosophy or the structure or operations of the
Employer be deemed such a cause.
(f) "Good Reason" shall mean (a) any assignment to Employee of any
duties significantly different than those contemplated in Paragraph 1 hereof,
or any material limitation in Employee's authority, powers or responsibilities
as Chief Executive Officer not contemplated in Paragraph 1 hereof, (b) the
failure to be elected, or his removal as a member of the Board of Directors of
either Cerulean or Blue Cross unless required by a change in Georgia law, (c)
receipt by Employee of any notice limiting the term of this Agreement to two
(2) years as provided in Paragraph 2 hereof, (d) a material breach by either
Cerulean or Blue Cross of any of the material provisions of this Agreement that
are not cured within thirty (30) days after notice, or (e) a Change in Control
as defined herein.
6. DISABILITY.
If Employer determines that Employee's physical or mental condition
prevents his performance during the term of this Agreement, then the monthly
salary payments described in Paragraph 3 of this Agreement shall continue at
the same rate then in effect for a period of two (2) years and Employee shall
become immediately entitled to the benefits provided in Paragraph 10 hereof.
If such condition is accepted by Employer's insurance carrier for disability
coverage, the amount of Employer's compensation obligation to Employee shall be
limited to the difference between disability payments to Employee (whether
received from the insurance carrier or Social Security, or both) and Employee's
salary at the time disability payments commence.
3
<PAGE> 4
7. VACATION.
Employee shall be entitled to six (6) weeks of vacation each year
instead of the vacation time that would otherwise be provided for in accordance
with Employer's normal policies.
8. EMPLOYEE BENEFITS.
This Agreement is not intended to and shall not be deemed to be in
lieu of any rights, benefits and privileges to which Employee may be entitled
as an employee of Employer under any retirement, pension, profit-sharing,
insurance, prepaid health care plans or other plans which may not be in effect
or which may hereafter be adopted; it being understood that Employee shall have
the same rights and privileges to participate in such plans and benefits as any
other employee of Employer. Information regarding the various benefit and
incentive plans available to executive and other employees of Employer have
previously been delivered to Employee and additional copies are available upon
request by Employee.
9. EXPENSES.
It is recognized that Employee will have to incur certain
out-of-pocket expenses in connection with his services hereunder. Employer
will reimburse Employee for reasonable expenses incurred in the furtherance of
Employer's business. In addition, throughout the term of this Agreement,
Employer shall pay for, provide Employee with, reimburse Employee for or
provide Employee at its expense: (i) an automobile allowance sufficient to
lease a Buick Park Avenue automobile or another automobile of comparable cost
selected by Employee; (ii) the cost of memberships in luncheon and civic clubs
as may be agreed to by Employer and Employee; (iii) the cost of having his
spouse accompany him on his out-of-town trips made in the course of carrying
out his duties as President and Chief Executive Officer of Employer; and (iv)
any costs or expenses incurred by Employee in connection with the negotiation
or renegotiation of this Employment Agreement or the enforcement of any
provision hereof.
10. ADDITIONAL BENEFITS.
In addition to the other benefits, compensation and expenses provided
to Employee under this Agreement, Employer shall also provide the following:
(a) Financial planning services to Employee at such cost and at
such times as determined in the reasonable discretion of Employee.
(b) Employer shall provide Employee with a nonqualified supplemental
executive retirement pension ("SERP") in the form attached hereto as Exhibit A.
The SERP benefit payable to Employee shall be determined as follows:
4
<PAGE> 5
(1) BENEFIT PAYABLE BEFORE AGE 55. If Employee voluntarily
terminates employment without Good Reason before age 55, no benefits
shall be payable from the SERP. If Employee terminates employment
before age 55 for any other reason, Employee shall be entitled to an
annual benefit, calculated as a single life annuity commencing at age
55, equal to the following:
(A) two (2) percent of Employee's Final Average Earnings (as
defined under the Retirement Program, but determined without
regard to the limitation on Earnings described in section
401(a)(17) of the Internal Revenue Code), multiplied by
(B) Employee's years of service, assuming that Employee has
twenty-one (21) years of service at age 51, and earns an
additional year of service for each year of additional age at
Employee's date of termination, reduced by
(C) twenty-one (21) percent (which represents a reduction of
three(3) percent per year from age 62, for commencement at age
55), and further reduced by
(D) the actuarial equivalent value of Employee's age 62 benefit
under the Social Security Act, and further reduced by
(E) the single life annuity Employee would be entitled to receive
under the Retirement Program for Certain Employees of Blue
Cross and Blue Shield of Georgia, Inc. (The "Retirement
Program") at the time benefits commence under this Agreement.
(2) BENEFITS PAYABLE AFTER AGE 55, BUT BEFORE AGE 60. If Employee
terminates employment for any reason on or after age 55, but before
reaching 60, Employee shall be entitled to an annual benefit,
calculated as single life annuity commencing as soon as practicable
following Employee's termination , equal to the following:
(A) two (2) percent of Employees's Final Average Earnings (as
defined in Paragraph 10(b)(1)(A) above) multiplied by
Employee's years of service at age 55 (assuming 25 years of
service at age 55), reduced by
(B) 0.25 percent for each month that Employee's termination date
precedes his 62nd birthday, plus
(C) three (3) percent of Employee's Final Average Earnings for
each year that Employee's termination date precedes age 62,
reduced by
(D) the actuarial equivalent value of Employee's age 62 benefit
under the Social Security Act, further reduced by
5
<PAGE> 6
(E) the single life annuity Employee would be entitled to receive
under the Retirement Program at the time benefits commence
under this Agreement.
(3) BENEFIT PAYABLE AFTER AGE 60. If Employee terminates
employment for any reason on or after age 60, Employee shall be
entitled to an annual benefit, calculated as a single life annuity
commencing as soon as practicable following Employee's termination,
equal to the following:
(A) 65 percent of Employee's Final Average Earnings, reduced by
(B) the actuarial equivalent value of Employee's age 62 benefit
under the Social Security Act, reduced by
(C) the single life annuity Employee would be entitled to receive
under the Retirement Program at the time benefits commence
under this Agreement.
(4) SPECIAL CHANGE IN CONTROL BENEFIT. Notwithstanding the above,
if Employee terminates his employment at any time following a Change
in Control (as defined herein)for any reason other than a voluntary
termination without Good Reason, Employee shall be entitled to an
annual benefit, calculated as a single life annuity commencing as soon
as practicable following such termination, equal to the greater of
(A) the benefit determined under (1), (2), or (3) above,
which-ever applies at the date of such Change in Control; or
(B) 60 percent of Employee's Final Average Earnings, with no
reduction for early commencement.
(5) DISABILITY BENEFITS. If Employee terminates employment because
of disability before the age of 55, Employee shall be entitled to an
immediate benefit equal to the retirement benefit he would have
received under (2) above, assuming that Employee was age 55 and had
completed 25 years of service at the time of disability. If Employee
terminates employment because of disability on or after age 55,
Employee shall be entitled o whatever benefit he has accrued at the
time of disability under (2) or (3) above.
(6) DEATH BENEFITS. If Employee dies before age 55 while actively
employed, Employee's beneficiary shall be entitled to a death benefit
equal to the retirement benefit that would have been paid under (2)
above, assuming that Employee retired at the date of his death at age
55 with 25 years of service. If Employee dies while actively employed
on or after age 55, Employee's beneficiary shall be entitled to a
death benefit equal to the retirement benefit that has been accrued by
the Employee under(2) or (3) above at the date of his death.
6
<PAGE> 7
(7) FORM OF PAYMENT. Employee may elect to receive the life
annuity SERP benefit described above in any other actuarial equivalent
payment form that is permitted under the Retirement Program. However,
if such election is not made at least one year before Employee's
retirement or other termination from employment, the annuity
calculated above shall be paid in the form of an actuarial equivalent
lump sum payment.
(8) FUNDING. Employer shall continuously and fully fund
Employee's SERP benefit through a "grantor trust", within the meaning
of subpart E, part I, subchapter J, chapter 1, subtitle A of the
Internal Revenue Code of 1986.
(c) "Change in Control" means (i) the acquisition by any one
person or entity, or by more than one person or entity acting as a group or in
concert, of ownership of stock or securities of either Blue Cross or Cerulean
representing 5% or more of the voting power of any class of stock or securities
of either Cerulean or Blue Cross [except in the case of registered common stock
of either Blue Cross or Cerulean traded on a recognized exchange or through the
National Association of Securities Dealers Automated Quotation System (NASDAQ),
which may be held in excess of 5% by institutional investors holding for
investment purposes only]; (ii) the date on which a majority of the members of
the Board of Directors of either Blue Cross or Cerulean are no longer
"Continuing Directors" as that term is defined in the License Agreement between
Cerulean and the Blue Cross and Blue Shield Association, originally dated
February 2, 1996; (iii) approval by the shareholders of Cerulean or Blue Cross
of any merger or consolidation or statutory share exchange as a result of which
the securities of Cerulean or Blue Cross shall be changed, converted or
exchanged [other than a merger or share exchange with a controlled subsidiary
of Cerulean or Blue Cross] into the shares of another corporation or person or
the liquidation of Cerulean or Blue Cross or the sale or disposition of 50% or
more of the assets or earning power of either Cerulean or Blue Cross; or (iv)
approval by the shareholders of any plan of consolidation or merger or
statutory share exchange as a result of which persons who were shareholders of
Cerulean or Blue Cross immediately prior to the effective date of the plan
shall thereafter retain less than 50% of the voting power to elect directors of
the surviving corporation.
(d) Employee shall have the right to defer up to 100% of the base
salary provided for in this Agreement. The ultimate time of receipt of such
deferred compensation and other terms and conditions relating to such deferral
shall be mutually agreed to by Employer and Employee.
11. TERMINATION UPON DEATH.
If Employee dies while employed by Employer, then Employee's salary
and all other compensation benefits hereunder shall continue for a period of
three (3) months from the date of death and shall then terminate except for
benefits which have vested on or prior to the date of death. Such payments
shall be made to Employee's estate or such beneficiary as Employee shall have
designated in writing.
7
<PAGE> 8
12. NON-COMPETITION.
During the term of the Employee's employment by the Employer and for a
period of two (2) years following the termination of such employment for any
reason whatsoever, the Employee shall not (except on behalf of or with the
prior written consent of the Employer), either directly or indirectly, on his
own behalf or in the service or on behalf of others, as an officer, director,
manager, supervisor, administrator, consultant, or in any other capacity which
involves duties and responsibilities similar to those undertaken for the
Employer, engage in the state of Georgia in any business or activity which is
the same as or essentially the same as Employer's business of providing,
maintaining, operating and administering plans that reimburse for or furnish
health care services.
13. PERSONAL SERVICES.
This is a contract for the personal services of Employee. Neither
Employee, his wife, nor their estate shall have any right to commute,
anticipate, or encumber any payment due hereunder, each of which is declared
nonassignable and nontransferable.
14. BINDING EFFECT.
This Agreement shall inure to the benefit of and be binding upon the
Employer, its successors and assigns, including, without limitation, any
person, partnership, company or corporation which may acquire substantially all
of the Employers assets or business or with or into which the Employer may be
liquidated, consolidated, merged or otherwise combined, and shall inure to the
benefit of and be binding upon Employee, his heirs, distributees and personal
representatives.
15. WAIVER.
The failure of either party to insist in any one or more instances
upon performance of any terms or conditions of this Agreement shall not be
construed a waiver of future performance of any such term, covenant or
condition, but the obligations of either party with respect thereto shall
continue in full force and effect.
16. ARBITRATION.
In the event the parties cannot agree as to any of the terms hereof,
then all such disputes shall be determined by arbitration and the Employer will
appoint one arbitrator and the Employee will appoint one arbitrator, and in the
event the two arbitrators are unable to resolve the dispute, then the
arbitrators shall appoint a neutral third party arbitrator, and the decision of
two of the three arbitrators shall bind the parties and judgement on the award
may be entered by any court having jurisdiction. All expenses of the
arbitration process shall be borne by Employer.
8
<PAGE> 9
17. NOTICES.
Any notice given hereunder shall be in writing and shall be deemed to
have been duly given on the date of personal delivery or three (3) days
following the date that such notice is mailed by registered or certified mail,
postage prepaid, return receipt requested.
(a) To the Employer, addressed to the Chairman of the Board at
3350 Peachtree Road N.E., Atlanta, Georgia 30326;
(b) To Employee at 823 Long Leaf Dr., Atlanta, Georgia 30342; or
(c) At such other address as either party may specify to the other
in writing.
18. NONFUNDED LIABILITY.
Employee expressly understands and agrees, for himself, his wife and
estate, that, except as provided in Paragraph 10 hereof, all other payments
contemplated hereunder shall constitute an absolutely nonfunded liability and
bare promise of Employer to make such payments as and when due. In no
circumstances shall Employee's status become more than that of a general
creditor of Employer, and then only for the payment then due.
9
<PAGE> 10
19. ENTIRE AGREEMENT.
This Agreement supersedes all previous agreements between Employee and
Employer and contains the entire understanding and agreement between the
parties with respect to the subject matter hereof and cannot be amended,
modified or supplemented in any respect except by a subsequent written
agreement entered into by both parties.
IN WITNESS WHEREOF, the parties hereto have executed this
Agreement the date and year first above written.
EMPLOYER:
[CORPORATE SEAL] BLUE CROSS AND BLUE SHIELD OF
GEORGIA, INC.
ATTEST: By:---------------------------------
Chairman of the Board
- --------------------------------
Mitchelle D. Johnson
Secretary
[ CORPORATE SEAL] CERULEAN COMPANIES, INC.
ATTEST:
By:
-------------------------------
Chairman of the Board
- --------------------
Hugh J. Stedman
Secretary
EMPLOYEE
-----------------------------
RICHARD D. SHIRK
10
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<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM
CERULEAN COMPANIES, INC. ON FORM 10-Q FOR THE QUARTER END AND IS QUALIFIED
IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
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<S> <C>
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<PERIOD-START> JAN-01-1997
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