<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington D.C. 20549
FORM 10-Q
{x} Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the period ended SEPTEMBER 30, 1998
or
{ } Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the transition period from to
--------------------- ---------------------
Commission File Number : 333-2796
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CERULEAN COMPANIES, INC.
(Exact name of registrant as specified in its charter)
Georgia 58-2217138
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
3350 Peachtree Road, N.E., Atlanta, Georgia 30326
(Address of principal executive offices) (Zip Code)
(404) 842-8000
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
YES X NO
--------- ---------
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Class: Class A Convertible Common Stock, no par value, $0.01 stated value.
Outstanding as of October 31, 1998 - 409,392 shares
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CERULEAN COMPANIES, INC.
FORM 10-Q
SEPTEMBER 30, 1998
INDEX
<TABLE>
<CAPTION>
PAGE
NUMBER
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<S> <C> <C>
PART I. FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements
Consolidated Balance Sheets as of
September 30, 1998 and December 31, 1997 Page 3
Consolidated Statements of Income for the Three and Nine
Months Ended September 30, 1998 and 1997 Page 4
Consolidated Statements of Comprehensive Income
for the Three and Nine Months Ended September 30, 1998 and 1997 Page 4
Consolidated Statements of Cash Flows for the Nine
Months Ended September 30, 1998 and 1997 Page 5
Notes to Consolidated Financial Statements Page 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations Page 11
Item 3. Quantitative and Qualitative Disclosure About Market Risk Page 15
PART II. OTHER INFORMATION
Item 1. Legal Proceedings Page 16
Item 2. Changes in Securities Page 16
Item 3. Defaults Upon Senior Securities Page 16
Item 4. Submission of Matters to a Vote of Security Holders Page 16
Item 5. Other Information Page 16
Item 6. Exhibits and Reports on Form 8-K Page 17
Signatures Page 19
</TABLE>
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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,
1998 1997
---------------- ----------------
(UNAUDITED)
<S> <C> <C>
ASSETS
Investments:
Fixed maturities:
Available-for-sale, at fair value (amortized cost: $232,873,177;
$185,037,630) $240,393,556 $187,662,551
Equity securities, at fair value (cost: $63,010,816; $58,348,840) 71,990,783 73,102,814
Short-term investments, at fair value (cost: $7,237,905; $19,555,875) 7,237,905 19,555,875
------------ ------------
Total investments 319,622,244 280,321,240
Cash and cash equivalents 44,932,964 35,001,855
Reimbursable portion of estimated benefit liabilities 104,169,036 100,109,036
Accounts receivable 62,101,555 59,624,899
FEP assets held by agent 25,553,200 25,553,200
Property and equipment 35,905,004 33,735,541
Other assets 20,647,054 19,017,199
------------ ------------
Total assets $612,931,057 $553,362,970
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Estimated benefit liabilities $237,594,615 $206,412,040
Unearned premiums 13,567,478 8,301,197
FEP stabilization reserve 25,553,200 25,553,200
Accounts payable and accrued expenses 45,231,164 31,210,088
Payables to other plans 278,229 1,068,051
Other liabilities 38,391,462 35,636,564
Note payable - 3,500,000
------------ ------------
Total liabilities 360,616,148 311,681,140
------------ ------------
Mandatorily redeemable preferred stock:
Class B Convertible Preferred Stock, no par value.
Authorized, issued and outstanding, 49,900 shares; aggregate
liquidation preference, $49,900,000; aggregate
mandatory redemption, $44,910,000 46,645,042 46,645,042
------------ ------------
Shareholders' equity:
Blank Preferred Stock, no par value.
Authorized and unissued 100,000,000 shares - -
Series A Preferred Stock, no par value, $0.01 stated value.
Authorized and unissued 64,000 shares (Note 6) - -
Class A Convertible Common Stock, no par value, $0.01 stated value.
Authorized 50,000,000 shares; issued and outstanding 409,387 and
351,545 shares, respectively 4,094 3,515
Additional paid in capital (Note 6) 32,134,422 -
Common Stock, no par value.
Authorized and unissued 100,000,000 shares - -
Stock warrants exercisable (Note 6) 21,310,000 -
Accumulated other comprehensive income - (unrealized appreciation on
securities, net of taxes) 12,905,243 13,949,895
Retained earnings 139,316,108 181,083,378
------------ ------------
Total shareholders' equity 205,669,867 195,036,788
Commitments and contingencies (Note 7) - -
------------ ------------
Total liabilities and shareholders' equity $612,931,057 $553,362,970
============ ============
</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,
1998 1997 1998 1997
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<S> <C> <C> <C> <C>
Revenues:
Premiums $ 444,728,175 $ 377,349,234 $ 1,270,223,761 $ 1,116,277,830
Investment and other income 4,682,916 4,065,139 12,679,249 12,074,011
Realized gains 1,613,090 5,329,668 7,697,457 11,116,690
------------- ------------- --------------- ---------------
Total revenues 451,024,181 386,744,041 1,290,600,467 1,139,468,531
Benefits expense 389,519,695 342,465,693 1,113,398,559 1,011,509,901
Operating expenses, net of
expense reimbursements of $20,255,422,
$15,841,288, $53,572,944 and
$46,038,883, respectively 50,455,919 43,117,134 153,250,644 125,315,572
------------- ------------- --------------- ---------------
Operating income 11,048,567 1,161,214 23,951,264 2,643,058
Non-operating income (Note 3) 63,750 - 191,250 1,275,000
------------- ------------- --------------- ---------------
Income before income
taxes, minority
interests and extraordinary item 11,112,317 1,161,214 24,142,514 3,918,058
Income tax expense (benefit) (Note 4) 3,331,000 (1,017,000) 7,067,000 (915,000)
Minority interest in (earnings) losses
of joint venture investments (256,909) 487,058 (2,152,283) 826,638
------------- ------------- --------------- ---------------
Income before extraordinary item 7,524,408 2,665,272 14,923,231 5,659,696
Extraordinary item - endowment of a
non-profit foundation (Note 5) - - (54,445,000) -
------------- ------------- --------------- ---------------
Net income (loss) $ 7,524,408 $ 2,665,272 $ (39,521,769) $ 5,659,696
============= ============= =============== ===============
</TABLE>
See accompanying notes.
CERULEAN COMPANIES, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
UNAUDITED
<TABLE>
<CAPTION>
THREE MONTHS ENDED SEPTEMBER 30, NINE MONTHS ENDED SEPTEMBER 30,
1998 1997 1998 1997
------------- ------------- --------------- ---------------
<S> <C> <C> <C> <C>
Net income (loss) $ 7,524,408 $ 2,665,272 $ (39,521,769) $ 5,659,696
Other comprehensive income (loss),
net of tax:
Unrealized holding gains (losses)
arising during period net of
reclassification adjustment for
gains included in net income of
$1,133,448, $4,263,734,
$6,000,942 and $8,893,352,
respectively (4,135,883) (319,385) (1,044,652) 3,381,179
------------- ------------- --------------- ---------------
Comprehensive income (loss) $ 3,388,525 $ 2,345,887 $ (40,566,421) $ 9,040,875
============= ============= =============== ===============
</TABLE>
See accompanying notes.
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CERULEAN COMPANIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
UNAUDITED
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30,
1998 1997
------------ ------------
<S> <C> <C>
OPERATING ACTIVITIES
Net income (loss) $(39,521,769) $ 5,659,696
Adjustments to reconcile net income (loss) to net cash provided by operating
activities:
Non-cash and non-operating items:
Extraordinary item - endowment of a non-profit foundation 53,445,000 -
Depreciation 8,022,137 7,198,286
Amortization 256,746 216,188
Uncollectible receivables 1,799,943 298,832
Gain on sale of investments (7,697,457) (11,116,690)
Loss (gain) on sale of property and equipment 89,887 (11,098)
Non-operating income (191,250) (1,275,000)
Decrease (increase) in certain assets:
Reimbursable portion of estimated benefit liabilities (4,060,000) 971,000
Accounts receivable (4,276,599) (10,309,775)
Other assets (1,795,959) (6,196,583)
Increase (decrease) in certain liabilities:
Estimated benefit liabilities 31,182,575 18,271,146
Unearned premiums 5,266,281 (1,268,092)
Accounts payable and accrued expenses 14,021,076 (1,070,730)
Payables to other plans (789,822) (1,324,208)
Other liabilities 509,398 5,645,131
Minority interest in sale of stock and stock warrants
by a subsidiary (183,750) (1,225,000)
------------ ------------
Net cash provided by operating activities 56,076,437 4,463,103
INVESTING ACTIVITIES
Investments purchased (213,332,434) (159,857,716)
Investments sold or matured 180,593,593 120,345,710
Property and equipment purchased (10,335,625) (7,780,290)
Property and equipment sold 54,138 170,400
------------ ------------
Net cash used in investing activities (43,020,328) (47,121,896)
FINANCING ACTIVITIES
Repayment of note payable (3,500,000) -
Sale of stock warrants by a subsidiary 375,000 -
Sale of stock by a subsidiary - 2,500,000
------------ ------------
Net cash (used in) provided by financing activities (3,125,000) 2,500,000
------------ ------------
Increase (decrease) in cash and cash equivalents 9,931,109 (40,158,793)
Cash and cash equivalents at beginning of period 35,001,855 89,024,410
------------ ------------
Cash and cash equivalents at end of period $ 44,932,964 $ 48,865,617
============ ============
</TABLE>
See accompanying notes.
5
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CERULEAN COMPANIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1998
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 other subsidiaries, and
for other lawful purposes.
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 a 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. 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 life insurance subsidiary,
a health maintenance organization subsidiary, a non-insurance subsidiary and
community health partnership network joint ventures ("CHPNs") in which the
Company has a majority interest. All significant intercompany transactions and
balances have been eliminated in consolidation.
ACCOUNTING FOR A SALE OF STOCK OR STOCK WARRANTS BY A SUBSIDIARY
Gains arising from a subsidiary issuing its own stock or stock warrants to a
third party are recorded as non-operating income and are presented as a separate
line item in the consolidated statements of income.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
During 1997, the Financial Accounting Standards Board (the "FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 131, Disclosures about
Segments of an Enterprise and Related Information. SFAS 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. However, it is not required to be implemented
in interim financial statements in the initial year of its application.
Management of the Company is presently assessing the effect that SFAS No. 131
will have on the Company's current consolidated financial statements and
footnote disclosures; however, the application of the new rules will not have an
impact on the Company's financial position or results from operations.
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1. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS (CONTINUED)
In February 1998, the FASB issued SFAS No. 132, Employer's Disclosures about
Pensions and Other Postretirement Benefits. SFAS No. 132 revises disclosure
requirements for pensions and other postretirement plans. This statement is
effective for year-end financial statements for the year ending December 31,
1998. The Company is currently assessing the effect that SFAS No. 132 will have
on the Company's consolidated financial statements and footnote disclosures;
however, the application of the new rules will not have an impact on the
Company's financial position or results from operations.
In June 1998, SFAS No. 133, Accounting for Derivative Instruments and Hedging
Activities, was issued. This statement standardizes the accounting and reporting
for hedging activities, and is effective for all fiscal quarters beginning after
September 15, 1999. The Company does not participate in hedging activities.
Therefore, the adoption of SFAS No. 133 will have no impact on the Company's
financial position or results from operations.
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 any equity securities of the
Company.
3. NON-OPERATING INCOME
CHPNs are locally based equity ventures between the Company, which owns a 51% or
greater interest, and local physician and/or hospital groups who own the
remaining equity interest. Clinical services are provided by the physician or
hospital partners as well as other providers with which the CHPNs maintain
contracts, and BCBSGA provides management and administrative services, including
information systems and data management services through service contracts with
the CHPNs.
In January 1998, a hospital purchased stock warrants exercisable for common
stock of one of the Company's CHPN subsidiaries in exchange for a $1.0 million
note receivable. The $1.0 million note will be paid ratably over two years. As
of September 30, 1998, $375,000 has been received. In accordance with the CHPN
formation agreement, the Company's 51% equity interest was not diluted as a
result of this transaction. The Company recorded non-operating income of
$191,250 for its portion of this transaction and increased the minority interest
liability for this CHPN by $183,750.
4. INCOME TAXES
The Company's income tax expense consisted primarily of federal alternative
minimum tax. The effective tax rate for the 1998 period was impacted by CHPN
subsidiaries which incurred taxes at a 34% rate and which do not join in the
filing of the Company's consolidated tax return. Additionally, contributing to
the higher rate were state income taxes for CHPNs and other permanent book to
tax differences, including non-deductible expenses.
5. SETTLEMENT OF THE CONVERSION LITIGATION
On September 3, 1997, a lawsuit (the "Lawsuit") was filed in the Superior Court
of Fulton County by Plaintiffs Let's Get Together, Inc.; Statewide Independent
Living Council of Georgia, Inc.; Living Independence for Everybody, Inc.; Aids
Survival Project, Inc.; Women's Policy Education Fund, Inc.; Disability
Connections-The Middle Georgia Center for Independent Living, Inc.; Physicians
for a National Health Program, Inc.; Campaign for a Prosperous Georgia, Inc.;
and Friends and Survivors Standing Together, Inc. (collectively, the
"Plaintiffs") 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 the conversion of
Blue Cross and Blue Shield of Georgia, Inc. from a not for profit corporation to
a business corporation was based. The complaint named BCBSGA, the Company 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.
7
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5. SETTLEMENT OF THE CONVERSION LITIGATION (CONTINUED)
The Plaintiffs' claims related to the conversion of BCBSGA from a non-profit
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
sought to have the fair market value of the assets of BCBSGA as of December 27,
1995, plus interest from December 27, 1995, placed in a public trust for the use
and benefit of a class of nonprofit charitable organizations. On October 3,
1997, the Georgia Insurance Department denied the Plaintiffs' request for
declaratory ruling, which decision the Plaintiffs appealed. On October 31, 1997,
the Company and BCBSGA filed a motion to dismiss the Lawsuit. Oral argument was
held on January 12, 1998.
On July 8, 1998, the Company entered into a stipulation and agreement of
settlement of the Lawsuit (the "Settlement") subject to the approval of the
Superior Court of Fulton County, Georgia (the "Court"). On August 17, 1998, six
individuals, including two shareholders, filed a motion to intervene in the
lawsuit and an objection to the Settlement. A settlement hearing was held on
August 20, 1998 to determine, among other things, if the terms and conditions of
the Settlement were fair and reasonable and should be approved by the Court.
On August 21, 1998, the judge denied the motion to intervene and entered a final
order approving the Settlement. The effective date of the Settlement was
September 21, 1998, the date on which the appeal period expired after the entry
of the final order. Under the terms of the Settlement, the Company established a
new non-profit foundation for the advancement of health care for all Georgians
and paid to the foundation, as endowment, and to the Plaintiffs' lawyers
(together, the "Foundation"), an aggregate of $1.0 million in cash, 57,772
shares of Class A Convertible Common Stock (the "Class A Stock") and 63,853
warrants (the "Warrants") exercisable for shares of non-voting Series A
Preferred Stock (the "Series A Stock") in the Company. Together the Class A
Stock and the Series A Stock represented by the Warrants will equal 20% of the
total equity after the issuance of the Series A Stock upon the exercise of the
Warrants. The aggregate exercise price for the Warrants is $21.0 million.
During June 1998, the Company recorded an extraordinary charge of $54.4 million
for the payment to the Foundation which, in management's judgement, represented
fair value as of the date of the Settlement. The Company recorded a full
valuation allowance against the related expected tax benefit.
6. SHAREHOLDERS' EQUITY
CLASS A STOCK ISSUED TO FOUNDATION
The 57,772 shares of Class A Stock issued as part of the Settlement have all of
the same terms and provisions as the other shares of Class A Stock as provided
in the Company's Articles of Incorporation (the "Articles"), except that the
Foundation has the right to tender for redemption shares of Class A Stock for an
aggregate redemption price of $1.0 million. Under the Company's Articles, this
redemption right was required to be separately authorized by holders of a
majority of the shares of Class B Convertible Preferred Stock (the "Class B
Stock") which authorization was granted at a meeting of holders of Class B Stock
held on September 15, 1998.
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6. SHAREHOLDERS' EQUITY (CONTINUED)
STOCK WARRANTS EXERCISABLE
The Warrants are exercisable for 63,853 shares of Series A Stock. The Series A
Stock is a new series of preferred stock created specifically for the
Settlement. The Series A Stock has all of the economic attributes of Class A
Stock, and each share of Series A Stock is the economic equivalent of one share
of Class A Stock. The Series A Stock, however, has no voting rights. In those
events in which there is a statutory voting right accorded to any class or
series of capital stock, each share of Series A Stock automatically converts
into one unit of the Company's Class A Common Stock Participation Rights (the
"Company's Rights"). Each of the Company's Rights is the economic equivalent of
one share of Class A Stock but has no voting rights. Consequently, the effect of
the issuance of the Warrants and the Series A Stock is that there are no
circumstances under which the equity interest represented by the Warrants has
any voting rights.
The Warrants also provide that upon the occasion of certain so-called "Major
Events," the Warrants must be exercised in a cashless exercise. The effect of
this provision is that the Warrants will be automatically converted into shares
of Series A Stock according to a formula provided in the Warrants. The Series A
Stock has been authorized by the Company's Board of Directors and holders of a
majority of the outstanding shares of Class B Stock, and an amendment to the
Company's Articles creating the Series A Stock was filed with the Georgia
Secretary of State.
7. COMMITMENTS AND CONTINGENCIES
PROPOSED MERGER
On July 9, 1998, the Company entered into an agreement and plan of merger (the
"Merger Agreement") with WellPoint Health Networks Inc. ("WellPoint") and a
subsidiary of WellPoint. Pursuant to the Merger Agreement, the Company will
become a wholly owned subsidiary of WellPoint. Finalization of the transaction
is subject to, among other things, the approval of the shareholders of the
Company, the approval of the Commissioner of Insurance of the State of Georgia,
the approval of the Blue Cross and Blue Shield Association and certain approvals
of the Health Care Financing Administration. Upon closing the transaction,
shareholders of the Company will exchange their shares for WellPoint shares or
cash in a transaction valued at $500 million.
LEGAL PROCEEDING
On September 18, 1998, Plaintiffs Allen Saravuth, Nga Nguyen, Chansamone
Sengsavath and Fatana Pirzad, individually and on behalf of all others similarly
situated, filed a lawsuit against the Company, BCBSGA, James L. Laboon, Jr.,
Fred L. Tolbert, Jr., Richard D. Shirk, James E. Albright, W. Daniel Barker,
Elizabeth W. Camp, Louis H. Felder, M.D., Edward M. Gillespie, Joseph D. Greene,
Mel H. Gregory, Jr., Frank J. Hanna, III, R. Pierce Head, Jr., Charles H.
Keaton, James H. Leigh, Jr., M.D., Julia L. Mitchell-Ivey, Charles R. Underwood,
M.D.,W. Jerry Vereen, A. Max Walker, Dan H Willoughby, M.D., Joe M. Young, and
John B. Zellars (collectively, the "Defendant Directors") in the Superior Court
of Richmond County ("the Court of Richmond"), State of Georgia, bearing Civil
Action File No. 98-RCCV-806. In addition, Plaintiffs filed a Motion for
Temporary Restraining Order and Interlocutory Injunctive Relief, which was heard
and denied by the Court of Richmond on September 21, 1998. The Plaintiffs
identify themselves as four individuals who were entitled to receive shares of
the Company's stock in connection with the conversion of BCBSGA from a
non-profit corporation to a regular business corporation. The Plaintiffs assert
claims for specific performance, fraud, breach of provisions of the Insurance
Code of Georgia, breach of fiduciary duty, and request declaratory judgment and
certification of a class action consisting of all persons who were "eligible
subscribers" of BCBSGA as of February 1, 1996, and who did not become holders of
Class A Stock of the Company. The Plaintiffs allege that they and the members of
the purported class are entitled to receive shares of Class A Stock in the
Company. The Plaintiffs allege alternatively that offering materials
disseminated by BCBSGA during 1996 relating to Class A Stock of the Company
contained materially misleading and deceptive statements and omissions and that
Plaintiffs and the purported class members are entitled to an award of damages
in excess of $100 million.
9
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7. COMMITMENTS AND CONTINGENCIES (CONTINUED)
LEGAL PROCEEDING (CONTINUED)
The Plaintiffs also assert derivative causes of action against the
Defendant Directors alleging that the Defendant Directors breached fiduciary
duties by, among other things, approving the placement and issuance of Class B
Stock in the Company during 1996, the issuance of Class A Stock in the Company,
the settlement of the Let's Get Together, Inc. et al. v. Insurance Commissioner,
et al., Civil Action E-61714 (Superior Court of Fulton County, Georgia) lawsuit,
and certain management compensation. On October 28, 1998, the Company and BCBSGA
filed answers and a motion to dismiss. The case remains pending. No discovery
has taken place as of this date. After considering the complaint, management of
the Company believes the case to be without merit and, in any event, believes
that its impact on the assets of the Company, if any, would not be material.
10
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion should be read in conjunction with the unaudited
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 other subsidiaries, and
for other lawful purposes.
On July 9, 1998, the Company entered into an agreement to merge with WellPoint
Health Networks Inc. ("WellPoint") and a subsidiary of WellPoint. For further
information, see Note 7 of the Notes to Consolidated Financial Statements
(Unaudited), which is incorporated herein by reference.
RESULTS OF OPERATIONS
Three Months Ended September 30, 1998 Compared to Three Months Ended September
30, 1997
Premium revenues increased 18% to $444.7 million for the three months ended
September 30, 1998 from $377.3 million for the three months ended September 30,
1997. Premium revenues for indemnity and PPO products increased $17.1 million to
$281.0 million for the three months ended September 30, 1998 primarily as a
result of rate increases during the 1998 period offset, in part, by a shift in
product mix as consumers selected products with lower cost benefit design in the
1998 period. HMO and POS premiums increased $49.9 million to $159.4 million for
the three months ended September 30, 1998 primarily as a result of rate
increases during the 1998 period and continued growth in membership for HMO and
POS products. 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 424,000 members at September 30, 1998
from 320,000 members at September 30, 1997. HMO and POS products accounted for
36% of total premiums for the three months ended September 30, 1998, compared to
29% of total premiums for the three months ended September 30, 1997.
Investment and other income of $4.7 million for the three months ended September
30, 1998 increased $0.6 million compared to the same period in 1997 as a result
of growth in the Company's investment portfolio during the period.
Realized gains on the sale of marketable securities of $1.6 million for the
three months ended September 30, 1998 were $3.7 million lower than gains
realized for the three months ended September 30, 1997. The results in 1998 and
1997 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 income 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 loss ratio (benefits expense as a percentage of premium revenues)
improved to 87.6% for the three months ended September 30, 1998 from 90.8% for
the three months ended September 30, 1997. This was primarily the result of an
improvement in the loss ratio for HMO and POS products to 83.9% for the third
quarter of 1998 from 90.4% for the third quarter of 1997 as the Company
recognized the benefit of rate increases in the 1998 period and medical cost
improvement actions implemented in late 1997 and 1998.
11
<PAGE> 12
Operating expenses increased 17% to $50.5 million for the third quarter of 1998
from $43.1 million for the third quarter of 1997, principally due to growth in
the Company's infrastructure necessary to support the increased HMO and POS
membership base, information technology development costs, Year 2000 renovation
costs and Medicare Risk product development. Additionally, during the three
months ended September 30, 1998, the Company recognized increased operating
expenses related to the settlement of the Lawsuit and the proposed merger with
WellPoint.
The Company's income tax expense for both periods consisted primarily of federal
alternative minimum tax. The effective tax rate of 30% for the 1998 period was
impacted by CHPN subsidiaries which do not join in the filing of the Company's
consolidated tax return. Additionally, contributing to the higher rate were
state income taxes for CHPNs and other permanent book to tax differences,
including non-deductible expenses. The income tax benefit for the three months
ended September 30, 1997 was principally due to a non-recurring benefit realized
in 1997 for certain long-lived tax assets for which deductions will occur in the
future.
As a result of the foregoing factors, net income was $7.5 million for the three
months ended September 30, 1998 compared to $2.7 million for the same period a
year ago.
Nine Months Ended September 30, 1998 Compared to Nine Months Ended September 30,
1997
Premium revenues increased 14% to $1,270.2 million for the nine months ended
September 30, 1998 from $1,116.3 million for the nine months ended September 30,
1997. Premium revenues for Indemnity and PPO products increased $8.9 million to
$812.1 million for the nine months ended September 30, 1998 primarily as a
result of rate increases during the 1998 period offset, in part, by a shift in
product mix as consumers selected products with lower cost benefit design in the
1998 period. HMO and POS premiums increased $143.6 million to $445.6 million for
the nine months ended September 30, 1998 resulting from a 33% 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 424,000 members at September 30, 1998 from 320,000
members at September 30, 1997.
Investment and other income of $12.7 million for the nine months ended September
30, 1998 increased $0.6 million compared to the nine months ended September 30,
1997 as a result of growth in the Company's investment portfolio during the
period.
Realized gains of $7.7 million on the sale of marketable securities for the nine
months ended September 30, 1998 were $3.4 million lower than gains realized in
the nine months ended September 30, 1997. The results in 1998 and 1997 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 loss ratio (benefits expense as a percentage of premium revenues)
improved to 87.7% for the nine months ended September 30, 1998 from 90.6% for
the nine months ended September 30, 1997. This was primarily a result of
increases in the 1998 period, medical cost improvement actions implemented in
late 1997 and early 1998, and in part to an improvement in payment patterns and
claims trends from prior year's claims estimates, principally for the Company's
HMO and POS products. The loss ratio for indemnity and PPO products improved to
90.1% for the 1998 period from 91.8% for the same period in 1997. The loss ratio
for HMO and POS products improved to 84.1% for the first nine months of 1998
from 88.9% for the comparable 1997 period.
12
<PAGE> 13
Operating expenses increased 22% to $153.3 million for the nine months ended
September 30, 1998 from $125.3 million for the nine months ended September 30,
1997, principally due to growth in the Company's infrastructure necessary to
support the increased HMO and POS membership base, information technology
changes, Year 2000 renovation costs and Medicare Risk product development.
Additionally, during the nine months ended September 30, 1998, the Company
recognized increased operating expenses related to the settlement of the Lawsuit
and the proposed merger with WellPoint. As a result, the operating expense ratio
increased to 12.1% for the nine months ended September 30, 1998, from 11.2% for
the nine months ended September 30, 1997.
In January 1998, a hospital purchased stock warrants exercisable for common
stock of one of the Company's CHPN subsidiaries in exchange for a note
receivable. In January 1997, a hospital purchased a 5% interest in one of the
Company's CHPN subsidiaries. These transactions were recorded as non-operating
income for the nine months ending September 30, 1998 and 1997.
The Company's income tax expense for both periods consisted primarily of federal
alternative minimum tax. The effective tax rate of 29% for the 1998 period was
impacted by CHPN subsidiaries which do not join in the filing of the Company's
consolidated tax return. Additionally, contributing to the higher rate were
state income taxes for CHPNs and other permanent book to tax differences,
including non-deductible expenses. In 1997, the Company increased the net value
of certain long-lived assets which provided an additional tax benefit of
approximately $2.1 million for 1997 of which $1.6 million was recognized during
the nine months ended September 30, 1997. As a result of the foregoing, the
Company recorded a tax benefit of $0.9 million for the nine months ended
September 30, 1997.
On July 8, 1998, the Company entered into a stipulation and agreement of
settlement of the Lawsuit. The Company endowed a new non-profit foundation and
issued cash, common stock and warrants pursuant to the Settlement; in connection
with this transaction, the Company recognized $54.4 million as an extraordinary
item for the nine months ended September 30, 1998.
As a result of the foregoing factors, income before extraordinary item increased
to $14.9 million for the nine months ended September 30, 1998 from $5.7 million
for the nine months ended September 30, 1997. After the extraordinary item the
Company recognized a net loss of $39.5 million for the nine months ended
September 30, 1998 compared to net income of $5.7 million for the nine months
ended September 30, 1997.
LIQUIDITY AND CAPITAL RESOURCES
Nine Months Ended September 30, 1998 Compared to Nine Months Ended September 30,
1997
The Company has both short-term and long-term liquidity needs and has structured
its investment portfolios accordingly. Short-term liquidity needs to fund
operating costs, as well as the payment obligations to customers, are met from
funds invested primarily in institutional money market accounts. Assets not
required for short-term liquidity needs are transferred to a portfolio of
investments in the fixed income and equity markets. This portfolio, which
provides reserves for future payment obligations and funds for long-term
liquidity needs, is managed by several independent advisory firms. 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. Of the Company's total investment portfolio,
$299.6 million is held at its insurance subsidiaries and is invested subject to
limitations prescribed by Georgia insurance statutes.
13
<PAGE> 14
Net cash provided by operating activities amounted to $56.1 million for the nine
months ended September 30, 1998. Income before extraordinary item was $14.9
million, an increase of over $9.3 million from the same period a year ago. In
addition, estimated benefit liabilities, accounts receivable from members,
unearned premiums and accounts payable were affected by timing of operating cash
payments and receipts, as well as changes in membership, utilization and claims
payment trends. 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 January 1998, BCBSGA terminated its $9.0 million revolving credit agreement
and paid in full the $3.5 million note payable thereunder.
The Company anticipates that the principal elements of its future capital
requirements are information technology needs, product development, development
of potential medical access points, equity contributions to its CHPN joint
ventures and other strategic acquisitions.
The Company believes that its long-term capital requirements can be met with a
combination of (i) the Company's current resources, including proceeds from the
sale of the Class B Stock, (ii) cash flows from operations, (iii) borrowings and
(iv) potential debt or equity offerings. The consummation of the proposed merger
with WellPoint will provide the Company with additional capital alternatives.
COMMITMENTS AND CONTINGENCIES
See the description under the same caption in Note 7 of the Notes to
Consolidated Financial Statements (Unaudited), which 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 that have
protocols which address dates in terms of the 20th century (19xx) only.
The Company has analyzed its systems and has formulated a comprehensive plan to
either modify or replace portions of its software and hardware so that those
systems will properly function when processing information involving dates after
1999. The Company's plans to resolve the Year 2000 issue involve the following
phases: (1) awareness; (2) assessment; (3) renovation; (4) validation; (5)
implementation and (6) contingency planning.
During 1997, the Company began its assessment of all systems that could be
significantly effected by the Year 2000 issue. Detailed plans for renovation
were finalized in early 1998. The Company is currently in the process of
renovating and testing those systems and estimates that the required changes
will be completed during early 1999. Once the software is renovated, the Company
begins validation and implementation of the updated systems. The Company
estimates that the validation and implementation phases should be completed by
the end of the second quarter 1999.
The Company conducts business with certain external parties, including
suppliers, customers, providers, and financial service organizations. The
Company is in the process of identifying and contacting external parties with
which it interacts to determine Year 2000 compliance issues and to assess the
Company's potential business risk of non-compliance by third parties. The
Company cannot guarantee that the systems of external parties upon which the
Company depends will be Year 2000 ready.
14
<PAGE> 15
YEAR 2000 COMPUTER SOFTWARE MODIFICATION COSTS (CONTINUED)
The Company utilizes both internal and external resources to renovate, replace,
test and implement the software and equipment to satisfy Year 2000 requirements.
The total cost of the Year 2000 changes is estimated at $13.0 million and is
being funded through operating cash flows. Through September 30, 1998, the
Company has incurred $2.8 million in capital expenditures and has expensed $5.3
million with $3.4 million expensed in the 1998 period. Remaining Year 2000 costs
are estimated at $4.9 million and include $3.1 million for renovation expense.
Costs of new software are capitalized and will be amortized over three to five
years.
The Company has received independent reviews of all corporate Year 2000
compliance activities from third parties. At this time, the Company has not
identified any business function which would suffer from Year 2000 problems if
the Year 2000 plan was successfully implemented. However, failure to
successfully execute the plan or the failure of external parties to achieve
their Year 2000 compliance could have a material adverse impact on the Company's
financial position and results of operations as the Company utilizes automated
systems to process claims, bill members, maintain membership data, perform
utilization management and many other functions.
The Company is also in the process of developing a contingency plan with a third
party consulting group in the event that all phases of the Year 2000 plan are
not completed. The contingency plan is scheduled to be completed by the end of
the second quarter of 1999.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
Not required.
15
<PAGE> 16
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Note 5 of the Notes to Consolidated Financial Statements (Unaudited) in Part I,
Item 1 regarding the settlement of 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.
Note 7 of the Notes to Consolidated Financial Statements (Unaudited) in Part I,
Item 1 regarding the lawsuit filed on September 18, 1998 in the Superior Court
of Richmond County is incorporated herein by reference.
ITEM 2. CHANGES IN SECURITIES
(c) On September 22, 1998, pursuant to a court order from the Superior Court of
Fulton County, the Company issued 57,772 shares of Class A Stock and 63,853
Warrants exercisable for Series A Stock to the Foundation in connection with the
Settlement in reliance on the exemption from registration contained in Section
3(a)(10) of the Securities Act of 1933, as amended. Notes 5 and 6 of the Notes
to Consolidated Financial Statements (Unaudited) in Part I, Item 1, regarding
the Settlement and the terms of conversion and exercise of the securities issued
in the Settlement are incorporated herein by reference.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
A special meeting of holders of Class B Stock was held on September 15, 1998. At
this meeting, the holders of Class B Stock approved the issuance of the Series A
Stock upon the exercise of the Warrants and the redemption of an amount of
shares of Class A Stock held by the Foundation equal in value to up to $1.0
million, both as described in Notes 5 and 6 of the Notes to Consolidated
Financial Statements (Unaudited) in Part I, Item 1, regarding the terms of the
Settlement and incorporated herein by reference. In addition, the holders of
Class B Stock elected Frank J. Hanna, III to serve as a Preferred Designated
Director of the Company until the 2001 Annual Meeting and William A. Alias, Jr.,
R. Pierce Head, Jr., Richard D. Shirk and Fred L. Tolbert, Jr. to serve as
Directors of the Company until the 2001 Annual Meeting, or until their
successors are duly elected and qualified. The other Directors of the Company
whose terms continued after the meeting of holders of Class B Stock include:
James R. Albright, Elizabeth W. Camp, Edward M. Gillespie, Joseph D. Greene, Mel
H. Gregory, Jr., James L. LaBoon, Jr., James H. Leigh, Jr., M.D., James R.
Lientz, Jr., Julia L. Mitchell-Ivey, Arnold Tenenbaum, W. Jerry Vereen and Joe
M. Young. For all items submitted to a vote, there were 48,900 votes for, with
1,000 abstaining.
ITEM 5. OTHER INFORMATION
See Note 7 of the Notes to Consolidated Financial Statements (Unaudited) in Part
I, Item 1 regarding a Merger Agreement with WellPoint Health Networks Inc.
("WellPoint") and a subsidiary of WellPoint incorporated herein by reference.
16
<PAGE> 17
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
<S> <C>
2.1 Agreement and Plan of Merger, dated July 9, 1998, by and among Cerulean
Companies, Inc., WellPoint Health Networks Inc. and Water Polo
Acquisition Corp.(1)
3.1 Amended Articles of Incorporation of Cerulean Companies, Inc.*
3.2 Bylaws of Cerulean Companies, Inc.(2)
4.1 Stock Escrow Agreement among Cerulean Companies, Inc., Blue Cross and
Blue Shield of Georgia, Inc. and SunTrust Bank, Atlanta.(2)
4.2 Specimen form of Class A Convertible Common Stock certificate.(2)
4.3 Amended Articles of Incorporation of Cerulean Companies, Inc. (included
in Exhibit 3.1).*
4.4 Form of Warrant Agreement by and among Cerulean Companies, Inc., Healthcare
Georgia, Inc., Endowed by Blue Cross and Blue Shield of Georgia and
Carr, Tabb & Pope, LLP.*
10.1 Executive Compensation Plans and Arrangements
(a) Form of Change in Control Severance Protection Agreement for
Certain Employees of: Cerulean Companies, Inc., Blue Cross and
Blue Shield of Georgia, Inc., HMO Georgia, Inc., Greater
Georgia Life Insurance Company, Inc. and Group Benefits of
Georgia, Inc., Effective January 1, 1998, entered into by
Cerulean Companies, Inc. and each of Messrs. Raymond J.
Colleran, John A. Harris, Mark Kishel, M.D., Richard A.
Steinhausen, R. Neil Vannoy, Hugh J. Stedman, Richard F.
Rivers, Robert A. Yungk and two additional management
employees of Blue Cross and Blue Shield of Georgia, Inc.(3)
(b) Form of Change in Control Severance Protection Agreement for
Certain Employees of: Cerulean Companies, Inc., Blue Cross and
Blue Shield of Georgia, Inc., HMO Georgia, Inc., Greater
Georgia Life Insurance Company, Inc. and Group Benefits of
Georgia, Inc., effective January 1, 1998, entered into by
Cerulean Companies, Inc. and twenty-eight management employees
in addition to those listed in Exhibit 10.1(a).(3)
27 Financial Data Schedule.* (FOR SEC only)
</TABLE>
- -------------
* This exhibit is filed herewith.
(1) This Appendix A of Form S-4, Registration No. 333-64955, filed by
WellPoint Health Networks Inc. on September 30, 1998 is incorporated
herein by reference.
(2) This exhibit to Form S-1, Registration No. 333-2796, filed on March 27,
1996 and subsequent amendments to the registration is incorporated
herein by reference.
(3) This exhibit to Form 10-Q filed on August 14, 1998 is incorporated
herein by reference.
17
<PAGE> 18
(b) Reports on Form 8-K
The Company filed a report on Form 8-K dated August 21, 1998. This filing
was made in connection with the Lawsuit described in Note 5 of the Notes to
Consolidated Financial Statements (Unaudited) in Part I, Item 1 which is
incorporated herein by reference.
The Company filed a report on Form 8-K dated September 18, 1998. This filing
was made in connection with the Lawsuit described in Note 7 of the Notes to
Consolidated Financial Statements (Unaudited) in Part I, Item 1 which is
incorporated herein by reference.
18
<PAGE> 19
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 hereunto duly authorized.
CERULEAN COMPANIES, INC.
Registrant
Date: November 11, 1998 By: /s/ Richard D. Shirk
--------------------------------
Richard D. Shirk, President and
Chief Executive Officer
Date: November 11, 1998 By: /s/ John A. Harris
--------------------------------
John A. Harris, Treasurer
19
<PAGE> 1
EXHIBIT 3.1
ARTICLES OF INCORPORATION
OF
CERULEAN COMPANIES, INC.*
ARTICLE I
CORPORATE NAME
The name of the corporation (the "Corporation") is: CERULEAN COMPANIES, INC..
ARTICLE II
CLASSES OF STOCK
Section 2.1. Authorized Stock. The Corporation shall have authority to
issue the following classes of shares, in the number and designation set forth
below:
<TABLE>
<CAPTION>
Class Number of Shares
----- ----------------
<S> <C>
Class A Convertible Common Stock ("Class A Stock") 50,000,000
Class B Convertible Preferred Stock ("Preferred Stock") 49,901
Common Stock ("Common Stock") 100,000,000
</TABLE>
Section 2.2. Blank Preferred Stock. In addition to the above authorized
classes, except as otherwise provided in the Georgia Business Corporation Code
(the "Code"), the Corporation is authorized to issue an additional class or
classes of preferred stock (the "Blank Preferred Stock"), which may be divided
into two (2) or more series; provided, however, for so long as any shares of
Preferred Stock are issued and outstanding, the Corporation shall not issue any
such additional class or series of preferred stock (including any Blank
Preferred Stock) without the consent or approval (in writing or as documented in
minutes of the Corporation) of the holders of a majority of the shares of
Preferred Stock then issued, outstanding and entitled to vote. The number of
such shares of Blank Preferred Stock that the Corporation is authorized to issue
is 100,000,000. The preferences, limitations and relative rights granted to and
imposed upon such Blank Preferred Stock shall be determined by the Board of
Directors of the Corporation as provided in Section 14-2-602 of the Code.
ARTICLE III
CLASS A STOCK
Shares of Class A Stock shall have the following preferences,
privileges and limitations:
Section 3.1. Voting. Except as otherwise provided in the Code:
(a) In the event no shares of Common Stock or Preferred Stock
are issued, outstanding and entitled to vote, all rights to vote shall
be vested in the holders of the outstanding shares of Class A Stock, or
the Blank Preferred Stock as designated by the Board of Directors
pursuant to Section 2.2.
- -------------------------------
* As filed and corrected with the Secretary of State of Georgia
<PAGE> 2
(b) (i) If any shares of both Preferred Stock and Class A
Stock are issued and outstanding, the holders of the
outstanding shares of Class A Stock, voting separately as a
single class (with each share being entitled to one vote) and
to the exclusion of all other classes and series of capital
stock of the Corporation, shall be entitled to elect two
Directors of each class of Directors (as described in Article
IX), each of which shall be designated a "Class A Designated
Director" in accordance with the procedures set forth in this
Section 3.1(b)(i). Beginning at or prior to the first annual
meeting of shareholders ("Year One"), a special nominating
committee composed of two Continuing Directors (as hereinafter
defined) and two Preferred Designated Directors (as
hereinafter defined) will nominate two Class A Designated
Directors to be voted on by all of the holders of the Class A
Stock at such annual meeting. At or prior to the annual
meeting of shareholders held in the following year ("Year
Two"), a special nominating committee composed of two
Continuing Directors and the two Class A Designated Directors
would nominate two additional Class A Designated Directors,
again to be voted on by all of the holders of Class A Stock at
such annual meeting. At or prior to the annual meeting of
shareholders held in the year after Year Two ("Year Three"), a
nominating committee composed of two Continuing Directors and
the four Class A Designated Directors would nominate two
additional Class A Designated Directors, again to be voted on
by all of the holders of the Class A Stock at such annual
meeting. At the annual meeting of shareholders held in the
year after Year Three and at each annual meeting until the
occurrence of a Stock Conversion (as hereinafter defined), a
special nominating committee composed of the six Class A
Designated Directors would nominate, and the holders of the
Class A Stock would be entitled to elect, two Class A
Designated Directors each year to replace the two Class A
Designated Directors whose terms expire during such year.
(ii) Notwithstanding any nomination by a special
nominating committee in any year, the holders of the Class A
Stock shall be entitled to nominate and elect any eligible
individual to fill the Class A Designated Director positions
subject to election in such year, as provided in the Code.
(c) On all other matters to come before the stockholders other
than the election of the Directors as provided for above, the
holders of the Class A Stock shall be entitled to vote as a
class and each share of Class A Stock shall have one vote.
Section 3.2. Dividends. Subject to Section 4.3, dividends may be
declared for distribution from time to time to the holders of shares of
Class A Stock at the discretion of the Board of Directors of the
Corporation.
Section 3.3. Liquidation. Subject to the provisions of Section 6.3(b):
(a) The holders of shares of Class A Stock shall be entitled
to receive any distributions of the Corporation's assets upon the
liquidation, dissolution or winding up of the Corporation, but only
after and on the condition that all the holders of issued and
outstanding shares of Preferred Stock, if any, shall have received an
amount of such assets equal to $1,000 per share of Preferred Stock (the
"Stated Value"), plus all accrued and unpaid dividends.
(b) If upon any dissolution, liquidation or winding up of the
affairs of the Corporation, the assets of the Corporation distributable
as aforesaid among the holders of the Preferred Stock shall be
insufficient to permit the payment to them of the full amounts to which
they are entitled, then the entire assets of the Corporation to be so
distributed shall be distributed ratably among the holders of
-2-
<PAGE> 3
the Preferred Stock in proportion to the sum of their respective per
share liquidation values, including all accrued and unpaid dividends,
until payment in full of such amount per share.
(c) After payment or distribution to the holders of the
Preferred Stock of the full amounts set forth in paragraphs (a) and (b)
of this Section 3.3, all of the remaining assets of the Corporation
available for distribution to stockholders shall be distributed ratably
among the holders of the Class A Stock then issued and outstanding.
(d) In the event no Class A Stock or Preferred Stock is issued
and outstanding at the time of a dissolution, liquidation or winding
up, the entire assets of the Corporation available for distribution to
stockholders shall be distributed ratably among the holders of Common
Stock then issued and outstanding.
Neither the consolidation nor the merger of the Corporation into or
with another corporation or corporations shall be deemed to be a liquidation,
dissolution or winding up of the Corporation within the meaning of this Section
3.3.
Section 3.4. Transfer Restriction. Shares of Class A Stock may not be
sold, transferred, encumbered, pledged or otherwise disposed of, prior to
December 1, 1998, except: (a) upon the death of the holder of such shares, in
which case such shares may be transferred by such holder's estate to an heir
taking by law or pursuant to testamentary succession, (b) by operation of law or
(c) as required by a final judicial decree.
Section 3.5. Right of First Refusal.
(a) Subject to the limitations set forth in Section 3.5(b),
during the period from December 1, 1998 to December 1, 2001, if a
holder of shares of Class A Stock (the "Offeror") desires to sell all
or any portion of such Class A Stock, such holder shall first offer
such shares of Class A Stock (the "Offered Shares") to the Corporation
by giving written notice of his intention to dispose of such Offered
Shares (the "Notice"). The Notice must name the type of disposition,
the proposed purchaser, the number of Offered Shares, the price per
share and the terms of payment. The Corporation may accept such offer
with respect to all, but not less than all, of the Offered Shares,
within thirty (30) days following receipt of the Notice. The
Corporation may exercise its option by giving notice of such exercise
to the Offeror. If any of the consideration for the Offered Shares
consists of anything other than cash, the Corporation may substitute
for such consideration the cash equivalent as reasonably determined by
the Corporation.
(b) The Corporation may exercise its right of first refusal
set forth in Section 3.5(a) to acquire only up to two percent (2%) of
the issued and outstanding shares of Class A Stock in any one calendar
year, unless the holders of a majority of the Preferred Stock then
issued, outstanding and entitled to vote, approve of the acquisition of
a larger percentage of Class A Stock.
(c) If the right of first refusal provided above is not
exercised as to all of the Offered Shares or if the purchase by the
Corporation is not consummated within the time specified in this
Section, through no fault of the Offeror, the Offeror may transfer the
Offered Shares to the proposed purchaser, at the price and on the terms
and conditions set forth in the Notice. If the transfer of the Offered
Shares by the Offeror to the proposed purchaser named in the Notice is
not made within thirty (30) days after the date the Offeror became free
to transfer, the right to transfer in accordance with the Notice will
expire.
-3-
<PAGE> 4
ARTICLE IV
PREFERRED STOCK
Section 4.1. Voting. Except as otherwise provided in the Code:
(a) Election of Board of Directors. So long as any shares of
Preferred Stock are issued, outstanding and entitled to vote: (i) the
holders of the Preferred Stock, voting separately as a single class
(with each share being entitled to one vote) and to the exclusion of
all other classes and series of capital stock of the Corporation, shall
be entitled to nominate and elect two (2) Directors of the Corporation
who shall be designated "Preferred Designated Directors"; and (ii) the
holders of the Preferred Stock, voting separately as a single class
(with each share being entitled to one vote) and to the exclusion of
all other classes and series of capital stock of the Corporation, shall
be entitled to elect all of the remaining Directors of the Corporation
(other than the Class A Designated Directors).
(b) Other Matters. On all matters to come before the
stockholders, other than the election of the Directors provided for in
Section 4.1(a) above or Section 3.1 hereof, the holders of the
Preferred Stock shall be entitled to vote as a class and each share of
Preferred Stock which is issued, outstanding and entitled to vote shall
have one vote, and no vote of the holders of the Preferred Stock shall
be deemed the vote of the class unless there shall have been an
affirmative vote or consent of the holders of a majority of the shares
of Preferred Stock, then issued, outstanding and entitled to vote.
Section 4.2. Liquidation Preference. Subject to the provisions of
Section 6.3(b), upon the liquidation, dissolution or winding up of the
Corporation, the assets of the Corporation shall be distributed as
provided in Section 3.3 hereof.
Section 4.3. Dividends.
(a) The holders of Preferred Stock shall be entitled to
receive, out of funds at the time legally available therefor, dividends
at the rate of $60.00 per annum per share, on and prior to December 1,
1998 and $100.00 per annum per share after December 1, 1998, and no
more, which shall be fully cumulative and shall accrue without interest
from the date of original issuance. Dividends are payable in cash
annually in arrears. Such dividends shall be due and payable on
December 1 of each year commencing December 1, 1996 (each, a "Dividend
Due Date") to the holders of Preferred Stock of record as such holders'
names appear in the securities register of the Corporation on the
record date fixed by the Board of Directors, which shall be not more
than sixty (60) nor less than ten (10) days preceding each Dividend Due
Date. If any Dividend Due Date is not a Business Day as defined below,
then such dividend shall be payable on the next Business Day following
such Dividend Due Date, provided that, for the purposes of computing
such dividend payment, no interest or sum in lieu of interest shall
accrue from such Dividend Due Date. For purposes hereof, the term
Business Day shall mean any day except a Saturday or Sunday or any day
on which banking institutions are authorized or required to close in
Atlanta, Georgia or New York, New York. Dividends on account of
dividends in arrears for any past dividend period may be declared at
any time and paid on any Business Day, without reference to any regular
Dividend Due Date. The amount of dividends payable for the initial
dividend period and any period shorter than a full annual dividend
period shall be computed on the basis of a 360-day year of twelve
thirty (30) day months. Dividends paid on shares of Preferred Stock in
an amount less than the total amount of such dividends at the time
accumulated and payable on such shares shall be allocated pro rata
among all such shares of Preferred Stock issued, outstanding and
entitled to vote at the time.
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(b) So long as any shares of Preferred Stock are issued,
outstanding and entitled to vote, without the approval of the holders
of a majority of the Preferred Stock, then issued, outstanding and
entitled to vote, (i) no dividends, in cash, stock or other property,
may be paid or declared and set aside for payment or any other
distribution made upon any stock of the Corporation and (ii) except as
provided in Section 3.5 hereof, no stock of the Corporation other than
the Preferred Stock may be (A) redeemed pursuant to a sinking fund or
otherwise or (B) purchased or otherwise acquired for any consideration
by the Corporation.
Section 4.4. Redemption of Preferred Shares.
(a) The Corporation shall not have the right at its option to
redeem any shares of the Preferred Stock.
(b) Each holder of the Preferred Stock shall have the option
to require the Corporation to redeem for cash any or all of such
holder's outstanding shares of Preferred Stock (i) after the effective
date of a "Change in Control," (provided, however, that a majority of
the members of the Board of Directors shall have first approved such
Change in Control) or (ii) on December 1, 2001 (the "Conversion
Redemption"). If the effective date of such a Change in Control or
Conversion Redemption is also a Stock Conversion (as hereinafter
defined), the holders of Preferred Stock, in lieu of such redemption,
may at their option have their shares of Preferred Stock converted to
Common Stock on the Redemption Date (as defined below), as provided in
Article VI hereof. Preferred Stock shall be deemed outstanding for the
sole purpose of executing the rights of the holders thereof under this
Section 4.4(b). The holders of the Preferred Stock may exercise the
right to have shares of Preferred Stock so redeemed by providing
written notice to the Corporation no later than fifteen (15) days prior
to the Redemption Date, specifying the number of shares of Preferred
Stock to be redeemed. The "Redemption Date" shall be (i) in the case of
a Change of Control, the date established by the Board of Directors,
but not less than thirty (30) or more than sixty (60) days after the
effective date of the Change in Control or (ii) in the case of the
Conversion Redemption, December 1, 2001. The Corporation shall pay to
each holder who has given such redemption notice an amount per share
(in cash) equal to $1,250 per share (or in the case of a Conversion
Redemption, $900 per share), plus accrued and unpaid dividends as of
the Redemption Date. The Corporation shall notify the holders of the
Preferred Stock in writing (i) of the occurrence of a Change in Control
and the related Redemption Date within fifteen (15) days after the
effective date of such Change in Control and (ii) of a Conversion
Redemption no later than November 1, 2001. For purposes of this Section
4.4(b), a Change in Control will be deemed to have occurred at such
time as any person (including any syndicate or group deemed to be a
"person" under Section 13(d)(3) of the Exchange Act (as defined in
Section 12.1), other than the Corporation, any subsidiary of the
Corporation or any employee benefit plan of the Corporation), is or
becomes the Beneficial Owner (as defined in Section 12.1 hereof),
directly or indirectly, through a purchase, merger or other acquisition
transaction or series of transactions of shares of capital stock of the
Corporation entitling such person to exercise fifty percent (50%) or
more of the total voting power of capital stock of the Corporation
entitled to vote generally in the election of directors.
(c) On or before the Redemption Date, each holder of the
Preferred Stock to be redeemed shall surrender the certificate or
certificates representing the shares of Preferred Stock to be redeemed
to the Corporation free and clear of all liens, claims and encumbrances
and, thereupon, the redemption price for such Preferred Stock shall be
payable in immediately available funds to the order of the person whose
name appears on such certificate or certificates as the owner thereof,
and each surrendered certificate shall be canceled and retired. In the
event less than all of the shares
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represented by such certificate are redeemed, a new certificate
representing the unredeemed shares shall be issued to the holder of
such shares of Preferred Stock.
(d) In the event shares of Preferred Stock to be redeemed
pursuant to this Section 4.4 are uncertificated, the shares of
Preferred Stock to be redeemed shall be canceled on the books and
records of the Corporation and the Corporation shall deliver notice
thereof to the holders of such Preferred Stock along with payment of
the redemption price therefor.
Section 4.5. Preemptive Rights. Subject to the provisions of Article
XII hereof:
(a) If the Corporation proposes to issue, grant or sell shares
of Common Stock or Rights to acquire Common Stock pursuant to the first
offering of Common Stock which is registered under the Securities Act
of 1933, as amended (the "Securities Act"), or any corresponding
securities laws of any foreign jurisdiction (the "Foreign Laws"); the
Corporation shall first give to each holder of the Preferred Stock a
notice (x) setting forth the information required or permitted to be
included therein by Rule 134 or other applicable provisions under the
Securities Act or the Foreign Laws, and (y) including the range of
prices within which the Corporation anticipates offering such shares.
Each holder of Preferred Stock shall have the preemptive right,
exercisable by notice to the Corporation no later than fifteen (15)
days after receipt by such holder of the Corporation's notice, to
purchase such holder's "Common Proportionate Share" (as defined in
Section 4.5(c)), or any portion thereof, of such shares or Rights for
the same price and on the same terms as offered to the public
purchasers of such Common Stock.
(b) If the Corporation proposes to issue, grant or sell shares
of its Preferred Stock or Rights to acquire shares of its Preferred
Stock, the Corporation shall first give to each holder of the Preferred
Stock a notice setting forth in reasonable detail the price and other
terms on which such shares of Preferred Stock or Rights are proposed to
be issued, granted or sold, and the amount thereof proposed to be
issued, granted or sold. Each holder of Preferred Stock shall have the
preemptive right, exercisable by notice to the Corporation no later
than thirty (30) days after receipt by such holder of the Corporation's
notice, to purchase such holder's "Preferred Proportionate Share" (as
hereinafter defined), or any portion thereof, of such shares of
Preferred Stock or Rights for the same price and on the same terms as
set forth in the Corporation's notice. For purposes of this Section
4.5(b), a holder's "Preferred Proportionate Share" shall mean the
quotient which results when the number of shares of Preferred Stock
issued, outstanding and entitled to vote then held by such holder is
divided by the total number of shares of Preferred Stock issued,
outstanding and entitled to vote at that time.
(c) If the Corporation proposes to issue, grant or sell shares
of Common Stock or Rights to acquire Common Stock except pursuant to
the first offering of Common Stock which is registered under the
Securities Act or the Foreign Laws, the Corporation shall first give to
each holder of the Preferred Stock a notice setting forth in reasonable
detail the price and other terms on which such shares of Common Stock
or Rights are proposed to be issued, granted or sold, and the amount
thereof proposed to be issued, granted or sold. Each holder of
Preferred Stock shall have the preemptive right, exercisable by notice
to the Corporation no later than thirty (30) days after receipt by such
holder of the Corporation's notice, to purchase such holder's "Common
Proportionate Share" (as hereinafter defined), or any portion thereof,
of such shares of Common Stock or Rights for the same price and on the
same terms as set forth in the Corporation's notice. For purposes of
this Section 4.5(c), a holder's "Common Proportionate Share" shall mean
the quotient which results when (i) the sum of (A) the number of shares
of Common Stock then issuable upon conversion of all shares of both the
Class A Stock and the Preferred Stock then held by such holder, plus
(B) the number of shares of Common Stock then held by such holder, is
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divided by (ii) the sum of (A) the total number of shares of Common
Stock issuable upon conversion of all shares of both the Class A Stock
and the Preferred Stock issued, outstanding and entitled to vote, plus
(B) the number of shares of Common Stock issued and outstanding at that
time.
(d) Any notice provided by such holder of Preferred Stock
exercising the right to purchase shares or Rights pursuant to Sections
4.5(b) and (c) shall constitute an irrevocable commitment to purchase
from the Corporation such holder's Preferred Proportionate Share,
Common Proportionate Share, or a portion thereof, as specified in such
notice. The closing of the purchase of shares or Rights by a holder of
Preferred Stock pursuant to Sections 4.5(b) and (c) above shall take
place at least two (2) business days after the notice of exercise,
except pursuant to the first offering of Common Stock which is
registered under the Securities Act or the Foreign Laws. The closing of
the purchase of shares pursuant to Section 4.5(a) hereof shall take
place after a registration statement with respect to the shares or
Rights to be purchased by such holder has been declared effective by
the Securities and Exchange Commission or the corresponding regulatory
body which governs the registration statements under such Foreign Laws.
(e) For purposes of Sections 4.5(b) and (c) above, from the
expiration of the thirty (30) day period provided in such sections and
for a period of ninety (90) days thereafter, the Corporation may only
offer, issue, grant or sell shares of capital stock or Rights subject
to the preemptive rights provided in such sections at a price and on
terms no less favorable to the Corporation than the terms and
conditions set forth in the notice provided by the Corporation to the
holders of Preferred Stock pursuant to such sections. All shares
subject to such preemptive rights which are not sold by the Corporation
within such ninety (90)-day period are once again subject to the
preemptive rights set forth in this Section 4.5.
(f) The provisions of this Section 4.5 shall not apply to (i)
the grant of stock options or shares of the Corporation's stock issued
pursuant to stock ownership, stock purchase or other similar plans duly
approved by the Finance Committee and the Board of Directors of the
Corporation; (ii) the issuance of shares of capital stock upon the
exercise of any stock options granted pursuant to a plan described in
(i); (iii) the issuance of shares of capital stock pursuant to any
Rights as to the issuance, granting or sale of which the Corporation
has previously complied with the provisions of this Section 4.5; (iv)
the issuance of any shares in order to effect any approved merger,
consolidation or other acquisition of any business, division or assets;
(v) the issuance of shares for consideration other than cash as a part
of a transaction involving the purchase, leasing (as lessee) or
licensing (as licensee) by the Corporation of goods, services,
equipment or intellectual property rights that are to be used by the
Corporation or its subsidiaries for bona fide operating purposes; (vi)
the issuance of shares of Class A Stock in accordance with the
Conversion Plan (filed pursuant to O.C.G.A. Section 33-20-34) approved
by the Georgia Department of Insurance; or (vii) shares of Common Stock
issued to holders of Class A Stock and Preferred Stock solely as a
result of a Stock Conversion.
(g) As used herein, "Rights" shall mean any options, warrants
or rights exercisable for, or otherwise giving the holder thereof the
right to acquire, or securities (other than Class A Stock and Preferred
Stock) convertible into, or exchangeable for, directly or indirectly,
any capital stock or any other such options, warrants, securities,
rights or instruments or any instrument the value of which is measured
by reference to the value of capital stock.
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ARTICLE V
COMMON STOCK
Shares of Common Stock shall have the following preferences, privileges
and limitations:
Section 5.1. Issuance. For so long as any shares of Preferred Stock are
issued, outstanding and entitled to vote, the Corporation shall not issue shares
of Common Stock or Rights to acquire Common Stock unless (i) approved by the
holders of a majority of the Preferred Stock, issued, outstanding and entitled
to vote or (ii) upon a Stock Conversion, including the first offering of Common
Stock registered under the Securities Act.
Section 5.2. Voting Rights. Subject to Section 4.1(a) and the rights of
the holders of any Blank Preferred Stock issued pursuant to Section 2.2, and
except as provided in Section 12.1(c) hereof or as otherwise provided by the
Code, upon issuance of Common Stock, all rights to vote shall be vested in the
holders of Common Stock. Each outstanding share of Common Stock is entitled to
one vote.
Section 5.3. Dividends. Dividends may be declared for distribution from
time to time to the holders of shares of Common Stock at the discretion of the
Board of Directors of the Corporation.
ARTICLE VI
CONVERSION OF PREFERRED STOCK
AND CLASS A STOCK TO COMMON STOCK
Section 6.1. Conversion. Shares of Preferred Stock and Class A Stock
shall be converted into shares of Common Stock pursuant to a "Discretionary
Conversion," an "Automatic Conversion," or a "Preliquidation Conversion" as set
forth below ("Stock Conversion").
Section 6.2. Discretionary Conversion. The Corporation may, upon
approval of the holders of a majority of the then issued and outstanding shares
of Preferred Stock entitled to vote, convert all, but not less than all, of the
issued and outstanding shares of Preferred Stock and the Class A Stock by
delivering written notice thereof to the holders of such shares, whereupon each
share of such stock automatically shall be converted to Common Stock as set
forth in this Article VI on the date determined by the Board of Directors (the
"Discretionary Conversion Date").
Section 6.3. Automatic Conversion and Preliquidation Conversion.
(a) Subject to Section 4.4(b), on the earlier of: (i) December
1, 2001; or (ii) the closing date of a public offering of Common Stock
registered under the Securities Act, each issued and then outstanding
share of Preferred Stock and Class A Stock shall automatically be
converted into shares of Common Stock, as set forth in this Article VI,
without further action (the "Automatic Conversion").
(b) Immediately preceding any liquidation, dissolution or
winding-up of the Corporation if approved by the holders of a majority
of the then issued and outstanding shares of Preferred Stock entitled
to vote, all the then issued and outstanding Preferred Stock and Class
A Stock shall automatically be converted, into shares of Common Stock,
without further action (the "Preliquidation Conversion").
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Section 6.4. Conversion Procedures.
(a) Upon any Stock Conversion as set forth in this Article VI,
each share of stock shall convert as follows:
(i) in the case of the Class A Stock, into one fully
paid and nonassessable share of Common Stock; and
(ii) in the case of the Preferred Stock, into the
number of fully paid and nonassessable shares of Common Stock
equal to 0.0004446420631% as adjusted from time to time as
provided for herein (as so adjusted, the "Preferred Conversion
Percentage") of the number of shares of Common Stock issuable
upon conversion of all outstanding Class A Stock and Preferred
Stock; (the "Fully Diluted Share Number"), in each case
calculated immediately prior to the time the Preferred Stock
is converted into Common Stock, but giving effect to any
adjustments required by Sections 6.6 and 6.7 hereof
immediately after such time of conversion.
(b) Subject to the provisions of Article VII hereof, the
Corporation shall, as soon as practicable after the surrender of the
certificate or certificates evidencing shares of Preferred Stock or
Class A Stock for conversion at the office of the Corporation or the
transfer agent for the Preferred Stock, the Class A Stock or the Common
Stock, issue to each holder of such shares, or its nominee or nominees,
a certificate or certificates evidencing the number of full shares of
Common Stock to which it shall be entitled; and in the case of the
Preferred Stock, subject to the provisions of the Code, an amount in
cash equal to the accrued but unpaid dividends through the effective
date of a Stock Conversion (the "Stock Conversion Date"). Upon the
occurrence of a Stock Conversion, a certificate or certificates of
Preferred Stock or Class A Stock shall represent the right to receive
the full number of shares of Common Stock into which such shares are to
be converted and an amount in cash equal to the accrued but unpaid
dividends on such shares of Preferred Stock through the Stock
Conversion Date. The Corporation shall not be required to convert any
shares of Class A Stock or Preferred Stock while the stock transfer
books of the Corporation are closed for any purpose, but the surrender
of Class A Stock or Preferred Stock for conversion during any period
while such books are so closed shall become effective for conversion
immediately upon the reopening of such books as if the surrender had
been made on the date of such reopening, and the conversion shall be at
the Preferred Conversion Percentage on such date. In the event shares
to be converted to Common Stock pursuant to this Article are
uncertificated, the shares to be converted shall be canceled on the
books and records of the Corporation and the Corporation shall evidence
such issuance of the Common Stock upon such conversion on such books
and records and shall give notice thereof as provided in Section 6.4(d)
to the holders of such shares.
(c) No fractional shares or scrip representing fractional
shares of Common Stock shall be issued upon conversion of Preferred
Stock. Instead, shares to be issued upon conversion pursuant to this
Article VI shall be rounded to the nearest whole share (rounding up if
.5 shares or more and rounding down if less than .5 shares).
(d) The Corporation shall give notice of any Stock Conversion
to the holders of the Class A Stock and the Preferred Stock no later
than the Stock Conversion Date. Notice to holders of Class A Stock may
be perfected by publication or with such other method as may be
approved by the Board of Directors.
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Section 6.5. Reservation of Shares; Transfer Tax; Etc.
(a) The Corporation shall at all times reserve and keep
available, out of its authorized and unissued stock, solely for the
purpose of effecting the conversion of the Class A Stock and Preferred
Stock, such number of shares of its Common Stock, free from preemptive
rights, as shall from time to time be sufficient to effect the
conversion of all shares of Class A Stock and Preferred Stock from time
to time outstanding. The Corporation shall from time to time, in
accordance with the laws of the State of Georgia, increase the
authorized number of shares of Common Stock if at any time the number
of shares of Common Stock not outstanding shall not be sufficient to
permit the conversion of all the then outstanding shares of Class A
Stock and Preferred Stock.
(b) If any shares of Common Stock required to be reserved for
purposes of conversion of the Class A Stock and Preferred Stock
hereunder require registration with or approval of any governmental
authority under any Federal or State law before such shares may be
issued upon conversion, the Corporation covenants that it will in good
faith and as expeditiously as possible endeavor to cause such shares to
be duly registered or approved, as the case may be.
(c) The Corporation covenants that it will pay any and all
issue or transfer taxes that may be payable in respect of any issue or
delivery of shares of Common Stock on conversion of the Class A Stock
and Preferred Stock. The Corporation shall not, however, be required to
pay any tax which may be payable in respect of any transfer involved in
the issue or delivery of Common Stock (or other securities or assets)
in a name other than that in which the shares of Class A Stock and
Preferred Stock so converted were registered, and no such issue or
delivery shall be made unless and until the person requesting such
issue has paid to the Corporation the amount of such tax or has
established, to the satisfaction of the Corporation, that such tax has
been paid.
Section 6.6. Antidilution Adjustment.
(a) The Conversion Price shall initially be equal to the
quotient of (i) $49,900,000 divided by (ii) 0.285142857142857 of the
number of shares of Class A Stock issued and outstanding immediately
after distribution of the shares of Class A Stock to the subscribers of
Georgia Blue entitled to the same and shall be adjusted from time to
time as provided herein. In case the Corporation shall issue shares of
Common Stock at a price, or Rights, having an Exercise Price (as
defined below), per share less than the Conversion Price on the date
such shares or Rights are issued, the Conversion Price in effect at the
opening of business on the day following the date on which such shares
or Rights are issued shall be reduced by multiplying the Conversion
Price on the date such shares or Rights are issued by a fraction of
which: (iii) the numerator shall be the (A) the number of shares of
Common Stock issuable upon conversion of all then outstanding Class A
Stock and upon exercise of Rights outstanding immediately prior to the
time at which such shares or Rights are issued; plus (B) the number of
shares of Common Stock which the aggregate of the offering price of the
total number of shares of Common Stock so issued, or the number of
shares of Common Stock which the aggregate of the Exercise Price of
such Rights so issued, would purchase at such Conversion Price; and
(iv) the denominator shall be the sum of: (A) the number of shares of
Common Stock issuable upon conversion of all then outstanding Class A
Stock and upon exercise of Rights outstanding immediately prior to the
time at which such shares or Rights are issued; plus (B) the number of
shares of Common Stock so issued or the number of shares of Common
Stock issuable upon the exercise of such Rights so issued, such
reduction to become effective immediately after the opening of business
on the day following the date on which such shares or Rights are
issued. For purposes of this clause, "Exercise Price" of any Rights is
the total amount received or receivable by the Corporation as
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consideration for the issue or sale of such Rights plus the minimum
aggregate amount of additional consideration, if any, payable to the
Corporation upon exercise thereof. In case part or all of the
subscription or purchase price for the Corporation's Common Stock shall
be in a form other than cash, the value of such consideration shall be
as determined in good faith by the vote of the Board of Directors of
the Corporation.
(b) Upon each adjustment of the Conversion Price pursuant to
Section 6.6(a), the Preferred Conversion Percentage shall be adjusted
so that the Preferred Conversion Percentage immediately after such
adjustment shall be equal to (i) the product of (A) the Preferred
Conversion Percentage immediately prior to such adjustment times (B)
the Fully Diluted Share Number immediately prior to such adjustment
times (c) the Adjustment Factor (as defined below) divided by (ii) the
sum of (A) the number of shares of Common Stock issuable upon
conversion of all outstanding Class A Stock plus (B) the quotient of
(x) the aggregate Stated Value of all outstanding shares of Preferred
Stock divided by (y) the Conversion Price, as so adjusted. As used
herein, with respect to any adjustment, the "Adjustment Factor" shall
be equal to the quotient of (i) the Conversion Price immediately prior
to such adjustment divided by (ii) the Conversion Price immediately
after such adjustment.
(c) Upon the issuance of any shares of Class A Stock after the
distribution of shares of Class A Stock referred to in Section 6.6(a),
the Conversion Price shall be adjusted so that the Conversion Price
immediately after such adjustment shall be equal to the quotient of (i)
the product of (A) 175,000,000 times (B) the Conversion Price
immediately prior to such adjustment divided by (ii) the sum of (A) the
product of (x) the number of shares of Class A Stock so issued times
(y) the Conversion Price immediately prior to such adjustment plus (B)
175,000,000.
(d) No adjustment under this Section 6.6 in the Conversion
Price (and, therefore, no adjustment in the number of shares of Common
Stock issuable upon conversion of shares of Preferred Stock) shall be
required unless such adjustment would require a change of at least one
half of one percent (0.5%) in such price; provided, however, that any
adjustments which by reason of this paragraph are not required to be
made shall be carried forward and taken into account in determining any
subsequent adjustment. All calculations under this Section shall be
made to the nearest one-hundredth of a cent.
(e) Whenever the Conversion Price is adjusted as herein
provided, the Corporation shall as soon as practicable, but in no event
later than thirty (30) calendar days thereafter:
(i) compute the adjusted Conversion Price in
accordance with this Section and shall prepare a certificate
signed by the principal accounting officer of the Corporation
or any other appropriate officer or official of the
Corporation setting forth the adjusted Conversion Price and
the adjusted number of shares of Common Stock issuable upon
conversion of the Preferred Stock and showing in reasonable
detail the facts upon which such adjustments are based; and
(ii) cause to be given notice to each of the holders
of Preferred Stock at such holder's address appearing in the
stock register of the Corporation. Such notice shall set forth
the adjusted Conversion Price and the adjusted number of
shares of Common Stock issuable upon conversion of each share
of Preferred Stock. Where appropriate, any such notice may be
given in advance and included as part of any other notice
required to be mailed under the other provisions of this
Section.
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The failure to give the notice required in this paragraph or
any defect therein shall not affect the legality or validity of the
event causing the adjustment of the Conversion Price and the number of
shares issuable upon conversion of the Preferred Stock or the vote
thereon or any other action taken in connection therewith.
(f) Notwithstanding the foregoing, no adjustment to the
Conversion Price shall be made (i) on account of the grant of any
option pursuant to a stock option plan of the Corporation approved by
the holders of a majority of the then issued and outstanding shares of
Preferred Stock entitled to vote by written consent or at a meeting or
(ii) on account of any shares of Common Stock or Rights as to which
holders of Preferred Stock exercise preemptive rights pursuant to
Section 4.5 hereof.
Section 6.7 Repurchase Adjustment. Upon the repurchase or redemption of
any Class A Stock by the Corporation, the then current Preferred Conversion
Percentage as adjusted from time to time pursuant hereto, shall be further
adjusted such that the adjusted Preferred Conversion Percentage shall equal the
Preferred Conversion Percentage, times the quotient of (a) "Post-Adjustment
Valuation" (as hereinafter defined) divided by (b) Post-Adjustment Valuation
less "Class A Repurchases" (as hereinafter defined). As used herein,
"Post-Adjustment Valuation" shall equal the sum of (x) $175,000,000 plus (y) the
number of shares of Preferred Stock issued and outstanding at the time of such
adjustment times $1,000. As used herein, "Class A Repurchases" shall be equal to
the total cumulative dollar value of Class A Stock repurchased or redeemed by
the Corporation as of the date of such adjustment.
ARTICLE VII
LOCKUP PERIOD
Section 7.1. Need for Lockup. In order to enhance the value of the
Common Stock and achieve orderly trading following any Stock Conversion, sales
of Common Stock issued in exchange for Class A Stock (the "Conversion Stock")
must be limited for a period of time via a lockup. The lockup is intended to
provide for the development of an orderly trading market in the Common Stock,
the development of an adequate investment research following of the Corporation,
and the promotion of institutional demand for the Common Stock.
Section 7.2. The Lockup, Duration. The Conversion Stock will be subject
to a lockup (a "Lockup") for the following periods (each a "Lockup Period"),
during which periods such Common Stock shall, as described below, be issued in
uncertificated form and will be subject to the restrictions on sale, pledge or
other transfer described in Section 7.4. The first Lockup Period (the "First
Lockup Period") will terminate on the six-month anniversary of the Stock
Conversion Date. The second Lockup Period (the "Second Lockup Period") will
terminate on the twelve-month anniversary of the Stock Conversion Date.
Section 7.3. Applicability of Each Lockup Period. One-half of all the
Conversion Stock will be released from the restrictions of Section 7.4 at the
termination of the First Lockup Period, and the remaining one-half of all the
Conversion Stock will be released from the restriction of Section 7.4 at the
termination of the Second Lockup Period.
Section 7.4. No Sales or Transfers During Lockup.
(a) Except as hereinafter set forth, the Corporation shall not
be obligated to recognize during a Lockup Period any sale, pledge, or
other transfer of any right or interest in or to any Conversion
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<PAGE> 13
Stock or other securities subject to the Lockup nor shall any such
attempted transaction be valid or binding.
(b) During a Lockup Period, the Corporation shall recognize
the following transfer of rights or interests in or to the Conversion
Stock subject to the Lockup: (i) the death of the holder of such
shares, in which case such shares may be transferred by such holder's
estate to an heir taking by law or pursuant to testamentary succession,
(ii) a transfer by operation of law or (iii) as required by a final
judicial decree.
Section 7.5. Uncertificated Securities During Lockup. Conversion Stock
shall be issued in uncertificated form pursuant to Section 14-2-626 of the Code,
an appropriate notice shall be sent to each holder in compliance with Section
14-2-626 of the Code, and no certificates shall be issued for any such
Conversion Stock during the Lockup Periods. The issuance and distribution of
certificates therefor shall be deferred until the termination of the Lockup
Periods applicable to the Conversion Stock to be evidenced by such certificates.
All distributions of Conversion Stock, or of securities convertible into or
exchangeable for Conversion Stock, as dividends or distributions on account of
such uncertificated Conversion Stock subject to the Lockup may, at the
discretion of the Corporation, also be subject to the same Lockup, and for the
same Lockup Period, as the Conversion Stock in respect of which it is
distributed.
Section 7.6. Distribution of Certificates After Lockup. As soon as
reasonably practicable after the expiration of each Lockup Period, the
Corporation shall issue to each holder of Conversion Stock upon request, a
certificate for the Conversion Stock being released from the Lockup at the end
of that Lockup Period, whereupon such Conversion Stock shall cease to be in
uncertificated form pursuant to Section 14-2- 626 of the Code, and shall be
represented by such certificate pursuant to Section 14-2-625 of the Code. Such
certificates shall be mailed by the Corporation to the holders of the Conversion
Stock, or, with respect to transfers of such Conversion Stock during the Lockup
which the Corporation has recognized pursuant to Section 7.4, to the
transferees, in each case at their addresses as they appear in the records of
the Corporation.
ARTICLE VIII
AMENDMENT OF ARTICLES AND BYLAWS
Amendments. The Articles of Incorporation and Bylaws of the Corporation
may be altered, amended or repealed by the shareholders only upon the
affirmative vote of (i) a majority of the members of the Board of Directors and
(ii) a majority (or in the case of amendment of provisions which require a
greater percentage, such greater percentage) of the shares of each class of
shares then outstanding and entitled to vote thereon; provided, however, that
this Article VIII, Sections 9.1 and 9.2 and Article XII of the Articles of
Incorporation may be altered, amended or repealed by the shareholders only upon
the affirmative vote of (i) a majority of the Board of Directors and (ii)
three-fourths of the shares of each class of shares then outstanding and
entitled to vote thereon.
ARTICLE IX
DIRECTORS
Section 9.1 Number and Designation. There shall be up to twenty-one
(21) Directors (with the number fixed from time to time by the Board of
Directors), who shall be divided into three (3) classes designated Class One,
Class Two and Class Three. The class, names and addresses of the initial
Directors are as follows:
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<PAGE> 14
<TABLE>
<CAPTION>
Class One
---------
Name Address
---- -------
<S> <C>
James E. Albright 5408 Tomahawk Drive
Columbus, Georgia 31907
Elizabeth W. Camp 3811 Dumbarton Road
Atlanta, Georgia 30327
<CAPTION>
Class One
---------
Name Address
---- -------
<S> <C>
Mel H. Gregory, Jr. 3350 Peachtree Road, NE
Atlanta, Georgia 30326
James L. LaBoon,Jr. 155 Rock Glen Road
Athens, Georgia 30606
James H. Leigh, Jr., M.D. 1527 Burns Drive
Gainesville, Georgia 30501
Julia L. Mitchell-Ivey 3508 Midvale Road
Tucker, Georgia 30084
John B. Zellars 3350 Peachtree Road, NE
Atlanta, Georgia 30326
<CAPTION>
Class Two
---------
Name Address
---- -------
<S> <C>
Louis H. Felder, M.D. 471 Loridans Drive, N.E.
Atlanta, Georgia 30342
Edward M. Gillespie 12 Indian Creek Road
Augusta, Georgia 30909
Joseph D. Greene, CLU P.O. Box 657
309 Margarets Road
Thomson, Georgia 30324
W. Jerry Vereen 21 Dogwood Circle
Moultrie, Georgia 31788
A. Max Walker 6215 Riverwood Drive
Atlanta, Georgia 30328
Dan H. Willoughby, M.D. 8622 Kent Drive
Savannah, Georgia 31406
Class Three
-----------
Name Address
---- -------
<S> <C>
W. Daniel Barker 50 South Prado, N.E.
Atlanta, Georgia 30309
Frank J. Hanna, III Two Ravinia Drive, Suite 1750
Atlanta, Georgia 30346
R. Pierce Head, Jr. 1166 Lullwater Road, N.E.
Atlanta, Georgia 30307
Charles H. Keaton 5025 Midland Trace
Midland, Georgia 31820
<CAPTION>
Class Three
-----------
Name Address
---- -------
<S> <C>
Richard D. Shirk 823 Longleaf Drive
Atlanta, Georgia 30342
Fred L. Tolbert, Jr. 2405 East Doublegate Drive
Albany, Georgia 31707
Charles R. Underwood, M.D. 425 St. Mary's Lane
Marietta, Georgia 30064
</TABLE>
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<PAGE> 15
Section 9.2. Terms. The initial term of office of the Class One
Directors named shall expire upon the annual meeting of shareholders in 1996.
The term of office of the Class Two Directors named shall expire upon the annual
meeting of shareholders in 1997. The term of office of Class Three Directors
named shall expire upon the annual meeting of shareholders in 1998. Upon
expiration of the terms of office of the Directors, their successors shall be
elected for the term of three (3) years each and shall serve until their
successors shall be elected and qualified. Despite the expiration of a
Director's term, he or she shall continue to serve until his or her successor is
elected and qualified. No decrease in the number of Directors through amendment
of these Articles or otherwise shall have the effect of shortening the term of
any Director. Directors may succeed themselves.
Section 9.3. Vacancies. During the intervals between annual meetings of
shareholders, any vacancy occurring in the Board of Directors caused by
resignation, removal, death or other incapacity, and any newly created
directorships resulting from an increase in the number of directors, shall be
filled by a majority vote of the directors then in office, whether or not a
quorum, provided, however, if any such vacancy occurs in the office of a
Preferred Designated Director, the holders of the Preferred Stock (by vote of
the holders of a majority of the Preferred Stock then issued, outstanding and
entitled to vote), and only the holders of the Preferred Stock, may designate
another person to serve as a Preferred Designated Director at a meeting of the
holders of the shares of Preferred Stock called for that purpose or pursuant to
unanimous written consent of the holders of the Preferred Stock, as the case may
be. In no instance shall the Board of Directors of the Corporation have the
power to fill any vacancy in the office of a Preferred Designated Director. Each
director chosen to fill a vacancy shall hold office for the unexpired term in
respect of which such vacancy occurred. Each director chosen to fill a newly
created directorship shall hold office until the next election of the class of
Directors for which such Director shall have been chosen.
Section 9.4. Removal of Directors. Any director may be removed from
office at any time, but only for cause, by the affirmative vote of the
shareholders of record holding a majority of the then outstanding shares of
stock of each class of shares of the Corporation entitled to vote in elections
of such directors at a meeting of the shareholders called for that purpose;
provided, however, that notwithstanding the foregoing, a Preferred Designated
Director may be removed, with or without cause, by the holders of the Preferred
Stock holding a majority of such Preferred Stock issued, outstanding and
entitled to vote at a meeting of the holders of Preferred Stock called for that
purpose.
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<PAGE> 16
Section 9.5 Constituencies. In discharging the duties of their
respective positions and in determining what is believed to be in the best
interests of the Corporation, the Board of Directors, committees of the Board of
Directors and individual directors, in addition to considering the effects of
any action on the Corporation or its shareholders, may consider the interests of
the employees, customers, suppliers, and creditors of the Corporation and its
subsidiaries, the communities in which offices or other establishments of the
Corporation and its subsidiaries are located, and all other factors such
directors consider pertinent; provided, however, that this provision shall be
deemed solely to grant discretionary authority to the directors and shall not be
deemed to provide to any constituency any right to be considered.
Section 9.6 Special Actions. No director shall be required to vote in
favor of or against or take any action which is contrary to or violative of the
written requirements of Blue Cross and Blue Shield Association.
Section 9.7. Directors of Subsidiary. The directors of the Corporation
shall also serve as directors of Blue Cross and Blue Shield of Georgia, Inc.
ARTICLE X
REGISTERED OFFICE AND REGISTERED AGENT
The registered office of the Corporation shall be located at 3350
Peachtree Road, N.E., Atlanta, Fulton County, Georgia 30326, and the registered
agent at such address is Hugh J. Stedman. The initial principal office of the
Corporation is 3350 Peachtree Road, N.E., Atlanta, Georgia 30326-1048.
ARTICLE XI
LIMITATIONS ON DIRECTOR LIABILITY
No director of the Corporation shall be personally liable to the
Corporation or its shareholders for monetary damages for breach of duty of care
or other duty as a director, except for liability (i) for any appropriation, in
violation of his duties, of any business opportunity of the corporation; (ii)
for acts or omissions which involve intentional misconduct or a knowing
violation of the law; (iii) for the types of liability set forth in Section
14-2-832 of the Code; or (iv) for any transaction from which the director
received an improper personal benefit. If the Code is amended after the
effective date of this Article to authorize corporate action further limiting
the personal liability of directors, then the liability of a director of the
Corporation shall be limited to the fullest extent permitted by the Code, as so
amended. Any repeal or modification of the foregoing paragraph by the
shareholders of the Corporation shall not adversely affect any right or
protection of a director of the Corporation existing at the time of such repeal
or modification.
ARTICLE XII
ADDITIONAL PROVISIONS
Section 12.1. Restriction on Acquisition of Securities. Notwithstanding
any provisions of the Articles of Incorporation to the contrary, unless approved
by two-thirds (2/3) of the Continuing Directors (as hereinafter defined), so
long as Common Stock is issued and outstanding, and no Preferred Stock is issued
and outstanding, the following provisions shall apply:
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<PAGE> 17
(a) No Person, including all of its Affiliates and Associates,
may, directly or indirectly, whether through merger, consolidation or
otherwise, acquire or hold the beneficial ownership of more than the
Permissible Ownership Amount of the outstanding shares of any class of
equity securities of the Corporation.
(b) That portion of shares of a class of outstanding equity
securities of the Corporation the beneficial ownership of which is held
or acquired by any Person which are in excess of the Permissible
Ownership Amount shall be deemed "Excess Shares." If, notwithstanding
the prohibition contained in Section 12.1(a), a Person (the "Purported
Owner"), shall become the owner of Excess Shares, then:
(i) the Excess Shares of such Purported Owner
shall, within twenty (20) days following the discovery of the
Purported Owner's ownership of the Excess Shares, be
transferred to and held in an escrow account, or other similar
arrangement, administered by an escrow agent (the "Escrow
Agent") for the benefit of such Purported Owner and pursuant
to which such Purported Owner does not have the right to vote
the Excess Shares;
(ii) subject to all applicable securities and other
laws, within ninety (90) days following the placement of the
Excess Shares with the Escrow Agent (the "Sales Period"), the
Escrow Agent shall use its reasonable best efforts to sell, or
cause to be sold, the Excess Shares at the highest available
price and in a commercially reasonable manner; provided,
however, that if such a sale cannot take place within the
Sales Period due to restrictions imposed by any applicable
securities, stock exchange or other laws, rules, regulations
or orders, such Sales Period shall be automatically extended
until ninety (90) days following the expiration of all such
restrictions; and
(iii) cash dividends, distributions, property, sales
and other proceeds received by the Escrow Agent with respect
to such Excess Shares shall be distributed to the Purported
Owner promptly upon the Escrow Agent's receipt thereof, less
the Escrow Agent's reasonable fee.
(c) Shares of Common Stock Beneficially Owned by any
particular person at any time in excess of the Permissible Voting
Amount shall not be entitled to vote.
(d) As used herein, the following definitions shall apply:
"Affiliate" and "Associate" have the respective
meanings ascribed to such terms in Rule 12b-2 of the General
Rules and Regulations under the Exchange Act.
Any person will be deemed to be the "Beneficial
Owner" of and shall be deemed to "beneficially own" any
securities:
(a) which such Person or any of such
Person's Affiliates or Associates beneficially owns,
directly or indirectly;
(b) which such Person or any of such
Person's Affiliates or Associates has (i) the right
to acquire (whether such right is exercisable
immediately or only after the passage of time)
pursuant to any agreement, arrangement or
understanding, or upon the exercise of conversion
rights, exchange rights, warrants or options, or
otherwise; or (ii) the right to vote pursuant to any
agreement, arrangement or understanding; provided,
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<PAGE> 18
however, that a Person shall not be deemed the
Beneficial Owner of, or to beneficially own, any
security if the agreement, arrangement or
understanding to vote such security (A) arises solely
from a revocable proxy or consent given to such
Person in response to a public proxy or consent
solicitation made pursuant to, and in accordance
with, the applicable rules and regulations
promulgated under the Exchange Act and (B) is not
also then reportable on Schedule 13D under the
Exchange Act (or any comparable or successor report);
or
(c) which are beneficially owned, directly
or indirectly, by any other Person (or any Affiliate
or Associate thereof) with which such Person (or any
of such Person's Affiliates or Associates) has any
agreement, arrangement or understanding (other than
customary agreements with and between underwriters
and selling group members with respect to a bona fide
public offering of securities) relating to the
acquisition, holding, voting (except to the extent
contemplated by the proviso to (b)(ii)(B) above) or
disposing of any securities of the Corporation.
Notwithstanding anything in this definition of
Beneficial Ownership to the contrary, the phrase "then
outstanding," when used with reference to a Person's
Beneficial Ownership of securities of the Corporation, shall
mean the number of such securities then issued and outstanding
together with the number of such securities not then actually
issued and outstanding which such Person would be deemed to
own beneficially hereunder.
"Continuing Directors" means the individuals who: (i)
are named as members of the Board of Directors of the
Corporation in Section 9.1 hereof (other than the Preferred
Designated Directors), together with any new directors whose
election or nomination to the Board of Directors was approved
by a vote of two-thirds (2/3) of the directors then still in
office who were such directors or whose election or nomination
was previously so approved; (ii) are not Beneficial Owners of
more than the Permissible Voting Amount of any outstanding
shares of any class of equity securities of the Corporation;
and (iii) were not nominated by such Beneficial Owner and,
prior to such director's election, did not have any agreement,
arrangement, or understanding with any such Beneficial Owner
with respect to any action to be taken by such person as a
director; provided that no person shall fail to qualify as a
Continuing Director solely because such person's nomination
was approved by the two Preferred Designated Directors as
contemplated by Section 3.1(b) hereof.
"Exchange Act" means the Securities Exchange Act of
1934, as amended.
"Person" shall mean any individual, firm,
partnership, corporation, trust, association, joint venture or
other entity, and shall include any successor (by merger or
otherwise) of such entity.
"Permissible Ownership Amount" means 20% of the total
shares of Common Stock outstanding at the time this term is
applied; provided, however, that the Permissible Ownership
Amount then in effect shall be increased to greater than 20%
under either or both of the following circumstances: (i) if a
majority of the Continuing Directors shall determine in their
reasonable judgment that setting the Permissible Ownership
Amount then in effect at a percentage greater than the
Permissible Ownership Amount then in effect does not have the
effect of causing the Corporation to lose its licenses from
the Blue Cross and Blue Shield Association (which together
with any successor is herein called the "Association") or
causing a Terminating Event under the License Addendum between
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<PAGE> 19
the Corporation and the Association as constituted from time
to time (the "License Addendum"), then the Board of Directors
shall have the right to change, and shall change, the
Permissible Ownership Amount then in effect to such greater
amount; and (ii) if the references to 20% in Section 2.1 in
the License Addendum between the Corporation and the
Association shall be changed to a percentage higher than the
Permissible Ownership Amount then in effect, then the
Permissible Ownership Amount then in effect shall
automatically change to that new percentage.
"Permissible Voting Amount" means 5% of the total
shares of Common Stock outstanding at the time this term is
applied; provided, however that the Permissible Voting Amount
then in effect shall be increased to greater than 5% under
either or both of the following circumstances: (i) if a
majority of the Continuing Directors shall determine in their
reasonable judgment that setting the Permissible Voting Amount
then in effect at a percentage greater than the Permissible
Voting Amount then in effect does not have the effect of
causing the Corporation to lose its licenses from the
Association or causing a Terminating Event under the License
Addendum, then the Board of Directors shall have the right to
change, and shall change, the Permissible Voting Amount then
in effect to such greater amount; and (ii) if the references
to 5% in Section 2.1 in the License Addendum between the
Corporation and the Association shall be changed to a
percentage higher than the Permissible Voting Amount then in
effect, then the Permissible Voting Amount then in effect
shall automatically change to that new percentage.
(e) Without limiting by implication the generality of the
preceding provisions, all of the Common Stock, regardless of how such
Common Stock is issued, including but not limited to, Common Stock
acquired as the result of being converted from Class A Stock or
Preferred Stock into Common Stock, or acquired pursuant to Article IV
or VI of these Articles of Incorporation, is subject to all of the
limitations of this Article XII.
Section 12.2. Cumulative Voting. The shareholders do not have the right
to cumulate their votes for Directors.
ARTICLE XIII
EFFECTIVE TIME
Section 13.1. Effective Date. These Articles of Incorporation shall be
effective upon the time of filing on the date they are filed, as evidenced by
the Secretary of State of Georgia's endorsement hereon.
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<PAGE> 20
ARTICLE XIV
INCORPORATOR
The name and address of the Incorporator is:
Blue Cross and Blue Shield of Georgia, Inc.
3350 Peachtree Road, N.E.
Atlanta, Georgia 30326
This 2nd day of February, 1996.
BLUE CROSS AND BLUE SHIELD OF GEORGIA, INC.
By /s/ Richard D. Shirk
-----------------------------------------
Richard D. Shirk
President and Chief Executive Officer
[CORPORATE SEAL]
ATTEST:
/s/ Hugh J. Stedman
- ------------------------------
Hugh J. Stedman
Assistant Corporate Secretary
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<PAGE> 21
ARTICLES OF AMENDMENT
OF
THE ARTICLES OF INCORPORATION
OF
CERULEAN COMPANIES, INC.
Pursuant to Section 14-2-602 of the Georgia Business Corporation Code,
the Articles of Incorporation (the "Articles of Incorporation")of Cerulean
Companies, Inc.(the "Corporation") are hereby amended to designate a new series
of Preferred Stock.
Article II, Section 2.2 of the Articles of Incorporation authorizes the
issuance by the Corporation, as approved by its Board of Directors with the
consent or approval of the holders of a majority of the shares of Class B
Convertible Preferred Stock then issued, outstanding and entitled to vote, of up
to 100,000,000 shares of an additional class of preferred stock in one or more
series, with the shares of each such series having such preferences, limitations
and relative rights as may be determined by the Board of Directors and set forth
in an amendment to the Articles of Incorporation.
On July 5, 1998, the Board of Directors of the Corporation duly adopted
an amendment (the "Amendment") to the Articles of Incorporation which amends and
is a part of the Articles of Incorporation. Effective September 15, 1998, in
accordance with Article II, Section 2.2, holders of a majority of the shares of
Class B Convertible Preferred Stock approved this amendment.
<PAGE> 22
In accordance with the provisions of Article II, Section 2.2 of the
Articles of Incorporation, this Amendment creates a series of preferred stock,
designated "Series A Preferred Stock," and establishes the preferences,
limitations and relative rights thereof, as follows:
SERIES A PREFERRED STOCK
1. DESIGNATION AND AMOUNT
The shares of such series shall be designated as Series A Preferred
Stock (the "Series A Preferred Stock"), and the number of shares constituting
the Series A Preferred Stock shall be not greater than 64,000 shares and shall
be issuable by the Corporation only pursuant to the exercise of Warrants for
their purchase issued pursuant to the final Judgment and Order of Dismissal
entered by the Superior Court of Fulton County, Georgia, dated August 21, 1998,
in settlement of litigation styled "Let's Get Together, Inc., et al. v.
Insurance Commissioner of the State of Georgia, et al.," bearing Case No.
E-61714, and the Stipulation and Agreement of Settlement, dated July 8, 1998,
referenced in such order.
2. DIVIDENDS; REDEMPTION
(a) Dividends may be declared for distribution from time to
time to the holders of shares of Series A Preferred Stock
at the discretion of the Board of Directors of the
Corporation, provided that, so long as any shares of
Class B Convertible Preferred Stock are issued,
outstanding and entitled to vote, without the approval of
the holders of a majority of the Class B Convertible
Preferred Stock then issued, outstanding and entitled to
vote, no dividends, in cash, stock or other property, may
be paid or declared and set aside for payment or any
other distribution made upon the Series A Preferred
Stock.
(b) The Board of Directors may fix a record date for the
determination of holders of shares of Series A Preferred Stock
entitled to receive payment of a dividend declared thereon,
which record date shall be not more than 60 days prior to the
date fixed for the payment thereof.
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<PAGE> 23
3. VOTING RIGHTS
The Series A Preferred Stock shall have no voting rights.
4. TRANSFER; RESTRICTIONS; RIGHT OF FIRST REFUSAL
(a) Shares of Series A Preferred Stock may not be sold,
transferred, encumbered, pledged or otherwise disposed of,
prior to December 1, 1998, except: (i) by operation of law or
(ii) as required by a final judicial decree.
(b) Subject to the limitations set forth in this Section
below, during the period from December 1, 1998 to
December 1, 2001, if a holder of shares of Series A
Preferred Stock (the "Offeror") desires to sell all or
any portion of such Series A Preferred Stock, such holder
shall first offer such shares of Series A Preferred Stock
(the "Offered Shares") to the Corporation by giving
written notice of his intention to dispose of such
Offered Shares (the "Notice"). The Notice must name the
type of disposition, the proposed purchaser, the number
of Offered Shares, the price per share and the terms of
payment. The Corporation may accept such offer with
respect to all, but not less than all, of the Offered
Shares, within thirty (30) days following receipt of the
Notice. The Corporation may exercise its option by
giving notice of such exercise to the Offeror. If any of
the consideration for the Offered Shares consists of
anything other than cash, the Corporation may substitute
for such consideration the cash equivalent as reasonably
determined by the Corporation.
(c) The Corporation may exercise its right of first refusal
set forth in this Section to acquire only up to two
percent (2%) of the aggregate of issued and outstanding
Warrants for the purchase of Series A Preferred Stock,
shares of Series A Preferred Stock and shares of Class A
Convertible Common Stock in any one calendar year, unless
the holders of a majority of the Class B Convertible
Preferred Stock then issued, outstanding and entitled to
vote, approve of the acquisition of a larger percentage
of Series A Preferred Stock.
(d) If the right of first refusal provided above is not exercised
as to all of the Offered Shares or if the purchase by the
Corporation is not consummated within the time specified in
this Section, through no fault of the Offeror, the Offeror may
transfer the Offered Shares to the proposed purchaser, at the
price and on the terms
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<PAGE> 24
and conditions set forth in the Notice. If the transfer of the
Offered Shares by the Offeror to the proposed purchaser named
in the Notice is not made within thirty (30) days after the
date the Offeror became free to transfer, the right to
transfer in accordance with the Notice will expire.
(e) Notwithstanding anything to the contrary herein, Series
A Preferred Stock and any security or right into which
Series A Preferred is converted or for which it may be
exchanged shall be considered Common Stock for purposes
of Article XII of the Articles of Incorporation and
holders of shares of Series A Preferred Stock or of such
other securities or rights shall be subject to all of the
provisions and limitations contained in Article XII of
the Articles of Incorporation provided that this clause
(e) shall not have the effect of increasing the number of
shares of actual Common Stock that any person is entitled
to vote or beneficially own under said Article XII.
5. CONVERSION
(a) Shares of Series A Preferred Stock shall, without any action
taken or consideration paid by the holders thereof, be
converted into Class A Common Stock Participation Rights (as
defined below) pursuant to a "Statutory Vote Conversion" as
set forth below.
(b) The Class A Common Stock Participation Rights of the
Corporation (the "Rights") shall not be shares of stock
of the Corporation, but instead each Right shall
represent an entitlement to all of the economic benefits
afforded to a share of Class A Convertible Common Stock
of the Corporation as set forth in the Articles of
Incorporation of the Corporation, except that the holder
of a Right shall not have the right to vote on any
matters to come before the stockholders of the
Corporation.
(c) Immediately preceding any event that would require the vote of
the holders of shares of Series A Preferred Stock pursuant to
any provision of the Georgia Business Corporation Code or
otherwise by operation of law, each issued and then
outstanding share of Series A Preferred Stock shall
automatically be converted into one Class A Common Stock
Participation Right, as set forth in this Section 5, without
further action (the "Statutory Vote Conversion").
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<PAGE> 25
(d) The Corporation shall, as soon as practicable after the
surrender of the certificate or certificates evidencing
shares of Series A Preferred Stock for conversion at the
office of the Corporation issue to each holder of such
shares, or its nominee or nominees, a certificate or
certificates evidencing the number of Rights to which it
shall be entitled. In the event shares to be converted
to Rights pursuant to this Section are uncertificated,
the shares to be converted shall be canceled on the books
and records of the Corporation, and the Corporation shall
evidence such issuance of the Rights upon such conversion
on such books and records and shall give notice thereof
to the holders of such Rights.
(e) Upon the occurrence of any Stock Conversion, as defined in
Article VI of the Corporation's Articles of Incorporation,
each share of Series A Preferred Stock and each Right shall
entitle the holder of such share or Right to all of the
economic benefits to which a share of Class A Convertible
Common Stock is entitled upon such Stock Conversion, including
the receipt of a share of Common Stock, provided that, upon
such a Stock Conversion, and as a result thereof, holders of
Series A Preferred Stock and/or Rights shall not be entitled
to, and shall not receive, any voting rights with respect to
any matters to come before the stockholders of the
Corporation.
6. LIQUIDATION
(a) The holders of Series A Preferred Stock shall be entitled
to participate equally, on a share-for-share basis with,
and with no preference to, the holders of Class A
Convertible Common Stock in any distribution of the
Corporation's assets upon the liquidation, dissolution or
winding up of the Corporation, but only after and on the
condition that all the holders of issued and outstanding
shares of Class B Convertible Preferred Stock, if any,
shall have received an amount of such assets equal to
$1,000 per share of Class B Convertible Preferred Stock,
plus all accrued and unpaid dividends.
(b) If upon any dissolution, liquidation or winding up of the
affairs of the Corporation, the assets of the Corporation
distributable as aforesaid among the holders of the Class B
Convertible Preferred Stock shall be insufficient to permit
the payment to them of the full amounts to which
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<PAGE> 26
they are entitled, then the entire assets of the Corporation
to be so distributed shall be distributed ratably among the
holders of the Class B Convertible Preferred Stock in
proportion to the sum of their respective per share
liquidation values, including all accrued and unpaid
dividends, until payment in full of such amount per share.
(c) After payment or distribution to the holders of the Class
B Convertible Preferred Stock of the full amounts set
forth in paragraphs (a) and (b) of this Section 6, all of
the remaining assets of the Corporation available for
distribution to stockholders shall be distributed ratably
among the holders of the Series A Preferred Stock (or
Rights, as the case may be) and Class A Convertible
Common Stock then issued and outstanding, with each of
such holders having equal right to such distribution,
with no preference over any other such holder with
respect to such distribution.
(d) In the event no Series A Preferred Stock (or Rights, as
the case may be), Class A Convertible Common Stock or
Class B Convertible Preferred Stock is issued and
outstanding at the time of a dissolution, liquidation or
winding up, the entire assets of the Corporation
available for distribution to stockholders shall be
distributed ratably among the holders of Common Stock
then issued and outstanding.
(e) Neither the consolidation nor the merger of the Corporation
into or with another corporation or corporations shall be
deemed to be a liquidation, dissolution or winding up of the
Corporation within the meaning of this Section 6.
7. STATUS OF REACQUIRED SHARES
Shares of Series A Preferred Stock issued and reacquired by the
Corporation (including, without limitation, shares of Series A Preferred Stock
which have been redeemed pursuant to the terms of Section 4 hereof) shall be
cancelled.
8. PREEMPTIVE RIGHTS
Holders of shares of Series A Preferred Stock are not entitled to any
preemptive or subscription rights in respect of any securities of the
Corporation.
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<PAGE> 27
9. LEGAL HOLIDAYS
In any case where any dividend payment date, date by which the
Corporation must accept an offer to purchase Offered Shares pursuant to Section
4 hereof or the date on which the Series A Preferred Stock is to convert such
holder's shares of Series A Preferred Stock to Rights shall not be a Business
Day (as defined below), then notwithstanding any other provision hereof, payment
of a dividend due or purchase price, acceptance of such offer or conversion of
the shares of Series A Preferred Stock need not be made on such date but may be
made on the next succeeding Business Day with the same force and effect as if
made on the dividend payment date or last acceptance date or the last day for
conversion. As used in this Section 10, "Business Day" means each Monday,
Tuesday, Wednesday, Thursday and Friday which is not a day on which banking
institutions in the State of Georgia are authorized or obligated by law or
executive order to close.
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<PAGE> 1
EXHIBIT 4.4
CERULEAN COMPANIES, INC.
WARRANT AGREEMENT
This Warrant Agreement (the "Warrant Agreement") is entered into
effective September 22, 1998 (the "Closing Date"), by and between Cerulean
Companies, Inc. (the "Company") and ____________________________ (the "Holder").
W I T N E S S E T H:
WHEREAS, this Warrant Agreement is entered into pursuant to the
Stipulation of Settlement (the "Stipulation") entered in the matter of Let's Get
Together, Inc. et al. v. Insurance Commissioner of the State of Georgia, et al,
No. E-61714, Superior Court of Fulton County, Georgia (the "Action") and
pursuant to the Final Judgment entered in the Action.
WHEREAS, the terms and conditions of the Stipulation are incorporated
herein by this reference.
WHEREAS, the Company has agreed to grant to Holder warrants to purchase
shares of Series A Preferred Stock of the Company (the "Series A Preferred
Stock") which, together with the warrants to be granted to ___________________,
represent 10.5% of the Total Equity of the Company (as defined in the
Stipulation) as of the date of this Warrant Agreement pursuant to the terms of
the Stipulation (as defined in the Stipulation, of which this Warrant Agreement
is an Exhibit).
WHEREAS, to further the interests of the Company and Holder, the
parties hereto have set forth the terms of such warrants in writing in this
Warrant Agreement; and
NOW, THEREFORE, for and in consideration of the premises and mutual
promises herein contained, and for other good and valuable consideration, the
receipt and sufficiency of which are acknowledged, the parties agree as follows:
1. Grant of Warrants.
Subject to the terms and conditions set forth herein, Holder
shall have the right to purchase ____________ shares of Series A Preferred Stock
of the Company (the "Warrant Shares" and this warrant is referred to herein as
the "Warrant").
2. Exercise Price.
The price per Warrant Share shall be $328.8804 (the "Warrant
Price").
<PAGE> 2
3. Term.
The Warrants are exercisable, in whole or in part, at any time
and from time to time from and after the Closing Date and prior to 5:00 p.m.,
Atlanta, Georgia time, on the fifth anniversary of the Closing Date (at which
time the Warrants shall be and become wholly void and of no value).
4. Exercise of Warrants.
(a) General. The Warrants may be exercised by Holder's
delivery to the Secretary of the Company of a written notice of exercise
executed by Holder (the "Notice of Exercise"). The Notice of Exercise shall be
substantially in the form set forth as Exhibit A, attached hereto and made a
part hereof, and shall identify the number of Warrants that are being exercised.
(b) Partial Exercise. Holder may exercise Warrants to
purchase fewer than all of the Warrant Shares, but such exercise may not be made
for less than 2,000 Warrant Shares or the total remaining Warrant Shares subject
to the Warrant, if less than 2,000 shares. In the event that the Holder
exercises the Warrant to purchase fewer than all of the Warrant Shares, the
Warrant shall remain in effect solely with respect to any unpurchased Warrant
Shares until otherwise terminated.
5. Transfer.
(a) The Warrants may not be sold, transferred, encumbered,
pledged or otherwise disposed of, prior to December 1, 1998, except: (i) by
operation of law or (ii) as required by a final judicial decree.
(b) Subject to the limitations set forth in this Section
below, during the period from December 1, 1998 to December 1, 2001, if Holder
(the "Offeror") desires to sell all or any portion of the Warrants, Holder shall
first offer such Warrants (the "Offered Warrants") to the Company by giving
written notice of its intention to dispose of such Warrants (the "Notice"). The
Notice must name the type of disposition, the proposed purchaser, the number of
Offered Warrants, the price per Warrant and the terms of payment. The Company
may accept such offer with respect to all, but not less than all, of the Offered
Warrants, within thirty (30) days following receipt of the Notice. The Company
may exercise its option by giving notice of such exercise to the Offeror. If any
of the consideration for the Offered Warrants consists of anything other than
cash, the Company may substitute for such consideration the cash equivalent as
reasonably determined by the Company.
(c) The Company may exercise its right of first refusal
set forth in this Section to acquire only up to two percent (2%) of the
aggregate of the issued and outstanding Warrants, shares of Class A Convertible
Common Stock and of Series A Preferred Stock in any one calendar year, unless
the holders of a majority of the Class B Convertible Preferred Stock then
issued, outstanding and entitled to vote, approve of the acquisition of a larger
percentage of Warrants.
2
<PAGE> 3
(d) If the right of first refusal provided above is not
exercised as to all of the Offered Warrants or if the purchase by the Company is
not consummated within the time specified in this Section, through no fault of
the Offeror, the Offeror may transfer the Offered Warrants to the proposed
purchaser, at the price and on the terms and conditions set forth in the Notice.
If the transfer of the Offered Warrants by the Offeror to the proposed purchaser
named in the Notice is not made within thirty (30) days after the date the
Offeror became free to transfer, the right to transfer in accordance with the
Notice will expire.
(e) As of December 1, 2001, all restrictions on the
transferability of the Warrants will expire, and the Company will, upon written
request of the holder, register the Warrant Shares or exchange the Warrant
Shares for a comparable security that is fully registered under the Securities
Act of 1933.
6. Medium and Time of Payment of Warrant Price.
The Holder may exercise for cash in the amount of the Exercise
Price at any time except in the case of a Major Event as described herein. In
the event the Exercise Price is paid in cash, such payment shall be made by bank
or cashier's check accompanying the Exercise Notice. The Company shall not be
required to issue fractional Warrant Shares upon exercise of the Warrants, but
shall pay an amount in cash equal to the Warrant Price of one share of Series A
Preferred Stock multiplied by such fraction.
Subject to the provisions of this Warrant Agreement, in lieu
of cash consideration, the Holder may, and shall in the case of a Major Event as
described in Section 7 hereof, when exercising the Warrants pursuant to Section
4 hereof, request that the Company convert the Warrants, in whole or in part and
at any time or times, into Warrant Shares, by surrendering to the Company the
Notice of Exercise of Warrants specifying the number of Warrants being
converted. Within ten (10) days after receipt of the Notice of Exercise of
Warrants, the Company shall deliver to the Holder (without payment by the Holder
of any Warrant Price) that number of Warrant Shares which is equal to the
difference obtained by subtracting from the total number of Warrants being
exercised the number of shares obtained by multiplying (i) the total number of
Warrants being exercised by (ii) a fraction, the numerator of which is the
Warrant Price and the denominator of which is the Market Price (as hereinafter
defined). "Market Price" means, with respect to any Warrant Share on any date
herein specified, if there shall not then be a public market for the Company's
Class A Common Stock, the Appraised Value (as defined hereafter) per share of
Class A Common Stock at such date, or if there shall then be a public market for
the Class A Common Stock, the average of the closing market prices for the five
(5) days on which the Class A Common Stock could be traded immediately preceding
such date. "Appraised Value" means, with respect to any share of Class A Common
Stock on any date herein specified, the higher of (i) the fair market value of a
share of Class A Common Stock as determined by agreement between the Holder and
the Company or (ii) in the absence of such an agreement, the fair market value
of a share of Class A Common Stock as determined by an independent investment
banking firm or an independent appraiser engaged by the Company and reasonably
acceptable to the Holder.
3
<PAGE> 4
7. Merger, Consolidation or Sale of Assets.
In the event of any capital reorganization or any
consolidation or merger of the Company with, or merger of the Company into,
another corporation (other than a consolidation or merger which does not result
in any reclassification or change of the outstanding Class A Common Stock), or
in case of any sale or conveyance to another corporation of the property of the
Company as an entirety or substantially as an entirety (each, a "Major Event"),
prior to the consummation of such Major Event, the Company shall accelerate the
exercise of all Warrants then existing under this Warrant Agreement, and such
Warrants shall automatically and without further action be converted into
Warrant Shares immediately prior to the consummation of the Major Event in the
manner described in Section 6 herein for Warrant exercises without payment of
cash. In the event the Company elects to undertake or enter into a Major Event,
the Company shall provide the Holder with notice of its intention to undertake
or enter into such Major Event at least thirty (30) days prior to the
consummation of the transaction constituting the Major Event.
8. Adjustments for Stock Splits and Combinations; Dilutive
Issuances.
(a) Except as provided in this Section 8, no adjustments
in respect of any dividends or other distributions on the Warrant Shares shall
be made during the term of the Warrants or upon the exercise of the Warrants.
Outstanding Warrants shall be subject to adjustment as
follows:
(1) In the event the Company shall
(i) pay a dividend or make a
distribution on the Class A Convertible
Common Stock ("Class A Common") in shares of
Class A Common or any other shares of
capital stock of the Company,
(ii) subdivide outstanding shares of
Class A Common into a greater number of
shares of Class A Common,
(iii) combine outstanding shares of Class
A Common into a smaller number of shares of
Class A Common, or
(iv) issue, by reclassification of
shares of Class A Common, any shares of its
capital stock or other securities of the
Company,
the amount of Warrant Shares receivable upon the
exercise of Warrants immediately prior thereto shall
be adjusted so that the Holder of any Warrants
thereafter exercised shall be entitled to receive the
number and kind of shares of capital stock or other
securities which such Holder would have owned or
4
<PAGE> 5
have been entitled to receive after the happening of
any of the events described above, had such Warrants
been exercised prior to the happening of such event;
provided, any such adjustment otherwise payable in
shares of Class A Common or other common equivalent
shall be payable instead in shares of Series A
Preferred. Such adjustments shall be made whenever
any of the events listed above shall occur and shall
become effective immediately after the close of
business on the record date, in the case of a stock
dividend, and shall become effective immediately
after the effective date, in the case of a
subdivision or combination or reclassification.
(2) The provisions of paragraph (1) of this
Section 8(a) shall also apply to other securities, in
addition to Class A Common, deliverable upon exchange
of the Warrants; for purposes of such application
"Class A Common" shall be deemed to refer to any such
security deliverable upon exercise of the Warrants.
(3) Whenever the property receivable upon
exercise is adjusted as herein provided, the Company
shall determine such adjustment in accordance with
this Section 8(a) and shall prepare a certificate of
an authorized officer of the Company (an "Officer's
Certificate") setting forth such adjustment and
showing in detail the facts upon which such
adjustment is based, and such certificate shall
forthwith be delivered to the Holder together with a
notice stating that the property receivable upon
exercise has been adjusted and setting forth what
kind and amount of stock, securities, property and
cash are deliverable upon the exercise of the
Warrants.
(4) In case the Company shall make a
distribution to all holders of Class A Common
(including any such distribution made in connection
with a consolidation or merger in which the Company
is the continuing corporation) of shares of its
stock, evidences of its indebtedness or assets (other
than dividends or distributions in cash payable out
of consolidated earnings or earned surplus or
dividends or distributions described in paragraph (1)
of this Section 8(a)), thereafter the Holder shall be
entitled to receive upon exercise thereof the number
and kind of shares of stock, evidences of
indebtedness or assets which such Holder would have
owned or have been entitled to receive, had such
Warrant been exercised prior to the distribution
thereof, provided any such distribution otherwise
payable in shares of Class A Common or other common
equivalent shall be payable instead in shares of
Series A Preferred.
(b) Upon any Major Event as described in Section 7
hereof, the Company shall determine the kinds and amount of stock, securities,
property and cash to which each Warrant Share is entitled and shall prepare an
Officer's Certificate setting forth such determination and showing in
5
<PAGE> 6
detail the facts upon which such determination is based, and such certificate
shall forthwith be delivered to the Holder with a notice stating that, as a
result of such merger, consolidation, sale or transfer, the property receivable
upon the exercise of Warrants has been altered, and setting forth what kind and
amount of stock, securities, property and cash are receivable upon the exercise
of Warrants.
(c) The provisions of paragraphs (a) and (b) hereof shall
also apply to other issuers, in addition to the Company, the securities of which
are deliverable upon the exercise of Warrants; for purposes of such application,
Class A Common shall be deemed to refer to any such security of such issuer.
(d) The Holder of a Warrant shall not be entitled to
receive any interest or earnings attributable to the investment of any cash that
is deliverable upon exercise of a warrant during the time prior to such Holder's
exercise of the Warrant.
(e) If the Company shall, at any time prior to the
expiration of this Warrant, issue Diluting Shares (as hereinafter defined) in a
Dilution Event (as hereinafter defined) for consideration per Diluting Share (as
hereinafter defined) (i) which is less than the Warrant Price and (ii) which is
less than fair market value, then the Warrant Price prior to the issuance of the
Diluting Shares shall be reduced to a price equal to the consideration per share
paid for each Diluting Share.
Diluting Shares shall mean shares of Common Stock or Class A
Convertible Common Stock (in either case in this Section 8(e) referred to as
"Common Stock") or evidence of indebtedness, shares of stock or other securities
which are convertible into or exchangeable, with or without payment of
additional consideration in cash or property, for shares of Common Stock either
immediately or upon the occurrence of a specified date or a specified event.
Dilution Event shall mean the issuance of Diluting Shares in
any transaction with a third party including present security holders of the
Company but excluding transactions with respect to (i) benefit plans for
employees and (ii) the conversion to Common Stock of shares of Class A
Convertible Common Stock or Class B Convertible Preferred Stock outstanding on
the date of this Warrant Agreement.
Nothing in this Section shall preclude the Warrant Holder from
other remedies at equity or at law with respect to the issuance of Diluting
Shares in a Dilution Event.
9. Agreement of Holder.
Holder acknowledges that it has read this Warrant Agreement
and understands the following:
(a) Agreement Restrictions: Certain restrictions may
apply with respect to the Warrant Shares acquired by Holder pursuant to the
terms and provisions of this Warrant Agreement.
6
<PAGE> 7
(b) Securities Restrictions. The Warrant Shares acquired
by Holder upon exercise of the Warrants have not been registered under the
Securities Act of 1933, as amended, or the securities laws of any state. If the
Company, upon advice of counsel, determines such action is necessary or
desirable, no Warrant Shares shall be issued to the Holder unless, at the time
of issuance, the Holder (i) represents and warrants that it will acquire the
Warrant Shares for investment only and not for purposes of resale or
distribution, and (ii) makes such further representations and warranties as are
deemed necessary or desirable by the Company with regard to holding and resale
of the Warrant Shares. The Holder shall, upon the request of the Company,
execute and deliver to the Company an agreement or affidavit to such effect. The
Warrant Shares issued pursuant to this Warrant Agreement shall be subject to the
restrictions set forth in the Articles of Amendment of the Articles of
Incorporation of Cerulean, which articles of amendment, as filed on September
22, 1998 and corrected as filed on October 1, 1998 are attached hereto as
Exhibit A.
10. Delivery of Certificates.
As promptly as practical after the date of exercise of the
Warrants and the receipt by the Company of consideration therefor, the Company
shall deliver to Holder a certificate representing the Warrant Shares acquired
by Holder pursuant to its exercise of the Warrants.
11. Notices.
All notices or other communications hereunder shall be in
writing and shall be effective (i) when personally delivered by courier
(including overnight carriers) or otherwise to the party to be given such notice
or other communication or (ii) on the third business day following the date
deposited in the United States mail if such notice or other communication is
sent by certified or registered mail with return receipt requested and postage
thereon fully prepaid. The addresses for such notices shall be as follows:
If to the Company:
Cerulean Companies, Inc.
3350 Peachtree Road, N.E.
Atlanta, Georgia 30326
Attention: Hugh J. Stedman, Esq.
with a copy to:
Edgar H. Sims, Jr., Esq.
Long Aldridge & Norman LLP
303 Peachtree Street - Suite 5300
Atlanta, Georgia 30308
7
<PAGE> 8
If to Holder:
____________________________________________
____________________________________________
____________________________________________
Attention: _________________________________
Any party hereto, by notice of the other party hereunder, may change its address
for receipt of notices hereunder.
12. Miscellaneous.
(a) Unless and except as otherwise specifically provided
in this Agreement, Holder shall have no rights of a stockholder with respect to
any Warrant Shares covered by the Warrants until the date of issuance of a stock
certificate to it for such Warrant Shares.
(b) If any term, provision, covenant or restriction
contained in this Agreement is held by a court or a federal regulatory agency of
competent jurisdiction to be invalid, void or unenforceable, the remainder of
the terms, provisions, covenants and restrictions contained in this Agreement
shall remain in full force and effect, and shall in no way be affected, impaired
or invalidated. If for any reason such court or regulatory agency determines
that this Agreement will not permit Holder to acquire the full number of Warrant
Shares as provided in Section 1 hereof, it is the express intention of the
Company to allow Holder to acquire such lesser number of Warrant Shares as may
be permissible without any amendment or modification hereof.
(c) This Agreement shall be construed and enforced in
accordance with the laws of the State of Georgia without giving effect to the
State of Georgia's choice-of-law principles.
(d) This Agreement together with the Stipulation and the
exhibits thereto contain the entire understanding among the parties and
supersedes any prior understanding and agreements between them representing the
subject matter hereof. There are no representations, agreements, arrangements or
understandings, oral or written, between and among the parties hereto relating
to the subject matter hereof which are not fully expressed herein.
(e) Section and other headings contained in this
Agreement are for reference purposes only and are in no way intended to
describe, interpret, define or limit the scope, extent or intent of this
Agreement or any provision hereof.
(f) This Agreement may be executed in multiple
counterparts, each of which shall be deemed an original and all of which shall
constitute one agreement, and the signatures of any party or any counterpart
shall be deemed to be a signature to, and may be appended to, any other
counterpart.
8
<PAGE> 9
IN WITNESS WHEREOF, the parties hereto have executed this Warrant
Agreement as of the date written above.
CERULEAN COMPANIES, INC.
By:_______________________________________
Hugh J. Stedman
Vice President and General Counsel
HOLDER:
___________________________________
By:_______________________________________
9
<PAGE> 10
EXHIBIT A
CERULEAN COMPANIES, INC.
NOTICE OF EXERCISE OF WARRANTS
This Notice of Exercise is given pursuant to the terms of the Warrant
Agreement, dated September 22, 1998 (the "Warrant Agreement") between Cerulean
Companies, Inc. (the "Company") and _________________________________________
(the "Holder"), which Warrant Agreement is made a part hereof and incorporated
herein by reference.
EXERCISE OF WARRANTS. Holder hereby elects to purchase _______ shares
of Series A Preferred Stock pursuant to the Warrant Agreement. Holder hereby
delivers, together with this written statement of exercise, the full Warrant
Price with respect to the purchase of the shares o by bank or cashier's check in
the amount of the total Warrant Price or, o without payment of cash by agreeing
to accept the lesser number of Warrant Shares determined in accordance with
Section 6 of the Warrant Agreement.
ACKNOWLEDGMENT. Holder hereby acknowledges that, to the extent it is an
"affiliate" of the Company (as that term is defined in Rule 144 promulgated
under the Securities Act of 1933, as amended) or to the extent that the shares
have not been registered under the Securities Act of 1933, as amended, or
applicable state securities laws, any shares of the Company's Series A Preferred
Stock acquired by it pursuant to this Notice are subject to, and the
certificates representing such shares shall be legended to reflect, certain
trading restrictions under applicable securities laws (including particularly
the Securities and Exchange Commission's Rule 144), all as described in Section
9 of the Warrant Agreement, and Holder hereby agrees to comply with all such
restrictions and to execute such documents or take such other actions as the
Company may require in connection with such restrictions.
Executed this ______ day of _________________, ________.
Holder:
_____________________________________________
By:_________________________________________________
Title:______________________________________________
Cerulean Companies, Inc. hereby acknowledges receipt
of this Notice of Exercise and receipt of payment in
the form and amount indicated above, all on this
______ day of ____________________, ________.
CERULEAN COMPANIES, INC.
By: _________________________________________________
Title: ______________________________________________
<TABLE> <S> <C>
<ARTICLE> 7
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS OF CERULEAN COMPANIES, INC. FOR THE NINE MONTH PERIOD
ENDED SEPTEMBER 30, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> SEP-30-1998
<DEBT-HELD-FOR-SALE> 240,393,556
<DEBT-CARRYING-VALUE> 0
<DEBT-MARKET-VALUE> 0
<EQUITIES> 71,990,783
<MORTGAGE> 0
<REAL-ESTATE> 0
<TOTAL-INVEST> 319,622,244
<CASH> 44,932,964
<RECOVER-REINSURE> 0
<DEFERRED-ACQUISITION> 0
<TOTAL-ASSETS> 612,931,057
<POLICY-LOSSES> 237,594,615
<UNEARNED-PREMIUMS> 13,567,478
<POLICY-OTHER> 25,553,200
<POLICY-HOLDER-FUNDS> 0
<NOTES-PAYABLE> 0
46,645,042
0
<COMMON> 4,094
<OTHER-SE> 205,665,773
<TOTAL-LIABILITY-AND-EQUITY> 612,931,057
1,270,223,761
<INVESTMENT-INCOME> 12,679,249
<INVESTMENT-GAINS> 7,697,457
<OTHER-INCOME> 0
<BENEFITS> 1,113,398,559
<UNDERWRITING-AMORTIZATION> 0
<UNDERWRITING-OTHER> 153,250,644
<INCOME-PRETAX> 24,142,514
<INCOME-TAX> 7,067,000
<INCOME-CONTINUING> 14,923,231
<DISCONTINUED> 0
<EXTRAORDINARY> (54,445,000)
<CHANGES> 0
<NET-INCOME> (39,521,769)
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
<RESERVE-OPEN> 0
<PROVISION-CURRENT> 0
<PROVISION-PRIOR> 0
<PAYMENTS-CURRENT> 0
<PAYMENTS-PRIOR> 0
<RESERVE-CLOSE> 0
<CUMULATIVE-DEFICIENCY> 0
</TABLE>
