<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 JUNE 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
--------
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 July 31, 1998 - 351,570 shares
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CERULEAN COMPANIES, INC.
FORM 10-Q
JUNE 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
June 30, 1998 and December 31, 1997 Page 3
Consolidated Statements of Income for the Three and Six
Months Ended June 30, 1998 and 1997 Page 4
Consolidated Statements of Comprehensive Income
for the Three and Six Months Ended June 30, 1998 Page 4
Consolidated Statements of Cash Flows for the Six
Months Ended June 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 9
Item 3. Quantitative and Qualitative Disclosure About Market Risk Page 12
PART II. OTHER INFORMATION
-----------------
Item 1. Legal Proceedings Page 13
Item 2. Changes in Securities Page 13
Item 3. Defaults Upon Senior Securities Page 13
Item 4. Submission of Matters to a Vote of Security Holders Page 13
Item 5. Other Information Page 13
Item 6. Exhibits and Reports on Form 8-K Page 13
Signatures Page 15
</TABLE>
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PART I - FINANCIAL INFORMATION
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS
CERULEAN COMPANIES, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1998 1997
----------- -------------
(UNAUDITED)
<S> <C> <C>
ASSETS
Investments:
Fixed maturities:
Available-for-sale, at fair value (amortized cost: $225,164,985;
$185,037,630) $228,617,478 $187,662,551
Equity securities, at fair value (cost: $59,217,122; $58,348,840) 76,985,549 73,102,814
Short-term investments, at fair value (cost: $2,834,750; $19,555,875) 2,834,750 19,555,875
------------ ------------
Total investments 308,437,777 280,321,240
Cash and cash equivalents 46,008,726 35,001,855
Reimbursable portion of estimated benefit liabilities 102,288,036 100,109,036
Accounts receivable 55,185,408 59,624,899
FEP assets held by agent 25,553,200 25,553,200
Property and equipment 35,609,442 33,735,541
Other assets 21,161,720 19,017,199
------------ ------------
Total assets $594,244,309 $553,362,970
------------ ------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Estimated benefit liabilities $229,110,560 $206,412,040
Unearned premiums 7,515,212 8,301,197
FEP stabilization reserve 25,553,200 25,553,200
Accounts payable and accrued expenses 39,629,716 31,210,088
Payables to other plans 392,051 1,068,051
Other liabilities 42,368,686 35,636,564
Note payable -- 3,500,000
------------ ------------
Total liabilities 344,569,425 311,681,140
------------ ------------
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
Class A Convertible Common Stock, no par value, $0.01, stated value. -- --
Authorized 50,000,000 shares; issued and outstanding 351,570 and
351,545 shares, respectively 3,516 3,515
Common stock issuable (Note 6) 32,135,000 --
Stock warrants issuable (Note 6) 21,310,000 --
Common Stock, no par value.
Authorized and unissued 100,000,000 shares -- --
Accumulated other comprehensive income - (unrealized appreciation on
securities, net of taxes) 17,041,126 13,949,895
Retained earnings 132,540,200 181,083,378
------------ ------------
Total shareholders' equity 203,029,842 195,036,788
Commitments and contingencies (Note 5) -- --
------------ ------------
Total liabilities and shareholders' equity $594,244,309 $553,362,970
============ ============
See accompanying notes.
</TABLE>
3
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CERULEAN COMPANIES, INC.
CONSOLIDATED STATEMENTS OF INCOME
UNAUDITED
<TABLE>
<CAPTION>
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
1998 1997 1998 1997
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Revenues:
Premiums $ 408,924,142 $ 376,313,848 $ 825,495,586 $738,928,596
Investment and other income 4,217,262 4,362,727 8,015,859 8,008,872
Realized gains 3,082,521 3,871,775 6,084,367 5,787,022
------------- ------------- ------------- ------------
Total revenues 416,223,925 384,548,350 839,595,812 752,724,490
Benefits expense 354,245,386 345,260,244 723,878,864 669,044,208
Operating expenses, net of expense
reimbursements of $16,811,832,
$15,835,278, $33,317,522 and
$29,249,686, respectively 52,817,277 40,524,928 102,814,251 82,198,438
------------- ------------- ------------- ------------
Operating income (loss) 9,161,262 (1,236,822) 12,902,697 1,481,844
Non-operating income (Note 3) 63,750 -- 127,500 1,275,000
------------- ------------- ------------- ------------
Income (loss) before income taxes,
minority interests and extraordinary
item 9,225,012 (1,236,822) 13,030,197 2,756,844
Income tax expense (benefit)(Note 4) 2,703,000 (517,000) 3,736,000 102,000
Minority interest in (earnings) losses of
joint venture investments (1,396,876) 407,597 (1,895,374) 339,580
------------- ------------- ------------- ------------
Income (loss) before extraordinary item 5,125,136 (312,225) 7,398,823 2,994,424
Extraordinary item - endowment of a
non-profit foundation (Note 6) 54,445,000 -- 54,445,000 --
------------- ------------- ------------- ------------
Net income (loss) $ (49,319,864) $ (312,225) $ (47,046,177) $ 2,994,424
============= ============= ============= ============
</TABLE>
See accompanying notes.
CERULEAN COMPANIES, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
UNAUDITED
<TABLE>
<CAPTION>
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
1998 1997 1998 1997
------------- ----------- ------------- -------------
<S> <C> <C> <C> <C>
Net income (loss) $ (49,319,864) $ (312,225) $ (47,046,177) $ 2,994,424
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
$2,446,017, $3,097,420,
$4,867,494 and $4,629,618,
respectively (822,952) 6,725,583 3,091,231 3,700,564
------------- ----------- ------------- ------------
Comprehensive income (loss) $ (50,142,816) $ 6,413,358 $ (43,954,946) $ 6,694,988
------------- ----------- ------------- ------------
</TABLE>
See accompanying notes.
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CERULEAN COMPANIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
UNAUDITED
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30,
1998 1997
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<S> <C> <C>
OPERATING ACTIVITIES
Net income (loss) $ (47,046,177) $ 2,994,424
Adjustments to reconcile net income to net cash provided by
(used in) operating activities:
Non-cash and non-operating items:
Extraordinary item - endowment of a non-profit foundation 54,445,000 --
Depreciation 5,325,521 4,752,745
Amortization 135,007 151,022
Uncollectible receivables 1,237,249 (310,528)
Gain on sale of investments (6,084,367) (5,787,022)
Loss (gain) on sale of property and equipment 34,972 (58,166)
Non-operating income (127,500) (1,275,000)
Decrease (increase) in certain assets:
Reimbursable portion of estimated benefit liabilities (2,179,000) 2,119,000
Accounts receivable 3,202,242 (5,822,132)
Other assets (2,895,315) (2,958,087)
Increase (decrease) in certain liabilities:
Estimated benefit liabilities 22,698,520 7,856,195
Unearned premiums (785,985) 2,144,241
Accounts payable and accrued expenses 7,419,628 (5,561,154)
Payables to other plans (676,000) (1,190,255)
Other liabilities 5,235,122 (717,520)
Minority interest in sale of stock and stock warrants by a
subsidiary (122,500) (1,225,000)
------------- ------------
Net cash provided by (used in) operating activities 39,816,417 (4,887,237)
INVESTING ACTIVITIES
Investments purchased (141,372,364) (88,209,546)
Investments sold or matured 123,047,212 63,074,449
Property and equipment purchased (7,288,532) (4,568,409)
Property and equipment sold 54,138 95,751
------------- ------------
Net cash used in investing activities (25,559,546) (29,607,755)
FINANCING ACTIVITIES
Repayment of notes payable (3,500,000) --
Sale of stock warrants by subsidiary 250,000 --
Sale of stock by a subsidiary -- 2,500,000
------------- ------------
Net cash (used in) provided by financing activities (3,250,000) 2,500,000
------------- ------------
Increase (decrease) in cash and cash equivalents 11,006,871 (31,994,992)
Cash and cash equivalents at beginning of period 35,001,855 89,024,410
------------- ------------
Cash and cash equivalents at end of period $ 46,008,726 $ 57,029,418
============= ============
</TABLE>
See accompanying notes.
5
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CERULEAN COMPANIES, INC.
Notes to Consolidated Financial Statements
June 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. 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.
6
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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
June 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.
RECLASSIFICATIONS
Certain prior year balances have been reclassified to conform to the current
year presentation.
2. EARNINGS PER SHARE
Earnings per share are omitted because such data are not meaningful at the
present time due to the likely dilutive events that will occur prior to the
conversion of the Class A Convertible Common Stock or the Class B Convertible
Preferred Stock. Presently there is no market for the Class A Stock or any
equity securities of the Company.
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.
On January 1, 1998, a hospital purchased stock warrants exerciseable 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 June 30, 1998, $250,000 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
$127,500 for its portion of this transaction and increased the minority interest
liability for this CHPN by $122,500. After deducting income taxes, net income
was favorably impacted by $102,000.
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 and other permanent book to tax
differences, including non-deductible expenses.
5. COMMITMENTS AND CONTINGENCIES
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.
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5. COMMITMENTS AND CONTINGENCIES (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 2,
1997, the Georgia Insurance Department denied the Plaintiffs' request for
declaratory ruling, which decision the Plaintiffs appealed. On October 13,
1997, the Company and BCBSGA filed a motion to dismiss the Lawsuit.
Oral argument was held on January 12, 1998.
6. SUBSEQUENT EVENTS
SETTLEMENT OF LAWSUIT AND ENDOWMENT OF A NON-PROFIT FOUNDATION
On July 8, 1998, the Company entered into a stipulation and agreement of
settlement of the Lawsuit (the "Stipulation") subject to the approval of the
Superior Court of Fulton County, Georgia (the "Court"). Under the terms of the
Stipulation, the Company will endow a new non-profit foundation for the
advancement of health care for all Georgians with $1.0 million in cash and
common stock and warrants in the Company (the "Endowment"). A settlement hearing
before the Court is scheduled for August 20, 1998 to determine, among other
things, if the terms and conditions of the Stipulation are fair and reasonable
and should be approved by the Court. Additionally, the Stipulation is
conditioned upon the approval of the Blue Cross and Blue Shield Association as
to certain matters including the transfer of the stock and warrants in the
Company. The Blue Cross and Blue Shield Association licenses the brand name and
trademarks to the Company. Management expects the requisite approvals to be
received.
As of June 30, 1998, the Company recorded an extraordinary charge of $54.4
million for the Endowment which represented, in management's judgment, fair
value as of the date of the Stipulation. The Company recorded a full valuation
allowance against the related expected tax benefit.
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, the expiration of
any required waiting period under the Hart-Scott-Rodino Antitrust Improvements
Act of 1976 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.
8
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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 6 of the Notes to Consolidated Financial Statements, which
is incorporated herein by reference.
RESULTS OF OPERATIONS
Three Months Ended June 30, 1998 Compared to Three Months Ended June 30, 1997
Premium revenues increased 9% to $408.9 million for the three months ended June
30, 1998 from $376.3 million for the three months ended June 30, 1997. Premium
revenues for indemnity and PPO products decreased $15.8 million to $255.2
million for the three months ended June 30, 1998 primarily as a result of a
decline in enrollment for traditional indemnity products with national accounts.
HMO and POS premiums increased $48.1 million to $149.4 million for the three
months ended June 30, 1998 primarily as a result of a 38% 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 407,000 members at June 30, 1998 from 295,000
members at June 30, 1997. HMO and POS products accounted for 37% of total
premiums for the three months ended June 30, 1998, compared to 27% of total
premiums for the three months ended June 30, 1997.
Realized gains on the sale of marketable securities of $3.1 million for the
three months ended June 30, 1998 were $0.8 million lower than gains realized for
the three months ended June 30, 1997. These results are not necessarily
indicative of results to be expected in the future. The magnitude of realized
gains in any period can fluctuate due to fixed 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 total loss ratio (benefits expense as a percentage of premium
revenues) decreased to 86.6% for the three months ended June 30, 1998 from 91.7%
for the three months ended June 30, 1997. This was primarily the result of a
decrease in the loss ratio for HMO and POS products to 83.1% for the second
quarter of 1998 from 89.8% for the second 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.
Operating expenses increased 30% to $52.8 million for the second quarter of 1998
from $40.5 million for the second 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 June 30, 1998, the Company recognized increased operating expenses
related to the pending settlement of the Lawsuit and the proposed merger with
WellPoint. As a result, the operating expense ratio (operating expenses as a
percentage of premium revenues) increased to 12.9% for the three months ended
June 30, 1998, from 10.8% for the three months ended June 30, 1997.
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The Company's income tax expense for both periods consisted primarily of federal
alternative minimum tax. The effective tax rate of 29.3% 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 and other permanent book to tax differences, including
non-deductible expenses. The income tax benefit for the three months ended June
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.
On July 8, 1998, the Company entered into a stipulation and agreement of
settlement of the Lawsuit (the "Stipulation") subject to the approval of the
Superior Court of Fulton County, Georgia. The Company will endow a new
non-profit foundation with cash and common stock and warrants pursuant to the
Stipulation. The Company recognized $54.4 million as an extraordinary item for
the three months ended June 30, 1998 related to the endowment of the foundation.
As a result of the foregoing factors, income before extraordinary item was $5.1
million for the three months ended June 30, 1998 compared to a $0.3 million loss
for the same period a year ago. After the extraordinary item, the Company
recognized a net loss of $49.3 million for the three months ended June 30, 1998
compared to a net loss of $0.3 million for the three months ended June 30, 1997.
Six Months Ended June 30, 1998 Compared to Six Months Ended June 30, 1997
Premium revenues increased 12% to $825.5 million for the six months ended June
30, 1998 from $738.9 million for the six months ended June 30, 1997. Premium
revenues for Indemnity and PPO products decreased $8.2 million to $531.1 million
for the six months ended June 30, 1998. Enrollment for Indemnity and PPO
products was essentially unchanged at June 30, 1998 compared to June 30, 1997.
HMO and POS premiums increased $93.8 million to $286.2 million for the six
months ended June 30, 1998 resulting from a 38% 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 407,000 members at June 30, 1998 from 295,000 members at
June 30, 1997.
Investment and other income of $8.0 million for the six months ended June 30,
1998 was comparable to investment and other income of $8.0 million for the six
months ended June 30, 1997.
Realized gains of $6.1 million on the sale of marketable securities for the six
months ended June 30, 1998 were $0.3 million higher than gains realized in the
six months ended June 30, 1997. These results are not necessarily indicative of
results to be expected in the future. The magnitude of realized gains in
any quarter can fluctuate due to fixed and equity market performance, as well as
timing of individual sale transactions, which are subject to decisions made by
individual investment portfolio managers.
The Company's total loss ratio (benefits expense as a percentage of premium
revenues) decreased to 87.7% for the six months ended June 30, 1998 from 90.5%
for the six months ended June 30, 1997 as the Company recognized the benefit of
rate increases implemented in the 1998 period and medical cost improvement
actions. Accordingly, the loss ratio for indemnity and PPO products improved to
90.1% for the 1998 six month period from 91.9% for the same period in 1997 and
the loss ratio for HMO and POS products improved to 84.2% for the first six
months of 1998 from 88.1% for the 1997 period.
Operating expenses increased 25% to $102.8 million for the six months ended June
30, 1998 from $82.2 million for the six months ended June 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
six months ended June 30, 1998, the Company recognized increased operating
expenses related to the pending settlement of the Lawsuit and the proposed
merger with WellPoint. As a result, the operating expense ratio increased to
12.5% for the six months ended June 30, 1998, from 11.1% for the six months
ended June 30, 1997.
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On January 1, 1998, a hospital purchased stock warrants exerciseable for common
stock of one of the Company's CHPN subsidiaries in exchange for a note
receivable. On January 1, 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 six months ending June 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 28.7% 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 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 $1.0 million was recognized during
the six months ended June 30, 1997. Lower earnings in the 1997 period and this
additional tax benefit for 1997 resulted in tax expense of $0.1 million for the
six months ended June 30, 1997.
On July 8, 1998, the Company entered into the Stipulation subject to the
approval of the Superior Court of Fulton County, Georgia. The Company
will endow a new non-profit foundation with cash and common stock and warrants
pursuant to the Stipulation. The Company recognized $54.4 million as an
extraordinary item for the six months ended June 30, 1998 related to the
endowment of the foundation.
As a result of the foregoing factors, income before extraordinary item increased
to $7.4 million for the six months ended June 30, 1998 from $3.0 million for the
six months ended June 30, 1997. After the extraordinary item the Company
recognized a net loss of $47.0 million for the six months ended June 30, 1998
compared to net income of $3.0 million for the six months ended June 30, 1997.
LIQUIDITY AND CAPITAL RESOURCES
Six Months Ended June 30, 1998 Compared to Six Months Ended June 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,
$284.5 million is held at its insurance subsidiaries and is invested subject to
limitations prescribed by Georgia insurance statutes.
Net cash provided by operating activities amounted to $39.8 million for the six
months ended June 30, 1998 compared to net cash used by operating activities of
$4.9 million for the same period in 1997 due primarily to increased estimated
benefit liabilities in 1998 related to the Company's expanded membership base.
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 Preferred 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
On July 8, 1998, the Company entered into the Stipulation to settle the Lawsuit
pending against the Company. For further information, see Notes 5 and 6 of the
Notes to Consolidated Financial Statements, which are incorporated herein by
reference.
11
<PAGE> 12
YEAR 2000 COMPUTER SOFTWARE MODIFICATION COSTS
All companies that operate on mature computer software programs face the
difficult task of how to reprogram or replace their existing systems, which have
protocols that address dates in terms of the 20th century (19xx) only. The
Company has analyzed its systems and has formulated an action plan to either
modify or replace its existing programs. The Company plans to have all necessary
corrective action completed by July 1, 1999. The project's impact on the
operating results of the Company is estimated to be in a range of $7 to $10
million over 1997 and 1998 and will be funded through operating cash flows.
Modification costs are expensed as incurred. Costs of new software are
capitalized and amortized over five years. The Company also conducts business
electronically with certain external parties, including suppliers, customers,
providers, and financial service organizations. The Company will be contacting
external parties with which it interacts to determine Year 2000 compliance
issues. Failure to successfully execute the Company's Year 2000 compliance plans
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.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
Not required.
12
<PAGE> 13
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Notes 5 and 6 of the Notes to Consolidated Financial Statements in Part I, Item
1 regarding the lawsuit filed on September 3, 1997 in the Superior Court of
Fulton County by nine groups on behalf of themselves and a class putatively
composed of all other 501(c)(3) organizations in Georgia are incorporated herein
by reference.
ITEM 2. CHANGES IN SECURITIES
None
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
ITEM 5. OTHER INFORMATION
See Note 6 of the Notes to Consolidated Financial Statements in Part I, Item I
regarding the merger with WellPoint Health Networks Inc. incorporated herein by
reference.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- -------- -----------
<S> <C>
3.1 Articles of Incorporation of Cerulean Companies, Inc.(1)
3.2 Bylaws of Cerulean Companies, Inc.(1)
4.1 Stock Escrow Agreement among Cerulean Companies, Inc., Blue Cross and
Blue Shield of Georgia, Inc. and SunTrust Bank, Atlanta.(1)
4.2 Specimen form of Class A Convertible Common Stock certificate.(1)
</TABLE>
- -------------
(1) 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.
13
<PAGE> 14
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
<S> <C>
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 additonal management employees of Blue Cross
and Blue Shield of Georgia, Inc.*
(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).*
27 Financial Data Schedule (for SEC use only).*
</TABLE>
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the quarter ended June 30, 1998.
- ---------------
*This exhibit is filed herewith.
14
<PAGE> 15
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
CERULEAN COMPANIES, INC.
Registrant
Date: August 13, 1998 By: /s/ Richard D. Shirk
-------------------------------
Richard D. Shirk, President and
Chief Executive Officer
Date: August 13, 1998 By: /s/ John A. Harris
-------------------------------
John A. Harris, Treasurer
15
<PAGE> 1
EXHIBIT 10.1(a)
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.
GROUP BENEFITS OF GEORGIA, INC.:
<PAGE> 2
CONTENTS
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PAGE
<S> <C>
Section 1. Term of Agreement 1
Section 2. Change in Control Benefits 2
Section 3. Excise Tax 8
Section 4. Successors and Assignments 9
Section 5. Confidentiality of Company Information 10
Section 6. Miscellaneous 10
Section 7. Contractual Rights and Legal Remedies 11
</TABLE>
i
<PAGE> 3
CHANGE IN CONTROL SEVERANCE AGREEMENT
This CHANGE IN CONTROL SEVERANCE AGREEMENT (this "Agreement") is made,
entered into, and is effective as of this 1st day of January 1998 (the
"Effective Date"), by and between Cerulean Companies, Inc., for itself and each
of its wholly owned subsidiaries ( Blue Cross and Blue Shield of Georgia, Inc.,
HMO Georgia, Inc., Group Benefits of Georgia, Inc. ) and Greater Georgia Life
Insurance Company, Inc., a wholly owned subsidiary of Blue Cross and Blue Shield
of Georgia, Inc. (hereinafter altogether referred to as the "Company"), which
shall be jointly and severally responsible for the performance required of
Company, hereunder, and (hereinafter referred to as "Executive"), who may be an
employee, officer or director of one or more of the entities making up the
Company, or whose compensation may be allocated among one or more of said
entities.
WHEREAS, Executive is presently employed by the Company in a key
management capacity; and
WHEREAS, Executive possesses considerable industry experience and knowledge
of the business and affairs of the Company concerning its policies, methods,
personnel, and operations; and
WHEREAS, the Company is desirous of assuring the continued employment of
Executive in a key management capacity, and Executive is desirous of having such
assurance;
NOW THEREFORE, in consideration of the foregoing, and of the mutual
covenants and agreements of the parties set forth in this Agreement, and of
other good and valuable consideration including, but not limited to, Executive's
continuing employment with the Company, the receipt and sufficiency of which are
hereby acknowledged, the parties hereto, intending to be legally bound, agree as
follows:
SECTION 1. TERM OF AGREEMENT
This Agreement will commence on the Effective Date and shall continue in
effect until December 31, 2001, (the "Initial Term").
This Agreement shall automatically be extended for one additional year at
the end of the Initial Term, and then for successive one-year periods (each such
one-year extension following the Initial Term a "Successive Period"). However,
either party may terminate this Agreement at the end of the Initial Term, or at
the end of any Successive Period, by giving the other party written notice of
intent not to renew, delivered at least ninety (90) calendar days prior to the
end of the Initial Term or Successive Period; provided, however, that any such
termination of this Agreement by the Company, which shall become effective
within ninety (90) days prior to the public announcement of an intended Change
in Control (as such term is defined in Section 2.5 hereof), shall be ineffective
and shall be deemed to be a Qualifying Termination as provided in Section 2.2
hereof. Except as otherwise provided, if such notice is properly
1
<PAGE> 4
delivered by either party, this Agreement, along with all corresponding rights,
duties, and covenants, shall then terminate at the end of the Initial Term or
Successive Period then in progress.
In the event that a public announcement of an intended "Change in Control"
of the Company occurs during the Initial Term or any Successive Period, then
upon such announcement, the term of this Agreement shall automatically and
irrevocably become a term ending twenty-four (24) full calendar months from the
effective date of such Change in Control. This Agreement shall then terminate
following such twenty-four (24) month period. Further, this Agreement shall be
assigned to, and shall be assumed by, the Company's successor in such Change in
Control, as further provided in Section 4 hereof.
SECTION 2. CHANGE IN CONTROL BENEFITS
2.1. RIGHT TO BENEFITS.
(a) SEVERANCE BENEFITS. Executive shall receive from the Company Severance
Benefits as described in Section 2.3 hereof, if during the term of
this Agreement there has been a public announcement of an intended
Change in Control of the Company (as defined in Section 2.5 hereof)
and if, subsequently during this Agreement's term, Executive's
employment with the Company shall end for any reason specified in
Section 2.2 hereof as being a Qualifying Termination. The Severance
Benefits described in Sections 2.3(a) through 2.3(d) hereof shall be
paid in cash to Executive in a single lump sum as soon as practicable
following a Qualifying Termination, but in no event later than thirty
(30) calendar days from such date. Notwithstanding the foregoing,
Severance Benefits which become due pursuant to the circumstances
described in Sections 2.6(d) and 4.1 shall be paid immediately.
(b) OTHER CHANGE IN CONTROL BENEFITS. Executive shall be entitled to
receive the payments described in Sections 2.4 and 3 if a Change in
Control occurs during the term of this Agreement, or if an intended
Change in Control is publicly announced within ninety (90) days
thereafter. These benefits shall be paid without regard to whether
Executive's employment with the Company ends following such Change in
Control. These benefits shall be paid in cash to Executive, in a
single lump sum, as soon as practicable following the Change in
Control, but in no event later than thirty (30) calendar days from
such date.
2.2. QUALIFYING TERMINATION. The occurrence of any one or more of the
following events, during the term of this Agreement following a public
announcement of an intended Change in Control of the Company shall be deemed a
Qualifying Termination, and shall require the payment of Severance Benefits , as
such benefits are described in Section 2.3 hereof, to Executive:
2
<PAGE> 5
(a) the Company's or its successor's termination of Executive's
employment without Cause (as Cause is defined in Section 2.7 hereof);
(b) Executive's termination of employment for Good Reason (as Good Reason
is defined in Section 2.6 herein);
(c) the termination of Executive's employment due to disability.
Additionally, it shall be deemed a Qualifying Termination of Executive,
hereunder, if the Company shall fail to renew this Agreement within 90 days
prior to the public announcement of an intended Change in Control.
A Qualifying Termination shall not include a termination of Executive's
employment by reason of death, the Executive's voluntary termination without
Good Reason, or the Company's termination of the Executive's employment for
Cause.
2.3. DESCRIPTION OF SEVERANCE BENEFITS. In the event that Executive
becomes entitled to receive Severance Benefits, as provided in Sections 2.1(a)
and 2.2 hereof, the Company shall, within the time limits stated in Section
2.1(a), pay to Executive and provide Executive each of the following:
(a) a lump-sum cash amount equal to Executive's earned but unpaid Base
Salary (as such term is defined in Section 2.8(b) hereof), earned and
accrued vacation pay, universal leave pay, unreimbursed business
expenses, and all other amounts earned by and owed to Executive
through and including the date of the Qualifying Termination. Such
payment shall constitute full satisfaction for these amounts owed to
Executive.
(b) a lump-sum cash amount equal to two (2) multiplied by the sum of (i)
and (ii), where (i) is the greater of the Executive's annual rate of
Base Salary in effect upon the date of the Qualifying Termination, or
the Executive's annual rate of Base Salary in effect immediately prior
to the announcement of the Change in Control, and (ii) is the average
of the amounts received by the Executive as incentive compensation
under the Annual Incentive Plan (or any successor plan thereto) during
the period of two (2) years that ended immediately before the year
which includes the date of the announcement of the intended Change in
Control (except that the average payment received shall be calculated
only for years in which Executive actually participated in each plan).
(c) this Section 2.3(c) shall apply only if Executive is at least age 50
or has completed at least 10 "Years of Employer Service" (as defined
in the Non-Contributory Retirement Program for Certain Employees of
Blue Cross and Blue Shield of Georgia, Inc.) as of the date of
Executive's Qualifying Termination. If this Section 2.3(c) applies,
the benefits to which
3
<PAGE> 6
Executive is entitled under the Non-Contributory Retirement Program
for Certain Employees of Blue Cross and Blue Shield of Georgia, Inc.,
the Blue Cross and Blue Shield of Georgia, Inc. Supplemental
Executive Retirement Plan, and the Blue Cross and Blue Shield of
Georgia, Inc. Executive Benefit Restoration Plan, or any other
tax-qualified or nonqualified defined benefit pension plan maintained
by the Company or an Affiliate, shall be calculated:
(i) as if the Executive is fully vested in benefits accrued to date
thereunder; and
(ii) as if either (A) the number of "Years of Employer Service" (as
defined in the Non-Contributory Retirement Program for Certain
Employees of Blue Cross and Blue Shield of Georgia, Inc.) was
increased by three (3) years; or (B) the Executive's age was
equal to his actual age plus three (3) years for purposes of
determining early retirement reductions under any of the Plans,
whichever option produces the largest benefit to Executive.
The amount due Executive under this Section 2.3(c) shall be the
amount calculated in accordance with (i) and (ii), above, reduced by
amounts paid or payable from the Non-Contributory Retirement Program
for Certain Employees of Blue Cross and Blue Shield of Georgia, Inc.,
and amounts paid or payable upon employment termination in accordance
with the provisions of any rabbi trust agreement established to fund
benefits under either the Blue Cross and Blue Shield of Georgia, Inc.
Supplemental Executive Retirement Plan or the Blue Cross and Blue
Shield of Georgia, Inc. Executive Benefit Restoration Plan.
The amount due Executive hereunder, including amounts previously
accrued under both the Blue Cross and Blue Shield of Georgia, Inc.
Supplemental Executive Retirement Plan and the Blue Cross and Blue
Shield of Georgia, Inc. Executive Benefit Restoration Plan shall be
paid in a cash lump sum.
The three (3) Years of Plan and Association Service granted under
this Paragraph 2.3(c) shall not be eligible for the service doubling
provision described in the Blue Cross and Blue Shield of Georgia,
Inc. Supplemental Executive Retirement Plan.
For purposes of calculating a lump sum benefit under this Section
2.3(c) for benefit payments under the Blue Cross and Blue Shield of
Georgia, Inc. Supplemental Executive Retirement Plan and the Blue
Cross and Blue Shield of Georgia, Inc. Executive Benefit Restoration
Plan, the lump sum payment shall be equal to the "actuarial
equivalent" of the Executive's accrued benefit under the respective
plan. The actuarial equivalent shall be determined using accepted
actuarial principles and based on (i) the interest rate provided by
the Pension Benefit Guaranty Corporation for purposes of determining
the value of benefits which are to be paid in a lump sum upon
termination of an
4
<PAGE> 7
insufficient trusteed single-employer plan, as set forth in Table II
of appendix B of PBGC Reg. Section 4044.52(b), and (ii) the mortality
rates set forth in the UP-1984 Mortality Table.
(d) a lump-sum cash amount sufficient for Executive to purchase health
and dental insurance, life insurance, and long-term disability
insurance coverage for Executive and Executive's eligible dependents
for twenty-four (24) months from the date of the Qualifying
Termination, at the exact same cost to Executive, and at the same
coverage level in effect as of Executive's date of Qualifying
Termination. The applicable COBRA health insurance benefit
continuation period shall begin on the date of Executive's
Qualifying Termination.
(e) Executive shall be entitled, at the expense of the Company, to
receive up to $20,000 of outplacement services from a nationally
recognized outplacement firm of Executive's selection.
2.4 OTHER CHANGE IN CONTROL BENEFITS. In the event Executive becomes
entitled to receive other Change in Control benefits, as provided in Section
2.1(b), the Company shall, within the time limits stated in Section 2.1(b), pay
to Executive the following:
(a) a lump sum cash amount equal to the bonus which would be earned, if
the then-current level of goal achievement, as of the date of a
Change in Control, under the Company's Annual Incentive Plan (or any
successor plan thereto) were annualized, then adjusted based on the
number of days Executive was actually employed during the bonus plan
year in which the Change in Control occurs. Such payment shall
constitute full satisfaction for these amounts owed to Executive.
(b) a lump sum cash amount equal to the award payable under the Cerulean
Companies, Inc. Performance Unit Plan (or any successor plan thereto)
as of the date of the Change in Control. Such payment shall
constitute full satisfaction for these amounts owed to the Executive.
In addition, stock options, restricted stock, or performance shares granted
to Executive during the term of this Agreement, if any, shall become fully
vested upon a Change in Control.
2.5. DEFINITION OF "CHANGE IN CONTROL." Change in Control of the Company
means, and shall be deemed to have occurred upon, the first to occur of any of
the following events:
(a) an acquisition by any Person or Persons (as used in Sections 13(d)
and 14(d) of the Securities Exchange Act of 1934) of Beneficial
Ownership (as defined in Rule 13d-3 under the Securities Exchange Act
of 1934) of the securities of the Company that are then outstanding
and entitled to vote generally in the
5
<PAGE> 8
election of directors ("Voting Securities Outstanding"); provided,
however, that such acquisition of Beneficial Ownership would result
in the Person of Persons Beneficially Owning fifty percent (50%) or
more of the combined voting power of Voting Securities Outstanding;
and provided further, that immediately prior to such acquisition such
Person or Persons were not the direct or indirect Beneficial Owners
of fifty percent (50%) or more of the combined voting power of Voting
Securities Outstanding; or
(b) the termination of service as directors, for any reason other than
death, disability, or retirement from the Board, during any period of
two consecutive years or less, of individuals who at the beginning of
such period constituted a majority of the Board, unless (i) the
election of or nomination for election of each new director during
such period was approved by a vote of at least two-thirds of the
directors still in office who were directors at the beginning of the
period and (ii) at least one-third of the directors in office at the
beginning of any such period are still in office at the end of such
period; or
(c) the approval by the shareholders of the Company of any merger or
consolidation or statutory share exchange as a result of which the
Voting Securities Outstanding shall be changed, converted, or
exchanged (other than a merger or share exchange with a wholly owned
subsidiary of the Company) or liquidation of the Company or any sale
or disposition of fifty percent (50%) or more of the assets or
earning power of the Company; or
(d) the approval by the shareholders of the Company of any merger or
consolidation or statutory share exchange to which the Company is a
party, as a result of which the persons who were shareholders of the
Company immediately before the effective date of the merger,
consolidation, or statutory share exchange shall have Beneficial
Ownership (as defined in Rule 13d-3 under the Securities Exchange Act
of 1934) of less than fifty percent (50%) of the Voting Securities
Outstanding of the surviving corporation following the effective date
of such merger, consolidation, or statutory share exchange.
No Change in Control shall occur as a result of any acquisition of
Voting Securities Outstanding by any wholly-owned subsidiary of the
Company or an employee benefit plan (or related trust) sponsored by
the Company .
2.6. DEFINITION OF "GOOD REASON." "Good Reason" shall be determined by
Executive, in the exercise of good faith and reasonable judgment, and
shall mean, without Executive's express written consent, the
occurrence of any one or more of the following, during a period which
commences upon the Company's public announcement of an intended
Change in Control and ends on the second annual anniversary of the
effective date of the Change in Control.
(a) the Company's requiring Executive to be based at a location that
is more
6
<PAGE> 9
than 50 miles farther from Executive's principal residence than
Executive's job location immediately prior to the Change in Control;
except for required travel on the Company's business to an extent
consistent with Executive's business travel obligations prior to the
Change in Control;
(b) a reduction of the greater of Executive's Base Salary in effect on
the Effective Date or on the date of a Change in Control, as the same
shall be increased from time to time;
(c) a significant reduction in Executive's responsibilities as defined
immediately preceding the announcement of an intended Change in
Control;
(d) the failure of the Company or its successor to keep in effect any of
the Company's compensation, incentive, health and welfare benefits,
or perquisite programs under which Executive receives value, as such
programs exist immediately prior to the announcement of an intended
Change in Control, or the failure of the Company to meet the funding
requirements, if any, of any of the programs. However, the
replacement of an existing program with a new program will be
permissible (and not grounds for a Good Reason termination) if the
value to be delivered to Executive under the new program is at least
as great as the value delivered to Executive under the program being
replaced, and, with respect to programs that require qualifying
service or vesting periods, the qualifying or vesting period of the
new program credits Executive's service up to the date of replacement
and does not impose new or greater qualifying or vesting periods ; or
(e) any breach by the Company or its successor of any of the provisions
of this Agreement including, but not limited to, the Company failing
to obtain the assumption of, or the successor Company refusing to
assume the obligations of, this Agreement pursuant to Section 4.1.
Executive's right to terminate employment for Good Reason shall not be
limited by Executive's incapacity due to physical or mental illness. Executive's
continued employment shall not constitute consent to, or a waiver of rights with
respect to any circumstance constituting Good Reason herein, and if a
circumstance constituting Good Reason shall arise, Executive may terminate
employment based thereon at any time prior to the second annual anniversary of
the effective date of the Change in Control.
2.7. DEFINITION OF "CAUSE." Cause shall be determined by the Chief
Executive Officer of the Company, ( except that in the case of the Chief
Executive Officer, cause shall be determined by the Chairman of the Company's
Board of Directors ) in the exercise of good faith and reasonable judgment, and
shall mean the occurrence of any one or more of the following:
(a) a demonstrably willful and deliberate act or failure to act by
Executive (other than as a result of incapacity due to physical or
mental illness) which is
7
<PAGE> 10
committed in bad faith, without reasonable belief that such action or
inaction is in the best interests of the Company, which causes actual
material financial injury to the Company and which act or inaction is
not remedied within fifteen (15) business days of written notice from
the Company; or
(b) Executive's conviction for a felony act of fraud, embezzlement,
theft, or moral turpitude, which acts cause material financial harm
to the Company.
2.8. OTHER DEFINED TERMS. The following terms shall have the meanings set
forth below:
(a) "Affiliate" means:
(i) any corporation while it is a member of the same "controlled
group" of corporations (within the meaning of Section 414(b) of
the Internal Revenue Code (the "Code")) as the Company;
(ii) any other trade or business (whether or not incorporated) while
it is under "common control" (within the meaning of Code
Section 414(c)) with the Company;
(iii) any organization during any period in which it (along with the
Company) is a member of an "affiliated service group" (within
the meaning of Code Section 414(m)); or
(iv) any other entity during any period in which it is required to
be aggregated with the Company under Code Section 414(o).
(b) "Base Salary" means, at any time, the then-regular annual rate of pay
to which Executive is entitled as annual salary, excluding amounts
(i) designated by the Company as payment toward reimbursement of
expenses; or (ii) received under incentive or other bonus plans,
regardless of whether any of the amounts of annual salary or bonus
are deferred.
SECTION 3. EXCISE TAX
3.1. EXCISE TAX PAYMENT. If any portion of the Severance Benefits or any
other payment under this Agreement (including, but not limited to, payments
described in Section 2.4), or under any other agreement with, or plan of the
Company (in the aggregate "Total Payments") constitute a payment, such that an
excise tax is due under Section 280G or other provisions of the Internal Revenue
Code, the Company shall provide to Executive, in cash, an additional payment in
an amount to cover the full excise tax due, and Executive's state and federal
income and employment taxes on this additional payment (cumulatively, the
"Gross-Up Payment"). If Executive experiences a Qualifying Termination, any
amount payable under this Section 3.1 shall be paid as soon as possible
following the date of Executive's Qualifying Termination, but in no event later
than thirty (30) calendar days after such date. If Executive is eligible for an
excise tax payment under this Section 3.1, but Executive remains in active
8
<PAGE> 11
employment, such payment shall be made as soon as possible following the date of
the Change in Control, but in no event later than thirty (30) calendar days
after such date.
All determinations required to be made under this Section 3.1, including
whether and when a Gross-Up Payment is required, and the amount of such Gross-Up
Payment and the assumptions to be used in determining such payment, shall be
made by the accounting firm used by the Company at the time of such
determination (the "Accounting Firm") which shall provide detailed supporting
calculations both to the Company and to Executive within fifteen (15) business
days of the receipt of notice from the Company or Executive that there has been
a Qualifying Termination or that there is an amount payable under Section 2.4,
or such earlier time as is requested by the Company. In the event that the
Accounting Firm is serving as accountant or auditor for the individual, entity,
or group effecting the Change in Control, the Executive may appoint another
nationally recognized accounting firm to make the determinations required
hereunder (which accounting firm shall then be referred to as the Accounting
Firm hereunder). All fees and expenses of the Accounting Firm shall be borne
solely by the Company.
For purposes of this Agreement, the term "excise tax" shall mean the tax
imposed on certain excess payments pursuant to Sections 280G and 4999 or any
other provision of the Internal Revenue Code, as amended.
3.2. SUBSEQUENT RECALCULATION. In the event the Internal Revenue Service
subsequently adjusts the excise tax computation herein described, the Company
shall reimburse Executive for the full amount necessary to make Executive whole
on an after-tax basis (less any amounts received by Executive that Executive
would not have received had the computations initially been computed as
subsequently adjusted), including the value of any underpaid excise tax, and any
related interest and/or penalties due to the Internal Revenue Service.
SECTION 4. SUCCESSORS AND ASSIGNMENTS
4.1. SUCCESSORS. The Company will require any successor (whether via a
Change in Control, direct or indirect, by purchase, merger, consolidation, or
otherwise) of the Company to expressly assume and agree to perform the Company's
obligations under this Agreement, in the same manner and to the same extent that
the Company would be required to perform them if no such succession had taken
place.
Failure of the Company to obtain such assumption and agreement prior to the
effectiveness of any such succession shall, as of the date immediately preceding
the date of a Change in Control, automatically accelerate and make immediately
payable, the full benefits due Executive hereunder as upon a Qualifying
Termination.
4.2. ASSIGNMENT BY EXECUTIVE. This Agreement shall inure to the benefit of
and be enforceable by Executive's personal or legal representatives, executors,
administrators, successors, heirs, distributees, devisees, and legatees. If
Executive should die while any amount is payable to Executive hereunder, all
such amounts, unless otherwise provided herein, shall be paid in accordance with
the terms of this
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Agreement, to Executive's devisee, legatee, or other designee, or if there is no
such designee, to Executive's estate.
Executive's rights hereunder shall not otherwise be assignable.
SECTION 5. CONFIDENTIALITY OF COMPANY INFORMATION
5.1. CONFIDENTIALITY, NON-DISCLOSURE AND LIMITATION UPON RECRUITING.
Without the prior written consent of the Company, during the term of this
Agreement, and if Executive either experiences a Qualifying Termination or
voluntarily terminates employment without Good Reason, for a period of
twenty-four (24) calendar months thereafter, Executive agrees hereby not to
directly or indirectly, disclose or use (except as may be required for the
performance of duties assigned by the Company) any trade secret or other
confidential material pertaining to the conduct of the Company's business. The
Company's business, as that term is used herein, includes but is not limited to,
the Company's training manuals, underwriting and group enrollment manuals,
records, processes, methods, data, reports, information, documents, equipment
and business secrets. Executive further agrees, that during the twenty-four (24)
month period following a Qualifying Termination, Executive shall not initiate
contact with or attempt to recruit other Company employees for opportunities
outside the Company. Nothing herein, however, shall prevent Executive from
responding to contacts initiated by other employees.
SECTION 6. MISCELLANEOUS
6.1. ADMINISTRATION. This Agreement shall be administered by the Board of
Directors of the Company, or by a Committee of the Board consisting of Board
members designated by the Board (the "Compensation Committee"). In fulfilling
its administrative duties hereunder, the Compensation Committee may seek and
rely on advice or assistance of the Company's management, outside counsel,
independent accountants, or other consultants.
6.2. NOTICES. Any notice required to be delivered to the Company or the
Compensation Committee by Executive hereunder shall be properly delivered to the
Company when personally delivered to, or actually received through the U.S.
mail, postage prepaid, by:
Blue Cross and Blue Shield of Georgia, Inc./Cerulean Companies, Inc.
3350 Peachtree Road, N.E.
Atlanta, GA 30326
Attn: General Counsel
Any notice required to be delivered to Executive by the Company or the
Compensation Committee hereunder shall be properly delivered to Executive when
personally delivered to, or actually received through the U.S. mail, postage
prepaid, by Executive.
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SECTION 7. CONTRACTUAL RIGHTS AND LEGAL REMEDIES
7.1. CONTRACTUAL RIGHTS TO BENEFITS. This Agreement establishes in
Executive a right to the benefits to which Executive is entitled hereunder.
However, except as expressly stated herein, nothing herein contained shall
require or be deemed to require, or prohibit or be deemed to prohibit, the
Company to segregate, earmark, or otherwise set aside any funds or other assets,
in trust or otherwise, to provide for any payments to be made or required
hereunder.
7.2. LEGAL FEES AND EXPENSES. The Company shall pay all legal fees, costs
of litigation, prejudgment interest at an annual rate of 12% compounded monthly,
and other expenses which are incurred in good faith by Executive as a result of
the Company's refusal to provide the Severance Benefits and other Change in
Control benefits to which Executive becomes entitled under this Agreement, or as
a result of the Company's (or any third party's) contesting the validity,
enforceability, or interpretation of this Agreement, or as a result of any
conflict between the parties pertaining to this Agreement.
7.3. ARBITRATION. Executive shall have the right and option to elect (in
lieu of litigation) to have any dispute or controversy arising under or in
connection with this Agreement settled by arbitration, conducted before a panel
of three (3) arbitrators sitting in a location selected by Executive within
fifty (50) miles from the location of Executive's job with the Company, in
accordance with the rules of the American Arbitration Association then in
effect. Executive's election to arbitrate, as herein provided, and the decision
of the arbitrators in that proceeding, shall be binding on the Company and
Executive.
Judgment may be entered on the award of the arbitrator in any court having
jurisdiction. All expenses of such arbitration, including the fees and expenses
of the counsel for Executive, shall be borne by the Company.
7.4. UNFUNDED AGREEMENT. This Agreement is intended to be an unfunded
general asset promise for a select, highly compensated member of the Company's
management and, therefore, is intended to be exempt from the substantive
provisions of the Employee Retirement Income Security Act of 1974 as amended.
7.5. EXCLUSIVITY OF BENEFITS. Unless specifically provided herein, neither
the provisions of this Agreement nor the benefits provided hereunder shall
reduce any amounts otherwise payable, or in any way diminish Executive's rights
as an employee of the Company, whether existing now or hereafter, under any
compensation and/or benefit plans (qualified or nonqualified), programs,
policies, or practices provided by the Company, for which Executive may qualify.
Vested benefits or other amounts which Executive is otherwise entitled to
receive under any plan, policy, practice, or program of the Company (i.e.,
including, but not limited to, vested benefits under the Non-Contributory
Retirement Program for Certain Employees of Cerulean Companies, Inc.), at or
subsequent to Executive's date of Qualifying Termination shall be payable in
accordance with such plan, policy,
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practice, or program except as expressly modified by this Agreement.
7.6. EMPLOYMENT STATUS. Nothing herein contained shall be deemed to create
an employment agreement between the Company and Executive, providing for the
employment of Executive by the Company for any fixed period of time. Executive's
employment with the Company is terminable at will by the Company or Executive
and each shall have the right to terminate Executive's employment with the
Company at any time, with or without Cause, subject to the Company's obligation
to provide Severance Benefits and other Change in Control benefits as required
hereunder.
In no event shall Executive be obligated to seek other employment or take
any other action by way of mitigation of the amounts payable to Executive under
any of the provisions of this Agreement, nor shall the amount of any payment
hereunder be reduced by any compensation earned by Executive as a result of
employment by another employer.
7.7. ENTIRE AGREEMENT. This Agreement represents the entire agreement
between the parties with respect to the subject matter hereof, and supersedes
all prior discussions, negotiations, and agreements concerning the subject
matter hereof, including, but not limited to, any prior severance agreement made
between Executive and the Company.
7.8. TAX WITHHOLDING. The Company shall withhold from any amounts payable
under this Agreement all federal, state, city, or other taxes legally required
to be withheld.
7.9. WAIVER OF RIGHTS. Except as otherwise provided herein, Executive's
acceptance of correctly calculated Severance Benefits, other Change in Control
benefits, the Gross-Up Payment (if applicable), and any other payments required
hereunder shall be deemed to be a waiver of all rights and claims of Executive
against the Company pertaining to any matters arising under this Agreement.
7.10. SEVERABILITY. In the event any provision of the Agreement shall be
held illegal or invalid for any reason, the illegality or invalidity shall not
affect the remaining parts of the Agreement, and the Agreement shall be
construed and enforced as if the illegal or invalid provision had not been
included.
[INTENTIONALLY CONTINUED ON SIGNATURE PAGE]
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7.11. APPLICABLE LAW. To the extent not preempted by the laws of the United
States, the law of the State of Georgia shall be the controlling law in all
matters relating to this Agreement.
IN WITNESS WHEREOF, the Company and Executive have executed this Agreement,
to be effective as of the day and year first written above.
Executive: Cerulean Companies, Inc.
- ------------------------------- By:
------------------------------
Title:
---------------------------
13
<PAGE> 1
EXHIBIT 10.1.(b)
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.
GROUP BENEFITS OF GEORGIA, INC.:
<PAGE> 2
CONTENTS
- ----------------------------------------------------------------------------
<TABLE>
<CAPTION>
PAGE
<S> <C>
Section 1. Term of Agreement 1
Section 2. Change in Control Benefits 2
Section 3. Excise Tax 8
Section 4. Successors and Assignments 9
Section 5. Confidentiality of Company Information 10
Section 6. Miscellaneous 10
Section 7. Contractual Rights and Legal Remedies 11
</TABLE>
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<PAGE> 3
CHANGE IN CONTROL SEVERANCE AGREEMENT
This CHANGE IN CONTROL SEVERANCE AGREEMENT (this "Agreement") is made,
entered into, and is effective as of this 1st day of January, 1998 (the
"Effective Date"), by and between Cerulean Companies, Inc., for itself and each
of its wholly owned subsidiaries (Blue Cross and Blue Shield of Georgia, Inc.,
HMO Georgia, Inc., Group Benefits of Georgia, Inc.) and Greater Georgia Life
Insurance Company, Inc., a wholly owned subsidiary of Blue Cross and Blue Shield
of Georgia, Inc. (hereinafter altogether referred to as the "Company"), which
shall be jointly and severally responsible for the performance required of
Company, hereunder, and (hereinafter referred to as "Executive"), who may be an
employee, officer or director of one or more of the entities making up the
Company, or whose compensation may be allocated among one or more of said
entities.
WHEREAS, Executive is presently employed by the Company in a key management
capacity; and
WHEREAS, Executive possesses considerable industry experience and knowledge
of the business and affairs of the Company concerning its policies, methods,
personnel, and operations; and
WHEREAS, the Company is desirous of assuring the continued employment of
Executive in a key management capacity, and Executive is desirous of having such
assurance;
NOW THEREFORE, in consideration of the foregoing, and of the mutual
covenants and agreements of the parties set forth in this Agreement, and of
other good and valuable consideration including, but not limited to, Executive's
continuing employment with the Company, the receipt and sufficiency of which are
hereby acknowledged, the parties hereto, intending to be legally bound, agree as
follows:
SECTION 1. TERM OF AGREEMENT
This Agreement will commence on the Effective Date and shall continue in
effect until December 31, 2001, (the "Initial Term").
This Agreement shall automatically be extended for one additional year at
the end of the Initial Term, and then for successive one-year periods (each such
one-year extension following the Initial Term a "Successive Period"). However,
either party may terminate this Agreement at the end of the Initial Term, or at
the end of any Successive Period, by giving the other party written notice of
intent not to renew, delivered at least ninety (90) calendar days prior to the
end of the Initial Term or Successive Period; provided, however, that any such
termination of this Agreement by the Company, which shall become effective
within ninety (90) days prior to the public announcement of an intended Change
in Control (as such term is defined in Section 2.5 hereof), shall be ineffective
and shall be deemed to be a Qualifying Termination as provided in Section 2.2
hereof. Except as otherwise provided, if such notice is properly
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delivered by either party, this Agreement, along with all corresponding rights,
duties, and covenants, shall then terminate at the end of the Initial Term or
Successive Period then in progress.
In the event that a public announcement of an intended "Change in
Control" of the Company occurs during the Initial Term or any Successive Period,
then upon such announcement, the term of this Agreement shall automatically and
irrevocably become a term ending twenty-four (24) full calendar months from the
effective date of such Change in Control. This Agreement shall then terminate
following such twenty-four (24) month period. Further, this Agreement shall be
assigned to, and shall be assumed by, the Company's successor in such Change in
Control, as further provided in Section 4 hereof.
SECTION 2. CHANGE IN CONTROL BENEFITS
2.1. RIGHT TO BENEFITS.
(a) SEVERANCE BENEFITS. Executive shall receive from the Company Severance
Benefits as described in Section 2.3 hereof, if during the term of
this Agreement there has been a public announcement of an intended
Change in Control of the Company (as defined in Section 2.5 hereof)
and if, subsequently during this Agreement's term, Executive's
employment with the Company shall end for any reason specified in
Section 2.2 hereof as being a Qualifying Termination. The Severance
Benefits described in Sections 2.3(a) through 2.3(d) hereof shall be
paid in cash to Executive in a single lump sum as soon as practicable
following a Qualifying Termination, but in no event later than thirty
(30) calendar days from such date. Notwithstanding the foregoing,
Severance Benefits which become due pursuant to the circumstances
described in Sections 2.6(d) and 4.1 shall be paid immediately.
(b) OTHER CHANGE IN CONTROL BENEFITS. Executive shall be entitled to
receive the payments described in Sections 2.4 and 3 if a Change in
Control occurs during the term of this Agreement, or if an intended
Change in Control is publicly announced within ninety (90) days
thereafter. These benefits shall be paid without regard to whether
Executive's employment with the Company ends following such Change in
Control. These benefits shall be paid in cash to Executive, in a
single lump sum, as soon as practicable following the Change in
Control, but in no event later than thirty (30) calendar days from
such date.
2.2. QUALIFYING TERMINATION. The occurrence of any one or more of the
following events, during the term of this Agreement following a public
announcement of an intended Change in Control of the Company shall be deemed a
Qualifying Termination, and shall require the payment of Severance Benefits , as
such benefits are described in Section 2.3 hereof, to Executive:
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(a) the Company's or its successor's termination of Executive's employment
without Cause (as Cause is defined in Section 2.7 hereof );
(b) Executive's termination of employment for Good Reason (as Good Reason
is defined in Section 2.6 herein);
(c) the termination of Executive's employment due to disability.
Additionally, it shall be deemed a Qualifying Termination of Executive,
hereunder, if the Company shall fail to renew this Agreement within 90 days
prior to the public announcement of an intended Change in Control.
A Qualifying Termination shall not include a termination of Executive's
employment by reason of death, the Executive's voluntary termination without
Good Reason, or the Company's termination of the Executive's employment for
Cause.
2.3. DESCRIPTION OF SEVERANCE BENEFITS. In the event that Executive becomes
entitled to receive Severance Benefits, as provided in Sections 2.1(a) and 2.2
hereof, the Company shall, within the time limits stated in Section 2.1(a), pay
to Executive and provide Executive each of the following:
(a) a lump-sum cash amount equal to Executive's earned but unpaid Base
Salary (as such term is defined in Section 2.8(b) hereof), earned and
accrued vacation pay, universal leave pay, unreimbursed business
expenses, and all other amounts earned by and owed to Executive
through and including the date of the Qualifying Termination. Such
payment shall constitute full satisfaction for these amounts owed to
Executive.
(b) a lump-sum cash amount equal to one (1) multiplied by the sum of (i)
and (ii), where (i) is the greater of the Executive's annual rate of
Base Salary in effect upon the date of the Qualifying Termination, or
the Executive's annual rate of Base Salary in effect immediately prior
to the announcement of the Change in Control, and (ii) is the average
of the amounts received by the Executive as incentive compensation
under the Annual Incentive Plan (or any successor plan thereto) during
the period of two (2) years that ended immediately before the year
which includes the date of the announcement of the intended Change in
Control (except that the average payment received shall be calculated
only for years in which Executive actually participated in each plan).
(c) this Section 2.3(c) shall apply only if Executive is at least age 50
or has completed at least 10 "Years of Employer Service" (as defined
in the Non-Contributory Retirement Program for Certain Employees of
Blue Cross and Blue Shield of Georgia, Inc.) as of the date of
Executive's Qualifying Termination. If this Section 2.3(c) applies,
the benefits to which
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Executive is entitled under the Non-Contributory Retirement Program
for Certain Employees of Blue Cross and Blue Shield of Georgia, Inc.,
the Blue Cross and Blue Shield of Georgia, Inc. Supplemental Executive
Retirement Plan, and the Blue Cross and Blue Shield of Georgia, Inc.
Executive Benefit Restoration Plan, or any other tax-qualified or
nonqualified defined benefit pension plan maintained by the Company or
an Affiliate, shall be calculated:
(i) as if the Executive is fully vested in benefits accrued to date
thereunder; and
(ii) as if either (A) the number of "Years of Employer Service" (as
defined in the Non-Contributory Retirement Program for Certain
Employees of Blue Cross and Blue Shield of Georgia, Inc.) was
increased by three (3) years; or (B) the Executive's age was
equal to his actual age plus three (3) years for purposes of
determining early retirement reductions under any of the Plans,
whichever option produces the largest benefit to Executive.
The amount due Executive under this Section 2.3(c) shall be the amount
calculated in accordance with (i) and (ii), above, reduced by amounts
paid or payable from the Non-Contributory Retirement Program for
Certain Employees of Blue Cross and Blue Shield of Georgia, Inc., and
amounts paid or payable upon employment termination in accordance with
the provisions of any rabbi trust agreement established to fund
benefits under either the Blue Cross and Blue Shield of Georgia, Inc.
Supplemental Executive Retirement Plan or the Blue Cross and Blue
Shield of Georgia, Inc. Executive Benefit Restoration Plan.
The amount due Executive hereunder, including amounts previously
accrued under both the Blue Cross and Blue Shield of Georgia, Inc.
Supplemental Executive Retirement Plan and the Blue Cross and Blue
Shield of Georgia, Inc. Executive Benefit Restoration Plan shall be
paid in a cash lump sum.
The three (3) Years of Plan and Association Service granted under this
Paragraph 2.3(c) shall not be eligible for the service doubling
provision described in the Blue Cross and Blue Shield of Georgia, Inc.
Supplemental Executive Retirement Plan.
For purposes of calculating a lump sum benefit under this Section
2.3(c) for benefit payments under the Blue Cross and Blue Shield of
Georgia, Inc. Supplemental Executive Retirement Plan and the Blue
Cross and Blue Shield of Georgia, Inc. Executive Benefit Restoration
Plan, the lump sum payment shall be equal to the "actuarial
equivalent" of the Executive's accrued benefit under the respective
plan. The actuarial equivalent shall be determined using accepted
actuarial principles and based on (i) the interest rate provided by
the Pension Benefit Guaranty Corporation for purposes of determining
the value of benefits which are to be paid in a lump sum upon
termination of an
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<PAGE> 7
insufficient trusteed single-employer plan, as set forth in Table II
of appendix B of PBGC Reg. Section 4044.52(b), and (ii) the mortality
rates set forth in the UP-1984 Mortality Table.
(d) a lump-sum cash amount sufficient for Executive to purchase health and
dental insurance, life insurance, and long-term disability insurance
coverage for Executive and Executive's eligible dependents for twenty-
four (24) months from the date of the Qualifying Termination, at the
exact same cost to Executive, and at the same coverage level in effect
as of Executive's date of Qualifying Termination. The applicable COBRA
health insurance benefit continuation period shall begin on the date
of Executive's Qualifying Termination.
(e) Executive shall be entitled, at the expense of the Company, to receive
up to $10,000 of outplacement services from a nationally recognized
outplacement firm of Executive's selection.
2.4 OTHER CHANGE IN CONTROL BENEFITS. In the event Executive becomes
entitled to receive other Change in Control benefits, as provided in
Section 2.1(b), the Company shall, within the time limits stated in
Section 2.1(b), pay to Executive the following:
(a) a lump sum cash amount equal to the bonus which would be earned, if
the then-current level of goal achievement, as of the date of a Change
in Control, under the Company's Annual Incentive Plan (or any
successor plan thereto) were annualized, then adjusted based on the
number of days Executive was actually employed during the bonus plan
year in which the Change in Control occurs. Such payment shall
constitute full satisfaction for these amounts owed to Executive.
(b) a lump sum cash amount equal to the award payable under the Cerulean
Companies, Inc. Performance Unit Plan (or any successor plan thereto)
as of the date of the Change in Control. Such payment shall constitute
full satisfaction for these amounts owed to the Executive.
In addition, stock options, restricted stock, or performance shares granted
to Executive during the term of this Agreement, if any, shall become fully
vested upon a Change in Control.
2.5. DEFINITION OF "CHANGE IN CONTROL." Change in Control of the Company
means, and shall be deemed to have occurred upon, the first to occur of any of
the following events:
(a) an acquisition by any Person or Persons (as used in Sections 13(d) and
14(d) of the Securities Exchange Act of 1934) of Beneficial Ownership
(as defined in Rule 13d-3 under the Securities Exchange Act of 1934)
of the securities of the Company that are then outstanding and
entitled to vote generally in the
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election of directors ("Voting Securities Outstanding"); provided,
however, that such acquisition of Beneficial Ownership would result in
the Person of Persons Beneficially Owning fifty percent (50%) or more
of the combined voting power of Voting Securities Outstanding; and
provided further, that immediately prior to such acquisition such
Person or Persons were not the direct or indirect Beneficial Owners of
fifty percent (50%) or more of the combined voting power of Voting
Securities Outstanding; or
(b) the termination of service as directors, for any reason other than
death, disability, or retirement from the Board, during any period of
two consecutive years or less, of individuals who at the beginning of
such period constituted a majority of the Board, unless (i) the
election of or nomination for election of each new director during
such period was approved by a vote of at least two-thirds of the
directors still in office who were directors at the beginning of the
period and (ii) at least one-third of the directors in office at the
beginning of any such period are still in office at the end of such
period; or
(c) the approval by the shareholders of the Company of any merger or
consolidation or statutory share exchange as a result of which the
Voting Securities Outstanding shall be changed, converted, or
exchanged (other than a merger or share exchange with a wholly owned
subsidiary of the Company) or liquidation of the Company or any sale
or disposition of fifty percent (50%) or more of the assets or earning
power of the Company; or
(d) the approval by the shareholders of the Company of any merger or
consolidation or statutory share exchange to which the Company is a
party, as a result of which the persons who were shareholders of the
Company immediately before the effective date of the merger,
consolidation, or statutory share exchange shall have Beneficial
Ownership (as defined in Rule 13d-3 under the Securities Exchange Act
of 1934) of less than fifty percent (50%) of the Voting Securities
Outstanding of the surviving corporation following the effective date
of such merger, consolidation, or statutory share exchange.
No Change in Control shall occur as a result of any acquisition of Voting
Securities Outstanding by any wholly-owned subsidiary of the Company or an
employee benefit plan (or related trust) sponsored by the Company .
2.6. DEFINITION OF "GOOD REASON." "Good Reason" shall be determined by
Executive, in the exercise of good faith and reasonable judgment, and shall
mean, without Executive's express written consent, the occurrence of any one or
more of the following, during a period which commences upon the Company's public
announcement of an intended Change in Control and ends on the second annual
anniversary of the effective date of the Change in Control.
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(a) the Company's requiring Executive to be based at a location that is
more than 50 miles farther from Executive's principal residence than
Executive's job location immediately prior to the Change in Control;
except for required travel on the Company's business to an extent
consistent with Executive's business travel obligations prior to the
Change in Control;
(b) a reduction of the greater of Executive's Base Salary in effect on the
Effective Date or on the date of a Change in Control, as the same
shall be increased from time to time;
(c) a significant reduction in Executive's responsibilities as defined
immediately preceding the announcement of an intended Change in
Control;
(d) the failure of the Company or its successor to keep in effect any of
the Company's compensation, incentive, health and welfare benefits, or
perquisite programs under which Executive receives value, as such
programs exist immediately prior to the announcement of an intended
Change in Control, or the failure of the Company to meet the funding
requirements, if any, of any of the programs. However, the replacement
of an existing program with a new program will be permissible (and not
grounds for a Good Reason termination) if the value to be delivered to
Executive under the new program is at least as great as the value
delivered to Executive under the program being replaced, and, with
respect to programs that require qualifying service or vesting
periods, the qualifying or vesting period of the new program credits
Executive's service up to the date of replacement and does not impose
new or greater qualifying or vesting periods; or
(e) any breach by the Company or its successor of any of the provisions of
this Agreement including, but not limited to, the Company failing to
obtain the assumption of, or the successor Company refusing to assume
the obligations of, this Agreement pursuant to Section 4.1.
Executive's right to terminate employment for Good Reason shall not be
limited by Executive's incapacity due to physical or mental illness. Executive's
continued employment shall not constitute consent to, or a waiver of rights with
respect to any circumstance constituting Good Reason herein, and if a
circumstance constituting Good Reason shall arise, Executive may terminate
employment based thereon at any time prior to the second annual anniversary of
the effective date of the Change in Control.
2.7. Definition of "Cause." Cause shall be determined by the Chief
Executive Officer of the Company, (except that in the case of the Chief
Executive Officer, cause shall be determined by the Chairman of the Company's
Board of Directors) in the exercise of good faith and reasonable judgment, and
shall mean the occurrence of any one or more of the following:
(a) a demonstrably willful and deliberate act or failure to act by
Executive (other than as a result of incapacity due to physical or
mental illness) which is
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committed in bad faith, without reasonable belief that such action or
inaction is in the best interests of the Company, which causes actual
material financial injury to the Company and which act or inaction is
not remedied within fifteen (15) business days of written notice from
the Company; or
(b) Executive's conviction for a felony act of fraud, embezzlement, theft,
or moral turpitude, which acts cause material financial harm to the
Company.
2.8. OTHER DEFINED TERMS. The following terms shall have the meanings set
forth below:
(a) "Affiliate" means:
(i) any corporation while it is a member of the same "controlled
group" of corporations (within the meaning of Section 414(b) of
the Internal Revenue Code (the "Code")) as the Company;
(ii) any other trade or business (whether or not incorporated) while
it is under "common control" (within the meaning of Code
Section 414(c)) with the Company;
(iii) any organization during any period in which it (along with the
Company) is a member of an "affiliated service group" (within
the meaning of Code Section 414(m)); or
(iv) any other entity during any period in which it is required to
be aggregated with the Company under Code Section 414(o).
(b) "Base Salary" means, at any time, the then-regular annual rate of pay
to which Executive is entitled as annual salary, excluding amounts (i)
designated by the Company as payment toward reimbursement of expenses;
or (ii) received under incentive or other bonus plans, regardless of
whether any of the amounts of annual salary or bonus are deferred.
SECTION 3. EXCISE TAX
3.1. EXCISE TAX PAYMENT. If any portion of the Severance Benefits or any
other payment under this Agreement (including, but not limited to, payments
described in Section 2.4), or under any other agreement with, or plan of the
Company (in the aggregate "Total Payments") constitute a payment, such that an
excise tax is due under Section 280G or other provisions of the Internal Revenue
Code, the Company shall provide to Executive, in cash, an additional payment in
an amount to cover the full excise tax due, and Executive's state and federal
income and employment taxes on this additional payment (cumulatively, the
"Gross-Up Payment"). If Executive experiences a Qualifying Termination, any
amount payable under this Section 3.1 shall be paid as soon as possible
following the date of Executive's Qualifying Termination, but in no event later
than thirty (30) calendar days after such date. If Executive is eligible for an
excise tax payment under this Section 3.1, but Executive remains in active
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employment, such payment shall be made as soon as possible following the date of
the Change in Control, but in no event later than thirty (30) calendar days
after such date.
All determinations required to be made under this Section 3.1, including
whether and when a Gross-Up Payment is required, and the amount of such Gross-Up
Payment and the assumptions to be used in determining such payment, shall be
made by the accounting firm used by the Company at the time of such
determination (the "Accounting Firm") which shall provide detailed supporting
calculations both to the Company and to Executive within fifteen (15) business
days of the receipt of notice from the Company or Executive that there has been
a Qualifying Termination or that there is an amount payable under Section 2.4,
or such earlier time as is requested by the Company. In the event that the
Accounting Firm is serving as accountant or auditor for the individual, entity,
or group effecting the Change in Control, the Executive may appoint another
nationally recognized accounting firm to make the determinations required
hereunder (which accounting firm shall then be referred to as the Accounting
Firm hereunder). All fees and expenses of the Accounting Firm shall be borne
solely by the Company.
For purposes of this Agreement, the term "excise tax" shall mean the tax
imposed on certain excess payments pursuant to Sections 280G and 4999 or any
other provision of the Internal Revenue Code, as amended.
3.2. SUBSEQUENT RECALCULATION. In the event the Internal Revenue Service
subsequently adjusts the excise tax computation herein described, the Company
shall reimburse Executive for the full amount necessary to make Executive whole
on an after-tax basis (less any amounts received by Executive that Executive
would not have received had the computations initially been computed as
subsequently adjusted), including the value of any underpaid excise tax, and any
related interest and/or penalties due to the Internal Revenue Service.
SECTION 4. SUCCESSORS AND ASSIGNMENTS
4.1. SUCCESSORS. The Company will require any successor (whether via a
Change in Control, direct or indirect, by purchase, merger, consolidation, or
otherwise) of the Company to expressly assume and agree to perform the Company's
obligations under this Agreement, in the same manner and to the same extent that
the Company would be required to perform them if no such succession had taken
place.
Failure of the Company to obtain such assumption and agreement prior to the
effectiveness of any such succession shall, as of the date immediately preceding
the date of a Change in Control, automatically accelerate and make immediately
payable, the full benefits due Executive hereunder as upon a Qualifying
Termination.
4.2. ASSIGNMENT BY EXECUTIVE. This Agreement shall inure to the benefit of
and be enforceable by Executive's personal or legal representatives, executors,
administrators, successors, heirs, distributees, devisees, and legatees. If
Executive should die while any amount is payable to Executive hereunder, all
such amounts, unless otherwise provided herein, shall be paid in accordance with
the terms of this
9
<PAGE> 12
Agreement, to Executive's devisee, legatee, or other designee, or if there is no
such designee, to Executive's estate.
Executive's rights hereunder shall not otherwise be assignable.
SECTION 5. CONFIDENTIALITY OF COMPANY INFORMATION
5.1. CONFIDENTIALITY, NON-DISCLOSURE AND LIMITATION UPON RECRUITING.
Without the prior written consent of the Company, during the term of this
Agreement, and if Executive either experiences a Qualifying Termination or
voluntarily terminates employment without Good Reason, for a period of
twenty-four (24) calendar months thereafter, Executive agrees hereby not to
directly or indirectly, disclose or use (except as may be required for the
performance of duties assigned by the Company) any trade secret or other
confidential material pertaining to the conduct of the Company's business. The
Company's business, as that term is used herein, includes but is not limited to,
the Company's training manuals, underwriting and group enrollment manuals,
records, processes, methods, data, reports, information, documents, equipment
and business secrets. Executive further agrees, that during the twenty-four (24)
month period following a Qualifying Termination, Executive shall not initiate
contact with or attempt to recruit other Company employees for opportunities
outside the Company. Nothing herein, however, shall prevent Executive from
responding to contacts initiated by other employees.
SECTION 6. MISCELLANEOUS
6.1. ADMINISTRATION. This Agreement shall be administered by the Board of
Directors of the Company, or by a Committee of the Board consisting of Board
members designated by the Board (the "Compensation Committee"). In fulfilling
its administrative duties hereunder, the Compensation Committee may seek and
rely on advice or assistance of the Company's management, outside counsel,
independent accountants, or other consultants.
6.2. NOTICES. Any notice required to be delivered to the Company or the
Compensation Committee by Executive hereunder shall be properly delivered to the
Company when personally delivered to, or actually received through the U.S.
mail, postage prepaid, by:
Blue Cross and Blue Shield of Georgia, Inc./Cerulean Companies, Inc.
3350 Peachtree Road, N.E.
Atlanta, GA 30326
Attn: General Counsel
Any notice required to be delivered to Executive by the Company or the
Compensation Committee hereunder shall be properly delivered to Executive when
personally delivered to, or actually received through the U.S. mail, postage
prepaid, by Executive.
10
<PAGE> 13
SECTION 7. CONTRACTUAL RIGHTS AND LEGAL REMEDIES
7.1. CONTRACTUAL RIGHTS TO BENEFITS. This Agreement establishes in
Executive a right to the benefits to which Executive is entitled hereunder.
However, except as expressly stated herein, nothing herein contained shall
require or be deemed to require, or prohibit or be deemed to prohibit, the
Company to segregate, earmark, or otherwise set aside any funds or other assets,
in trust or otherwise, to provide for any payments to be made or required
hereunder.
7.2. LEGAL FEES AND EXPENSES. The Company shall pay all legal fees, costs
of litigation, prejudgment interest at an annual rate of 12% compounded monthly,
and other expenses which are incurred in good faith by Executive as a result of
the Company's refusal to provide the Severance Benefits and other Change in
Control benefits to which Executive becomes entitled under this Agreement, or as
a result of the Company's (or any third party's) contesting the validity,
enforceability, or interpretation of this Agreement, or as a result of any
conflict between the parties pertaining to this Agreement.
7.3. ARBITRATION. Executive shall have the right and option to elect (in
lieu of litigation) to have any dispute or controversy arising under or in
connection with this Agreement settled by arbitration, conducted before a panel
of three (3) arbitrators sitting in a location selected by Executive within
fifty (50) miles from the location of Executive's job with the Company, in
accordance with the rules of the American Arbitration Association then in
effect. Executive's election to arbitrate, as herein provided, and the decision
of the arbitrators in that proceeding, shall be binding on the Company and
Executive.
Judgment may be entered on the award of the arbitrator in any court having
jurisdiction. All expenses of such arbitration, including the fees and expenses
of the counsel for Executive, shall be borne by the Company.
7.4. UNFUNDED AGREEMENT. This Agreement is intended to be an unfunded
general asset promise for a select, highly compensated member of the Company's
management and, therefore, is intended to be exempt from the substantive
provisions of the Employee Retirement Income Security Act of 1974 as amended.
7.5. EXCLUSIVITY OF BENEFITS. Unless specifically provided herein, neither
the provisions of this Agreement nor the benefits provided hereunder shall
reduce any amounts otherwise payable, or in any way diminish Executive's rights
as an employee of the Company, whether existing now or hereafter, under any
compensation and/or benefit plans (qualified or nonqualified), programs,
policies, or practices provided by the Company, for which Executive may qualify.
Vested benefits or other amounts which Executive is otherwise entitled to
receive under any plan, policy, practice, or program of the Company (i.e.,
including, but not limited to, vested benefits under the Non-Contributory
Retirement Program for Certain Employees of Cerulean Companies, Inc.), at or
subsequent to Executive's date of Qualifying Termination shall be payable in
accordance with such plan, policy, practice, or program except as expressly
modified by this Agreement.
11
<PAGE> 14
7.6. EMPLOYMENT STATUS. Nothing herein contained shall be deemed to create
an employment agreement between the Company and Executive, providing for the
employment of Executive by the Company for any fixed period of time. Executive's
employment with the Company is terminable at will by the Company or Executive
and each shall have the right to terminate Executive's employment with the
Company at any time, with or without Cause, subject to the Company's obligation
to provide Severance Benefits and other Change in Control benefits as required
hereunder.
In no event shall Executive be obligated to seek other employment or take
any other action by way of mitigation of the amounts payable to Executive under
any of the provisions of this Agreement, nor shall the amount of any payment
hereunder be reduced by any compensation earned by Executive as a result of
employment by another employer.
7.7. ENTIRE AGREEMENT. This Agreement represents the entire agreement
between the parties with respect to the subject matter hereof, and supersedes
all prior discussions, negotiations, and agreements concerning the subject
matter hereof, including, but not limited to, any prior severance agreement made
between Executive and the Company.
7.8. TAX WITHHOLDING. The Company shall withhold from any amounts payable
under this Agreement all federal, state, city, or other taxes legally required
to be withheld.
7.9. WAIVER OF RIGHTS. Except as otherwise provided herein, Executive's
acceptance of correctly calculated Severance Benefits, other Change in Control
benefits, the Gross-Up Payment (if applicable), and any other payments required
hereunder shall be deemed to be a waiver of all rights and claims of Executive
against the Company pertaining to any matters arising under this Agreement.
7.10. SEVERABILITY. In the event any provision of the Agreement shall be
held illegal or invalid for any reason, the illegality or invalidity shall not
affect the remaining parts of the Agreement, and the Agreement shall be
construed and enforced as if the illegal or invalid provision had not been
included.
[INTENTIONALLY CONTINUED ON SIGNATURE PAGE]
12
<PAGE> 15
7.11. APPLICABLE LAW. To the extent not preempted by the laws of the United
States, the law of the State of Georgia shall be the controlling law in all
matters relating to this Agreement.
IN WITNESS WHEREOF, the Company and Executive have executed this Agreement,
to be effective as of the day and year first written above.
Executive: Cerulean Companies, Inc.
By:
- ---------------------------- ----------------------------
Title:
--------------------------
--------------------------------
13
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THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM CERULEAN
COMPANIES, INC. ON FORM 10-Q FOR THE QUARTER ENDED JUNE 30, 1998 AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
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