<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington D.C. 20549
FORM 10-Q
[x] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the period ended MARCH 31, 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
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APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Class: Class A Convertible Common Stock, no par value, $0.01 stated value.
Outstanding as of April 30, 1998 - 351,550 shares
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CERULEAN COMPANIES, INC.
FORM 10-Q
MARCH 31, 1998
INDEX
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PAGE
NUMBER
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PART I. FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements
Consolidated Balance Sheets as of
March 31, 1998 and December 31, 1997 Page 3
Consolidated Statements of Income for the Three Months
Ended March 31, 1998 and 1997 Page 4
Consolidated Statements of Comprehensive Income for the
Three Months Ended March 31, 1998 and 1997 Page 4
Consolidated Statements of Cash Flows for the Three Months
Ended March 31, 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 8
Item 3. Quantitative and Qualitative Disclosure About Market Risk Page 9
PART II. OTHER INFORMATION
Item 1. Legal Proceedings Page 10
Item 2. Changes in Securities Page 10
Item 3. Defaults Upon Senior Securities Page 10
Item 4. Submission of Matters to a Vote of Security Holders Page 10
Item 5. Other Information Page 10
Item 6. Exhibits and Reports on Form 8-K Page 10
Signatures Page 12
</TABLE>
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PART I - FINANCIAL INFORMATION
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS
CERULEAN COMPANIES, INC.
CONSOLIDATED BALANCE SHEETS
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MARCH 31, DECEMBER 31,
1998 1997
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(UNAUDITED)
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ASSETS
Investments:
Fixed maturities:
Available-for-sale, at fair value (amortized cost: $186,581,601;
$185,037,630) $189,181,534 $187,662,551
Equity securities, at fair value (cost: $59,499,115; $58,348,840) 79,272,040 73,102,814
Short-term investments, at fair value (cost: $4,319,632; $19,555,875) 4,319,632 19,555,875
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Total investments 272,773,206 280,321,240
Cash and cash equivalents 60,922,915 35,001,855
Reimbursable portion of estimated benefit liabilities 100,109,036 100,109,036
Accounts receivable 65,498,278 59,624,899
FEP assets held by agent 25,553,200 25,553,200
Property and equipment 34,370,350 33,735,541
Other assets 19,032,954 19,017,199
============ ============
Total assets $578,259,939 $553,362,970
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Estimated benefit liabilities $220,168,567 $206,412,040
Unearned premiums 8,722,650 8,301,197
FEP stabilization reserve 25,553,200 25,553,200
Accounts payable and accrued expenses 32,256,219 31,210,088
Payables to other plans 589,730 1,068,051
Other liabilities 43,848,372 35,636,564
Note payable -- 3,500,000
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Total liabilities 331,138,738 311,681,140
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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 351,550 and
351,545 shares, respectively 3,516 3,515
Common Stock, no par value
Authorized and unissued 100,000,000 shares -- --
Net unrealized appreciation on securities 17,864,079 13,949,895
Retained earnings 182,608,564 181,083,378
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Total shareholders' equity 200,476,159 195,036,788
Commitments and contingencies (Note 5) -- --
------------ ------------
Total liabilities and shareholders' equity $578,259,939 $553,362,970
============ ============
</TABLE>
See accompanying notes.
3
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CERULEAN COMPANIES, INC.
CONSOLIDATED STATEMENTS OF INCOME
UNAUDITED
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THREE MONTHS ENDED MARCH 31,
1998 1997
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Revenues:
Premiums $ 416,571,444 $ 362,614,748
Investment and other income 3,798,597 3,646,145
Realized gains 3,001,846 1,915,247
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Total revenues 423,371,887 368,176,140
Benefits expense 369,633,478 323,783,964
Operating expenses, net of expense reimbursements of $16,505,690 and
$13,414,408, respectively 49,996,974 41,673,510
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Operating income 3,741,435 2,718,666
Non-operating income (Note 3) 63,750 1,275,000
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Income before income taxes and minority interests 3,805,185 3,993,666
Income tax expense 1,033,000 619,000
Minority interest in earnings of joint venture investments (498,498) (68,017)
============= =============
Net income $ 2,273,687 $ 3,306,649
============= =============
</TABLE>
See accompanying notes.
CERULEAN COMPANIES, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
UNAUDITED
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31,
1998 1997
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Net income $ 2,273,687 $ 3,306,649
Other comprehensive income, net of tax:
Unrealized holding gains (losses) arising during period net
of reclassification adjustment for gains included in net
income of $2,401,477 and $1,532,198, respectively 3,914,184 (3,025,019)
============= =============
Comprehensive income $ 6,187,871 $ 281,630
============= =============
</TABLE>
See accompanying notes.
4
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CERULEAN COMPANIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
UNAUDITED
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31,
1998 1997
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OPERATING ACTIVITIES
Net income $ 2,273,687 $ 3,306,649
Adjustments to reconcile net income to net cash provided by
operating activities:
Non-cash and non-operating items:
Depreciation 2,561,742 2,339,909
Amortization 40,355 80,184
Uncollectible receivables 1,044,949 (255,992)
Gain on sale of investments (3,001,846) (1,915,247)
Gain on sale of property and equipment (14,579) (8,325)
Non-operating income (63,750) (1,275,000)
Decrease (increase) in certain assets:
Reimbursable portion of estimated benefit liabilities -- 10,000
Accounts receivable (6,918,328) (2,754,401)
Other assets (1,095,534) (1,257,865)
Increase (decrease) in certain liabilities:
Estimated benefit liabilities 13,756,527 4,974,174
Unearned premiums 421,453 1,632,177
Accounts payable and accrued expenses 1,046,131 (3,471,629)
Payables to other plans (478,321) (282,423)
Other liabilities 7,463,308 919,725
Minority interest in sale of stock and stock warrants by a
subsidiary (61,250) (1,225,000)
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Net cash provided by operating activities 16,974,544 816,936
INVESTING ACTIVITIES
Investments purchased (42,145,906) (44,643,879)
Investments sold or matured 57,649,394 21,853,409
Property and equipment purchased (3,225,729) (2,173,873)
Property and equipment sold 43,757 8,325
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Net cash provided by (used in) investing activities 12,321,516 (24,956,018)
FINANCING ACTIVITIES
Repayment of notes payable (3,500,000) --
Sale of stock warrants by subsidiary 125,000 --
Sale of stock by a subsidiary -- 2,500,000
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Net cash (used in) provided by financing activities (3,375,000) 2,500,000
------------- -------------
Increase (decrease) in cash and cash equivalents 25,921,060 (21,639,082)
Cash and cash equivalents at beginning of period 35,001,855 89,024,410
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Cash and cash equivalents at end of period $ 60,922,915 $ 67,385,328
============= =============
</TABLE>
See accompanying notes.
5
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CERULEAN COMPANIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1997
UNAUDITED
1. SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION
Cerulean Companies, Inc. (the "Company") was incorporated under the laws of the
State of Georgia on February 2, 1996 to act as the holding company for Blue
Cross and Blue Shield of Georgia, Inc. ("BCBSGA") and 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 its life insurance subsidiary are subject to regulation by the
Georgia Insurance Department, including minimum capital and surplus requirements
and restrictions on payment of dividends. Because of the nature of the Company's
operations, the results for interim periods are not necessarily indicative of
results expected for the entire year. In the opinion of management, all material
adjustments necessary for a fair presentation of the financial position and
results of operations for the interim periods have been made. 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 FASB issued Statement No. 131, Disclosures about Segments of an
Enterprise and Related Information. Statement No. 131 establishes standards for
the way that public business enterprises report information about operating
segments in annual financial statements and requires that those enterprises
report selected information about operating segments in 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 fiscal years beginning after December 15,
1997. Management of the Company is presently assessing the effect that Statement
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)
As of January 1, 1998, the Company adopted Statement 130, Reporting
Comprehensive Income. Statement 130 establishes new rules for the reporting and
display of comprehensive income and its components; however, the adoption of
this Statement had no impact on the Company's net income or shareholders'
equity. Statement 130 requires unrealized gains or losses on the Company's
available-for-sale securities, which prior to adoption were reported separately
in shareholders' equity, to be included in other comprehensive income. Prior
year financial statements have been reclassified to conform to the requirements
of Statement 130.
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 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 March 31, 1998, $125,000 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 $63,750
for its portion of this transaction and increased the minority interest
liability for this CHPN by $61,250. After deducting income taxes, net income was
favorably impacted by $51,000.
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 book and tax basis differences for CHPN investments, 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 nine groups on behalf of themselves and a class putatively
composed of all other 501(c)(3) organizations in Georgia seeking, among other
things to invalidate a Georgia statute upon which certain aspects of Cerulean
Companies, Inc.'s formation was based. The complaint names Blue Cross and Blue
Shield of Georgia, Inc., Cerulean Companies, Inc. and the Commissioner of
Insurance of the State of Georgia as defendants. An additional, similar request
for declaratory ruling was filed with the Georgia Insurance Department on
September 3, 1997.
The plaintiffs' claims relate to the conversion of BCBSGA from a nonprofit
entity to a for-profit entity which occurred as part of a Plan of Conversion
submitted to a public hearing November 21, 1995, and approved by the Georgia
Commissioner of Insurance in an order dated December 27, 1995. The complaint
seeks to have the fair market value of the assets of BCBSGA as of December 27,
1995, including but not limited to the surplus, plus interest from December 27,
1995, placed in a public trust for the use and benefit of a class of nonprofit
charitable organizations. On October 2, 1997, the Georgia Insurance Department
denied the plaintiffs request for declaratory ruling, which decision the
plaintiffs have appealed. On October 13, 1997, the Company and BCBSGA filed a
motion to dismiss the Lawsuit. Oral argument was held on January 12, 1998, and
the motion remains pending before the court.
The Company believes that the plaintiffs' claims are without substantive merit
and intends to vigorously defend the lawsuit.
7
<PAGE> 8
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 its subsidiaries, and for
other lawful purposes.
RESULTS OF OPERATIONS
Three Months Ended March 31, 1998 Compared to Three Months Ended March 31, 1997
Premium revenues increased 15% to $416.6 million for the three months ended
March 31, 1998 from $362.6 million for the three months ended March 31, 1997.
Premium revenues for indemnity and PPO products increased $7.5 million to $275.9
million for the three months ended March 31, 1998 while enrollment for these
products remained flat. HMO and POS premiums increased $45.7 million to $136.8
million for the three months ended March 31, 1998 primarily as a result of a
39% 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 395,000 members at March
31, 1998 from 284,000 members at March 31, 1997. HMO and POS products
accounted for 33% of total premiums at March 31, 1998, compared to 25% of
total premiums at March 31, 1997.
Realized gains on the sale of marketable securities of $3.0 million for the
three months ended March 31, 1998 were $1.1 million higher than gains realized
for the three months ended March 31, 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 benefits loss ratio (benefits expense as a percentage of premium
revenues) decreased to 88.7% for the three months ended March 31, 1998 from
89.3% for the three months ended March 31, 1997. This was primarily the result
of a decrease in the loss ratio for HMO and POS products to 85.4% for the first
quarter of 1998 from 86.2% for the first quarter of 1997 as the Company
recognized the benefit of rate increases implemented in the 1998 period and, to
a lesser extent, medical cost improvement actions.
Operating expenses increased 20% to $50.0 million for the first quarter of 1998
from $41.7 million for the first quarter of 1997, principally due to growth in
the Company's infrastructure necessary to support product development,
information technology development costs, Year 2000 renovation costs and the
increased HMO and POS membership base. As a result, the operating expense ratio
(operating expenses as a percentage of premium revenues) increased to 12.0% for
the three months ended March 31, 1998, from 11.5% for the three months ended
March 31, 1997.
The Company's effective tax rate for three months ended March 31, 1998 was 27%.
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 book and tax basis differences for CHPN investments, state
income taxes and other permanent book to tax differences, including
non-deductible expenses. The effective income tax rate of 16% for the three
months ended March 31, 1997 was principally due to a non-recurring benefit
realized in the 1997 period for certain long-lived tax assets for which
deductions will occur in the future.
8
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As a result of the foregoing factors, net income decreased to $2.3 million for
the three months ended March 31, 1998 from $3.3 million for the three months
ended March 31, 1997.
LIQUIDITY AND CAPITAL RESOURCES
Three Months Ended March 31, 1998 Compared to Three Months Ended March 31, 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. Over $252.0 million of the Company's
investment portfolio 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 $ 17.0 million for the
three months ended March 31, 1998 compared to net cash provided by operating
activities of $0.8 million for the same period in 1997. 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.
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) additional
borrowings and (iv) potential debt or equity offerings.
COMMITMENTS AND CONTINGENCIES
See the description under the same caption in Note 5 to the Notes to the
Consolidated Financial Statements, which description is incorporated herein by
reference.
YEAR 2000 COMPUTER SOFTWARE MODIFICATION COSTS
All companies that operate on mature computer software programs face the
difficult task of how to reprogram or replace their existing systems, which have
protocols that address dates in terms of the 20th century (19xx) only. The
Company has analyzed its systems and has formulated an action plan to either
modify or replace its existing programs. The 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 $12
million over 1997 and 1998 and will be funded through operating cash flows and
capital raised in the February 1996 private placement. 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 is 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.
9
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PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Note 5 to the Consolidated Financial Statements in Part I, Item 1 regarding the
lawsuit filed on September 3, 1997 in the Superior Court of Fulton County by
nine groups on behalf of themselves and a class putatively composed of all other
501(c)(3) organizations in Georgia is incorporated herein by reference.
ITEM 2. CHANGES IN SECURITIES
None
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
ITEM 5. OTHER INFORMATION
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
<TABLE>
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EXHIBIT
NUMBER DESCRIPTION
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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>
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(1) This exhibit to Form S-1, Registration No. 333-2796, filed on March 27, 1996
and subsequent amendments is incorporated herein by reference.
10
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<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
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10.1 Executive Compensation Plans and Arrangements
(a) First Amendment, effective January 1, 1998, to the Employment
Agreement between Blue Cross and Blue Shield of Georgia, Inc.,
Cerulean Companies, Inc. and Richard D. Shirk, dated January 1,
1997.*
(b) First Amendment, effective January 1, 1998, to the Agreement for
Supplemental Executive Retirement Benefits between Blue Cross
and Blue Shield of Georgia, Inc. and Richard D. Shirk, dated
December 1, 1996.*
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 March 31, 1998.
- ---------------
*This exhibit is filed herewith.
11
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
CERULEAN COMPANIES, INC.
Registrant
Date: May 13, 1998 By: /s/ Richard D. Shirk
-------------------------------
Richard D. Shirk, President and
Chief Executive Officer
Date: May 13, 1998 By: /s/ John A. Harris
-------------------------------
John A. Harris, Treasurer
12
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EXHIBIT 10.1(a)
FIRST AMENDMENT TO THE
EMPLOYMENT AGREEMENT
BETWEEN BLUE CROSS AND BLUE SHIELD OF GEORGIA, INC.,
CERULEAN COMPANIES, INC. AND RICHARD D. SHIRK
This First Amendment is made to that certain Employment Agreement
entered into between Blue Cross and Blue Shield of Georgia, Inc., the Cerulean
Companies, Inc. (collectively, the "Employer") and Richard D. Shirk (the
"Employee"), dated January 1, 1997 (the "Employment Agreement").
W I T N E S S E T H:
WHEREAS, the Employer and the Executive desire to amend the Employment
Agreement to make certain technical corrections to more closely approximate the
intent of the parties at the time of execution; and
WHEREAS, Section 19 of the Employment Agreement provides that the
Employer and the Executive may amend the Employment Agreement at any time by a
written instrument signed by both parties; and
WHEREAS, the Board of Directors of the Employer has adopted a
resolution authorizing this amendment of the Employment Agreement;
NOW, THEREFORE, the Employment Agreement hereby is amended as follows:
1.
Section 10(b) of the Employment Agreement is amended by deleting that
section in its entirety and by substituting the following in lieu thereof:
"(b) Employer shall provide Employee with a nonqualified
supplemental executive retirement pension (SERP) pursuant to the terms
of that certain Agreement for Supplemental Executive Retirement
Benefits, dated December 1, 1996, between Blue Cross and Blue Shield of
Georgia, Inc. and Richard D. Shirk, a copy of which is attached hereto,
as the same may be amended by the parties from time to time."
2.
A new Section 10(e) is hereby added to the Employment Agreement, to
read as follows:
"(e) Excise Tax Benefits Following a Change in Control.
(1) Gross-Up Payment. If all or a portion of any payments under
this Agreement, or under any other agreement with or plan of Employer
qualifies as "excess parachute payments" under Section 280G of the
Internal Revenue Code of l986, as amended (the "Code"), and are thereby
subject to the excise tax described in Code Section 4999, Employer
shall provide Employee an additional "Gross-Up Payment." This Gross-Up
Payment shall be a cash payment that is equal to Employee's excise tax
liability under
<PAGE> 2
Code Section 4999, plus an additional amount to cover Employee's state
and federal income taxes on the additional payment.
If any such excess parachute payments become payable to
Employee following Employer's termination of Employee for any reason
other than For Cause, or following Employee's voluntary termination for
Good Reason, the Gross-Up Payment described in this Paragraph 10(e)(1)
shall be paid as soon as practicable following such termination from
employment, and in no event later than thirty (30) days following such
termination. If any such excess parachute payments become payable to
Employee while Employee continues in active employment with Employer,
such payment shall be made as soon as practicable following the Change
in Control, but not later than thirty (30) days following such Change
in Control.
The independent accounting firm used by Employer at the time
of a Change in Control (the "Accounting Firm") shall determine whether
Executive is entitled to a Gross-Up Payment under this Paragraph
10(e)(1), and the amount of any such payment. The Accounting Firm shall
provide detailed supporting calculations to Employer and Employee
within fifteen (15) business days of receiving notice from Employer or
Employee that there has been a Change in Control. If the Accounting
Firm is serving as accountant or auditor for the individual, entity, or
group effecting the Change in Control, Employee may appoint another
nationally recognized accounting firm to make the determinations
required under this Paragraph. Employer shall pay all fees and expenses
of the Accounting Firm.
(2) Subsequent Recalculation. If the Internal Revenue Service
subsequently adjusts the excise tax computation described above,
Employer shall reimburse Employee for the full amount necessary to make
Employee whole on an after-tax basis, including the value of any
underpaid excise tax, and any related interest and/or penalties due to
the Internal Revenue Service."
3.
The amendments made to the Employment Agreement by this First Amendment
shall be effective as of January 1, 1998.
4.
Except as specifically set forth herein, the terms of the Employment
Agreement shall remain in full force and effect.
IN WITNESS WHEREOF, the Employer and the Executive have executed this
First Amendment to the Employment Agreement on the 7th day of March, 1998.
EMPLOYER:
BLUE CROSS AND BLUE SHIELD OF GEORGIA, INC.
By: /s/ James L. LaBoon, Jr.
----------------------------------------------
Title: Chairman
----------------------------------------------
<PAGE> 3
Attest:
/s/ Mitchell D. Johnson
- ---------------------------
[CORPORATE SEAL]
CERULEAN COMPANIES, INC.
By: /s/ James L. LaBoon, Jr.
-------------------------------------
Title: Chairman
-------------------------------------
Attest:
/s/ Hugh J. Stedman
- ---------------------------
[CORPORATE SEAL]
EXECUTIVE:
/s/ Richard D. Shirk
--------------------------------------------
RICHARD D. SHIRK
<PAGE> 1
EXHIBIT 10.1(b)
FIRST AMENDMENT TO THE
AGREEMENT FOR SUPPLEMENTAL EXECUTIVE RETIREMENT BENEFITS
BETWEEN BLUE CROSS AND BLUE SHIELD OF GEORGIA, INC. AND
RICHARD D. SHIRK
This First Amendment is made to that certain Agreement for Supplemental
Executive Retirement Benefits, entered into between Blue Cross and Blue Shield
of Georgia, Inc. (the "Company") and Richard D. Shirk (the "Executive"), dated
December 1, 1996 (the "SERP").
W I T N E S S E T H:
WHEREAS, the Company and the Executive desire to amend the SERP to make
certain technical corrections to more closely approximate the intent of the
parties at the time of execution; and
WHEREAS, Section 10(f) of the SERP provides that the Company and the
Executive may amend the SERP at any time by a written instrument signed by both
parties; and
WHEREAS, the Board of Directors of the Company has adopted a resolution
authorizing the amendment of the SERP;
NOW, THEREFORE, the SERP hereby is amended as follows:
1.
Effective as of January 1, 1998, Section 3(d)(2) of the SERP is amended
by deleting that section in its entirety and by substituting the following in
lieu thereof:
"3(d)(2) FINAL AVERAGE EARNINGS. Executive's Final Average Earnings
shall equal one-twelfth of Executive's "Final Average Earnings" as
determined under the Qualified Plan, with the following modifications:
(i) Final Average Earnings shall be determined without regard to
the limitation on compensation that is described in Section 401(a)(17)
of the Internal Revenue Code of 1986, as amended;
(ii) Cash incentive payments will be included in the calculation of
Final Average Earnings, regardless of whether Executive receives these
payments directly in cash or defers them under the terms of a
nonqualified deferred compensation plan; and
(iii) If Executive's market target rate for any given calendar year
exceeds his base salary rate, the market target rate shall be used
instead of the base salary rate in the calculation of Final Average
Earnings.
For purposes of this Section, Executive's market target rate for each
year shall equal the 50th percentile market rate as determined and
approved by the Company's Compensation Committee annually."
<PAGE> 2
2.
Except as specifically set forth herein, the terms of the SERP shall
remain in full force and effect.
IN WITNESS WHEREOF, the Company and the Executive have executed this
First Amendment to the SERP on the 7th day of March, 1998.
COMPANY:
BLUE CROSS AND BLUE SHIELD OF GEORGIA, INC.
By: /s/ James L. LaBoon, Jr.
-------------------------------------
Title: Chairman
-------------------------------------
Attest:
/s/ Mitchelle D. Johnson
- ----------------------------
[CORPORATE SEAL]
EXECUTIVE:
/s/ Richard D. Shirk
--------------------------------------------
RICHARD D. SHIRK
<TABLE> <S> <C>
<ARTICLE> 7
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS OF CERULEAN COMPANIES, INC. ON FORM 10-Q FOR THE QUARTER
ENDED MARCH 31, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> MAR-31-1998
<EXCHANGE-RATE> 1
<DEBT-HELD-FOR-SALE> 189,181,534
<DEBT-CARRYING-VALUE> 0
<DEBT-MARKET-VALUE> 0
<EQUITIES> 79,272,040
<MORTGAGE> 0
<REAL-ESTATE> 0
<TOTAL-INVEST> 272,773,206
<CASH> 60,922,915
<RECOVER-REINSURE> 0
<DEFERRED-ACQUISITION> 0
<TOTAL-ASSETS> 578,259,939
<POLICY-LOSSES> 220,168,567
<UNEARNED-PREMIUMS> 8,722,650
<POLICY-OTHER> 25,553,200
<POLICY-HOLDER-FUNDS> 0
<NOTES-PAYABLE> 0
46,645,042
0
<COMMON> 3,516
<OTHER-SE> 200,472,643
<TOTAL-LIABILITY-AND-EQUITY> 578,259,939
416,571,444
<INVESTMENT-INCOME> 3,798,597
<INVESTMENT-GAINS> 3,001,846
<OTHER-INCOME> 0
<BENEFITS> 369,633,478
<UNDERWRITING-AMORTIZATION> 49,996,974
<UNDERWRITING-OTHER> 0
<INCOME-PRETAX> 3,805,185
<INCOME-TAX> 1,033,000
<INCOME-CONTINUING> 2,273,687
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,273,687
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
<RESERVE-OPEN> 0
<PROVISION-CURRENT> 0
<PROVISION-PRIOR> 0
<PAYMENTS-CURRENT> 0
<PAYMENTS-PRIOR> 0
<RESERVE-CLOSE> 0
<CUMULATIVE-DEFICIENCY> 0
</TABLE>
