CERULEAN COMPANIES INC, 10-K405, 1998-03-30

CERULEAN COMPANIES INC
10-K405, 1998-03-30
HEALTH SERVICES

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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------------

FORM 10-K
FOR ANNUAL AND TRANSITION REPORTS PURSUANT TO SECTIONS 13 OR 15 OF THE
SECURITIES EXCHANGE ACT OF 1934

<TABLE>
<C> <S>
(MARK ONE)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM ____________ TO ____________
</TABLE>

COMMISSION FILE NUMBER: 333-2796

CERULEAN COMPANIES, INC.
(Exact name of Registrant as specified in its charter)

<TABLE>
<S> <C>
GEORGIA 58-2217138
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
3350 PEACHTREE ROAD, N.E., 30326
ATLANTA, GEORGIA (Zip Code)
(Address of principal executive offices)
</TABLE>

Registrant's telephone number, including area code: (404) 842-8000

Securities registered pursuant to Section 12(b) of the Act: NONE

Securities registered pursuant to Section 12(g) of the Act:
CLASS A CONVERTIBLE COMMON STOCK, NO PAR VALUE

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. [X] Yes [ ] No

Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]

The aggregate market value of the Class A Convertible Common Stock and
Class B Convertible Preferred Stock (voting stock) held by non-affiliates of the
registrant as of March 27, 1998: The Class A Convertible Common Stock and the
Class B Convertible Preferred Stock are not traded.

The number of shares of the registrant's Class A Convertible Common Stock,
no par value, $0.01 stated value, outstanding as of February 28, 1998 was
351,550.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the registrant's Form S-1, Registration No. 333-2796, filed on
March 27, 1996 and subsequent amendments are incorporated by reference into Part
II -- Items 6 and 7 of this Form 10-K.

Exhibits to Forms S-1, Registration No. 333-2796, filed on March 27, 1996
and subsequent amendments are incorporated by reference into Part IV -- Item 14
of this Form 10-K.
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CERULEAN COMPANIES, INC.

TABLE OF CONTENTS
FOR THE YEAR ENDED DECEMBER 31, 1997

<TABLE>
<CAPTION>
PAGE
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<S> <C> <C>
PART I
Item 1. BUSINESS.................................................... 1
Item 2. PROPERTIES.................................................. 13
Item 3. LEGAL PROCEEDINGS........................................... 13
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS......... 13
PART II
Item 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS....................................... 14
Item 6. SELECTED FINANCIAL DATA..................................... 14
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS................................. 16
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA................. 20
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE.................................. 20
PART III
Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.......... 21
Item 11. EXECUTIVE COMPENSATION...................................... 28
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT................................................ 32
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.............. 33
PART IV
Item 14. EXHIBITS, FINANCIAL STATEMENTS, FINANCIAL STATEMENT
SCHEDULES AND REPORTS ON FORM 8-K......................... 34
Signatures............................................................ 37
</TABLE>

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PART I

ITEM 1. BUSINESS

THE COMPANY

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. BCBSGA was established in 1937 and through a series of
business combinations and subsidiary operations had, by 1985, the largest health
insurance company market share in Georgia. During 1997, BCBSGA made a
distribution of its investments in certain subsidiaries, including HMO Georgia,
Inc. ("HMO-Ga") and Group Benefits of Georgia, Inc. ("GBG") to the holding
company. As of December 31, 1997, BCBSGA and HMO-Ga had 762,000 insurance and
administrative service contracts covering or administering benefits for
approximately 1.6 million members. This represents more than 21% of the total
Georgia population and includes approximately 22% of the over 3.0 million
residents of the metropolitan Atlanta area.

THE CONVERSION

On February 2, 1996, the Company acquired all of the outstanding capital
stock of BCBSGA, following BCBSGA's conversion from a not-for-profit corporation
to a for-profit corporation, pursuant to a Plan of Conversion approved by the
Georgia Commissioner of Insurance (the "Commissioner") on December 27, 1995 (the
"Conversion"). In connection with the Conversion, the Company issued 49,900
shares of Class B Convertible Preferred Stock (the "Preferred Stock") to raise
$49.9 million in capital. After deducting offering costs, the net proceeds to
the Company were $46.6 million.

As a part of the Conversion, the Company agreed to offer to each of
BCBSGA's eligible subscribers five shares of its Class A Convertible Common
Stock, no par value (the "Class A Stock"), at no cost. Effective May 14, 1996,
the Company's registration under the Securities Act of 1933 of the public
offering of its Class A Stock with the Securities and Exchange Commission (the
"Commission") became effective. The registration of the Class A Stock under
Section 12(g) of the Securities Exchange Act of 1934 became effective on June
30, 1997. As of February 28, 1998, a total of 70,309 eligible subscribers held
351,550 shares of Class A Stock. Currently, the Class A Stock is not publicly
traded.

INDUSTRY OVERVIEW

According to the Health Care Financing Administration, health care spending
in the U.S. rose from $699.5 billion in 1990 to $1,035.1 billion in 1996, an
average annual increase of approximately 6.8%. This rate was considerably more
than the average annual increase of the Consumer Price Index ("CPI") of
approximately 3.1% for the same period. Health care spending accounted for 13.6%
of the Gross Domestic Product ("GDP") in 1996, versus approximately 12% in 1990.
On an absolute dollar basis, as well as on a percentage of GDP basis, the United
States spends more on health care than any other country in the world. Several
factors have contributed to the dramatic increase in healthcare expenditures,
including the aging of the population, increased use of high-technology
treatments and tests, the rising cost of malpractice insurance and higher
operating costs for hospitals, physicians and other health care providers. Prior
to the development of managed health care, most health insurers offered health
care benefit plans known as indemnity, or fee-for-service plans, which do not
typically provide incentives to use particular providers for the provision of
discounted care or include other cost-containment features.

Due to the escalating cost of health care services, customers (both groups
and individuals) began to demand lower cost alternatives to traditional
indemnity insurance plans. Managed health care plans were developed to attempt
to provide access to appropriate health care services in an affordable manner.
Typically, health maintenance organization (an "HMO") and preferred provider
organization (a "PPO") plans develop networks of health care providers to
deliver health care at favorable rates while participating in quality
initiatives together with utilization management and other cost control
measures. An important factor in controlling costs is the number of members
(i.e., enrolled health care consumers) that a managed care benefit

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plan can direct to providers. Under many managed care plans, providers are
reimbursed based on either capitation (a fixed monthly fee per member regardless
of frequency of use, generally used by HMOs for physicians and ancillary medical
services such as laboratory services) or a negotiated per diem (daily rates,
generally used for hospitals) or limited fee schedules (generally used for
specialty physicians). Managed health care plans also feature a variety of
methods of health care utilization management to monitor the type, quantity and
setting of services obtained. Utilization management programs are designed to
provide incentives to encourage providers to deliver disciplined and
cost-effective care. According to a compilation of industry sources, in 1996 the
total number of HMO members nationwide grew by an estimated 8.4 million people,
to 67.5 million. Since 1990, HMO enrollment has increased by 85%. In 1996, the
total number of PPO members grew by an estimated 6 million, to 97.8 million and,
since 1990, PPO enrollment has increased by 154%.

Different types of health care utilization management and cost control
methods differentiate managed health care plans. HMOs generally require members
to use network providers exclusively, except in emergency cases, and to consult
with a primary care physician prior to obtaining treatment from specialists.
HMOs generally include capitated payment arrangements with network providers and
charge members only modest copayments in addition to regular monthly premiums. A
point of service network plan (a "POS") provides members with an HMO service
option for network coverage and also permits the member, at the time medical
service is required, to choose a provider that is not a member of the HMO
network at additional cost. POS plans generally require the use of a primary
care physician within the network to coordinate health care services for the
members while PPO plans often do not. PPO and POS plans also provide members
with the option of using non-network providers under indemnity-type coverage
terms which require higher coinsurance payments by members and higher
deductibles. These member payments are generally limited to an out-of-pocket
maximum. Coinsurance and higher deductible requirements for non-network care in
POS and PPO plans are designed to encourage greater utilization of the network
care by members, thereby reducing costs. See "BUSINESS -- Business Lines and
Products."

GENERAL

The Company, through its subsidiaries, has the largest health insurance
company market share in Georgia, with 762,000 insurance and administrative
service contracts covering or administering benefits for approximately 1.6
million members as of December 31, 1997 (including HMO, PPO and POS members).
This represents over 21% of the total Georgia population. BCBSGA has one of the
State's largest PPO memberships, serving approximately 360,000 members as of
December 31, 1997. HMO-Ga, a health maintenance organization which also offers
POS products, serves an additional 336,000 members. Greater Georgia Life
Insurance Company, Inc. ("GGL"), a subsidiary of BCBSGA and GBG, a subsidiary of
the Company, are also part of the consolidated group. GGL offers group life,
accident and disability insurance products that are sold in conjunction with the
Company's health products. GGL has an "A-" rating from A.M. Best and is licensed
to offer its products in Alabama, Georgia, Mississippi, North Carolina, South
Carolina and Tennessee. GBG is a general insurance agency that principally sells
life, accidental death and dismemberment and disability coverage to complement
health insurance products. Additionally, GBG recently developed a managed care
workers compensation service to provide medical management services to
customers.

The Company's core business products are its traditional indemnity products
and its HMO, POS and PPO products. The Company's current business strategy
centers around the belief that development of managed care products, with a
strong HMO at the core, represents the most prudent response to current
marketplace demands. In areas where there is no managed care, the Company's
strategy is to solidify market presence through PPO network expansion, favorable
changes in provider reimbursement and benefit design alterations that meet
employers' needs.

The Company offers its traditional indemnity products and its HMO, POS and
PPO products exclusively within the boundaries of the State of Georgia. The
Company and certain of its subsidiaries are licensed by the Blue Cross Blue
Shield Association ("BCBSA") to refer to themselves under the name of Blue Cross
and Blue Shield only in the State of Georgia. While there are only limited BCBSA
restrictions on the conduct of

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business by the Company or its subsidiaries outside the State of Georgia under a
different name, none of the Company's revenue is currently associated with
non-Georgia business.

BCBSGA and HMO-Ga have a comprehensive quality management program which
focuses on assessment, management and methodology for monitoring inpatient and
ancillary services. The quality management program monitors, collects data on
and evaluates inpatient and outpatient medical care, inclusive of preventive and
mental health services, as well as the level of customer service provided to its
members by physicians and other medical providers. The Company has a disciplined
credentialing function which monitors the recruitment and retention of its
provider panels throughout the state. BCBSGA's PPO was the first preferred
provider organization in Georgia to receive full accreditation from The
Utilization Review Accreditation Commission. Additionally, in 1997, HMO-Ga was
awarded a full, three year accreditation by the National Committee for Quality
Assurance ("NCQA"). The NCQA is a nationwide organization which evaluates
quality assurance programs for HMOs.

The Georgia marketplace is extremely diverse, ranging from the major
metropolitan area of Atlanta, with a 1997 population in excess of 3.0 million,
to several mid-sized cities, including Augusta, Columbus, Macon and Savannah, to
smaller cities, including Athens, Cartersville, Gainesville and Rome, to very
rural areas. The southern half of the State of Georgia is primarily rural and
dominated by an agrarian economy.

The metropolitan Atlanta area has an HMO market penetration of
approximately 40%; however, Georgia as a whole currently has penetration of 16%.
Based on industry sources, the five states with the highest HMO penetration in
the country have market shares ranging from 39% to 47%.

At present, HMO-Ga is licensed and operational as an HMO in eight markets
in Georgia representing more than 5.0 million residents, including Atlanta.
HMO-Ga's HMO and POS products are serviced through networks of primary care
physicians, specialist physicians and hospitals. Beginning in January 1995,
HMO-Ga also began supporting its products through Community Health Partnership
Networks ("CHPNs").

ORGANIZATIONAL STRUCTURE

The Company's primary operating subsidiary, BCBSGA, is organized in a
Business Unit, Support Unit and Governance Unit structure. Business Units have
responsibility to sell products, at appropriate prices, and to manage the
effective delivery of product benefits at acceptable levels. Support Units
manage the delivery of administrative services to individual or multiple
Business Units within defined cost parameters, while meeting customer service
expectations. The Governance Units establish policy, provide direction for
BCBSGA and monitor compliance.

Within the Individual Business Unit, health insurance products are sold to
individuals (or individual families) under age 65, or to persons over age 65 who
are Medicare eligible. Local Market Business Units offer a full line of health
insurance products for employer groups of less than 500 employees. The
Major/National Business Unit offers a full line of health products to employer
groups with 500 or more covered employees and the National Par Business Unit
supports participating plan accounts of Georgia employees of national employers
sold through other Blue Cross and Blue Shield plans.

STRATEGIC INITIATIVES

CHPNs

As a result of concern with rising health care costs and changing trends in
the health care industry, the Company determined to develop its own integrated
delivery systems for managed health care products. The Company's CHPNs are the
cornerstone of this strategy. The Company believes CHPNs will facilitate the
introduction of its HMO and POS products into new markets and address group
customer demand for lower cost health care while providing more predictable
revenue. CHPNs are locally based equity ventures between the Company and a local
physician group and/or hospital, which owns the remaining equity interests in
the CHPN. The Company owns at least 51% of the equity interests in each CHPN it
has organized and the local physician group and/or hospital owns the remaining
equity interest. Clinical services are provided by the physician or hospital
partners as well as other providers with which the CHPN maintains contracts and

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BCBSGA provides sales, management and administrative services, including
information systems and data management services through service contracts with
the CHPNs. Premium and fee revenues are received from subscribers by HMO-Ga
which retains a flat percentage for administration and as a contribution to
surplus. After deduction for premium taxes, the remaining premium revenue is
used for payment of medical expenses and for contribution to the CHPN's retained
earnings.

The Company has taken several actions to support the CHPNs, including (i)
providing initial and additional capital, (ii) hiring experienced managers to
oversee sales, medical network management and financial performance in the local
markets, (iii) providing dedicated claims processing and membership services,
(iv) developing a strategic information systems plan that addresses the
information requirements, applications needs and systems architecture necessary
to support the CHPNs and (v) enhancing medical management activities and
continued development of NCQA processes and Health Plan Employer Data and
Information Set ("HEDIS") reporting. Atlanta Healthcare Partners, Inc. (which
operates in the Atlanta metropolitan area and surrounding counties) was the
first CHPN to become operational. At the end of 1997 an additional four CHPNs,
jointly owned by the Company and health care providers, have been formed and
capitalized, including CHPNs in Augusta, Athens, Macon and Savannah.

Information Technology

In 1995 the Company completed a Strategic Information Systems Plan ("SISP")
which addresses specific information systems and network requirements for the
future. In 1996 the Company began implementing the SISP and expects to complete
its implementation in the 1998-1999 time frame. The SISP is comprehensive and
provides an assessment of the extent and cost of its development and
implementation over a three to four year period. It identifies the capital,
equipment, software and intellectual property necessary to employ and support
traditional kinds of systems effectively in an evolving managed care and
customer service environment. It also details new technologies that will support
and enable the Company to enhance its strategic business initiatives, such as
CHPNs.

The Company believes that the strategies outlined in the SISP will result
in more cohesive and efficiently interrelated uses of information technology,
both through systems targeted to specific uses and through the use of networks
to deploy solutions Company-wide.

Currently, the Company uses a mixture of systems and processing platforms
to meet its requirements. As provided in the SISP, the principal system is GTE's
Q/Care product, as modified for the Company. The primary modules have been
completed and installed. The Company is currently migrating both data and
applications from other systems, principally a claims processing system which
was internally developed, onto the Q/Care system. The predecessor systems will
then be retired. When complete, the Company hopes to have established a
technical infrastructure providing highly available, reliable and responsive
business and clinical systems that position the Company to excel in the dynamic
health care marketplace.

The Company also performs paperless claim clearinghouse/electronic data
interchange activities. The recent addition of on-line eligibility, claims
status and preauthorization/referral processing options to providers, as well as
on-line access by groups to their eligibility and claims information, has
strengthened the Company's position for health care electronic commerce.

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
corrective action necessary 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
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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 on the
Company's financial position and results of operations.

BUSINESS LINES AND PRODUCTS

Overview

The Company is a full service provider of health benefit programs in the
Georgia marketplace. The Company markets life, health and disability insurance
products to employer groups and individuals. The overall product portfolio
available includes standard indemnity insurance, PPO, HMO and POS health
benefits plans, life insurance products and ancillary products including dental
insurance, a vision affinity product, vision insurance and specialty products
for mental health and pharmacy benefits.

Various funding arrangements are available for each health benefit product.
These arrangements range from fully insured to administrative services only
("ASO/Cost Plus"). For example, under a fully insured indemnity arrangement,
BCBSGA assumes the full risk (subject to deductibles and other adjustments) with
direct payment by BCBSGA, generally to the provider. In an ASO/Cost Plus
indemnity arrangement, BCBSGA administers the health insurance program for its
customer and is compensated according to the terms of the contract for its
services by a fee in excess of those amounts that are disbursed to providers.
The formula for compensation in ASO/Cost Plus arrangements varies from contract
to contract, but conceptually in such arrangements BCBSGA receives reimbursement
for benefit payments processed and related administrative fees. ASO/Cost Plus
funding is generally utilized by employers with at least 500 covered enrollees.
Some employers may choose individual member or aggregate reinsurance to protect
against catastrophic losses.

Shown below is certain information on each of the Company's major product
lines.

PERFORMANCE BY PRODUCT

<TABLE>
<CAPTION>
YEAR ENDED
AT DECEMBER 31, 1997 DECEMBER 31, 1997
---------------------- -----------------------
REVENUES
PRODUCT CONTRACTS MEMBERS(2) ($000) LOSS RATIO
- ------- --------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Indemnity........................................... 204,463 381,112 $ 550,170 91.2%
PPO................................................. 163,535 359,777 527,822 92.3
HMO................................................. 116,608 243,989 310,894 88.7
POS................................................. 43,956 92,018 110,330 88.8
Other............................................... -- -- 14,860 52.6
Other Enrollment(1)................................. 233,243 513,134 -- --
------- --------- ---------- ----
All Products........................................ 761,805 1,590,030 $1,514,076 90.5%
======= ========= ========== ====
</TABLE>

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(1) Includes Administrative Services Only (ASO), Third Party Administrator (TPA)
and National Service Only Services.
(2) Actuals for HMO and POS. Estimates for other products.

HMO and POS

The Company's HMO product has been offered by HMO-Ga since 1986. From 1986
through 1993, the product did not experience substantial growth. However, in
1993 new management and an increased emphasis on sales of managed care products
dramatically increased the market acceptance of HMO-Ga's products. HMO-Ga's HMO
and POS products are now the Company's fastest growing products, due, in part,
to the Company's CHPN initiatives. At present, HMO-Ga is licensed and
operational as an HMO in eight separate markets in Georgia, including Athens,
Atlanta, Augusta, Columbus, Gainesville, Macon, Rome and Savannah, representing
more than 7.4 million residents. HMO-Ga's HMO and POS products are offered to
group subscribers as "Blue Choice Healthcare Plan," which is a prepaid coverage
and preventive care product and as

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"Blue Choice Option," which is a point-of-service product that allows members to
choose between HMO-Ga network providers and out-of-network providers. Premiums
are collected on a monthly basis from employers. Some employers allow members to
elect, at annual enrollment, whether they wish to be in the "Blue Choice
Healthcare Plan" or the "Blue Choice Option."

Under the Company's HMO product, HMO members select a primary care
physician who provides basic medical care for the member pursuant to a contract
with HMO-Ga. The primary care physician coordinates all of the medical and
health care for each HMO member, including physical examinations, specialist
care and hospitalization. Each primary care provider is credentialed and
periodically re-credentialed by the Company to maintain physician network
standards. The primary care physician coordinates with the member and the
Company to promote the delivery of appropriate care in a cost-effective manner.
HMO benefit plans require varying copayments for health care services. Coverage
for non-emergency hospitalization services requires prior approval by the
member's primary care physician and must be provided in network facilities,
except for certain specified services and in cases of medical emergency. HMO
benefit plans also provide coverage for preventive treatment and wellness
programs. Benefits such as dental services, pharmacy services and vision care
may be purchased as options to the basic benefit plan with a variety of
copayment levels.

Blue Choice Option members are required to use a primary care physician for
basic medical services and pre-certification of specialist services whether
performed by network or non-network providers. Network hospitalization is fully
covered. Non-network services and services obtained without primary care
physician approval are subject to deductibles and significant coinsurance
requirements.

BlueChoice Platinum

HMO-Ga's application to offer a Medicare risk HMO product in nine counties
within the Atlanta metropolitan area was approved by the Health Care Financing
Administration in December 1996. This product, "BlueChoice Platinum," became
operational in April, 1997 and had 3,900 members as of December 31, 1997. The
individual BlueChoice Platinum product has no member premium and includes all
traditional Medicare benefits plus preventive services, immunizations, annual
vision screening, annual hearing screening and limited outpatient prescription
coverage. The core benefits of the group BlueChoice Platinum benefits are those
of the BlueChoice Platinum individual product with additional benefits defined
by each employer.

PPO

The Company's PPO was first introduced in Georgia in the mid-1980's and
began being offered as "Blue Choice PPO" in 1995. The Company's PPO is one of
the three largest statewide provider networks in Georgia, serving approximately
360,000 members as of December 31, 1997.

The Company's PPO products are intended to deliver health care benefits at
lower premium costs than traditional indemnity products due to benefit design,
favorable pricing arrangements with network providers and utilization management
and other cost control arrangements with network providers. Typically, 80% to
90% of the cost of covered health care services received by a subscriber through
the PPO network is covered by the Company's PPO benefit plans. Non-network
services are generally covered at 60% to 70%, subject to higher deductible and
coinsurance requirements. Currently, the Atlanta, Athens, Augusta, Columbus and
Savannah PPO networks are utilizing a fee schedule for providers rather than the
traditional discount from the providers customary charge. The Company
anticipates that its other PPO networks will also convert to utilizing a fee
schedule rather than a traditional discount from charge, which will further
enhance the cost effectiveness of this product.

Full coverage for covered services is provided after a member has paid a
specified annual out-of-pocket maximum (coinsurance). The Company offers a broad
range of PPO benefit plans which enables the employer to choose the mix of
benefits that is suited to its employees' needs. Higher deductibles, coinsurance
and out-of-pocket maximums and other financial incentives encourage subscribers
to use network provider services. The Company's PPO also offers preventive
health benefit coverage, such as health assessments,

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immunizations and prenatal visits. Premiums for the Company's PPO product are
collected monthly from employers.

Indemnity

The Company's traditional indemnity product line includes benefit options
for both the individual and group markets through products that reimburse for
covered health care services on a fee-for-service basis. Premiums for this
product are set annually and collected on a monthly basis. Traditional indemnity
products may utilize the statewide networks that the Company has established for
physicians, hospitals and pharmacies. The majority of new business opportunities
for traditional indemnity group business are in the rural markets where, the
Company believes, the flexibility of its indemnity products, in terms of
provider access, is an advantage.

The Company's indemnity products are offered to group subscribers as "New
CHIP," the traditional indemnity insurance product with certain managed care
features. Indemnity products are offered to individual subscribers as (i) "Flex
Plus," a comprehensive major medical product for people under age 65, that
provides a full range of benefits related to hospital, surgical, pharmacy and
other associated medical expenses with varying deductible and coinsurance
options, (ii) "hospital/surgical," a lower cost product than "Flex Plus," which
insures only catastrophic non-routine services associated with a more serious
medical condition related to a surgical procedure or inpatient hospital stay and
which is also offered to people under 65 and (iii) "65 PLUS," a guaranteed issue
plan that acts as a supplement to the federally insured Medicare program.

Life Insurance

GGL offers group life and disability products to employers of all sizes and
is licensed to do business in six states throughout the Southeast although its
revenues are derived from business in the State of Georgia. Term life insurance
is commonly offered with accidental death and dismemberment ("AD&D") for all
groups with less than 100 employees. For larger groups, the life product may be
offered with health insurance. In addition to the standard term life and AD&D
products, GGL also offers a contributory, voluntary life insurance product as
well as a dependent life insurance product. GGL offers a variety of plan designs
and coverage amounts. GGL also offers both short and long term disability
insurance.

Ancillary and Specialty Network Benefits

The Company offers a variety of ancillary and specialty network benefits to
enhance the Company's competitive position and is developing other such
products. Offering an array of ancillary products and specialty networks permits
the Company to capitalize on its name recognition and to appeal to employer
groups that are increasingly seeking a variety of benefit options. Currently,
these ancillary and specialty network benefits are offered in conjunction with
the Company's medical benefit plan designs.

The Company has offered dental insurance since 1982. Dental insurance is
typically offered as a benefit enhancement that may be purchased in conjunction
with group products. A number of major commercial carriers and other entities
are offering managed dental care products, although BCBSGA does not currently
offer such a product.

The Company offers vision, mental health/substance abuse and pharmacy
benefits as part of certain of its medical plan designs. These benefits have not
been designed as stand-alone products and are not sold separately from medical
products.

Workers Compensation Services

The Company recently developed a managed care workers compensation service
to provide medical management services to customers. The managed care
organization is certified in 137 counties in Georgia. The Company believes that
by focusing on its core business of network management, medical review and
provider reimbursement, it will be able to successfully assemble and market
networks and generate revenue through

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access fees to TPAs, self-administered companies and a limited number of full
service insurers as its distribution channel.

MARKETING AND SALES

General

The Company's marketing operations vary depending upon the segment at which
sales efforts are directed; individuals (i.e., direct pay), small employer
groups (defined as groups of two to 99 employees), large employer groups
(defined as groups of 100 or more employees) and major national groups (defined
as groups of 500 or more employees). The Company's marketing efforts are
coordinated by Vice Presidents who serve as local market managers in each of the
established local market regions, as well as by an Assistant Vice-President of
Major/National Accounts and a Director of Individual Sales. Each of these
individuals is supervised by the Executive Vice-President of Market Operations.

From a competitive perspective, the Company's market is segmented generally
by geography, product and customer group size. Significant competition exists in
the Atlanta and Augusta markets for managed care products. In other metropolitan
areas, the majority of competition is generally for indemnity or PPO products,
although new market entrants with managed care capabilities are beginning to
penetrate these areas.

The Company believes that a large percentage of profitable marketing
opportunities exist in the small group market and it has become more active and
competitive in this area. The Company has pioneered cooperative buying programs
as an enhancement to its existing distribution channels. These programs are
developed with a "market sponsor" and offer an exclusive endorsement of the
Company's products and the opportunity for a reduction in sales costs. The
Company believes that these cooperative programs provide enhanced product access
to small group customers. Cooperative programs are currently active in Albany,
Athens, Cartersville, Gainesville and Rome, Georgia.

The Company has also been highly successful in developing Major and
National account business, especially for its HMO and POS products, because of
its unique position regarding statewide capabilities.

Internal Sales and Service Force

The Company employs an internal sales staff of account executives and group
sales representatives to sell and service all of the Company's group product
lines. The sales force works with other members of the distribution channel,
including independent agents and brokers. They also make direct calls on
selected target accounts and work with nationally recognized consulting firms.
Each geographic area has a local market manager and a sales manager directly
responsible for the results of the unit. In addition, a centralized
communications department develops direct mail advertising and promotional
material that targets specific audiences for potential distribution of products.
Service representatives are assigned specific accounts and work directly with
the internal sales force and independent agents and brokers. Service
representatives become the principal administrative contact for employers and
their benefit managers. Their duties include conducting on-site meetings,
providing health data reports and resolving potential service issues.

The Company also maintains an additional fully-commissioned staff of sales
employees who sell the Company's individual indemnity insurance products (other
than the Medicare supplement). The Medicare supplement is sold by a
telemarketing staff.

Independent Insurance Agents and Brokers

The Company's group sales representatives market health insurance and
managed care products through independent agents, brokers and consultants who
are paid commissions from the premiums received by the Company. Brokers who meet
selected production and underwriting criteria are also eligible for a "Preferred
Producer" bonus. These independent agents and brokers are responsible for a
significant portion of the Company's enrollment growth over the past two years.
Any future growth in ensuing calendar years will also be dependent on the
Company's ability to continue productive relationships with these independent
agents and brokers. Independent agents and brokers are not salaried employees of
any insurance company or managed

8
<PAGE> 11

care company and are free to sell multiple products from multiple insurance
firms. Some agents and brokers are career agents of other insurance companies
whom they represent, and for whom they may be required to maintain product
exclusivity for a given type of product but are able to sell group health
insurance and managed care products from a number of carriers, including the
Company. The distribution channel for the majority of sales opportunities in the
Georgia market is dominated by independent agents and brokers, particularly in
rural areas, and most insurance companies utilize them to distribute their
products.

UNDERWRITING

In determining whether to accept groups and to establish appropriate rates
for its plans, the Company uses specific underwriting criteria based on its
accumulated actuarial data, with adjustments for factors such as claims
experience, member mix and risk characteristic differences, to evaluate
anticipated health care costs. The risk selection criteria utilized by the
Company employ generally accepted risk characteristics and a flexible
underwriting formula to generate new business and renewal rates. Rates and the
rating process are monitored monthly with appropriate adjustments made at least
quarterly. New business ratings for all groups are applied through the use of an
automated proposal system, with rates and risk selection criteria being
implemented by field sales personnel. For employer groups with 100 or more
employees, all rates are determined by home office underwriting personnel, who
utilize the same screening of risk characteristics that is conducted for
employer groups of smaller size, but who attempt to blend actual claim
experience (utilizing a flexible credibility formula and underwriting
intervention) in order to establish an appropriate rate based on the Company's
desired competitive position. Rates for groups smaller than 50 are regulated by
Georgia law.

CUSTOMERS

The Company has contracts with certain employer groups that account for a
significant portion of the Company's business. For 1997, two employer groups
accounted for approximately 19% and 10%, respectively, of the Company's total
premium revenues. Additionally, the Company processes and pays claims as fiscal
intermediary for the Medicare Part A program and as administrative agent for the
State of Georgia Employee Health Benefit Plan and for BCBSA's Out-of-Area
Program. In 1997, claim payments for these agency programs exceeded $3.8 billion
dollars which are not included in either revenues or benefits expense in the
Company's statement of income. The Company receives fees from these federal and
state government programs for performing these services. Fees received from
these programs are deducted from operating expenses and are not included in
premium revenues. The non-renewal or termination of any of the contracts with
these employer groups could have a material adverse effect on the Company's
business, financial condition and results of operations.

INVESTMENT PORTFOLIO

The Company's conservative management of the investment process has played
an integral role in developing and maintaining its financial strength. Earnings
from the investment portfolio have contributed significantly to the profits of
the Company. Over the five-year period from January 1, 1993 to December 31,
1997, investment income plus gains realized on sales of investments represented
108% of consolidated pre-tax income. In 1997, such income and gains were $28.6
million compared to consolidated pre-tax income of $0.9 million. The increase in
investment income and realized gains on sales of investments in relation to
pre-tax income for 1997 is primarily the result of lower earnings due to
increased medical expenses during 1997 and increased realized gains on sales of
marketable securities.

Investment discretion of the Company's insurance subsidiaries is limited by
the Georgia Insurance Code. The Company has established a two-tiered investment
portfolio. Liquidity needs are met through an internally managed investment
portfolio (the "Internal Portfolio") which is invested primarily in
institutional money market accounts. Those assets not required for liquidity are
transferred to external money managers for long term investment in the fixed
income and equity markets (the "External Portfolio"). The assets in the External
Portfolio are held in custody by banks in Georgia. All bonds in the investment
portfolios must have quality ratings of "A" or higher by Moody's Investors
Service and Standard & Poor's Ratings Group. The equity investments in the
Company's investment portfolios are highly diversified and limited to high
quality domestic
9
<PAGE> 12

equity securities. There are no derivative securities or instruments in the
Company's investment portfolios. The Board of Directors of each subsidiary
reviews and approves investment related activities at least quarterly.

BCBSGA's investment portfolio represented 68% of the Company's consolidated
investment portfolio at December 31, 1997. BCBSGA's Internal Portfolio is
managed by management staff, who report to the Treasurer and Chief Financial
Officer ("CFO") of BCBSGA who in turn reports to the Treasurer of the Company.
BCBSGA's External Portfolio is managed by independent advisory firms and is
subject to the review of BCBSGA's CFO. The CFO monitors the performance of
BCBSGA's investment managers and compares their performance on a monthly basis
to predetermined benchmarks. The Finance Committee of the Board of Directors of
the Company formally reviews performance of each investment manager on a
quarterly basis. Performance is also calculated quarterly by an outside
consultant, Furman Selz LLC, including benchmarking to an extensive group of
other professionally managed investment portfolios. The investment process is
dynamic and continually reviewed for improvements and refinements.

Shown below are the Company's consolidated invested assets by category. The
following tables should be read in conjunction with the accompanying
Consolidated Financial Statements and the related Notes thereto at Item 8 of
this Form 10-K.

INVESTMENTS BY CATEGORY

<TABLE>
<CAPTION>
AS OF AS OF
DECEMBER 31, 1997 DECEMBER 31, 1996
------------------- -------------------
% OF % OF
CARRYING CARRYING CARRYING CARRYING
VALUE VALUE VALUE VALUE
-------- -------- -------- --------
($ IN MILLIONS)
<S> <C> <C> <C> <C>
Fixed maturities.......................................... $187.7 66.9% $157.6 72.2%
Equity securities......................................... 73.1 26.1 60.1 27.6
Short-term investments.................................... 19.5 7.0 0.4 0.2
------ ----- ------ -----
Total investments............................... $280.3 100.0% $218.1 100.0%
====== ===== ====== =====
</TABLE>

The Company's consolidated portfolio is comprised primarily of highly
liquid investment securities. The Company's fixed maturities consist of United
States Government securities and corporate securities. At December 31, 1997, all
of the Company's fixed maturities consisted of instruments bearing fixed, rather
than variable, rates of interest. The following summarizes the Company's fixed
maturities by category.

FIXED MATURITIES BY CATEGORY

<TABLE>
<CAPTION>
AS OF
DECEMBER 31, 1997
-------------------
% OF
CARRYING CARRYING
VALUE VALUE
-------- --------
($ IN MILLIONS)
<S> <C> <C>
U.S. Treasury securities and obligations of U.S. government
agencies.................................................. $134.4 71.6%
Corporate securities........................................ 28.4 15.1
Mortgage-backed securities.................................. 24.9 13.3
------ ------
Total fixed maturities............................ $187.7 100.0%
====== ======
</TABLE>

10
<PAGE> 13

The following table summarizes the Company's fixed maturities by
contractual maturity. Expected maturities will differ from contractual
maturities because borrowers may have the right to call or prepay obligations
with or without a call or prepayment premium.

FIXED MATURITIES BY MATURITY CATEGORY

<TABLE>
<CAPTION>
AS OF
DECEMBER 31, 1997
-------------------
% OF
CARRYING CARRYING
VALUE VALUE
-------- --------
($ IN MILLIONS)
<S> <C> <C>
Due in one year or less..................................... $ 23.8 12.7%
Due after one year through five years....................... 66.1 35.2
Due after five years through ten years...................... 71.0 37.8
Due after ten years......................................... 1.9 1.0
Mortgage-backed securities.................................. 24.9 13.3
------ ------
Total fixed maturities............................ $187.7 100.0%
====== ======
</TABLE>

COMPETITION

The market for each of the Company's products in Georgia is highly
competitive on both a regional and statewide basis and has undergone significant
changes in recent years. From a competitive perspective, the market is segmented
generally by geography, product and employer group size. Significant competition
exists in the metropolitan Atlanta market for managed care products, while
outside of this area the majority of competition currently is for either
traditional indemnity or PPO products, although new market entrants with managed
care capabilities are beginning to penetrate this area. The Company has many
competitors in its indemnity, PPO and HMO operations, many of which have
substantially greater financial and other resources than the Company. However,
based upon current data available in publications circulated generally and
within the health care industry, no single competitor is dominant in any one of
the Company's eight geographic markets in the state.

Price competition among benefit plans in the Company's markets,
particularly the Atlanta metropolitan area, has intensified. As of October 1997,
85% of the Georgia HMO and POS market was held by the Company and four national
competitors, according to public information, of which the Company's share was
22% and the largest competitor's share was 18%. Because the Company's existing
business operations are confined to markets within the State of Georgia, the
Company currently is unable to subsidize losses in these markets with profits
from other markets as national companies can. The Company believes that certain
larger, national competitors are able to subsidize losses in the Georgia market
with profits from other markets in which they operate and could pursue such a
strategy in the Company's markets in an effort to increase market share. The
national health care industry has recently seen a consolidation of companies
that offer health care insurance, including traditional indemnity and managed
care products. In addition to intensifying competition, this consolidation may
result in corporations with enhanced financial resources positioned to pursue a
strategy of subsidizing losses to increase their market position in Georgia.

Further, future legislation at the federal and state levels may also result
in increased competition in the Company's markets. Competition may also be
affected by independent agents and brokers who sell the Company's health care
benefit plans as well as the benefit plans of the Company's competitors.
Additionally, provider-sponsored initiatives, through which certain hospital and
physician alliances compete with traditional means of health care financing, are
developing in some market segments. No assurance can be given that the Company
will be able to compete effectively with such competition in the future.

EMPLOYEES

The Company had 2,325 employees at December 31, 1997. No Company employees
are represented by any union, and the Company believes that its relations with
its employees are satisfactory.

11
<PAGE> 14

GOVERNMENT REGULATIONS

Holding Company Regulation

The Company is an insurance holding company and as such is subject to
regulation by the Georgia Insurance Department (the "Department"). Georgia
regulations require the filing of financial and other information concerning the
operations and interrelationships of entities within an insurance holding
company system. Such regulations extend to contracts, loans, dividends,
distributions, management agreements and other transactions between holding
company entities. Certain of these agreements must be submitted to the
Department for approval, based on concepts of fair and reasonable terms,
reasonable charges and fees, and the condition that following any such related
party transaction the insurer's surplus with regard to policyholders shall be
reasonable in relation to the insurer's outstanding liabilities and adequate to
meet its financial needs.

Regulation of Insurance Subsidiaries

BCBSGA, HMO-Ga and GGL are subject to comprehensive regulation. The
Department has broad authority to regulate, among other things: licenses to
transact the business of insurance; investment activity of insurers; premium
rates for certain insurance products; trade practices of insurers; agent
licensing; policy forms; insurance underwriting and claims practices; and
reserve adequacy and solvency. BCBSGA, HMO-Ga and GGL are required to file
detailed annual reports with the Department. BCBSGA, HMO-Ga and GGL's accounts
are subject to periodic examination by the Department. The regulation of
insurance holding company systems includes the acquisition and sales of licensed
entities, payment of dividends by regulated entities, the terms of affiliate
transactions and other related matters. HMO-Ga is a licensed HMO under Georgia
insurance law. Pursuant to Georgia law, HMOs are considered insurers and, except
as specifically provided to the contrary, are regulated by the same provisions
that apply with respect to BCBSGA and GGL.

Change or Acquisition of Control

Georgia insurance law requires the Commissioner's prior approval of any
transaction affecting a change of control of, or other acquisition of, a
domestic insurer, or of any person or entity that controls a domestic insurer.
In general, a presumption of control exists if any person or entity beneficially
owns or controls 10% or more of the voting securities of a domestic insurer or
of a person that controls a domestic insurer. Any direct or indirect change in
control of a domestic insurer or an entity which controls a domestic insurer, is
subject to the approval of the Commissioner, following a public hearing.

Examinations

BCBSGA, HMO-Ga and GGL are each subject to examination of their affairs by
the Department. The Department conducts triennial examinations of insurance
companies domiciled in Georgia. The most recent examination of BCBSGA, HMO-Ga
and GGL by the Department was completed during the last quarter of 1995 and
covered the period from January 1, 1992 through December 31, 1994. As a result
of the most recent examination, no matters were raised by the Department that
would have a material impact upon the statutory financial statements of either
BCBSGA, HMO-Ga or GGL.

TRADE NAMES, TRADE MARKS, SERVICE MARKS AND LICENSES

Pursuant to licenses from BCBSA, the Company has the exclusive right to
conduct business under the name "Blue Cross and Blue Shield of Georgia" and to
use the Blue Cross and Blue Shield names, trademarks and service marks for all
of the indemnity and managed health care products and services it offers in all
159 counties in Georgia. The Company believes that the well-recognized Blue
Cross and Blue Shield names, trademarks and service marks will continue to
provide a significant marketing advantage in its licensed service area,
particularly as competitive pressures narrow differences among health care
benefit plans. The Company cannot do business using the Blue Cross and Blue
Shield names, trademarks and service marks outside of its licensed service area.

12
<PAGE> 15

ITEM 2. PROPERTIES

The Company's corporate headquarters occupies approximately 261,000 square
feet of leased space in a 17-story building located in Atlanta, Georgia, and its
main claims operations center occupies approximately 176,000 square feet of
owned space in a four-story building located in Columbus, Georgia. Both
facilities are in desirable and accessible locations. The Company leases space
in 25 other buildings in communities throughout Georgia for a variety of
corporate purposes. If the current rate of the Company's business growth can be
sustained, additional space may be required.

ITEM 3. LEGAL PROCEEDINGS

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 plaintiff's 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 on 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.

The Company and its subsidiaries from time to time are parties to legal
proceedings arising out of, and incidental to, the Company's normal course of
business. In the opinion of the Company, adequate provision has been made for
losses which may result from currently known actions and, accordingly, the
outcome of these proceedings is not expected to have a material adverse effect
on the financial condition of the Company.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

On April 25, 1997 the Company held the 1997 Annual Meeting of Class A
Shareholders. The following item was submitted to vote by the holders of all
shares of Class A Common Stock held of record on February 28, 1997.

ELECTION OF CLASS A DESIGNATED DIRECTORS

<TABLE>
<CAPTION>
FOR AGAINST ABSTAIN NON-VOTE TOTAL
-------- ------- ------- --------- -------
<S> <C> <C> <C> <C> <C>
Joseph D. Green to serve until the 2000 annual
meeting of shareholders or until a successor is
duly elected and qualified...................... 174,410 3,185 230 172,710 350,535
James R. Lientz, Jr. to serve until the 2000
annual meeting of shareholders or until a
successor is duly elected and qualified......... 174,210 3,265 350 172,710 350,535
Arnold Tenenbaum to serve until the 1998 annual
meeting of shareholders or until a successor is
duly elected and qualified...................... 174,795 2,950 80 172,710 350,535
</TABLE>

13
<PAGE> 16

PART II

ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS

As of February 28, 1998, the Company had 70,309 Class A shareholders of
record. There is no established public trading market for the Class A Stock.
Further, because of restrictions on transfer of the Class A Stock until December
1, 1998, it is not anticipated that a trading market will develop prior to that
time. Thereafter, during the period December 1, 1998 through December 2001, any
sale of Class A Stock will be subject to the Company's first right of refusal.
The Company does not anticipate that any dividends will be paid on Class A
Stock.

ITEM 6. SELECTED FINANCIAL DATA

The following is Selected Consolidated Financial and Operating Data of
BCBSGA, HMO-Ga and all subsidiaries for the periods described therein prior to
the Conversion and of the Company for the period following the Conversion. The
following data, prepared in accordance with generally accepted accounting
principles, should be read in conjunction with the accompanying Consolidated
Financial Statements and the related Notes thereto at Item 8 of this Form 10-K
and "Management's Discussion and Analysis of Financial Condition and Results of
Operations" at Item 7 of this Form 10-K.

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------------------------------------
1997 1996 1995 1994 1993
---------- ---------- ---------- ---------- ----------
($ IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
STATEMENT OF INCOME DATA:
Revenues:
Premiums........................... $1,514,076 $1,323,663 $1,159,476 $1,038,397 $ 939,671
Investment and other income........ 17,259 14,358 11,980 9,462 8,524
Realized gains..................... 11,300 4,113 15,265 2,512 4,658
---------- ---------- ---------- ---------- ----------
Total revenues.................. 1,542,635 1,342,134 1,186,721 1,050,371 952,853
Benefits expense..................... 1,370,962 1,175,740 1,039,095 914,277 832,908
Operating expenses................... 172,060 146,616 126,077 111,012 89,284
---------- ---------- ---------- ---------- ----------
Operating (loss) income.............. (387) 19,778 21,549 25,082 30,661
Loss on building repurchase.......... -- -- -- -- (7,566)
Non-operating income................. 1,275 1,275 -- -- --
---------- ---------- ---------- ---------- ----------
Income before taxes, minority
interests and cumulative effect of
a change in accounting principle... 888 21,053 21,549 25,082 23,095
Income tax (benefit) expense(1)...... (2,050) 3,159 3,857 5,621 4,796
Minority interests in (earnings)
losses of joint venture
investments........................ 1,460 (421) (282) -- --
---------- ---------- ---------- ---------- ----------
Income before cumulative effect of a
change in accounting principle..... 4,398 17,473 17,410 19,461 18,299
Cumulative effect of change in
accounting for income taxes........ -- -- -- -- 5,449
---------- ---------- ---------- ---------- ----------
Net income........................... $ 4,398 $ 17,473 $ 17,410 $ 19,461 $ 23,748
========== ========== ========== ========== ==========
</TABLE>

- ---------------

(1) The Company's consolidated tax expense for 1997 calculated under the regular
tax system was reduced by available net operating loss carryforwards which
subjected the Company to alternative minimum tax. Additional tax benefits
were recognized in 1997 resulting in a net tax benefit for the period. (See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Results of Operations at item 7 of this Form 10-K.") Income
tax expense for years prior to 1997 consisted primarily of federal
alternative minimum tax as a result of a deduction available under Section
833(b) of the Internal Revenue Code (see "Management's Discussion and
Analysis of Financial Condition and Result
14
<PAGE> 17

of Operations -- Overview at item 7 of this Form 10-K.") If the deduction
were no longer available, BCBSGA would be subject to federal income taxes at
the regular corporate tax rate, which is currently 35%. See "Certain Federal
Income Tax Consequences -- Section 833 of the Code" in the Form S-1,
Registration No. 333-2796 filed on March 27, 1996 and subsequent amendments,
as incorporated herein by reference.

Earnings per share are omitted because such data is not meaningful at the
present time due to the likely dilutive events that will occur prior to or in
conjunction with the conversion of the Class A Stock or the Preferred Stock.
Currently there is no public trading market for the Company's Class A Stock or
any equity securities of the Company.

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------------------------------------
1997 1996 1995 1994 1993
---------- ---------- ---------- ---------- --------
($ IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
OPERATING DATA BY PRODUCT GROUP:
Premium Revenues by Product Group:
HMO and POS......................... $ 421,224 $ 254,229 $ 144,662 $ 87,532 $ 76,196
Indemnity and PPO................... 1,077,992 1,058,650 1,006,524 944,156 857,167
Other............................... 14,860 10,784 8,290 6,709 6,308
---------- ---------- ---------- ---------- --------
Total premium revenues....... $1,514,076 $1,323,663 $1,159,476 $1,038,397 $939,671
========== ========== ========== ========== ========
As a Percentage of Premium Revenues:
HMO and POS......................... 27.8% 19.2% 12.5% 8.4% 8.1%
Indemnity and PPO................... 71.2 80.0 86.8 90.9 91.2
Other............................... 1.0 0.8 0.7 0.7 0.7
---------- ---------- ---------- ---------- --------
Total premium revenues....... 100.0% 100.0% 100.0% 100.0% 100.0%
========== ========== ========== ========== ========
Percentage of Net Income:
HMO and POS......................... (106.8)% 28.1% 40.0% 4.9% (0.9)%
Indemnity and PPO................... 52.7 57.7 49.5 88.4 92.8
Other............................... 154.1 14.2 10.5 6.7 8.1
---------- ---------- ---------- ---------- --------
Total........................ 100.0% 100.0% 100.0% 100.0% 100.0%
========== ========== ========== ========== ========
Loss Ratio (Benefits Expense as a
Percentage of Premium Revenues):
HMO and POS......................... 88.9% 85.2% 83.7% 89.2% 93.2%
Indemnity and PPO................... 91.7 90.1 90.7 88.2 88.5
Other............................... 52.6 53.8 56.5 52.0 46.6
---------- ---------- ---------- ---------- --------
Total loss ratio............. 90.5% 88.8% 89.6% 88.0% 88.6%
========== ========== ========== ========== ========
Operating Expense Ratio (Operating
Expenses as a Percentage of Premium
Revenues)........................... 11.4% 11.1% 10.9% 10.7% 9.5%
========== ========== ========== ========== ========
Effective Income Tax Rate(1).......... (230.9)% 15.0% 17.9% 22.4% 20.8%
BALANCE SHEET DATA (AT PERIOD END):
Cash & investments.................... $ 315,323 $ 307,190 $ 223,994 $ 201,976 $177,650
Total assets.......................... 553,363 521,338 418,940 408,059 356,241
Total estimated benefit liabilities... 206,412 181,718 175,846 167,895 153,881
Total liabilities..................... 311,681 287,123 245,901 259,389 226,502
Mandatorily redeemable preferred
stock............................... 46,645 46,645 -- -- --
Common stock.......................... 4 4 -- -- --
Shareholders' equity.................. 195,037 187,570 173,039 148,670 129,739
</TABLE>

- ---------------

15
<PAGE> 18

Internal Revenue Code (see "Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Overview at item 7 of this
Form 10-K.") If the deduction were no longer available, BCBSGA would be
subject to federal income taxes at the regular corporate tax rate, which is
currently 35%. See "Certain Federal Income Tax Consequences -- Section 833
of the Code" in the Form S-1, Registration No. 333-2796 filed on March 27,
1996 and subsequent amendments, as incorporated herein by reference.

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS

The following discussion should be read in conjunction with the
Consolidated Financial Statements and the related Notes thereto at Item 8 of
this Form 10-K. 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

The Company was organized on February 2, 1996 to become a holding company
for BCBSGA and its subsidiaries upon the Conversion on February 2, 1996. During
1997, BCBSGA made a distribution of its investments in certain subsidiaries,
including HMO-Ga and GBG to the holding company. The discussions below relate to
the historical operations of BCBSGA, HMO-Ga and all subsidiaries prior to
February 2, 1996 and to the Company (including BCBSGA, HMO-Ga and all
subsidiaries on a consolidated basis) for the period following the Conversion.

Historically, substantially all of the Company's premium revenues and net
income were derived from its traditional indemnity and PPO business; however,
the growth of revenues and earnings in recent years is the result of a strategic
shift in focus that began in 1992. As a result of the new strategy, HMO and POS
premiums have grown from 6% of total premiums at the end of 1992 to 28% at the
end of 1997. HMO and POS membership has grown from 45,000 members at the end of
1992 to over 336,000 members at the end of 1997. The growth in the HMO and POS
products is attributable to new sales, in-group-growth and, to a lesser degree,
migration of business from other traditional indemnity products offered by the
Company. Since 1995 medical services for substantially all of the Company's HMO
and POS products sold were provided through its CHPNs.

Prudent management of the Company's investments has played a significant
role in developing and maintaining the Company's financial strength. Investment
earnings, including realized gains on sales of investments, have represented an
average of over 108% of pre-tax income during the period January 1, 1993 through
December 31, 1997.

Benefits expense consists primarily of health care claims and payments to
physicians, hospitals and other health care providers. The Company's
profitability largely depends on the ability to accurately predict and
effectively manage these health care costs. Accordingly, the Company continues
its efforts to improve contractual terms with providers for the delivery of
medical services, and effectively manage business mix changes from indemnity and
PPO into HMO and POS products.

The Company's emphasis on managed care products, and the expenses
associated with the change in its infrastructure to support managed care
products, is reflected in the increase in its operating expense ratio (the ratio
of operating expenses divided by premiums), which grew from 9.5% in 1993 to
11.4% in 1997.

In the State of Georgia, insurers are required to pay a tax on insurance
premiums in lieu of a state income tax. Premium taxes are charged to operating
expenses as incurred.

The Company's consolidated tax expense for 1997 calculated under the
regular tax system was reduced by available net operating loss carryforwards
which subjected the Company to alternative minimum tax. Income tax expense for
years prior to 1997 consisted primarily of federal alternative minimum tax as a
result of a special deduction available to certain Blue Cross and Blue Shield
plans under Section 833(b) of the Internal Revenue Code. If the deduction
provided under Section 833(b) were no longer available, the Company would be
subject to federal income taxes at the regular corporate tax rate, which is
currently 35%.
16
<PAGE> 19

See "Certain Federal Income Tax Consequences -- Section 833 of the Code" in the
Form S-1, Registration No. 333-2796, filed March 27, 1996 and subsequent
amendments, as incorporated herein by reference.

Significant health care legislation has been, and continues to be, proposed
at both the federal and state level. Any such legislation could have a material
impact on the Company's business. With or without legislation, consumers and
employer groups are expected to continue to exert pressure on pricing of health
care products. To meet these demands, more predictable, lower cost products will
be required.

Results of operations are directly affected by premium rate adequacy which
depends on pricing and underwriting decisions, the level of membership serviced
by and the performance by the Company's physician, hospital, pharmacy and
ancillary health care services networks (and since January 1995, by the
Company's CHPNs), estimates of medical benefits, health care utilization,
estimates of health care cost trends, effective administration of benefit
payments, operating efficiencies, investment returns and federal and state laws
and regulations.

RESULTS OF OPERATIONS

1997 Compared to 1996

Premium revenues for 1997 were $1,514.1 million, an increase of 14% over
the premium revenues of $1,323.7 million for 1996. Premium revenues for
indemnity and PPO products increased $19.3 million to $1,078.0 million for 1997
from $1,058.7 million for 1996, while enrollment for indemnity and PPO products
remained flat. HMO and POS premiums increased to $421.2 million for 1997, up
from $254.2 million for 1996, as a result of a 50% 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 336,000 members at December 31, 1997 from 224,000 members
at December 31, 1996. HMO and POS products accounted for 28% of total premiums
in 1997, compared to 19% of total premiums in 1996.

Investment and other income increased 20% to $17.3 million in 1997 from
$14.4 million in 1996 principally due to growth in the Company's investment
portfolio.

Realized gains of $11.3 million on the sale of marketable securities for
1997 were $7.2 million higher than gains realized for 1996. These results are
not necessarily indicative of results to be expected in the future. The
magnitude of realized gains in any period can fluctuate due to fixed 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) increased to 90.5% for 1997 from 88.8% for 1996 as the Company
experienced increasing medical cost trends and higher utilization in its
indemnity and PPO products in all markets and higher cost trends and utilization
in all of its managed care networks. Accordingly, the loss ratio for indemnity
and PPO products increased to 91.7% for 1997 from 90.1% for 1996 and the loss
ratio for HMO and POS products increased to 88.9% for 1997 from 85.2% for 1996.

Operating expenses increased 17% to $172.1 million for 1997 from $146.6
million for 1996, principally due to growth in the Company's infrastructure
necessary to support its Medicare Risk product development, information
technology development costs and the increased HMO and POS membership base.
Information technology costs for 1997 included approximately $2.0 million
incurred for year 2000 software modification. As a result, the operating expense
ratio increased to 11.4% for 1997, from 11.1% for 1996.

On May 23, 1996, a hospital purchased a 5% interest in one of BCBSGA's CHPN
subsidiaries. On January 1, 1997, another hospital purchased a 5% interest in
the same CHPN subsidiary. These transactions were recorded as non-operating
income for 1997 and 1996, respectively.

The Company recorded a tax benefit of $2.1 million for 1997 compared to tax
expense of $3.2 million in 1996. The net benefit primarily resulted from (1) an
increase of $2.1 million in the net value of the Company's

17
<PAGE> 20

long-lived tax assets and a refinement of the related valuation allowance; (2) a
$2.1 million net benefit from the difference in book and tax basis for its CHPN
investments; (3) utilization of $2.4 million in carryforwards; (4) offset by
$4.2 million in CHPN losses that are not expected to generate benefit currently
or in the foreseeable future.

As a result of the foregoing factors, net income decreased to $4.4 million
for 1997 compared to net income of $17.5 million in 1996.

1996 Compared to 1995

Premium revenues for 1996 were $1,323.7 million, an increase of 14% over
the premium revenues of $1,159.5 million for 1995. Premium revenues for
indemnity and PPO products increased $52.1 million to $1,058.7 million for 1996
from $1,006.5 million for 1995, principally due to growth in PPO products. The
number of indemnity contracts declined 9% in 1995; while PPO contracts grew 18%.
HMO and POS premiums increased to $254.2 million for 1996, up from $144.7
million for 1995, as a result of a 70% 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 224,000 members at December 31, 1996 from 132,000
members at December 31, 1995. HMO and POS products accounted for 19% of total
premiums in 1996, compared to 13% of total premiums in 1995.

Investment and other income increased 20% to $14.4 million in 1996 from
$12.0 million in 1995 principally due to an increase in the Company's cash and
investment portfolio from proceeds relating to the issuance of the Preferred
Stock.

Realized gains on the sale of marketable securities of $4.1 million in 1996
were $11.2 million less than realized gains of $15.3 million in 1995. In 1995
the Company took advantage of the strong market performance and realized gains
of $9.9 million on the sale of marketable securities in November 1995.

The loss ratio for HMO and POS products was 85.2% for 1996 compared to
83.7% for 1995. The loss ratio for HMO and POS products was unfavorably impacted
by higher levels of utilization in non-CHPN markets of 1996 and start-up in CHPN
markets with small risk pools of less than 10,000 members. As an offset, risk
sharing settlements favorably impacted loss ratios in both years. Excluding the
impact of these favorable settlements, the loss ratio for 1996 would be 85.7%
compared to 85.0% for 1995. The loss ratio for indemnity and PPO products
decreased to 90.1% in 1996 compared to 90.7% in 1995 as the Company realized
more favorable loss ratio experience in its traditional indemnity products in
the 1996 period. During 1995 the Company had experienced increasing medical cost
trends in all markets for its indemnity products which related to the third and
fourth quarters of 1994. As a result, an additional $6.2 million was recorded in
benefit expenses during 1995, for the prior period. The combination of these
factors resulted in a more favorable overall loss ratio of 88.8% in 1996
compared to 89.6% in 1995.

The operating expense ratio of 11.1% in 1996 increased from the 1995
operating expense ratio of 10.9% principally due to costs related to product
development and enhanced managed care information and administrative
capabilities.

Non-operating income of $1.3 million for 1996 related to a gain on the sale
of a 5% interest in one of the Company's CHPN subsidiaries to a third party.

The effective income tax rate of 15% in 1996 decreased from the effective
income tax rate of 18% in 1995, principally due to an increase in the valuation
of certain long-lived tax assets for which tax deductions will occur in the
future.

As a result of the foregoing factors, net income of $17.5 million for 1996
was comparable to net income of $17.4 million in 1995.

18
<PAGE> 21

LIQUIDITY AND CAPITAL RESOURCES

Liquidity

The Company has both short-term and long-term liquidity needs and has
structured its investment portfolios accordingly. Over $244.0 million of the
Company's investment portfolio is held at its insurance subsidiaries and is
invested subject to limitations prescribed by Georgia insurance statutes.
Short-term liquidity needs to fund the Company's operating costs, as well as
payment obligations to its customers, are met from funds invested primarily in
institutional money market accounts. Assets not required for short-term
liquidity needs are 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.

At December 31, 1997, cash and investments were $315.3 million or 57% of
total assets. The allocation of the Company's external investment portfolio has
been consistently maintained with over 67% in fixed maturities, all of which are
investment grade, and the balance in equity securities. Corporate and government
bonds are in issues with ratings of "A" or better by Moody's Investors Service
and Standard & Poor's Rating Group and investments in equity securities are in
domestic, dividend paying companies. The Company's portfolio currently does not
contain any derivative securities or instruments, or any real estate investments
or equity investments in corporations engaged solely in real estate activities.
Management believes that the Company's conservative investment portfolio
contributes to its financial stability.

The Company's balance sheet has improved steadily since 1993, with total
assets growing to $553.4 million at December 31, 1997, up from $356.2 million at
December 31, 1993. A substantial portion of the increase was a result of growth
in the Company's cash and investment portfolio as it invested excess cash
generated from operating activities and investment earnings.

The Company has historically satisfied its ordinary cash requirements from
operations. Net cash provided by operating activities amounted to $2.2 million
for 1997 compared to net cash provided by operating activities of $38.1 million
for 1996. This decrease was primarily the result of lower operating earnings in
1997 and the payment in 1997 of certain obligations incurred in 1996. Because of
the nature of the Company's business, current cash flows from operations are not
necessarily expected to be indicative of future results; however, the Company
does believe its future cash resources will be adequate to meet its operating
requirements.

In April 1996, BCBSGA obtained a $55 million insolvency line of credit with
a group of banks. The insolvency line of credit may be drawn on solely in the
event of any insolvency of BCBSGA to pay authorized insurance policy claims. The
insolvency line of credit is designed to satisfy certain membership standards of
the BCBSA from which the Company and certain of its subsidiaries have the
exclusive license to do business in Georgia under the name "Blue Cross and Blue
Shield", and to use the Blue Cross and Blue Shield names, trademarks, and
service marks with respect to the Company's indemnity, PPO, HMO, POS and life
insurance products. The Company does not anticipate making draws on the
insolvency line of credit.

BCBSGA, HMO-Ga and GGL are domiciled in the state of Georgia and prepare
their statutory statements in accordance with accounting principles and
practices prescribed by the Georgia Insurance Department. These entities may
distribute dividends only out of realized profits (undistributed, accumulated,
net earnings since organization). The amount of dividends distributable each
year is limited to the greater of the prior year's net income determined on a
statutory basis or 10% of prior year statutory surplus. In addition, dividends
distributable by BCBSGA are further limited by the Conversion order (approved by
the Georgia Commissioner of Insurance on December 27, 1995 related to BCBSGA's
conversion to a for-profit corporation). Dividend distributions by BCBSGA,
HMO-Ga and GGL above these defined limits require a filing with, and in some
cases special approval by, the State of Georgia Insurance Commissioner.

19
<PAGE> 22

Capital Resources

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 subsidiaries and strategic acquisitions.

Medical access point development could occur if the CHPNs are not able to
adequately cover the geography or range of services desired. The solution to
these access needs could take the form of physician practice acquisition, the
establishment of urgent care, 24-hour, or primary care clinic facilities, or
physician recruitment or relocation costs. The capital cost to develop a medical
access point varies because of differing factors such as available facilities
and extent of existing infrastructure. The Company anticipates that the
development of a single medical access point could cost in the range of $0.5
million to $2.0 million. To date, no CHPN has produced an access need that has
translated into additional capital requirements.

In 1994, BCBSGA entered into a revolving credit loan agreement with a group
of banks to finance its community health partnership networks and other related
costs. Under terms of the agreement, BCBSGA could borrow up to $25.0 million. In
December 1996, BCBSGA reduced the total amount available under the revolving
credit agreement to $9.0 million and the margin on LIBOR loans from 0.7% to
0.5%. Interest accrues on amounts advanced at the variable LIBOR rate plus the
margin mentioned previously. Borrowings outstanding totaled $3.5 million at
December 31, 1997 and 1996. During January 1998, the Company terminated its $9.0
million revolving credit agreement and paid in full the $3.5 million note
payable outstanding at December 31, 1997.

The Company believes that future 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

Refer to in Item 3. "Legal Proceedings" of this Form 10-K which description
is incorporated herein by reference.

Year 2000 Computer Software Modification Costs

Refer to Item 1. "BUSINESS -- Year 2000 Computer Software Modification
Costs" of this Form 10-K which description is incorporated herein by reference.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

The financial statements listed in Item 14(a)(1) are included in this Form
10-K beginning on page F-1.

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE

None.

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<PAGE> 23

PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

The following table sets forth certain information as of March 6, 1998
regarding each of the Directors of the Company and the executive officers of the
Company or Blue Cross and Blue Shield of Georgia, Inc. Each Director of the
Company also serves as a Director of Blue Cross and Blue Shield of Georgia, Inc.

<TABLE>
<CAPTION>
NAME AGE TITLE
- ---- --- -----
<S> <C> <C>
James L. LaBoon, Jr..................... 61 Chairman of the Board of Directors of the Company
and Blue Cross and Blue Shield of Georgia, Inc.
Fred L. Tolbert, Jr..................... 68 Vice Chairman of the Board of Directors of the
Company and Blue Cross and Blue Shield of Georgia,
Inc.
Richard D. Shirk........................ 52 Chief Executive Officer, President and Director of
the Company and Blue Cross and Blue Shield of
Georgia, Inc.
James E. Albright....................... 61 Director
William A. Alias, Jr.................... 56 Director
Elizabeth W. Camp....................... 46 Director
Edward M. Gillespie..................... 62 Director
Joseph D. Greene........................ 57 Director
Mel H. Gregory, Jr...................... 61 Director
Frank J. Hanna, III..................... 36 Director
R. Pierce Head, Jr...................... 70 Director
James H. Leigh, Jr., M.D. .............. 55 Director
James R. Lientz, Jr..................... 54 Director
Julia L. Mitchell-Ivey.................. 65 Director
Arnold M. Tenenbaum..................... 61 Director
W. Jerry Vereen......................... 57 Director
Joe M. Young............................ 69 Director
John A. Harris.......................... 47 Treasurer of the Company, Executive Vice President
of Finance & Strategic Planning of Blue Cross and
Blue Shield of Georgia, Inc.
Hugh J. Stedman......................... 50 Secretary of the Company, Senior Vice President and
General Counsel of Blue Cross and Blue Shield of
Georgia, Inc.
Raymond J. Colleran..................... 55 Executive Vice President, Market Operations of Blue
Cross and Blue Shield of Georgia, Inc.
Mark Kishel, M.D........................ 51 Executive Vice President, Chief Medical Officer of
Blue Cross and Blue Shield of Georgia, Inc.
Richard F. Rivers....................... 44 Executive Vice President, Chief Operating Officer of
Blue Cross and Blue Shield of Georgia, Inc.
Richard A. Steinhausen ................. 54 Executive Vice President, Service Operations and
Information Systems of Blue Cross and Blue Shield of
Georgia, Inc.
R. Neil Vannoy.......................... 51 Executive Vice President, Community Operations of
Blue Cross and Blue Shield of Georgia, Inc.
</TABLE>

James L. LaBoon, Jr., is the Chairman and President of Athens First Bank
and Trust Company, an affiliate of Synovus Financial Corporation, in Athens,
Georgia. Prior to joining Athens Bank and Trust, Mr. LaBoon was Vice President
of Finance and Chief Financial Officer of Wilkins Industries, Inc. He presently
serves as a Director of Athens First Bank and Trust Company, Synovus Mortgage
Corp., Athens Y.M.C.A. and Athens Symphony, Inc. Mr. LaBoon has been Chairman of
the Board of Directors of

21
<PAGE> 24

BCBSGA since 1994 and a Director since 1984. He has also served as a Director of
the Company since its organization in February 1996 and as its Chairman since
March 22, 1996. He is also a member of the Board of Directors of GBG.

Fred L. Tolbert, Jr., is retired as President of Albany First Federal
Savings and Loan in Albany, Georgia. He currently operates his own real estate
investment company in Albany, Georgia. Mr. Tolbert is a Trustee of the Darton
College Foundation. He has been a Director of BCBSGA since 1983 and Vice
Chairman of the Board since 1994. He has been Vice Chairman of the Board and a
Director of the Company since its organization in February 1996, and its Vice
Chairman since March 22, 1996. He also serves as Chairman of the Board of GBG.

Richard D. Shirk joined BCBSGA as President and Chief Executive Officer on
April 1, 1992 and has been a Director of BCBSGA since that date. He has been
President, Chief Executive Officer and a Director of the Company since its
organization in February 1996. Mr. Shirk has been Chairman of GGL since 1992. He
is also a Director of HMO-Ga and GBG. Mr. Shirk has more than 25 years of
experience in employee benefits and managed care. He was a key senior officer of
Equicor in its formation in 1986 serving as President of the Southern Region.
When Equicor combined business operations with CIGNA in 1990, Mr. Shirk was
named Senior Vice President of the Central Region and coordinated the
integration of managed care operations of the companies. Mr. Shirk is a board
member of the Georgia Coalition for Health, the National Institute of Health
Care Management and the Georgia Caring Program for Children Foundation. He is a
board member of Central Atlanta Progress and serves as Chairman of the Georgia
U.S.O.C. Steering Committee, as well as on the board of directors of the Georgia
Chamber of Commerce and the Board of SSGA Mutual Funds. He is Director of the
Buckhead Coalition and Metropolitan Atlanta Chapter of the American Red Cross.

James R. Albright is a Partner with Albright & Fortenberry, Certified
Public Accountants, an accounting firm he founded in Columbus, Georgia in 1971.
Prior to beginning his own firm, Mr. Albright was a Partner in the firm of Henry
& Albright, Certified Public Accountants. Mr. Albright is currently an officer
and Director of Darbyshire, Inc., Albrights, Inc., Presidential Management, Inc.
and Pine Mountain Trail Association, Inc. Mr. Albright has been a Director of
BCBSGA since 1980 and a Director of the Company since its organization in
February 1996.

William A. Alias, Jr., is an entrepreneur holding various private
investments. Formerly, Mr. Alias was President of Rollins Protective Services, a
residential security company. Prior to joining Rollins, he was Executive Vice
President and Chief Operating Officer of Across the Street Restaurants of
America, Inc. He also held positions at Royal Crown Cola Company and the
National Icee Corporation. Mr. Alias is a former member of the Board of Trustees
of the Lovett School and is a Board Member of Security Check. He has been a
member of the Boards of Directors of the Company and BCBSGA since December 1996.

Elizabeth W. Camp is President of Camp Oil Company in Rome, Georgia. Prior
to joining Camp Oil, Ms. Camp held positions as an attorney at Silver, Freedman
& Taff, attorneys in Washington, D.C., and as an accountant at Arthur Andersen,
LLP in Atlanta, Georgia. Ms. Camp is a member of the Boards of Directors of
Citizens First Bank in Rome, Camp Oil Company, Inc. and Sav-A-Ton Oil. She is a
member and past Chairman of the Board of Alumni Advisors for the Terry School of
Business at the University of Georgia. She is also a member of the Board of
Trustees of Darlington School in Rome. She has been a Director of BCBSGA since
1993 and a Director of the Company since its organization in February 1996.

Edward M. Gillespie is retired from University Hospital in Augusta,
Georgia, where he served as President and Executive Director until 1991. Prior
to joining University Hospital, Mr. Gillespie held various hospital
administrative positions including Hospital Administrator of Rochester Methodist
Hospital in Rochester, Minnesota. Mr. Gillespie serves on the advisory board of
South Trust and Brandon Wilde retirement community. He is also President of
Health Advance, a health care consulting organization. Mr. Gillespie has been a
Director of BCBSGA since 1980 and a Director of the Company since its
organization in February 1996.

Joseph D. Greene is a professor of Business Administration for the College
of Business at Augusta State University in Augusta, Georgia. Before joining
Augusta State University, Mr. Greene was employed by

22
<PAGE> 25

Pilgrim Health and Life Insurance Company, where he retired as Executive Vice
President after 32 years of employment with the company. Mr. Greene is past
Chairman of the Georgia Board of Regents. He currently serves on the Boards of
Directors of McDuffie Bank & Trust of Thomson, the Greater Augusta Community
Foundation, Southeastern Technology Center, the National Science Center
Discovery, the Minority Business Development Corporation and the University of
Georgia Terry College of Business. Mr. Greene has been a Director of BCBSGA
since 1993 and a Director of the Company since its organization in February
1996. He is also Vice Chairman of the Board of Directors of HMO-Ga.

Mel H. Gregory, Jr., is retired, following a 35 year career in executive
insurance positions with The Equitable Companies. He held positions as Executive
Vice President, Agency Operations; President and Chief Operating Officer,
Equitable Variable Life Insurance Company; Chief Executive Officer, Equico
Securities; and as a member of The Equitable's Executive Committee. He is a
member of the Board of Directors of Stetson University School of Business. Mr.
Gregory has been a Director of the Company since its organization in February
1996 and a Director of BCBSGA since 1996. Mr. Gregory is also a Director of GGL.

Frank J. Hanna, III is, and has been since 1993, the Chief Executive
Officer of HBR Capital, Ltd., an investment firm based in Atlanta, Georgia. Mr.
Hanna began his career in Atlanta as a corporate attorney with the Atlanta law
firm of Troutman Sanders LLP. Mr. Hanna is also extensively involved in
education, including serving as a founding member of the Board of Directors of
the Archbishop Donnellan School and as a Director of Pinecrest Academy. Mr.
Hanna is also a Director of Outsourcing Solutions, Inc. Mr. Hanna is a graduate
of the University of Georgia and the University of Georgia School of Law. Mr.
Hanna became a director of the Company and BCBSGA in February 1996.

R. Pierce Head, Jr., is a retired Senior Vice President of Georgia Power
Company, where he worked for 40 years in various capacities in the risk
management, employee benefits, information systems, general services and labor
relations areas. While at Georgia Power, Mr. Head chaired several task forces
and received a number of awards, including a Presidential Citation for hiring
the physically challenged. Mr. Head has been a Director of BCBSGA since 1981 and
a Director of the Company since its organization in February 1996.

James H. Leigh, Jr., M.D., is a surgeon in Gainesville, Georgia, where he
has a private practice. He is a member of the Northeast Georgia Medical Center
staff and the Lanier Park Hospital consultant staff. Dr. Leigh is currently a
member of the Board of Directors of Longstreet Clinic. Dr. Leigh is also past
Chief of Surgery and Chief of Staff at Northeast Georgia Medical Center. Dr.
Leigh served as an Assistant Professor of Surgery at the University of Tennessee
College of Medicine. Dr. Leigh was a member of the Board of Directors of the
Northeast Georgia Health Association and an Alternate Director of the Medical
Association of Georgia. He has been a Director of BCBSGA since 1975 and a
Director of the Company since its organization in February 1996.

James R. Lientz, Jr., is President of NationsBank, N.A. Mid-South Banking
Group. Prior to joining NationsBank, he was President and CEO of C&S National
Bank of South Carolina, a predecessor of NationsBank. Mr. Lientz is a member of
the Board of Directors of Georgia Power Company. He is a trustee of the Rhodes
College, the Lovett School, the Georgia Research Alliance, Georgia State
University Foundation and the Community Foundation of Metropolitan Atlanta. He
serves as Chairman of the Georgia Chamber of Commerce and the Georgia Council on
Economic Education. He is also a member of the Executive Committee of the
Metropolitan Atlanta Chamber of Commerce.

Julia L. Mitchell-Ivey is a consultant and former Vice President and
Assistant Corporate Secretary at First Union National Bank of Georgia.
Previously, she held various positions at Decatur Federal Savings and Loan
Association including Corporate Treasurer, Corporate Secretary and Division Vice
President. Ms. Mitchell-Ivey is a past Chairperson of the Board of Directors of
Metropolitan Atlanta Rapid Transit Authority (MARTA) and Chairperson of the
Board of Directors of Private Colleges and Universities Authority and a member
of the Board of Directors of the Y.W.C.A. and the DeKalb Chamber of Commerce.
She has been a Director of BCBSGA since 1980 and a Director of the Company since
its organization in February 1996. She is Chairperson of the Board of Directors
of HMO-Ga.

23
<PAGE> 26

Arnold M. Tenenbaum is President of Chatham Steel Corporation. He is a
member of the Boards of Directors of the Georgia Lottery Commission, First Union
National Bank of Savannah, First Union Bank of Georgia, Savannah Electric &
Power Company. Mr. Tenenbaum is a past President of the Telfair Academy of Arts
& Sciences, the chair-elect of Steel Service Center Institute and past Chairman
of the Georgia Chamber of Commerce.

W. Jerry Vereen is President and Chief Executive Officer of Riverside
Manufacturing Company in Moultrie, Georgia and is acting Chairman of the Board
of Directors of Riverside Manufacturing Company and all of its subsidiary
corporations. Mr. Vereen serves on the Boards of Directors of Georgia Power
Company, Georgia Chamber of Commerce, Gerber Scientific, Inc., American Apparel
Manufacturers Association, and the Textile Clothing Technological Corporation,
and is an Advisory Director of NationsBank of Georgia, National Association
Southern Region. He is also a member of the Board of Governor's Development
Council. He has been a Director of BCBSGA since 1993 and a Director of the
Company since its organization in February 1996.

Joe M. Young is the General Manager of LOR, Inc. and Rollins Investment
Fund, two entities which manage the holdings of the family of the late O. Wayne
Rollins. His service with LOR, Inc. commenced in 1979 and with Rollins
Investment Fund at its inception in 1988. He also serves as an Officer and
Director of several other related entities and as a Trustee of several Rollins
Family Foundations and Trusts. Since 1992 he has been a Director of Valley
Systems, Inc., a public company traded on the NASDAQ Exchange. Mr. Young became
a Director of the Company and BCBSGA as of February 2, 1996.

John A. Harris has served as BCBSGA's Executive Vice-President, Finance and
Strategic Planning since January 1993. He has served as Treasurer of the Company
since its organization in February 1996. Prior to joining BCBSGA, he worked in
the health care industry for 10 years, primarily in managed care companies, but
also with multi-line carriers. His positions included Chief Financial Officer,
Western Market Group, for the Employee Benefits Division of Lincoln National,
Assistant Corporate Controller for Financial Planning, Reporting and Analysis
for Equicor, President, VIP Health Plan (an IPA model HMO in California), and
Vice-President, Finance for CIGNA Health Plans for Southern California.

Hugh J. Stedman currently serves as Secretary of the Company and Senior
Vice President and General Counsel to BCBSGA. Mr. Stedman has been Counsel to
BCBSGA since 1985. Mr. Stedman obtained his J.D. from Rutgers University and is
admitted to practice law in Georgia and Pennsylvania. Prior to joining BCBSGA,
Mr. Stedman was Associate Counsel and Director of Investor and Public Relations
for Healthdyne, Inc., a manufacturer of medical devices and supplier of
home-health services. His entire legal career has been specialized within the
health care service, equipment and financing industry. Mr. Stedman is a member
of the American, Georgia and Cobb County Bar Associations, the Cobb County
Chamber of Commerce and the National Health Lawyers' Association.

Raymond J. Colleran joined BCBSGA in February 1993, as BCBSGA's Executive
Vice President, Market Operations. Prior to February 1993, Mr. Colleran held a
number of key management positions with Equitable Life, Equicor and CIGNA. These
positions included Regional Financial Officer and Regional Account Vice
President with Equitable Life, Vice President in Charge of Sales and Accounts
for Equicor, President of the East Central Region for Equicor, and most
recently, Senior Vice President in Charge of Sales for the East Central Region
for CIGNA. Mr. Colleran is an active member of the Blue Cross and Blue Shield
Association National Labor Office Board and the Buckhead Chamber of Commerce
Executive Committee.

Mark Kishel, M.D., has been Executive Vice President and Chief Medical
Officer of BCBSGA since October 1993. Prior to joining BCBSGA, he developed
staff, group and IPA model HMOs, as well as PPOs, for major carriers and other
managed care organizations including Travelers, Lincoln National and Health
America. His management experience includes capitated Medicaid, managed workers
compensation, POS and HMO networks. Dr. Kishel has developed quality management
and utilization management programs for various start-up companies and consulted
in physician hospital organizations and university-sponsored health plan
development. As a practicing pediatrician and family physician for 11 years, Dr.
Kishel assisted in the development of a model primary care system that addressed
the needs of the indigent and uninsured in Arizona. He is a Director of the
Atlanta Boys and Girls Clubs, Inc.
24
<PAGE> 27

Richard F. Rivers joined BCBSGA as Executive Vice President and Chief
Operating Officer in September 1997. Prior to joining BCBSGA, Mr. Rivers worked
for Prudential Insurance Company for 22 years. Most recently, he was Senior Vice
President of Health Plan Operations with Prudential Healthcare and was
responsible for the operations of 32 local health plans nationwide. Prior to
this, he was President of South Central Operations and had full responsibility
for operations in ten states.

Richard A. Steinhausen joined BCBSGA in August 1995 as Executive Vice
President, Service Operations and Information Systems. Mr. Steinhausen has more
than 30 years of health care industry experience. Most recently, he served as
Vice President Employee Benefits Division of Washington National. Previously, he
was a Senior Vice President of Equicor and President of its National Benefits
Sector. He also served as a Regional Vice President, Claims for Equitable Life
Assurance Society.

R. Neil Vannoy joined BCBSGA as Senior Vice President of Public Affairs and
Product Development in July 1992. In 1994, he was appointed Executive Vice
President of Community Operations of BCBSGA and is responsible for community
healthcare partnership developments, government programs and corporate marketing
communications. Prior to joining BCBSGA, Mr. Vannoy served in management
positions with Prudential Insurance Company for 16 years, including Vice
President, Group Corporate at Prudential's New Jersey headquarters, Vice
President in charge of the company's Southern Group Operations, Vice President
of Florida Group Operations and Vice President of Group Marketing and Sales at
the New York City group office. Mr. Vannoy is a member of the Boards of
Directors of the Georgia Business Forum on Health, the Georgia Caring Program
for Children Foundation and the Community Health Partnerships in Atlanta,
Athens, Augusta, Macon, Rome and Savannah. He serves on the Professional
Advisory Council of Mission New Hope in Atlanta, supported the development of
the Georgia Coalition for Health as a member of the steering committee, serves
on the technical advisory committee of the Georgia Health Policy Center and is
co-chair of the Research Demonstration Committee of the Atlanta Regional
Commission's Health Collaborative. Mr. Vannoy holds a Chartered Life Underwriter
designation.

INFORMATION REGARDING THE BOARD OF DIRECTORS

The Company's Articles of Incorporation provide that the Board of Directors
shall consist of not more than 21 members with the actual number of Directors to
be fixed from time to time by the Board of Directors. The Board of Directors of
the Company has currently fixed the number of directors at 17. The Articles of
Incorporation provide for the classification of the Company's directors into
three classes, with each class containing approximately the same number of
Directors and the term of one class expiring each year. At each Annual Meeting
of Shareholders, the Directors of one class are elected by the shareholders
entitled to vote thereon, to hold office for a term of 3 years and provides that
such Directors serve until their successors are elected and qualified. Set forth
below is the name of each Director, the class in which he or she serves and the
year in which his or her current term expires.

Class One -- Term Expires at the 1999 Annual Meeting of Shareholders

James E. Albright
Elizabeth W. Camp(1)
Mel H. Gregory, Jr.
James L. LaBoon, Jr.
James H. Leigh, Jr., M.D.
Julia L. Mitchell-Ivey

Class Two -- Term Expires at the 2000 Annual Meeting of Shareholders

Edward M. Gillespie
Joseph D. Greene, CLU(1)
James R. Lientz, Jr.(1)
W. Jerry Vereen
Joe M. Young(2)

25
<PAGE> 28

Class Three -- Term Expires at the 1998 Annual Meeting of Shareholders

William A. Alias, Jr.(2)
Frank J. Hanna, III(2)
R. Pierce Head, Jr.(3)
Richard D. Shirk(2)
Arnold M. Tenenbaum(1)
Fred L. Tolbert, Jr.(2)
- ---------------

(1) Ms. Camp and Messrs. Green, Lientz and Tenenbaum are Class A Designated
Directors.
(2) Messrs. Hanna and Young are Preferred Designated Directors. At the 1998
Annual Meeting of Preferred Shareholders, Mr. Hanna will be a candidate for
re-election as a Class Three, Preferred Designated Director; in addition,
pursuant to a shareholders' agreement, the Preferred Shareholders are
expected to re-elect Messrs. Alias, Shirk and Tolbert as Class Three
Directors.
(3) According to the retirement policy set forth in the Company's bylaws, this
Director will retire effective at the conclusion of the annual meeting in
1998.

Under the Articles of Incorporation, so long as shares of Preferred Stock
are issued, outstanding and entitled to vote and no shares of the Company's
Common Stock, no par value (the "Common Stock"), are outstanding, the holders of
outstanding shares of Class A Stock, voting separately as a single class (with
each share being entitled to one vote) and to the exclusion of all other classes
and series of capital stock of the Company, are entitled to elect two Directors
to each of the Company's three Classes of Directors ("Class A Designated
Directors"), for a total of six of the total number of members of the Board of
Directors following the third annual election. Prior to the Special Meeting of
Class A Stockholders held on December 18, 1996 (the "Special Meeting"), a
special nominating committee composed of two Continuing Directors (as defined
below) and the two Preferred Designated Directors (as defined below) nominated
the two Class A Designated Directors to be voted on by all of the holders of the
Class A Stock at the Special Meeting. At the Special Meeting, Joseph D. Greene
was elected as a Class A Designated Director to serve as a Class Two Director
until the 1998 Annual Meeting and Elizabeth W. Camp was elected as a Class A
Designated Director to serve as a Class One Director until the 1999 Annual
Meeting.

On March 4, 1997 a special nominating committee composed of two Continuing
Directors and Ms. Camp and Mr. Greene, the then current Class A Designated
Directors, nominated Mr. Greene and James R. Lientz as Class A Designated
Directors to serve as Class Two Directors until the 2000 Annual Meeting or until
their successors are duly elected and qualified and Arnold Tenebaum as a Class A
Designated Director to serve as a Class Three Director until the 1998 Annual
Meeting to be voted on by all of the holders of the Class A Stock at the Annual
Meeting of shareholders held on April 25, 1997. The three nominees were elected
as Class A Designated Directors at the 1997 Annual Meeting. Prior to the third
Class A Shareholders' Meeting at which Class A Designated Directors are to be
elected, a special nominating committee composed of two Continuing Directors and
the then current Class A Designated Directors will nominate two Class A
Designated Directors to serve as Class Three Directors until the 2001 Annual
Meeting and one Class A Designated Director to serve as a Class One Director
until the 1999 Annual Meeting to be voted on by all of the holders of the Class
A Stock. Thereafter, at each annual meeting until the Class A Stock is converted
to Common Stock as provided in the Articles of Incorporation, a special
nominating committee composed of the six Class A Designated Directors will
nominate, and the holders of the Class A Stock will be entitled to elect, two
Class A Designated Directors each year to replace the Class A Designated
Directors whose terms expire during such year.

Notwithstanding any nomination by a special nominating committee, the
holders of the Class A Stock are entitled to nominate and elect any eligible
individual to fill the Class A Designated Director positions subject to election
each year.

The holders of shares of the Preferred Stock, voting separately as a single
class (with each share being entitled to one vote) and to the exclusion of all
other classes and series of capital stock of the Company, are entitled to
nominate and elect two directors (the "Preferred Designated Directors") and all
of the remaining Directors of the Company (other than the Class A Designated
Directors). However, pursuant to the terms of

26
<PAGE> 29

a Shareholders' Agreement (the "Shareholders' Agreement") among the holders of
the Preferred Stock, BCBSGA and the Company, so long as no shares of the
Company's Common Stock are issued and outstanding, the holders of the Preferred
Stock will be obligated to vote their shares so that the persons (other than the
Preferred Designated Directors and the Class A Designated Directors) nominated
by the Nominating Committee of the Company's Board of Directors and approved by
two-thirds of the Continuing Directors of the Company are elected Directors of
the Company. As a result, the current Board of Directors will have the ability
to designate a majority of the Directors of the Company.

"Continuing Directors" are those individuals who: (i) were named as members
of the initial Board of Directors of the Company (other than the Preferred
Designated Directors), together with any new Directors whose election or
nomination to the Board of Directors was approved by a vote of two-thirds of the
Directors then still in office who were such Directors or whose election or
nomination was previously so approved; (ii) are not beneficial owners of more
than five percent of the total shares of any class of equity securities of the
Company outstanding; and (iii) were not nominated by such a beneficial owner
and, prior to such Director's election, did not have any agreement, arrangement,
or understanding with any such beneficial owner with respect to any action to be
taken by such person as a Director.

If no shares of Preferred Stock or Common Stock are issued, outstanding and
entitled to vote, all rights to vote in the election of Directors are vested in
the holders of outstanding Class A Stock and Blank Preferred Stock.

SECTION 16(A) OF THE SECURITIES EXCHANGE ACT
BENEFICIAL OWNERSHIP REPORTING

Section 16(a) of the Securities Exchange Act of 1934, as amended, and
regulations of the Commission thereunder require the Company's executive
officers and Directors and persons who own more than ten percent of the
Company's Class A Stock, if any, as well as certain affiliates of such persons,
to file initial reports of ownership and reports of changes in ownership with
the Commission. Executive officers, Directors and persons owning more than ten
percent of the Company's Class A Stock are required by Commission regulation to
furnish the Company with copies of all Section 16(a) forms they file. Based
solely on its review of the copies of such reports received by it and written
representations from the reporting persons that no other reports were required
for those persons, to the Company's knowledge, during and with respect to the
fiscal year ended December 31, 1997, all filing requirements applicable to its
executive officers and Directors were complied with in a timely manner. To the
Company's knowledge, there is no person that owns more than ten percent of the
Company's Class A Stock.

27
<PAGE> 30

ITEM 11. EXECUTIVE COMPENSATION

General

The following table presents certain information concerning annual
compensation paid or accrued and long-term compensation paid by the Company for
services rendered in all capacities during the last three fiscal years, for the
Chief Executive Officer and four most highly compensated executive officers
whose total annual salary and bonus exceeded $100,000 (collectively, the "Named
Executive Officers").

TABLE 1: SUMMARY COMPENSATION TABLE

<TABLE>
<CAPTION>
LONG-TERM
ANNUAL COMPENSATION COMPENSATION
------------------------------------- ------------
OTHER ANNUAL LTIP ALL OTHER
SALARY ($) BONUS ($) COMPENSATION PAYOUTS COMPENSATION
NAME AND PRINCIPAL POSITION YEAR (1) (2) ($)(3) ($)(4) ($)(5)
- --------------------------- ---- ---------- --------- ------------ ------- ------------
<S> <C> <C> <C> <C> <C> <C>
Richard D. Shirk................. 1997 $481,250 $ -- $ -- $281,437 $4,030
Chief Executive Officer, 1996 425,000 278,000 -- 432,225 5,878
President and Director of the 1995 425,000 -- 54,002 -- 5,087
Company and BCBSGA

John A. Harris................... 1997 225,750 -- -- 89,967 3,202
Treasurer of the Company, 1996 195,000 88,011 -- 67,392 3,185
Executive Vice President, 1995 187,500 -- -- 53,625 2,803
Finance and Strategic
Planning of BCBSGA

Raymond J. Colleran.............. 1997 207,750 -- -- 82,883 3,202
Executive Vice President, 1996 195,000 81,081 -- 67,392 3,836
Market Operation of 1995 194,250 -- -- 87,360 4,909
BCBSGA

Mark Kishel, M.D................. 1997 208,750 -- -- 89,967 3,238
Executive Vice President 1996 205,000 88,100 -- 70,848 3,507
and Chief Medical Officer of 1995 203,750 -- -- 91,000 3,130
BCBSGA

R. Neil Vannoy................... 1997 204,750 -- -- 82,883 1,612
Executive Vice President, 1996 195,000 81,081 -- 67,392 1,181
Community Operations of 1995 192,750 -- -- 84,630 801
BCBSGA
</TABLE>

- ---------------

(1) Includes amounts deferred at the election of the officers pursuant to the
Company's 401(k) Retirement Savings Program and other deferred compensation
plans.
(2) Threshold financial performance criteria pursuant to the Annual Incentive
Program was not achieved for 1997 or 1995; no bonuses were earned for those
periods.
(3) Perquisites for Named Executive Officers were less than 10% of their total
salary for all periods presented. Perquisites paid to Mr. Shirk in 1995
include $26,054 paid for vacation earned in prior years as part of a 1995
change in vacation policy for all employees.
(4) Includes payments in 1997 to the Named Executive Officers for long-term
incentive payments for the 1994-1996 performance period, in 1996 for
long-term incentive payments for the 1993-1995 performance period and in
1995 for long-term incentive payments for the 1992-1994 performance period,
except for Mr. Shirk whose payment for the 1992-1994 performance period was
deferred by the Compensation Committee until 1996.
(5) Reflects contributions to the 401(k) Retirement Savings Program in 1997 and
1996, respectively of $2,500 and $2,375 for Mr. Shirk, Mr. Harris, Mr.
Colleran and Dr. Kishel and $910 in 1997 for Mr.

28
<PAGE> 31

Vannoy and premium payments on group term life insurance in 1997 and 1996,
respectively: Mr. Shirk, $1,530 and $3,503; Mr. Harris, $702 and $810; Mr.
Colleran, $702 and $1,461; Dr. Kishel, $738 and $810 and Mr. Vannoy $701 and
$1181.

Long-Term Incentive Compensation

Prior to fiscal year 1997, BCBSGA maintained a Long-Term Incentive Plan
("LTIP"). The LTIP was designed to reward participants for their contributions
to the successful achievement of specific financial (60%), market share (20%)
and customer service (20%) goals based on the Company's long-term business
strategy. Goals were established for three-year performance periods. The LTIP
had minimum threshold, target and maximum performance levels. Participants were
required to be employed by one of the Company's subsidiaries on the last day of
the performance period. Prior to 1997, long-term incentive award opportunities
had been established for two performance cycles, the 1994-1996 performance
period and the 1995-1997 performance period. The Compensation Committee makes
the final award determination related to the achievement of the defined goals
for each performance period. Named Executive Officers received payouts for the
1994-1996 performance cycle which are reflected in the Summary Compensation
Table. Minimum threshold levels for financial performance were not exceeded for
the 1995-1997 cycle. No payouts to Named Executive Officers were due for this
performance period.

Additionally, the Named Executive Officers also participated in a
supplemental salary make-up plan for the 1996-1997 performance period. Under
this plan adopted in 1996, the Named Executive Officers did not receive salary
increases for 1996 (three years for the CEO beginning in 1995) to recover from
the financial performance criteria not achieved in 1995 and to accelerate pay
progress of non-executive associates. No cash awards were due to the Named
Executive Officers under this plan since target financial performance was not
achieved for the 1997 period.

The Company has a Performance Unit Plan (the "PUP") that is designed to
reward key executives for creating and increasing the value of the Company. The
Compensation Committee of the Board of Directors of the Company is responsible
for the administration and governance of the PUP including identification of
participants and granting of units. The award payable to a participant under the
PUP will be equal to the increase in unit value (calculated as of the end of the
measurement period) multiplied by the number of units granted. However,
performance hurdles must be surpassed before any award is payable under the PUP.
If the growth in Company value over the measurement period is less than the
performance hurdle, the award will be zero. Payouts under the PUP will be
calculated upon the occurrence of a market/liquidity event as defined in the
plan. Prior to the time the Company's Common Stock is listed or traded on a
recognized U.S. exchange, the Board of Directors will determine when a
market/liquidity event occurs that creates a definite value of the Company and
results in liquidity. The initial measurement period began on February 2, 1996.
At the end of 1997, the growth in Company value did not exceed the specified
performance hurdle for the period, therefore, units granted under the PUP did
not have any assigned value. The units granted under this plan were 140,000 to
Mr. Shirk and 30,000 each to Mr. Harris, Mr. Colleran, Dr. Kishel and Mr.
Vannoy.

29
<PAGE> 32

Retirement Plan

Table 3 reflects the estimated annual lifetime benefits calculated on a
straight-line annuity basis and payable under the terms of the Non-Contributing
Retirement Program for Certain Employees of Blue Cross and Blue Shield of
Georgia (the "Retirement Plan"), as currently in effect, to persons in specified
compensation and years of service classifications upon retirement at age 65.
Benefit amounts as reflected in the table are after reductions for a portion of
Social Security benefits. The years of service, as of December 31, 1997,
credited for retirement benefits for the Named Executive Officers are Mr. Shirk,
5 3/4 years; Dr. Kishel, 4 1/4 years; Mr. Colleran, 4 11/12 years; Mr. Harris, 5
years; and Mr. Vannoy, 5 5/12 years. The compensation covered by the Retirement
Plan generally includes the base rate of annual earnings and annual incentive
payments actually paid to a participant by BCBSGA up to $150,000, the maximum
amount of compensation that may be recognized under qualified pension plans; for
each Named Executive Officer, the compensation in the Summary Compensation Table
exceeds this maximum amount.

TABLE 2: PENSION PLAN TABLE

<TABLE>
<CAPTION>
5 YEAR YEARS OF SERVICE
AVERAGE -------------------------------------
EARNINGS 15 20 25 30
- -------- ------- ------- ------- -------
<S> <C> <C> <C> <C>
$100,000.................................................. $33,756 $45,012 $56,268 $64,512
150,000.................................................. 41,268 55,008 68,772 82,512
</TABLE>

The Retirement Plan is a qualified defined benefit pension plan that covers
all employees of BCBSGA and its participating affiliated companies, who have
attained age 21 and have completed 1,000 hours of service in a 12-month period
after their date of hire, or who complete 1,000 hours of service in any calendar
year thereafter. Benefits under the Retirement Plan are based upon length of
service with any BCBS plan, with varying provisions for employees who are
terminated or take early, normal or deferred retirement. The annual retirement
benefit is calculated according to a specific formula, called the Final Average
Earnings formula. The benefit is 60% of the Final Average Earnings (i.e., the
average of the highest five consecutive years of annual salaries and annual
incentive payments out of the last 10 years of credited service) reduced by 50%
of the participant's Social Security Benefit. If the participant has less than
30 years of service, the result is multiplied by a service fraction. The
fraction is the years of credited service up to 30 divided by 30. A participant
becomes fully vested after five years of service. Generally, upon retirement,
participants can elect to receive their benefits in the form of a lump sum
payment, lifetime only pension, lifetime pension with a guaranteed payout period
(10 or 20 years) or 50%, 66 2/3% or 100% joint pensions. The Retirement Plan
also provides, subject to certain conditions, for the payment of vested benefits
of a deceased employee to his or her spouse during such spouse's lifetime.
Actuaries hired by the Retirement Plan determine the amount to be contributed to
the Retirement Plan by BCBSGA to fund benefits for its employees. All
contributions are held in trust. Benefits under the Retirement Plan are insured
by the Pension Benefit Guaranty Corporation.

BCBSGA makes contributions to the Retirement Plan to fund the benefits
which accrue thereunder. Annual contribution amounts are determined actuarially.
Participant contributions are not permitted. The amounts shown in the Summary
Compensation Table above do not include BCBSGA's contributions in connection
with the Retirement Plan for the Named Executive Officers. Such amounts are not
and cannot be readily separated or individually calculated. BCBSGA made a
contribution of $3.4 million to the Retirement Plan for the plan year ended
December 31, 1997.

The Retirement Plan is administered by the Blue Cross and Blue Shield
Association. Bankers Trust Company serves as Trustee to the Retirement Plan.

Supplemental Retirement Benefits

The Company maintains a Supplemental Executive Retirement Plan in which the
Named Executive Officers participate. Provisions under the plan include a
vesting requirement of five years and attainment of age 55 and a normal
retirement age of 65. A participant whose employment is terminated within one
year following a change in control (as defined in the plan) for reasons other
than death or disability will have a fully

30
<PAGE> 33

vested right to receive all benefits accrued under the plan as of the date of
termination if the Company terminates his employment without just cause or the
participant terminates with good reason. Benefits are based upon final average
pay with two years service credit for each year worked capped at 30 years of
service. Benefits are not to exceed 60% of final average pay with offsets for
qualified retirement, restoration plan and social security benefits.

The Company also maintains an Executive Benefit Restoration Plan in which
the named Executive Officers participate. The plan provides benefits to
participants whose benefits under the Retirement Plan are restricted by the
limitations described in Internal Revenue Code Sections 401(a)(17) and 415.
Provisions under the plan include a vesting requirement of five years and
attainment of age 55 and a normal retirement age of 65. A participant whose
employment is terminated within one year following a change in control (as
defined in the plan) for reasons other than death or disability will have a
fully vested right to receive all benefits accrued under the plan as of the date
of termination if the Company terminates his employment without just cause or
the participant terminates with good reason. The benefit payable is equal to the
difference between (a) the benefit the participant would be entitled to under
the Retirement Plan, calculated without regard to the compensation limits in
effect under the Code and (b) the sum of the benefit payable under the
Retirement Plan and any non-qualified defined benefit plan sponsored by another
Blue Cross/Blue Shield employer that relates to a period of service for which
credit is given under the plan.

The Company has agreed to provide Mr. Shirk supplemental retirement
benefits based on average earnings multiplied by a retirement factor. Under this
arrangement, Mr. Shirk could receive retirement benefits of up to 65% of his
final average earnings (base salary and bonus) for retirement at or after age 60
offset by Social Security benefits and benefits payable under the Retirement
Plan. If Mr. Shirk's employment is terminated at any time following a change in
control (as defined in the agreement) for any reason other than a voluntary
termination without good reason, Mr. Shirk will be entitled to an annual
benefit, commencing as soon as practicable following his termination, equal to
the greater of (a) the benefit payable under the plan applicable to his age at
termination or (b) 60 percent of his final average earnings, with no reduction
for early commencement.

Supplemental benefits accrued at the end of 1997 were $245,410 for Mr.
Shirk; $28,042 for Mr. Harris; $26,580 for Mr. Colleran; $28,050 for Dr. Kishel;
and $35,176 for Mr. Vannoy.

401(k) Retirement Savings Program

The 401(k) Retirement Savings Program (the "Savings Program") is sponsored
by BCBSGA. The Savings Program is a tax-deferred savings plan designed to help
participants build long-term savings for the future. Generally, all employees
are eligible to participate after they complete 30 days of service and have
attained age 21. A participant may contribute to the Savings Program on a
before-tax basis from 1% to 15% of pay up to the maximum dollar contribution
amount ($9,500 in 1997). The employer will match $0.50 for every dollar the
participant contributes up to $500 (maximum $250). For the remaining
contribution, the employer will add $0.25 for each dollar the participant
contributes up to $2,125 for a total employer match of $2,375. Participants
become 25% vested in all employer matching contributions after two years, 50%
vested after three years, 75% vested after four years, and 100% vested once they
complete five years of service. Lump sum distributions generally may be made
from the Savings Program upon termination of employment or attainment of age
59 1/2. Participants may also obtain a hardship withdrawal or borrow money from
their account. All contributions to the Savings Program and investment earnings
are held in trust for the exclusive benefit of participants and their
beneficiaries. The name of the trust is The National 401(k) Master Trust. The
trustee is INVESCO Trust Company.

Deferred Compensation Plans

The Company offers certain Directors and employees the opportunity to defer
income pursuant to the Company's "Deferred Compensation Plan for Select
Management." Qualified Directors and employees may elect to defer payment of all
or any portion of such person's compensation during any year for a period of
three years or more. At the election of the qualified Director or employee, such
deferred compensation may be paid

31
<PAGE> 34

in a lump sum or in monthly installments over a period from 5 to 20 years.
Approximately 51 Directors and employees participate in these arrangements and
become general creditors of the Company thereunder. The Company's total
obligation to these participants, which is unsecured, was approximately $3.7
million as of December 31, 1997.

DIRECTORS COMPENSATION

Non-employee Directors each receive aggregate annual retainers of $20,000
for service on the Boards of the Company and BCBSGA plus meeting fees for
attendance at Board and Committee meetings of the Company and of BCBSGA. The
Chairman, the Vice Chairman and each Committee Chairman receive additional
aggregate retainers of $10,000, $5,000 and $3,000, respectively. Each
non-employee Director receives $500 for attendance at Board Meetings, $500 for
attendance at Committee meetings and $250 for participation in telephone
meetings for each of the two companies. Each non-employee Director may defer his
or her Director fees pursuant to certain of the Company's non-qualified,
deferred compensation plans. Directors also are reimbursed for reasonable
expenses incurred in connection with the performance of their duties.

COMPENSATION COMMITTEE

The Compensation Committee is comprised of Directors Vereen (Chair),
Gillespie, Gregory, Hanna and Tolbert (Messrs. Gillespie and Gregory were new
members of the Committee in 1997). Mr. LaBoon sits with the Committee ex
officio. The Committee meets quarterly. The Compensation Committee sets the
compensation for the Chief Executive Officer and the other Named Executive
Officers at a meeting early in each fiscal year after reviewing, in each case,
the performance targets established for the prior year in comparison to the
prior year's actual performance. At this meeting the Committee also sets
performance targets for the new fiscal year as well as any targets for
additional compensation plans pursuant to which the Chief Executive Officer and
the other Named Executive Officers may earn compensation with respect to that
fiscal year and sets annual salaries in accordance with the same considerations.
None of the members of the Compensation Committee is or has ever been an officer
or employee of the Company. There were no interlocking relationships between any
executive officers of the Company and any entity whose Directors or executive
officers served on the Company's Compensation Committee. None of the members of
the Compensation Committee engaged in transactions or had relationships
requiring disclosure under Item 404 of Regulation S-K in the fiscal year ended
December 31, 1997.

EXECUTIVE OR OTHER SEVERANCE AGREEMENTS

BCBSGA is a party to an Employment Agreement dated January 1, 1997 with
Richard D. Shirk, President and Chief Executive Officer. This agreement
contemplates an ever-renewing 24-month term, and, in the event of his
involuntary termination, including a termination resulting from a change in
control (as defined in the agreement), a 24-month continuation of salary and
certain other benefits. Additionally, Dr. Kishel is a party to a letter
agreement which, under certain limited termination circumstances, provides for a
twelve-month salary continuation.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

Currently, no shares of Common Stock are outstanding or beneficially owned
by any person and no shares of Blank Preferred Stock are outstanding or
beneficially owned by any person.

As of February 28, 1998, a total of 70,309 eligible subscribers held
351,550 shares of Class A Stock, all of which were outstanding. No directors or
officers of the Company or of BCBSGA beneficially own any shares of capital
stock of the Company except Frank J. Hanna, III. Georgia Strategic Healthcare,
LLC owns 40,000 (approximately 80%) of the Preferred Stock outstanding. Frank J.
Hanna, III, Frank J. Hanna, Jr. and David Hanna share voting and dispositive
power with regard to all of the shares of Preferred Stock owned by Georgia
Strategic Healthcare, LLC. Frank J. Hanna, III, is, therefore, deemed to be the
indirect beneficial owner of

32
<PAGE> 35

the 40,000 shares held by Georgia Strategic Healthcare, LLC. (The address of
Georgia Strategic Healthcare, LLC is Suite 1750, Two Ravinia Drive, Atlanta,
Georgia 30346.)

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

None.

33
<PAGE> 36

PART IV

ITEM 14. EXHIBITS, FINANCIAL STATEMENTS, FINANCIAL STATEMENT SCHEDULES AND
REPORTS ON FORM 8-K

(a) The following documents are filed as part of this Annual Report on Form
10-K.

1. The following financial statements are incorporated by reference into
Part II, Item 8 of this Form 10-K:

Report of Independent Auditors
Consolidated Balance Sheets -- December 31, 1997 and 1996
Consolidated Statements of Income -- Years Ended December 31, 1997,
1996 and 1995
Consolidated Statements of Shareholders' Equity -- Years Ended December
31, 1997, 1996
and 1995
Consolidated Statements of Cash Flows -- Years Ended December 31, 1997,
1996 and 1995
Notes to Consolidated Financial Statements

2. Financial Statement Schedules

Schedule II -- Condensed Financial Information of Registrant
Schedule V -- Valuation and Qualifying Accounts

All other schedules are omitted because they are not applicable, not
required or the information is included elsewhere in the Financial Statements or
Notes thereto.

The financial statement schedules follow the signature page.

34
<PAGE> 37

3. Exhibits

<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
<C> <S> <C>
2.1 -- Blue Cross and Blue Shield of Georgia, Inc. Plan of
Conversion, filed with the Insurance Department of the State
of Georgia, October 30, 1995.(1)
2.2 -- Form A Statement regarding the Acquisition of Control of or
Merger with a Domestic Insurer filed with respect to Blue
Cross and Blue Shield of Georgia, Inc. by Cerulean
Companies, Inc. on October 30, 1995, as amended and
supplemented.(1)
2.3 -- Conversion Order dated December 27, 1995 from Georgia
Insurance Commissioner.(1)
3.1 -- Articles of Incorporation of Cerulean Companies, Inc.(1)
3.2 -- Bylaws of Cerulean Companies, Inc.(1)
4.1 -- Stock Escrow Agreement among Cerulean Companies, Inc., Blue
Cross and Blue Shield of Georgia, Inc. and SunTrust Bank,
Atlanta.(1)
4.2 -- Specimen form of Class A Convertible Common Stock
certificate.(1)
10.1 -- Administrative Services Agreement between the State
Personnel Board and Blue Cross and Blue Shield of Georgia,
Inc., dated July 1, 1994.(1)
10.2 -- Plaza Lease Capital Plaza Associate ("Landlord") and Blue
Cross and Blue Shield of Georgia, Inc. ("Tenant") dated
December 23, 1986.(1)
10.3 -- Executive Compensation Plans and Arrangements.(1)
(a) Employment Agreement between Blue Cross and Blue Shield
of Georgia, Inc. and Mark Kishel, M.D., dated September 23,
1993.(1)
(b) Deferred Compensation Plan.(1)
(c) Annual Executive Incentive Plan.(1)
(d) Long-Term Incentive Plan.(1)
(e) Employment Agreement between Blue Cross and Blue Shield
of Georgia, Inc. and Richard D. Shirk dated January 1,
1997.(2)
(f) Performance Unit Plan, effective February 2, 1996.(3)
(g) Agreement for Supplemental Executive Retirement Benefits
Between Blue Cross and Blue Shield of Georgia, Inc. and
Richard D. Shirk dated December 1, 1996.(*)
(h) Blue Cross and Blue Shield of Georgia, Inc. Supplemental
Executive Retirement Plan effective July 1, 1996.(*)
(i) Blue Cross and Blue Shield of Georgia, Inc. Executive
Benefit Restoration Plan effective July 1, 1996.(*)
10.4 -- $55,000,000 Insolvency Credit Agreement dated as of April
18, 1996 among Blue Cross and Blue Shield of Georgia, Inc.
the Banks Listed Herein and Wachovia Bank of Georgia, N.A.,
as agent.(1)
10.5 -- $9,000,000 Credit Facility Between Blue Cross and Blue
Shield of Georgia, Inc., as Borrower and Wachovia Bank of
Georgia, N.A., as Agent, dated December 19, 1996.(4)
21 -- Subsidiaries of the registrant.(1)
</TABLE>

(b) Reports on Form 8-K

The Company filed a report on Form 8-K dated September 3, 1997. This filing
was made in connection with the lawsuit described in Item 3. LEGAL PROCEEDINGS
which is incorporated herein by reference.
- ---------------

(*) This exhibit is filed herewith.
(1) This exhibit to Form S-1, Registration No. 333-2796, filed on March 27, 1996
and subsequent amendments is incorporated herein by reference.
(2) This exhibit to Form 10-Q filed on May 15, 1997 is incorporated herein by
reference.
(3) This exhibit to Form 10-Q filed on November 14, 1997 is incorporated herein
by reference.

35
<PAGE> 38

(4) This exhibit to Form 10-K filed on March 31, 1997 is incorporated herein by
reference.

The following additional exhibit is being filed concurrently with this
report.

<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
<C> <C> <S>
27 -- Financial Data Schedule.
</TABLE>

36
<PAGE> 39

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934 as amended, the Registrant has duly caused this report to
be signed on its behalf by the undersigned, thereunto duly authorized in the
City of Atlanta, State of Georgia, on March 27, 1998.

CERULEAN COMPANIES, INC.
(Registrant)

By: /s/ RICHARD D. SHIRK
------------------------------------
Richard D. Shirk
President

Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed by the following persons on behalf of the Company and in
the capacities indicated on March 27, 1998.

<TABLE>
<CAPTION>
SIGNATURE TITLE
--------- -----
<S> <C>

/s/ RICHARD D. SHIRK President
- ----------------------------------------------------- (Principal Executive
Richard D. Shirk Officer)
and Director

/s/ JOHN A. HARRIS Treasurer
- ----------------------------------------------------- (Principal Financial and
John A. Harris Accounting Officer)

/s/ JAMES E. ALBRIGHT Director
- -----------------------------------------------------
James E. Albright

/s/ WILLIAM A. ALIAS, JR. Director
- -----------------------------------------------------
William A. Alias, Jr.

/s/ ELIZABETH W. CAMP Director
- -----------------------------------------------------
Elizabeth W. Camp

/s/ EDWARD M. GILLESPIE Director
- -----------------------------------------------------
Edward M. Gillespie

/s/ JOSEPH D. GREENE Director
- -----------------------------------------------------
Joseph D. Greene

/s/ MEL H. GREGORY, JR. Director
- -----------------------------------------------------
Mel H. Gregory, Jr.

/s/ FRANK J. HANNA, III Director
- -----------------------------------------------------
Frank J. Hanna, III

/s/ R. PIERCE HEAD, JR. Director
- -----------------------------------------------------
R. Pierce Head, Jr.

/s/ JAMES L. LABOON, JR. Director
- -----------------------------------------------------
James L. LaBoon, Jr.
</TABLE>

37
<PAGE> 40

<TABLE>
<CAPTION>
SIGNATURE TITLE
--------- -----
<S> <C>

/s/ JAMES H. LEIGH, JR., M.D. Director
- -----------------------------------------------------
James H. Leigh, Jr., M.D.

/s/ JAMES R. LIENTZ, JR. Director
- -----------------------------------------------------
James R. Lientz, Jr.

/s/ JULIA L. MITCHELL-IVEY Director
- -----------------------------------------------------
Julia L. Mitchell-Ivey

/s/ ARNOLD M. TENENBAUM Director
- -----------------------------------------------------
Arnold M. Tenenbaum

/s/ FRED L. TOLBERT, JR. Director
- -----------------------------------------------------
Fred L. Tolbert, Jr.

/s/ W. JERRY VEREEN Director
- -----------------------------------------------------
W. Jerry Vereen

/s/ JOE M. YOUNG Director
- -----------------------------------------------------
Joe M. Young
</TABLE>

38
<PAGE> 41

SCHEDULE II

CERULEAN COMPANIES, INC. (PARENT ONLY)

CONDENSED BALANCE SHEETS

<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------
1997 1996
------------ ------------
<S> <C> <C>
ASSETS
Investment in subsidiaries.................................. $202,553,748 $190,837,779
Investments in available-for-sale securities................ 27,881,234 --
Cash and cash equivalents................................... 8,892,626 44,851,119
Accrued interest and other assets........................... 4,306,645 243,533
------------ ------------
Total assets...................................... $243,634,253 $235,932,431
============ ============

LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Accounts payable and accrued expenses..................... $ 1,951,423 $ 1,716,861
------------ ------------
Total liabilities................................. 1,951,423 1,716,861
Mandatorily redeemable preferred stock:
Class B Convertible Preferred Stock, no par value.
Authorized, issued and outstanding, 49,900 shares at
December 31, 1997 and 1996; aggregate liquidation
preference, $49,900,000; aggregate mandatory redemption
$44,910,000............................................ 46,646,042 46,646,042
------------ ------------
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 351,545 and 350,615 shares at December 31,
1997 and 1996, respectively............................ 3,515 3,506
Common Stock, no par value. Authorized and unissued
1,000,000,000 shares................................... -- --
Net unrealized appreciation on securities................. 13,949,895 7,886,318
Retained earnings......................................... 181,083,378 179,679,704
------------ ------------
Total shareholders' equity........................ 195,036,788 187,569,528
------------ ------------
Total liabilities and shareholders' equity........ $243,634,253 $235,932,431
============ ============
</TABLE>

39
<PAGE> 42

SCHEDULE II (CONTINUED)

CERULEAN COMPANIES, INC. (PARENT ONLY)

CONDENSED STATEMENTS OF INCOME

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------
1997 1996
----------- -----------
<S> <C> <C>
Investment income........................................... $ 2,531,695 $ 2,281,204
Realized gains.............................................. 155 --
Operating expenses.......................................... 1,752,533 429,214
----------- -----------
Income before income taxes.................................. 779,317 1,851,990
Income taxes................................................ (3,395,000) 719,000
----------- -----------
Income before equity in earnings of subsidiaries............ 4,174,317 1,132,990
Equity in earnings of subsidiaries.......................... 223,366 16,340,410
----------- -----------
Net income.................................................. $ 4,397,683 $17,473,400
=========== ===========
</TABLE>

CERULEAN COMPANIES, INC. (PARENT ONLY)
CONDENSED STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------
1997 1996
------------ ------------
<S> <C> <C>
OPERATING ACTIVITIES
Net income.................................................. $ 4,397,683 $ 17,473,400
Adjustments to reconcile net income to cash provided by
operating activities:
Items that did not provide (use) cash:
Equity in earnings of subsidiaries..................... (223,366) (16,340,410)
Accretion.............................................. (22) (15,391)
Gain on sale of investments............................ (155) --
Increase in accrued interest and other assets.......... (4,057,591) (243,533)
Increase in accounts payable and accrued expenses...... 234,562 1,716,861
------------ ------------
Net cash provided by operating activities......... 351,111 2,590,927
INVESTING ACTIVITIES
Investments purchased..................................... (63,580,809) (11,385,609)
Investment in subsidiaries................................ (5,420,000) --
Investments sold or matured............................... 35,685,205 11,400,000
------------ ------------
Net cash (used in) provided by investing
activities..................................... (33,315,604) 14,391
FINANCING ACTIVITIES
Proceeds from issuance of preferred stock................... -- 46,646,042
Dividends paid and declared................................. (2,994,000) (2,727,867)
S-1 registration costs...................................... -- (1,672,374)
------------ ------------
Net cash (used in) provided by financing
activities..................................... (2,994,000) 42,245,801
------------ ------------
(Decrease) increase in cash and cash equivalents............ (35,958,493) 44,851,119
Cash and cash equivalents at beginning of year.............. 44,851,119 --
------------ ------------
Cash and cash equivalents at end of year.................... $ 8,892,626 $ 44,851,119
============ ============
</TABLE>

40
<PAGE> 43

SCHEDULE V

CERULEAN COMPANIES, INC.

VALUATION AND QUALIFYING ACCOUNTS
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995

<TABLE>
<CAPTION>
BALANCE AT CHARGED TO BALANCE
BEGINNING COSTS AND AT END
DESCRIPTION OF YEAR EXPENSES DEDUCTIONS OF YEAR
- ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Deferred Tax Asset Valuation Allowance
1997...................................... $58,011,000 $10,169,000 $(6,030,000) $62,150,000
=========== =========== =========== ===========
1996...................................... $29,805,000 $29,325,000 $(1,119,000) $58,011,000
=========== =========== =========== ===========
1995...................................... $30,573,000 $ 2,410,000 $(3,178,000) $29,805,000
=========== =========== =========== ===========
</TABLE>

41
<PAGE> 44

SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549

FORM 10-K

CERULEAN COMPANIES, INC.
Commission file number: 333-2796

CONSOLIDATED FINANCIAL STATEMENTS
Years Ended December 31, 1997, 1996 and 1995
With Report of Independent Auditors
<PAGE> 45

CERULEAN COMPANIES, INC.

CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995

CONTENTS

<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of Independent Auditors.............................. F-2

Audited Consolidated Financial Statements

Consolidated Balance Sheets................................. F-3
Consolidated Statements of Income........................... F-4
Consolidated Statements of Shareholders' Equity............. F-5
Consolidated Statements of Cash Flows....................... F-6
Notes to Consolidated Financial Statements.................. F-7
</TABLE>

F-1
<PAGE> 46

REPORT OF INDEPENDENT AUDITORS

Board of Directors
Cerulean Companies, Inc.

We have audited the accompanying consolidated balance sheets of Cerulean
Companies, Inc. and subsidiaries as of December 31, 1997 and 1996, and the
related consolidated statements of income, shareholders' equity and cash flows
for each of the three years in the period ended December 31, 1997. Our audits
also included the financial statement schedules listed in the Index at Item
14(a). These financial statements and schedules are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements and schedules based on our audits.

We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Cerulean
Companies, Inc. and subsidiaries at December 31, 1997 and 1996, and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended December 31, 1997, in conformity with generally
accepted accounting principles. Also, in our opinion, the related financial
statement schedules, when considered in relation to the basic financial
statements taken as a whole, present fairly in all material respects the
information set forth therein.

/s/ ERNST & YOUNG LLP

February 6, 1998
Atlanta, Georgia

F-2
<PAGE> 47

CERULEAN COMPANIES, INC.

CONSOLIDATED BALANCE SHEETS

<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------
1997 1996
------------ ------------
<S> <C> <C>
ASSETS
Investments (Note 3):
Fixed maturities:
Available-for-sale, at fair value (amortized cost:
$185,037,630; $156,949,004)............................ $187,662,551 $157,637,412
Equity securities, at fair value (cost: $58,348,840;
$50,969,299)........................................... 73,102,814 60,104,421
Short-term investments, at fair value (cost: $19,555,875;
$475,000).............................................. 19,555,875 423,788
------------ ------------
Total investments................................. 280,321,240 218,165,621
Cash and cash equivalents................................... 35,001,855 89,024,410
Reimbursable portion of estimated benefit liabilities....... 100,109,036 101,645,300
Accounts receivable (Note 4)................................ 59,624,899 46,679,498
FEP assets held by agent.................................... 25,553,200 22,715,241
Property and equipment (Note 5)............................. 33,735,541 31,264,521
Other assets................................................ 19,017,199 11,808,667
------------ ------------
Total assets...................................... $553,362,970 $521,303,258
============ ============

LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Estimated benefit liabilities (Note 8).................... $206,412,040 $181,718,093
Unearned premiums......................................... 8,301,197 8,983,956
FEP stabilization reserve................................. 25,553,200 22,715,241
Accounts payable and accrued expenses..................... 31,210,088 31,519,728
Payables to other plans................................... 1,068,051 2,633,307
Other liabilities......................................... 35,636,564 36,018,363
Note payable (Note 6)..................................... 3,500,000 3,500,000
------------ ------------
Total liabilities................................. 311,681,140 287,088,688
------------ ------------
Mandatorily redeemable preferred stock:
Class B Convertible Preferred Stock, no par value.
Authorized, issued and outstanding, 49,900 shares at
December 31, 1997 and 1996; aggregate liquidation
preference $49,900,000; aggregate mandatory redemption,
$44,910,000 (Note 9)................................... 46,645,042 46,645,042
------------ ------------
Shareholders' equity:
Blank Preferred Stock, no par value.
Authorized and unissued 100,000,000 shares (Note 9)....... -- --
Class A Convertible Common Stock, no par value, $0.01
stated value.
Authorized 50,000,000 shares; issued and outstanding
351,545 and 350,615 shares at December 31, 1997 and
1996, respectively (Note 9)............................ 3,515 3,506
Common Stock, no par value.
Authorized and unissued 100,000,000 shares (Note 9)....... -- --
Net unrealized appreciation on securities................. 13,949,895 7,886,318
Retained earnings......................................... 181,083,378 179,679,704
------------ ------------
Total shareholders' equity........................ 195,036,788 187,569,528
Commitments and contingencies (Note 14)
------------ ------------
Total liabilities and shareholders' equity........ $553,362,970 $521,303,258
============ ============
</TABLE>

See accompanying notes.

F-3
<PAGE> 48

CERULEAN COMPANIES, INC.

CONSOLIDATED STATEMENTS OF INCOME

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------------------
1997 1996 1995
-------------- -------------- --------------
<S> <C> <C> <C>
Revenues (Note 2):
Premiums...................................... $1,514,076,163 $1,323,662,988 $1,159,475,955
Investment and other income................... 17,258,952 14,358,273 11,980,241
Realized gains................................ 11,299,757 4,112,863 15,265,396
-------------- -------------- --------------
Total revenues........................ 1,542,634,872 1,342,134,124 1,186,721,592
Benefits expense (Note 8)....................... 1,370,961,608 1,175,740,173 1,039,095,566
Operating expenses, net of expense
reimbursements of $63,691,448, $57,491,950 and
$52,583,581, respectively (Note 10)........... 172,059,986 146,615,452 126,076,519
-------------- -------------- --------------
Operating (loss) income......................... (386,722) 19,778,499 21,549,507
Non-operating income (Note 13).................. 1,275,000 1,275,000 --
-------------- -------------- --------------
Income before income taxes and minority
interests..................................... 888,278 21,053,499 21,549,507
Income tax (benefit) expense (Note 7)........... (2,050,000) 3,159,000 3,857,000
Minority interests in (earnings) losses of joint
venture investments........................... 1,459,405 (421,099) (282,061)
-------------- -------------- --------------
Net income............................ $ 4,397,683 $ 17,473,400 $ 17,410,446
============== ============== ==============
</TABLE>

See accompanying notes.

F-4
<PAGE> 49

CERULEAN COMPANIES, INC.

CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY

<TABLE>
<CAPTION>
CLASS A
CONVERTIBLE UNREALIZED RETAINED
COMMON STOCK GAINS/(LOSSES) EARNINGS TOTAL
------------ -------------- ------------ ------------
<S> <C> <C> <C> <C>
Balance at December 31, 1994............ $ -- $ (529,242) $149,199,605 $148,670,363
Net income............................ -- -- 17,410,446 17,410,446
Unrealized gain on available-for-sale
securities, net of income taxes of
$1,688,000......................... -- 6,958,617 -- 6,958,617
------ ----------- ------------ ------------
Balance at December 31, 1995............ -- 6,429,375 166,610,051 173,039,426
Issuance of Class A Common Stock to
eligible subscribers............... 3,506 -- (3,506) --
Net income............................ -- -- 17,473,400 17,473,400
Dividends paid and accrued............ -- -- (2,727,867) (2,727,867)
S-1 registration costs................ -- -- (1,672,374) (1,672,374)
Unrealized gain on available-for-sale
securities, net of income taxes of
$331,000........................... -- 1,456,943 -- 1,456,943
------ ----------- ------------ ------------
Balance at December 31, 1996............ 3,506 7,886,318 179,679,704 187,569,528
Issuance of Class A Common Stock to
eligible subscribers............... 9 -- (9) --
Net income............................ -- -- 4,397,683 4,397,683
Dividends paid and accrued............ -- -- (2,994,000) (2,994,000)
Unrealized gain on available-for-sales
securities, net of income taxes of
$1,543,000......................... -- 6,063,577 -- 6,063,577
------ ----------- ------------ ------------
Balance at December 31, 1997............ $3,515 $13,949,895 $181,083,378 $195,036,788
====== =========== ============ ============
</TABLE>

See accompanying notes.

F-5
<PAGE> 50

CERULEAN COMPANIES, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------------------
1997 1996 1995
------------- ------------- -------------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income........................................ $ 4,397,683 $ 17,473,400 $ 17,410,446
Adjustments to reconcile net income to net cash
provided by operating activities:
Non-cash and non-operating items:
Depreciation................................. 9,765,395 9,350,458 8,451,468
Amortization................................. 277,183 319,673 424,299
Uncollectible receivables.................... 1,356,180 1,128,796 659,361
Gain on sale of investments.................. (11,299,757) (4,112,863) (15,265,396)
(Gain) loss on sale of property and
equipment.................................. (13,419) 21,304 33,183
Non-operating income......................... (1,275,000) (1,275,000) --
Decrease (increase) in certain assets:
Reimbursable portion of estimated benefit
liabilities.................................. 1,536,264 487,000 (2,871,000)
Accounts receivable............................. (14,301,581) (9,883,655) (7,334,638)
Other assets.................................... (8,751,532) (3,341,080) 1,990,503
Increase (decrease) in certain liabilities:
Estimated benefit liabilities................... 24,693,947 5,871,843 7,950,774
Unearned premiums............................... (682,759) 1,694,830 2,249,459
Accounts payable and accrued expenses........... (309,640) 14,884,194 (3,781,088)
Payables to other plans......................... (1,565,256) 190,559 (1,433,209)
Other liabilities............................... (381,799) 6,469,229 97,081
Minority interest in sale of stock by a
subsidiary................................... (1,225,000) (1,225,000) --
------------- ------------- -------------
Net cash provided by operating activities......... 2,220,909 38,053,688 8,581,243
INVESTING ACTIVITIES
Investments available-for-sale:
Investments purchased........................... (211,187,305) (134,652,892) (197,280,599)
Investments sold or matured..................... 167,660,837 96,757,972 210,596,136
Investments held-to-maturity:
Investments purchased........................... -- -- (149,844)
Investments matured............................. -- -- 12,123,761
Property and equipment purchased.................. (12,434,970) (7,773,300) (10,068,720)
Property and equipment sold....................... 211,974 1,089,453 18,151
------------- ------------- -------------
Net cash (used in) provided by investing
activities...................................... (55,749,464) (44,578,767) 15,238,885
FINANCING ACTIVITIES
Proceeds from note payable........................ -- 1,500,000 --
Proceeds from the issuance of preferred stock..... -- 46,645,042 --
Dividends paid and accrued........................ (2,994,000) (2,727,867) --
S-1 registration costs............................ -- (1,672,374) --
Sale of stock by a subsidiary..................... 2,500,000 2,500,000 --
------------- ------------- -------------
Net cash (used in) provided by financing
activities...................................... (494,000) 46,244,801 --
------------- ------------- -------------
(Decrease) increase in cash and cash
equivalents..................................... (54,022,555) 39,719,722 23,820,128
Cash and cash equivalents at beginning of year.... 89,024,410 49,304,688 25,484,560
------------- ------------- -------------
Cash and cash equivalents at end of year.......... $ 35,001,855 $ 89,024,410 $ 49,304,688
============= ============= =============
</TABLE>

See accompanying notes.

F-6
<PAGE> 51

CERULEAN COMPANIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997

1. ORGANIZATION

Cerulean Companies, Inc. (the "Company") was incorporated under the laws of
the State of Georgia on February 2, 1996 to act as the holding company for Blue
Cross and Blue Shield of Georgia, Inc. ("BCBSGA") and its subsidiaries, and for
other lawful purposes. On February 2, 1996, the Company acquired all of the
outstanding capital stock of BCBSGA, following BCBSGA's conversion from a
not-for-profit corporation to a for-profit corporation pursuant to a Plan of
Conversion approved by the Georgia Commissioner of Insurance on December 27,
1995 (the "Conversion"). In connection with the Conversion, the Company issued
49,900 shares of Class B Convertible Preferred Stock ("Preferred Stock") to
raise $49,900,000 in capital. After deducting offering costs, the net proceeds
to the Company were $46,645,042.

Although the Company did not become a holding company for BCBSGA until the
Conversion on February 2, 1996, the consolidated results of operations include
the historical operations of BCBSGA and its subsidiaries prior to February 2,
1996 and the Company (including its subsidiaries on a consolidated basis) from
the period February 2, 1996 through December 31, 1996 and thereafter.

Effective May 14, 1996, the Company's registration under the Securities Act
of 1933 of the public offering of its Class A Convertible Common Stock, no par
value (the "Class A Stock") with the Securities and Exchange Commission became
effective. As part of the Conversion, the Company agreed to offer to each of
BCBSGA's approximately 160,000 eligible subscribers five shares of Class A Stock
at no cost. Upon completion of the offering eligible subscribers accepted
351,545 shares of no par value Class A Stock. The registration of the Class A
Stock under section 12(g) of the Securities Exchange Act of 1934 became
effective on June 30, 1997. Currently, the Class A Stock is not publicly traded.

2. SIGNIFICANT ACCOUNTING POLICIES

BASIS OF PRESENTATION

The Company's accompanying 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. In the opinion of management, all
material adjustments necessary for a fair presentation of the financial position
and results of operations for the periods presented have been made. All such
adjustments are of a normal recurring nature.

PRINCIPLES OF CONSOLIDATION

The Company's accompanying consolidated financial statements include the
accounts of the Company, BCBSGA and its wholly-owned life insurance subsidiary,
a health maintenance 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 BY A SUBSIDIARY

Gains arising from a subsidiary issuing its own stock to third parties are
recorded as non-operating income and are presented as a separate line item in
the consolidated statements of income.

F-7
<PAGE> 52
CERULEAN COMPANIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

EARNINGS PER SHARE

Earnings per share are omitted because such data is not meaningful at the
present time due to the likely dilutive events that will occur prior to the
conversion of the Class A Stock or the Class B Convertible Preferred Stock.
Presently there is no market for Class A Stock or any equity securities of the
Company.

INVESTMENTS

The Company accounts for its investments in accordance with Financial
Accounting Standards Board ("FASB") Statement No. 115, Accounting for Certain
Investments in Debt and Equity Securities ("Statement No. 115"). Statement No.
115 requires that fixed maturity securities are to be classified as either
"held-to-maturity", "available-for-sale", or "trading".

Management determines the appropriate classification of its fixed maturity
securities at the time of purchase and reevaluates such designation as of each
balance sheet date. Fixed maturity securities are classified as held-to-maturity
when the Company has the positive intent and ability to hold them to maturity.
Held-to-maturity securities are stated at amortized cost, adjusted for
amortization of premiums and accretion of discounts to maturity. Such
amortization as well as interest earned is included in investment and other
income.

Fixed maturity and equity securities not classified as held-to-maturity are
classified as available-for-sale. Available-for-sale securities are carried at
fair value, with the unrealized gains and losses, net of tax, reported in a
separate component of shareholders' equity. The amortized cost of debt
securities in this category is adjusted for amortization of premiums and
accretion of discounts to maturity. Such amortization and interest earned is
included in investment and other income. The cost of securities sold is based on
the specific identification method. At December 31, 1997 and 1996, the Company
classified all of its fixed maturity and equity securities as
available-for-sale. The Company's investment portfolio is not significantly
concentrated in any particular industry or geographic region.

CASH AND CASH EQUIVALENTS

Cash equivalents are liquid, short-term investments with maturities of
three months or less at the time of purchase and are combined with cash account
balances. These investments are stated at cost, which approximates fair value.

PROPERTY AND EQUIPMENT

Property and equipment are stated at cost less accumulated depreciation.
The costs of developing software for internal use are capitalized when
technological feasibility has been established. Depreciation is computed using
the straight-line method over the estimated useful lives of the respective
assets, which are 15 years for buildings and 3-7 years for software, furniture
and equipment. Amortization of software developed for internal use begins when
the asset is placed in service.

ESTIMATED BENEFIT LIABILITIES

The Company provides for claims reported but unpaid and for claims incurred
but unreported and the cost of adjudicating claims based primarily on past
experience, membership demographics, claims run-off patterns and other current
medical trend information, using accepted actuarial methods. Estimates are
adjusted as changes in these factors occur and such adjustments are reported in
the year of determination. Portions of the Company's estimated benefit
liabilities are reimbursable due to the nature of certain self-funded and rate
stabilization reserve programs. Offsetting receivables have been recorded in the
consolidated balance sheets.

F-8
<PAGE> 53
CERULEAN COMPANIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

PREMIUM REVENUES

The Company's revenues consist primarily of premiums for traditional
indemnity health insurance and services, managed care products and services, and
group life insurance products.

All of the Company's individual and certain employer group contracts
provide for the individual or the group to be fully insured. Premiums for these
contracts are billed in advance of the respective coverage periods and are
initially recorded as premium receivables and as unearned premiums. Unearned
premiums are recognized as earned in the period of coverage.

Certain other employer groups have contracts that provide for the group to
be at risk for all or a portion of their claims experience. Most of these
self-funded groups purchase aggregate and/or specific stop-loss coverage. In
exchange for a premium, the group's aggregate liability is capped for the year
or the group's liability on any one participant is capped for the year. The
Company charges self-funded groups an administrative fee which is based on the
number of members in a group or a percentage of the group's claims experience.
Under the Company's self-funded arrangements, amounts due are recognized based
on claims experience plus administrative and other fees and any stop-loss
premiums.

RATE STABILIZATION RESERVES

The Company has entered into agreements with certain groups whose premium
revenues are based on experience rating. On each group's anniversary date, the
gain or loss resulting from its experience is determined.

Accumulated net gains which represent the accumulated excess of premium
revenues over claims incurred and retention for administrative expenses are
recorded as a rate stabilization reserve liability. Under the terms of these
agreements, groups may utilize these excess funds to reduce prospective rates,
leave the excess funds on deposit with the Company or receive a refund. The
accumulated excess of claims incurred and retention for administrative expenses
over premium revenues is generally expensed by the Company. However, in a few
shared risk arrangements, net losses are recorded as receivables to the extent
they are recoverable from the respective groups.

NATIONAL ACCOUNTS

The Company participates in the underwriting of certain national
(multiple-plan) groups. Claims paid plus certain administrative expenses are
reimbursed by a control plan. The Company's share of underwriting gains or
losses on these national groups is recognized when settlements are rendered by
the control plan, which is typically between 6 and 18 months after the
expiration of the contract period.

FEDERAL EMPLOYEE PROGRAM

The Company and other Blue Cross and Blue Shield plans participate in the
Federal Employee Program ("FEP") which underwrites a voluntary health insurance
contract for employees (and their dependents) of the federal government. The
Blue Cross and Blue Shield Association has been designated as the contract
agent. A premium stabilization reserve liability (FEP stabilization reserve) and
an offsetting asset (FEP asset held by agent) have been recorded in the
consolidated balance sheets, and premium revenues, investment income and
operating expenses, including FEP operations center expenses, have been recorded
in the consolidated statements of income to recognize the Company's portion of
the FEP's reserves.

AGENCY CONTRACTS

The Company acts as fiscal intermediary and administrative agent for
Medicare and certain other plans. Operating expenses are allocated to these
lines of business to determine reimbursement for services rendered

F-9
<PAGE> 54
CERULEAN COMPANIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

under these arrangements. The reimbursement of operating expenses is recorded as
a reduction of the Company's operating expenses. The claims processed for these
plans are not included in the accompanying consolidated statements of income.

ADVERTISING AND PROMOTION

All costs associated with advertising and promoting products are expensed
in the year incurred. Advertising and promotion expense was $5,012,557 in 1997,
$1,651,610 in 1996 and $3,107,389 in 1995.

MAJOR CUSTOMERS AND MARKET CONCENTRATION

The Company primarily conducts business in the State of Georgia, and a
significant portion of its customer base is concentrated with companies that are
located in the metropolitan Atlanta area. As a percentage of premium revenues,
the Company's largest customer represented 19% of premium revenues in 1997, 20%
in 1996 and 23% in 1995; and the second largest customer represented 10% of
premium revenues in 1997 and 1996 and 11% of premium revenues in 1995.

RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS

During 1997, the FASB issued Statement No. 129, Disclosure of Information
about Capital Structure, Statement No. 130, Reporting Comprehensive Income and
Statement No. 131, Disclosures about Segments of an Enterprise and Related
Information. Statement No. 129 establishes standards for disclosing information
about an entity's capital structure and is effective for periods ending after
December 15, 1997. The disclosures required under Statement No. 129 are included
in these consolidated financial statements.

Statement No. 130 establishes standards for reporting and display of
comprehensive income and its components in a full set of general-purpose
financial statements. This statement is effective for fiscal years beginning
after December 15, 1997. Statement No. 131 establishes standards for the way
that public business enterprises report information about operating segments in
annual financial statements and requires that those enterprises report selected
information about operating segments in interim financial reports issued to
shareholders. It also establishes standards for related disclosures about
products and services, geographic areas and major customers. This statement is
effective for financial statements for periods beginning after December 15,
1997. Management of the Company is presently assessing the effect that Statement
No. 130 and 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.

RECLASSIFICATIONS

Certain prior year balances have been reclassified to conform to the
current year presentation.

F-10
<PAGE> 55
CERULEAN COMPANIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

3. INVESTMENTS

Investments at December 31, 1997 and 1996 are as follows:

<TABLE>
<CAPTION>
DECEMBER 31, 1997
AVAILABLE-FOR-SALE SECURITIES
----------------------------------------------------------------------
COST OR GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR CARRYING
COST GAINS LOSSES VALUE VALUE
------------ ----------- ----------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Fixed Maturities:
U.S. Treasury securities
and obligations of U.S.
government agencies..... $132,452,239 $ 2,006,357 $ (97,877) $134,360,719 $134,360,719
Corporate securities....... 27,994,540 419,864 (59,242) 28,355,162 28,355,162
Mortgage-backed
securities.............. 24,590,851 376,052 (20,233) 24,946,670 24,946,670
------------ ----------- ----------- ------------ ------------
Total fixed maturities..... 185,037,630 2,802,273 (177,352) 187,662,551 187,662,551
Equity Securities:
Preferred stocks........... 745,000 -- -- 745,000 745,000
Common stocks.............. 57,603,840 15,793,174 (1,039,200) 72,357,814 72,357,814
------------ ----------- ----------- ------------ ------------
Total equity securities...... 58,348,840 15,793,174 (1,039,200) 73,102,814 73,102,814
Short-term investments....... 19,555,875 -- -- 19,555,875 19,555,875
------------ ----------- ----------- ------------ ------------
Total
available-for-sale
securities....... $262,942,345 $18,595,447 $(1,216,552) $280,321,240 $280,321,240
============ =========== =========== ============ ============
</TABLE>

<TABLE>
<CAPTION>
DECEMBER 31, 1996
AVAILABLE-FOR-SALE SECURITIES
----------------------------------------------------------------------
COST OR GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR CARRYING
COST GAINS LOSSES VALUE VALUE
------------ ----------- ----------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Fixed Maturities:
U.S. Treasury securities
and obligations of U.S.
government agencies..... $121,074,259 $ 1,212,880 $ (532,159) $121,754,980 $121,754,980
Corporate securities....... 17,703,054 202,073 (211,705) 17,693,422 17,693,422
Mortgage-backed
securities.............. 18,171,691 127,930 (110,611) 18,189,010 18,189,010
------------ ----------- ----------- ------------ ------------
Total fixed maturities..... 156,949,004 1,542,883 (854,475) 157,637,412 157,637,412
Equity Securities:
Preferred stocks........... 1,000,000 -- -- 1,000,000 1,000,000
Common stocks.............. 49,969,299 9,956,759 (821,637) 59,104,421 59,104,421
------------ ----------- ----------- ------------ ------------
Total equity securities.... 50,969,299 9,956,759 (821,637) 60,104,421 60,104,421
Short-term investments..... 475,000 -- (51,212) 423,788 423,788
------------ ----------- ----------- ------------ ------------
Total
available-for-sale
securities....... $208,393,303 $11,499,642 $(1,727,324) $218,165,621 $218,165,621
============ =========== =========== ============ ============
</TABLE>

Fair values for fixed maturities and short-term investments are based on
quoted market prices, where available. For fixed maturities not actively traded,
fair values are estimated using values obtained from independent pricing
services. The fair values for common stocks are based on quoted market prices.

Substantially all of the Company's investments in equity securities at
December 31, 1997 and 1996 are comprised of stocks in industrial companies.

F-11
<PAGE> 56
CERULEAN COMPANIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

The amortized cost and fair values of fixed maturities at December 31,
1997, by contractual maturity, are shown below. Expected maturities will differ
from contractual maturities because borrowers may have the right to call or
prepay obligations with or without call or prepayment penalties.

<TABLE>
<CAPTION>
DECEMBER 31, 1997
AVAILABLE-FOR-SALE SECURITIES
-----------------------------
AMORTIZED FAIR
COST VALUE
------------- -------------
<S> <C> <C>
Due in one year or less..................................... $ 23,812,261 $ 23,818,894
Due after one year through five years....................... 64,929,533 66,109,032
Due after five years through ten years...................... 69,929,565 71,012,535
Due after ten years......................................... 1,775,420 1,775,420
Mortgage-backed securities.................................. 24,590,851 24,946,670
------------ ------------
Total fixed maturity securities................... $185,037,630 $187,662,551
============ ============
</TABLE>

Bonds, certificates of deposit and money market funds carried at a value of
$755,423 were on deposit with insurance regulatory authorities at December 31,
1997 and 1996 in accordance with statutory requirements.

Investment and other income for the years ended December 31, 1997, 1996 and
1995 is summarized as follows:

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------------
1997 1996 1995
----------- ----------- -----------
<S> <C> <C> <C>
Fixed maturities................................ $11,464,768 $ 9,618,411 $ 8,231,507
Equity securities............................... 1,302,477 1,057,287 1,711,034
Short-term investments and cash equivalents..... 5,165,927 4,803,801 1,827,176
----------- ----------- -----------
Interest and dividend income.................... 17,933,172 15,479,499 11,769,717
Less investment expenses........................ (947,913) (834,828) (785,327)
----------- ----------- -----------
Net investment income........................... 16,985,259 14,644,671 10,984,390
Other income (loss)............................. 273,693 (286,398) 995,851
----------- ----------- -----------
Investment and other income..................... $17,258,952 $14,358,273 $11,980,241
=========== =========== ===========
</TABLE>

The other income (loss) amount for the years ended December 31, 1997 and
1995 includes the receipts of $579,000 and $2,000,000, respectively related to
the settlement of a lease dispute. Some terms in the Company's primary lease for
its headquarters building were modified to the benefit of the landlord, and the
Company was paid for giving up its right to those terms.

F-12
<PAGE> 57
CERULEAN COMPANIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

Realized and unrealized investment gains and losses for the years ended
December 31, 1997, 1996 and 1995 were as follows:

<TABLE>
<CAPTION>
1997 1996 1995
----------- ----------- -----------
<S> <C> <C> <C>
Realized gains:
Fixed maturities.............................. $ 248,942 $ 686,260 $ 1,487,683
Equity securities............................. 11,910,540 4,473,669 15,406,816
----------- ----------- -----------
Total gains..................................... 12,159,482 5,159,929 16,894,499
Realized losses:
Fixed maturities.............................. (127,366) (244,172) (529,914)
Equity securities............................. (732,359) (802,894) (1,099,189)
----------- ----------- -----------
Total losses.................................... (859,725) (1,047,066) (1,629,103)
----------- ----------- -----------
Net realized investment gains................... 11,299,757 4,112,863 15,265,396
Changes in unrealized gains (losses):
Fixed maturities.............................. 1,936,513 (4,251,603) 9,939,912
Equity securities............................. 5,618,852 6,063,183 (1,261,656)
Short-term investments........................ 51,212 (23,637) (27,576)
----------- ----------- -----------
Net unrealized gains............................ 7,606,577 1,787,943 8,650,680
----------- ----------- -----------
Total realized and unrealized gains... $18,906,334 $ 5,900,806 $23,916,076
=========== =========== ===========
</TABLE>

4. ACCOUNTS RECEIVABLE

Accounts receivable consists of the following:

<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------
1997 1996
----------- -----------
<S> <C> <C>
Groups and subscribers...................................... $37,350,669 $25,933,318
Other Blue Cross and Blue Shield plans...................... 2,971,988 5,757,577
Federal Employee Program.................................... 3,312,909 1,636,883
Other....................................................... 20,998,784 17,004,991
Less: Allowance for doubtful accounts....................... (5,009,451) (3,653,271)
----------- -----------
$59,624,899 $46,679,498
=========== ===========
</TABLE>

5. PROPERTY AND EQUIPMENT

Property and equipment consists of the following:

<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------
1997 1996
------------ ------------
<S> <C> <C>
Land...................................................... $ 1,046,773 $ 1,131,528
Building & improvements................................... 14,742,097 14,173,091
Furniture & equipment..................................... 73,988,271 63,784,066
------------ ------------
89,777,141 79,088,685
Less accumulated depreciation............................. (56,041,600) (47,824,164)
------------ ------------
$ 33,735,541 $ 31,264,521
============ ============
</TABLE>

At December 31, 1997, furniture and equipment includes $1,701,673 of
capitalized costs related to the development of internal use software. No costs
related to the development of internal use software were

F-13
<PAGE> 58
CERULEAN COMPANIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

capitalized during 1996. As of December 31, 1997, the software developed for
internal use has not been placed in service; accordingly, no amortization was
recognized during the year.

Depreciation expense was $9,765,395, $9,350,458 and $8,451,468 for 1997,
1996 and 1995, respectively, including $1,063,318 in 1997, $965,196 in 1996 and
$746,113 in 1995 for building improvements.

6. LINES OF CREDIT

The Company has available a $5,500,000 line of credit with a bank to
finance its working capital needs. Interest accrues on amounts advanced at the
prime rate. There were no borrowings on this line of credit in 1997 or 1996.

In 1994, the Company entered into a revolving credit loan agreement with a
group of banks to finance its community health partnership networks and other
related costs. Under terms of the agreement, the Company could borrow up to
$25,000,000. In December 1996, the Company reduced the total amount available
under the revolving credit agreement to $9,000,000. Interest accrued on amounts
advanced at 0.5% over the LIBOR rate in 1997 and 1996 and 0.7% over the LIBOR
rate for 1995. Borrowings outstanding under the revolving credit agreement were
$3,500,000 at December 31, 1997 and 1996. The weighted average interest rate on
amounts outstanding for 1997 and 1996 was 6.3%.

In April 1996, the Company obtained a $55,000,000 insolvency line of credit
with a group of banks. The insolvency line of credit may be drawn on solely in
the event of an insolvency of BCBSGA to pay authorized insurance policy claims.
The insolvency line of credit is designed to satisfy certain membership
standards of the Blue Cross and Blue Shield Association, from which the Company
and certain of its subsidiaries have the exclusive right to do business in
Georgia under the name "Blue Cross and Blue Shield" and to use the Blue Cross
and Blue Shield names, trademarks and service marks with respect to the
Company's indemnity, PPO, HMO and POS products.

7. INCOME TAXES

Income tax expense (benefit) attributable to income before income taxes and
minority interests, substantially all of which is federal, consists of:

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------------
1997 1996 1995
----------- ----------- ----------
<S> <C> <C> <C>
Current tax expense.............................. $ 3,330,000 $ 6,671,000 $3,895,000
Deferred tax benefit............................. (5,380,000) (3,512,000) (38,000)
----------- ----------- ----------
Total tax (benefit) expense............ $(2,050,000) $ 3,159,000 $3,857,000
=========== =========== ==========
</TABLE>

F-14
<PAGE> 59
CERULEAN COMPANIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

The provision for income taxes is different than the amount computed using
the statutory federal income tax rate of 35% as follows:

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------------
1997 1996 1995
----------- ---------- ----------
<S> <C> <C> <C>
Tax expense at statutory rates.................... $ 311,000 $7,368,000 $7,543,000
Utilization of carryforwards...................... (2,356,000) -- --
Alternative minimum tax........................... -- (3,162,000) (3,030,000)
Difference related to long-lived tax assets....... (2,119,000) (1,590,000) --
Difference between book and tax basis of CHPN
investments..................................... (2,132,000) -- --
CHPN losses with no benefit....................... 4,231,000 781,000 --
Changes in valuation allowance related to other
temporary differences........................... (375,000) (320,000) (379,000)
Other............................................. 390,000 82,000 (277,000)
----------- ---------- ----------
$(2,050,000) $3,159,000 $3,857,000
=========== ========== ==========
</TABLE>

In 1997 the Company increased the net value of its long-lived tax assets
and refined the related valuation allowance, recognizing a benefit of
$2,119,000. Additionally, the Company recorded a $3,731,000 benefit from the
difference in book and tax basis for its CHPN investments, reduced to its
expected realizable value of $2,132,000. CHPN subsidiaries which do not join in
the filing of the consolidated tax return with the Company generated tax losses
in 1997 that are not expected to generate benefit currently or in the
foreseeable future. Other includes state taxes, net of federal tax benefit, and
other permanent book to tax differences, including non deductible expenses.

The Company and its wholly-owned subsidiaries file a consolidated federal
income tax return. The Company's consolidated tax expense in 1997 calculated
under the regular tax system was reduced by available net operating loss
carryforwards, which subjected the Company to alternative minimum tax. Income
tax expense in 1997, 1996 and 1995 consisted primarily of federal alternative
minimum tax. Federal income taxes paid during 1997, 1996 and 1995 were
$2,800,000, $5,400,000 and $3,300,000, respectively.

F-15
<PAGE> 60
CERULEAN COMPANIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. The significant
components of the deferred tax asset, which is included in other assets in the
balance sheet, are as follows:

<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------
1997 1996
------------ ------------
<S> <C> <C>
Deferred tax asset:
Regular tax operating loss carryforwards for the
consolidated tax group............................... $ 19,590,000 $ 22,390,000
Regular tax operating loss carryforwards for CHPNs...... 6,050,000 781,000
Long-lived tax assets................................... 24,590,000 23,390,000
Other temporary differences............................. 8,629,000 8,850,000
Alternative minimum tax credit.......................... 10,750,000 8,410,000
Difference between book and tax basis of CHPN
investments.......................................... 3,731,000 --
------------ ------------
Total deferred tax asset................................ 73,340,000 63,821,000
Valuation allowance for deferred tax asset.............. (62,150,000) (58,011,000)
------------ ------------
Deferred tax asset, net of valuation allowance.......... 11,190,000 5,810,000
------------ ------------
Deferred tax liability:
Unrealized investments gains............................ 3,429,000 1,886,000
------------ ------------
Total deferred tax liability............................ 3,429,000 1,886,000
------------ ------------
Net deferred tax asset.................................... $ 7,761,000 $ 3,924,000
============ ============
</TABLE>

The Company recorded a valuation allowance of $20,882,000 and $21,800,000
as of December 31, 1997 and 1996 for certain long-lived tax assets which will be
deductible in the future. The other temporary differences consist principally of
differences between tax and generally accepted accounting principles related to
estimated benefit liabilities and accounting accruals.

At December 31, 1997, the Company's consolidated tax group has net
operating loss carryforwards of $55,969,000 for regular income tax purposes that
expire in the years 2001 through 2003. Certain of the CHPN subsidiaries which
file separate tax returns have net operating loss carryforwards of $15,937,000
that expire in 2011 through 2012. The Company recognized a benefit in 1997 from
consolidated tax group carryforwards of $2,356,000. The Company qualifies for a
special deduction under the regular tax system available to certain Blue Cross
and Blue Shield plans under Section 833(b) of the Internal Revenue Code. The
effect of this deduction is to significantly reduce regular taxable income and
subjects the Company to alternative minimum tax. The Company expects to be taxed
under the alternative minimum tax system into the foreseeable future and
therefore the regular tax net operating loss carryforwards of the consolidated
tax group and the alternative minimum tax credit will most likely not be
utilized. For financial reporting purposes, a valuation allowance has been
recorded to reduce the deferred tax assets related to the amount expected to be
realized. The Company continually reviews the adequacy of the deferred tax
valuation allowance and recognizes benefits only as reassessment indicates that
it is more likely than not that benefits will be realized.

F-16
<PAGE> 61
CERULEAN COMPANIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

8. ESTIMATED BENEFIT LIABILITIES

The following table provides a reconciliation of the beginning and ending
estimated benefit liabilities including claims adjudication expenses, net of
reimbursable reserves and life reserves, for 1997, 1996 and 1995:

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------------
1997 1996 1995
------------ ------------ ------------
<S> <C> <C> <C>
Balance at January 1......................... $181,718,093 $175,846,250 $167,895,476
Less: Reimbursable reserves and life
reserves................................... 106,870,527 107,059,898 105,931,261
------------ ------------ ------------
Net balance at January 1..................... 74,847,566 68,786,352 61,964,215
Plus incurred related to:
Current year............................... 576,250,933 424,307,017 340,152,289
Prior year................................. 901,109 (2,201,775) 4,669,051
------------ ------------ ------------
Total incurred..................... 577,152,042 422,105,242 344,821,340
Less paid related to:
Current year............................... 478,159,277 352,344,803 275,188,109
Prior year................................. 73,958,646 63,699,225 62,811,094
------------ ------------ ------------
Total paid......................... 552,117,923 416,044,028 337,999,203
------------ ------------ ------------
Net balance at December 31................... 99,881,685 74,847,566 68,786,352
Plus: Reimbursable reserves and life
reserves................................... 106,530,355 106,870,527 107,059,898
------------ ------------ ------------
Balance at December 31....................... $206,412,040 $181,718,093 $175,846,250
============ ============ ============
</TABLE>

The Company uses paid claims and completion factors based on historical
payment patterns to estimate incurred claims. Changes in payment patterns and
claims trends can result in changes to prior year's claims estimates.

A reconciliation of the Company's incurred expense to total benefits
expense as shown in the consolidated statements of income is as follows:

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------------------
1997 1996 1995
-------------- -------------- --------------
<S> <C> <C> <C>
Incurred related to current and prior
year.................................. $ 577,152,042 $ 422,105,242 $ 344,821,340
Benefits expense related to life
insurance claims and claims reimbursed
by employer groups.................... 793,809,566 753,634,931 694,274,226
-------------- -------------- --------------
Total benefits expense........ $1,370,961,608 $1,175,740,173 $1,039,095,566
============== ============== ==============
</TABLE>

9. CAPITAL STOCK

MANDATORILY REDEEMABLE PREFERRED STOCK

The Preferred Stock has a liquidation preference of $1,000 per share and a
mandatory redemption value of $900 per share. Dividends on the Preferred Stock
are currently paid at the rate of $60.00 per annum per share, are fully
cumulative and accrue without interest. The preferred shares are mandatorily
redeemable on December 1, 2001 or may be redeemed prior to this date upon the
occurrence of certain events. Upon completion of a Stock Conversion, each share
of Preferred Stock shall convert into the number of fully paid and nonassessable
shares of Common Stock equal to .0004446420631%. This rate may be adjusted
periodically upon the occurrence of certain events. The holders of the Preferred
Stock vote separately as a single class with each share being entitled to one
vote.

F-17
<PAGE> 62
CERULEAN COMPANIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

BLANK PREFERRED STOCK

The Board of Directors (the "Board") of the Company may from time to time
issue shares of Blank Preferred Stock in such series or classes with such terms,
preferences and other provisions as the Board shall determine, provided that
such issuance is approved by the majority of the holders of the Preferred Stock
then issued, outstanding and entitled to vote. Presently, there is no Blank
Preferred Stock issued or outstanding.

CLASS A CONVERTIBLE COMMON STOCK

Shares of Class A Convertible Stock ("Class A Stock") may not be sold,
transferred, encumbered, pledged or otherwise disposed of prior to December 1,
1998 except upon the occurrence of certain events. In the event of a Stock
Conversion, each share of Class A Stock will be converted into one share of
Common Stock. So long as any shares of the Company's Preferred Stock are issued,
outstanding and entitled to vote, no dividends may be paid on the Class A Stock
without the approval of the Board and the holders of a majority of the shares of
Preferred Stock. As long as no Common Stock is outstanding, the holders of the
Class A Stock vote separately as a single class with each share being entitled
to one vote. The Company's Articles of Incorporation do not contain any
provisions protecting holders of Class A Stock against dilution. In the event
the Company issues additional shares of Class A Stock, or issues shares of
Common Stock or Blank Preferred Stock convertible into Common Stock or effects a
stock split, stock dividend or other recapitalization of or on its Common Stock,
the then existing Class A Shareholders will be diluted.

COMMON STOCK

Unless approved by two-thirds of the Directors, no person may directly or
indirectly acquire or hold more than the permissible ownership amount which is
currently 20% of the total shares of Common Stock outstanding. So long as any
shares of the Company's Preferred Stock are issued, outstanding and entitled to
vote, no dividends may be paid on the Common Stock without the approval of the
Board and the holders of a majority of the shares of Preferred Stock. In the
event no Class A Stock or Preferred Stock is issued or outstanding at the time
of a liquidation, dissolution or winding up of the affairs of the Company, the
entire assets of the Company available for distribution to stockholders will be
distributed pro rata among the holders of the Common Stock. Each outstanding
share of Common Stock is entitled to one vote. Presently, there is no Common
Stock issued or outstanding.

10. AGENCY CONTRACTS

The Company processes and pays claims as fiscal intermediary for the
Medicare Program and as an administrative agent for the State of Georgia and the
national Blue Cross Blue Shield interplan system. Claims processed for these
programs, which are excluded from the accompanying consolidated statements of
income, are as follows:

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------------------
1997 1996 1995
-------------- -------------- --------------
<S> <C> <C> <C>
Claims processed for:
Medicare.............................. $2,888,499,047 $2,610,855,633 $2,431,829,705
State of Georgia...................... 841,545,396 805,281,401 757,743,385
Interplan System...................... 151,133,076 94,907,790 56,311,783
-------------- -------------- --------------
$3,881,177,519 $3,511,044,824 $3,245,884,873
============== ============== ==============
</TABLE>

The Company receives reimbursement for administrative expenses incurred in
performing these services. These expense reimbursements have been deducted from
operating expenses in the accompanying consolidated statements of income.

F-18
<PAGE> 63
CERULEAN COMPANIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

The operating expense reimbursements in connection with processing Medicare
claims have been audited through 1994 by government representatives. Management
is of the opinion that no significant adjustments will be made affecting cost
reimbursement through December 31, 1997.

11. OPERATING LEASES

The Company has an operating lease arrangement for its home office
facility. The term of the lease is ten years, with two five-year renewal
options. Annual rental includes base rental plus pro-rated real estate taxes and
operating expenses.

In addition, the Company leases other office space and data processing
equipment. Future minimum lease obligations (including estimated real estate
taxes and operating expenses) under all non-cancelable operating leases are as
follows:

<TABLE>
<S> <C>
1998........................................................ $16,985,764
1999........................................................ 15,250,929
2000........................................................ 5,231,731
2001........................................................ 2,666,090
2002........................................................ 1,446,383
Thereafter.................................................. 1,387,549
-----------
$42,968,446
===========
</TABLE>

Rent expense amounted to approximately $14,235,000 in 1997, $12,249,000 in
1996 and $9,933,000 in 1995.

12. EMPLOYEE BENEFITS

PENSION PLAN

The Company and its subsidiaries participate in a multi-employer
non-contributory defined benefit pension plan covering substantially all of its
employees. The benefits are based on years of service and the employee's
compensation during those years. The Company's funding policy is to contribute
amounts sufficient to meet the minimum funding requirements set forth in the
Employee Retirement Income Security Act of 1974. Contributions are intended to
provide not only for benefits attributed to service to date but also for those
expected to be earned in the future. The Projected Unit Credit Method is used to
determine funding requirements and pension expense.

F-19
<PAGE> 64
CERULEAN COMPANIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

The following table presents the funded status and amounts recognized in
the consolidated financial statements at the respective dates:

<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------
1997 1996
----------- -----------
<S> <C> <C>
Actuarial present value of benefit obligations:
Accumulated benefit obligation, including vested benefits
of $36,424,955 in 1997 and $28,836,520 in 1996......... $43,991,079 $34,961,900
=========== ===========
Actuarial present value of projected benefit obligation for
service rendered to date.................................. $63,341,053 $52,051,955
Plan assets at fair value, primarily short-term investments,
listed stocks, corporate bonds and U.S. government
securities................................................ 56,731,183 46,515,060
----------- -----------
Plan assets (less than) projected benefit obligation........ (6,609,870) (5,536,895)
Unrecognized net loss....................................... 1,800,191 981,857
Unrecognized transition asset............................... (799,526) (933,899)
Unrecognized prior service cost............................. 2,880,716 3,129,666
----------- -----------
Accrued pension liability................................... $(2,728,489) $(2,359,271)
=========== ===========
</TABLE>

The net pension cost includes the following components:

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------------
1997 1996 1995
----------- ----------- -----------
<S> <C> <C> <C>
Service cost-benefits earned during the
period........................................ $ 3,397,936 $ 3,336,777 $ 2,367,130
Interest cost on projected benefit obligation... 4,027,434 3,847,048 3,296,580
Actual return on plan assets.................... (9,492,285) (6,660,548) (7,348,111)
Net amortization and deferral................... 5,856,949 3,659,355 4,626,964
----------- ----------- -----------
Net pension cost................................ $ 3,790,034 $ 4,182,632 $ 2,942,563
=========== =========== ===========
</TABLE>

The following assumptions were used in the pension calculations:

<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------------
1997 1996 1995
--------- --------- ---------
<S> <C> <C> <C>
Weighted-average discount rate...................... 7.25% 7.75% 8.5%
Rate of increase in future compensation............. 3.5% - 7% 3.5% - 7% 3.5% - 7%
Expected long-term rate of return on assets......... 9% 9% 9%
</TABLE>

SUPPLEMENTAL EXECUTIVE RETIREMENT PLAN

During 1996, the Company and its subsidiaries established three defined
benefit pension plans (the "Plans") covering certain executives. The benefits
are based on years of service and the employee's compensation during those
years. The Plans are non-qualified and unfunded. The Projected Unit Credit
Method is used to determine pension expense. The Company will pay benefits to
eligible participants when due under terms of the individual plans.

F-20
<PAGE> 65
CERULEAN COMPANIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

The following table presents the funded status and amounts recognized in
the consolidated financial statements at the respective dates:

<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------
1997 1996
----------- -----------
<S> <C> <C>
Actuarial present value of benefit obligations:
Accumulated benefit obligation, no vested benefits in 1997
or 1996................................................ $ 1,849,543 $ 1,340,435
=========== ===========
Actuarial present value of projected benefit obligation for
service rendered to date.................................. $ 3,328,666 $ 2,513,008
Plan assets at fair value................................... -- --
----------- -----------
Projected benefit obligation in excess of plan assets....... (3,328,666) (2,513,008)
Unrecognized net loss....................................... 284,032 --
Unrecognized prior service cost............................. 1,631,787 1,845,625
Adjustment required to recognize minimum liability.......... (436,696) (673,052)
----------- -----------
Accrued pension liability................................... $(1,849,543) $(1,340,435)
=========== ===========
</TABLE>

The net pension cost includes the following components:

<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
-------------------
1997 1996
-------- --------
<S> <C> <C>
Service cost-benefits earned during the period.............. $333,973 $293,938
Interest cost on projected benefit obligation............... 197,653 159,608
Net amortization and deferral............................... 213,838 213,837
-------- --------
Net pension cost.................................. $745,464 $667,383
======== ========
</TABLE>

The following assumptions were used in the pension calculations:

<TABLE>
<CAPTION>
DECEMBER 31,
------------
1997 1996
---- ----
<S> <C> <C>
Weighted-average discount rate.............................. 7.25% 7.75%
Rate of increase in future compensation..................... 5% 5%
</TABLE>

DEFINED CONTRIBUTION PLAN

The Company offers a defined contribution plan ("401(k) plan") covering
substantially all employees. Under this plan, employees can contribute up to 15%
of their base compensation, subject to certain maximum limitations. The Company
matches 50% of the employee's first $500 contributed and 25% thereafter, up to a
maximum of 6% of the employee's annual compensation. The Company's matching
contributions vest 25% per year commencing at the end of the second year of
participation. Employee contributions vest immediately. The Company contributed
$1,031,000 to this 401(k) plan during 1997, $799,000 during 1996 and $878,000
during 1995.

POSTRETIREMENT PLAN

The Company sponsors a Defined Dollar Benefit Plan that provides
postretirement health, dental, vision and life insurance benefits to full-time
associates with at least ten years of service or part-time associates with the
equivalent of ten years full-time employment. These benefits are also available
to spouses. Credits based on length of service are provided to retirees annually
to be used towards the cost of postretirement benefits. Spouses of retirees
receive one half of the credits received by retirees. For those who retired
prior to January 1, 1995, insurance is provided by the Company at no cost to the
retiree. Additionally, a group of associates who

F-21
<PAGE> 66
CERULEAN COMPANIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

meet the "rule of 80" (those who were at least age 55 with ten years of service,
and whose combined years of service plus age equaled 80 or greater) by December
31, 1994, are grandfathered and will receive postretirement benefits at no cost
whenever they retire.

Effective January 1, 1995, the Company changed its method of accounting for
such benefits from a pay-as-you-go method to a full accrual method and adopted
FASB Statement of Financial Accounting Standards No. 106, Employers' Accounting
for Postretirement Benefits Other Than Pensions. This Statement requires that
the projected future cost of providing postretirement benefits, such as health
care and life insurance, be recognized as an expense as employees render service
instead of when the benefits are paid. The implementation required the
recognition of a transition obligation (as defined in the Statement)
representing the unfunded obligation attributable to prior employee service. The
Company has elected to amortize the transition obligation over a period of 20
years. The effect of the change for 1995 was to increase net periodic
postretirement benefit cost by $1,986,664 and decrease net income by $1,589,331.

The following table presents the plan's funded status reconciled with
amounts recognized in the Company's consolidated balance sheets:

<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------
1997 1996
------------ ------------
<S> <C> <C>
Accumulated postretirement benefit obligation:
Retirees................................................ $ (9,624,100) $ (9,787,900)
Fully eligible active plan participants................. (110,400) (116,300)
Other active plan participants.......................... (8,067,700) (6,845,800)
------------ ------------
(17,802,200) (16,750,000)
Fair value of plan assets................................. -- --
------------ ------------
Accumulated postretirement benefit obligation in excess of
plan assets............................................. (17,802,200) (16,750,000)
Unrecognized transition obligation........................ 13,685,600 14,490,700
Unrecognized gain......................................... (1,723,500) (1,602,300)
------------ ------------
Accrued postretirement benefit cost....................... $ (5,840,100) $ (3,861,600)
============ ============
</TABLE>

The net periodic postretirement benefit cost includes the following
components:

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------
1997 1996
---------- ----------
<S> <C> <C>
Service cost................................................ $ 475,900 $ 442,900
Interest cost............................................... 1,264,200 1,231,800
Amortization of transition obligation over 20 years......... 805,100 805,100
Amortization of unrecognized net gain....................... (23,400) --
---------- ----------
Net periodic postretirement benefit cost.................... $2,521,800 $2,479,800
========== ==========
</TABLE>

The valuation is based on census information as of January 1, 1997 and
claims development based on the benefits provided. The discount rate assumed is
7.25% and the salary increase rate assumed varies by age. The health care cost
trend rate is assumed to be 8.5% in 1997, decreasing 0.5% each year to an
ultimate rate of 5.25%. The health care cost trend rate was assumed to be 9.0%
in 1996, decreasing 0.5% each year to an ultimate rate of 6.0%. The health care
cost trend rate assumption has a significant effect on the amounts reported. For
example, increasing the assumed health care cost trend rates by one percentage
point each year would increase the accumulated postretirement benefit obligation
by $1,112,000 and $1,307,000 as of December 31, 1997 and 1996, respectively, and
the aggregate of the estimated service and interest cost

F-22
<PAGE> 67
CERULEAN COMPANIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

components of net periodic postretirement benefit cost by $84,000 and $110,000
for 1997 and 1996, respectively.

13. NON-OPERATING INCOME

Community health partnership networks ("CHPNs") are locally based equity
ventures between the Company, which owns a 51% interest, and local physician
and/or hospital groups, which own the remaining equity interests in the CHPNs.
Clinical services are provided by the physician or hospital partners as well as
other providers with which the CHPNs maintain contracts, and BCBSGA provides
sales, management and administrative services, including information systems and
data management services through service contracts with the CHPNs.

In 1996, a hospital purchased a 5% interest in one of the Company's CHPN
subsidiaries. In 1997, another hospital purchased a 5% interest in the same
subsidiary. In accordance with the CHPN formation agreement, the Company's 51%
equity interest was not diluted as a result of these transactions. The Company
recorded non-operating income of $1,275,000 in 1997 and 1996 for the gains
related to its portion of these transactions and increased the minority interest
liability for this CHPN by $1,225,000 in each year. After deducting deferred
income taxes of $255,000, net income was favorably impacted by $1,020,000 in
1997 and 1996.

14. COMMITMENTS AND CONTINGENCIES

LEGAL ACTIONS

On September 3, 1997, a lawsuit was filed in the Superior Court of Fulton
County by nine groups on behalf of themselves and a class putatively composed of
all other 501(c)(3) organizations in Georgia seeking, among other things, to
invalidate a Georgia statute upon which certain aspects of Cerulean Companies,
Inc.'s formation was based. The complaint names Blue Cross and Blue Shield of
Georgia, Inc., Cerulean Companies, Inc. and the Commissioner of Insurance of the
State of Georgia as defendants.

The plaintiffs' claims relate to the conversion of BCBSGA from a nonprofit
entity to a for-profit entity which occurred as part of a Plan of Conversion
submitted to a public hearing November 21, 1995, and approved by the Georgia
Commissioner of Insurance in an order dated December 27, 1995. The complaint
seeks to have the fair market value of the assets of BCBSGA as of December 27,
1995, including but not limited to the surplus, plus interest from December 27,
1995, placed in a public trust for the use and benefit of a class of nonprofit
charitable organizations.

The Company believes that the plaintiffs' claims are without substantive
merit and intends to vigorously defend the lawsuit.

In the normal course of business, the Company is involved in and subject to
claims, contractual disputes and other uncertainties. Management, after
reviewing with legal counsel all of these actions and proceedings, believes that
the aggregate losses, if any, will not have a material effect on the Company's
financial position or results of operations.

15. STATUTORY FINANCIAL INFORMATION AND ACCOUNTING PRACTICES

BCBSGA, Greater Georgia Life Insurance Company, a life insurance
subsidiary, and HMO Georgia, Inc., a health maintenance organization are
domiciled in the state of Georgia and prepare their statutory financial
statements in accordance with accounting principles and practices prescribed by
the Georgia Insurance Department. Prescribed statutory accounting practices are
interspersed throughout state insurance laws and regulations and a variety of
publications of the National Association of Insurance Commissioners ("NAIC").
Permitted statutory accounting practices encompass all accounting practices that
are not prescribed; such practices may differ from state to state, may differ
from company to company within a state

F-23
<PAGE> 68
CERULEAN COMPANIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

and may change in the future. The NAIC currently is in the process of codifying
statutory accounting practices ("Codification"). Codification will likely
change, to some extent, prescribed statutory accounting practices and may result
in changes to the accounting practices that the Company's subsidiaries use to
prepare their statutory financial statements. Codification, which is expected to
be approved by the NAIC in 1998, will require adoption by the various states
before it becomes the prescribed basis of accounting on which domestic insurers
must report their statutory-basis results to the Insurance Department. At this
time it is unclear whether Georgia will adopt codification. However, based on
current draft guidance, management believes that the impact of codification will
not be material to its subsidiaries' statutory-basis financial statements. The
Company's insurance subsidiaries do not have permitted practices which would
require authorization by the Georgia Insurance Department.

The following table presents the amount of statutory capital and surplus
for the Company's insurance subsidiaries:

<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------
1997 1996
------------ ------------
<S> <C> <C>
Blue Cross and Blue Shield of Georgia, Inc................ $142,475,727 $158,554,152
HMO Georgia, Inc.......................................... 14,136,223 16,078,811
Greater Georgia Life Insurance Company.................... 21,804,868 19,256,302
</TABLE>

The following table presents the amount of statutory net income for the
Company's insurance subsidiaries:

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------
1997 1996 1995
---------- ---------- ----------
<S> <C> <C> <C>
Blue Cross and Blue Shield of Georgia, Inc......... $2,214,036 $7,079,305 $9,533,254
HMO Georgia, Inc................................... 8,250,726 6,295,782 6,174,947
Greater Georgia Life Insurance Company............. 3,173,716 1,801,326 1,865,264
</TABLE>

The minimum amount of statutory capital and surplus necessary to satisfy
regulatory requirements of the Georgia Insurance Department is $1,000,000 for
BCBSGA and $3,000,000 each for HMO Georgia, Inc. and Greater Georgia Life
Insurance Company. The Company's insurance subsidiaries may distribute dividends
only out of realized profits (undistributed, accumulated, net earnings since
organization). The amount of dividends distributable each year is limited to the
greater of the prior year's net income determined on a statutory basis or 10% of
prior year statutory surplus. In addition, dividends distributable by BCBSGA are
further limited by the Conversion order (approved by the Georgia Commissioner of
Insurance on December 27, 1995 related to BCBSGA's conversion to a for-profit
corporation). Dividend distributions by BCBSGA, HMO Georgia, Inc. and Greater
Georgia Life Insurance Company above these defined limits require special
approval by the State of Georgia Insurance Commissioner.

16. SUBSEQUENT EVENT

During January 1998, the Company terminated its $9,000,000 revolving credit
agreement and paid in full the $3,500,000 note payable outstanding at December
31, 1997.

F-24

<PAGE> 1
EXHIBIT 10.3(g)

AGREEMENT

for
SUPPLEMENTAL EXECUTIVE RETIREMENT BENEFITS

This Agreement is made this 1st day of December, 1996, between Blue Cross and
Blue Shield of Georgia, Inc. (the "Company") and Richard D. Shirk (the
"Executive").

RECITALS

WHEREAS, Company desires to employ and retain the unique experience, ability,
and services of Executive as Company's President and Chief Executive Officer;
and

WHEREAS, Company desires to provide a nonqualified retirement benefit to
supplement the retirement income benefit provided to Executive under the
Non-Contributory Retirement Program for Certain Employees of Blue Cross and Blue
Shield of Georgia, Inc. (the "Qualified Plan"); and

WHEREAS, the terms and conditions of this Agreement have been duly approved and
authorized by the Compensation Committee of the Company's Board of Directors;

NOW, THEREFORE, in consideration of the mutual covenants set forth in this
Agreement, and of other good and valuable consideration which Company and
Executive have received and accept as sufficient, Company and Executive agree
as follows:

1. AGREEMENT TERM

The term of this Agreement shall coincide with the term of the Employment
Agreement between Company and Executive. No termination of this Agreement
shall have the effect of reducing benefits accrued by Executive prior to the
date of such termination.

2. BENEFIT ELIGIBILITY

If Executive voluntarily terminates employment with Company without Good
Reason before reaching age 55, Executive shall not be entitled to any
benefits under this Agreement. Executive becomes entitled to benefits
under this Agreement upon any other termination from employment.

1
<PAGE> 2

For purposes of this Agreement, Executive's employment is terminated for Good
Reason if the termination constitutes Good Reason under Executive's Employment
Agreement.

3. AMOUNTS OF BENEFITS

(a) TERMINATION BEFORE AGE 55. If Executive's employment is terminated
before age 55, and Executive is otherwise eligible for a retirement
benefit under Section 2 above, Executive shall be entitled to a
monthly benefit, calculated as a single life annuity commencing at age
55. This monthly benefit shall equal --

(1) 2 percent of Executive's Final Average Earnings; times

(2) Executive's Years of Credited Service; minus

(3) 21 percent (which represents a reduction of 3 percent per year
for each year that the benefit begins before age 62); minus

(4) the single life annuity Executive would be entitled to under the
Qualified Plan at the time benefits commence under this
Agreement; minus

(5) the Actuarial Equivalent value (as defined in Section 7(c) below)
of Executive's age 62 benefits under the Social Security Act.

(b) TERMINATION AFTER AGE 55, BUT BEFORE AGE 60. If Executive's
employment is terminated after reaching age 55, but before reaching
age 60, Executive shall be entitled to a monthly benefit, calculated
as a single life annuity commencing as soon as practicable following
Executive's termination from employment. This monthly benefit shall
equal--

(1) 2 percent of Executive's Final Average Earnings for each of
Executive's first 25 Years of Credited Service; minus

(2) 0.25 percent for each month that Executive's termination date
precedes his sixty-second birthday; plus

(3) 3 percent of Executive's Final Average Earnings for each of
Executive's next 5 Years of Credit Service; minus

2
<PAGE> 3

(4) the single life annuity Executive would be entitled to under the
Qualified Plan at the time benefits commence under this
Agreement, minus

(5) the Actuarial Equivalent value (as defined in Section 7(c) below)
of Executive's age 62 benefits under the Social Security Act.

(c) TERMINATION AFTER AGE 60. If Executive's employment is terminated
after reaching age 60, Executive shall be entitled to a monthly
benefit, calculated as a single life annuity commencing as soon as
practicable following Executive's termination from employment. This
monthly benefit shall equal --

(1) 65 percent of Executive's Final Average Earnings; minus

(2) the single life annuity Executive would be entitled to under the
Qualified Plan at the time benefits commence under this
Agreement; minus

(3) the Actuarial Equivalent value (as defined in Section 7(c) below)
of Executive's age 62 benefits under the Social Security Act.

(d) DEFINITIONS

(1) CREDITED SERVICE. Executive shall be deemed to have completed 25
Years of Credited Service at age 55. For each year of employment
after age 55, Executive will earn one additional Year of Credited
Service, up to a maximum of 30 years.

If Executive terminates employment before age 55, Executive's
Credited Service shall be determined as follows:

<TABLE>
<CAPTION>
--------------------------------------------------------------
AGE AT TERMINATION YEARS OF CREDITED SERVICE
-------------------------------------------------------------
<S> <C>
51 21

52 22

53 23

54 24
-------------------------------------------------------------
</TABLE>

3
<PAGE> 4

(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 without regard to the
limitation on compensation described in Section 401(a)(17) of
the Internal Revenue Code of 1986.

4. CHANGE IN CONTROL BENEFIT

(a) ELIGIBILITY. If Executive terminates employment following a Change
in Control for any reason other than a voluntary termination
without Good Reason, Executive's benefit shall be determined under
this Section 4 instead of Section 3.

(b) AMOUNT OF BENEFIT. The benefit payable under this Section 4 shall
be a monthly benefit, calculated as a single life annuity
commencing as soon as practicable following Executive's termination
from employment. This monthly benefit shall equal the greater of --

(1) the benefit determined under Section 3 above as of the date of
Executive's termination of employment; or

(2) 60 percent of Executive's Final Average Earnings (as defined
in Section 3(d)(2) above), without deduction for early
commencement, but with reductions for benefits payable under
the Qualified Plan and the Social Security Act.

(c) CHANGE IN CONTROL. A Change in Control means (i) the acquisition by
any one person or entity, or by more than one person or entity
acting as a group or in concert, of ownership of stock or securities
of either Blue Cross or Cerulean representing 5% OR MORE of the
voting power of any class of stock or securities of either Cerulean
or Blue Cross (except in the case of registered common stock of
either Blue Cross or Cerulean traded on a recognized exchange or
through the National Association of Securities Dealers Automated
Quotation System (NASDAQ), which may be held in excess of 5% by
institutional investors holding for investment purposes only); (ii)
the date on which a majority of the members of the Board of
Directors of either Blue Cross or Cerulean are no longer "Continuing
Directors" as that term is defined in the License Agreement between
Cerulean and the Blue Cross and Blue Shield Association, originally
dated February 2,1996; (iii) approval by the shareholders of
Cerulean or Blue Cross of any merger or consolidation or statutory
share

4
<PAGE> 5
exchange as a result of which the securities of Cerulean or Blue
Cross shall be changed, converted or exchanged (other than a merger
or share exchange with a controlled subsidiary of Cerulean or Blue
Cross) into the share of the another corporation or person or the
liquidation of Cerulean or Blue Cross or the sale or disposition of
50% or more of the assets or earning power of either Cerulean or
Blue Cross; (iv) approval by the shareholders of any plan of
consolidation or merger or statutory share exchange as a result of
which persons who were shareholders of Cerulean or Blue Cross
immediately prior to the effective date of the plan shall thereafter
retain less than 50% of the voting power to elect directors of the
surviving corporation. Notwithstanding the foregoing a registered
secondary offering shall not be deemed a change in control for
purposes of this plan.

The references to 5% in clause (c)(i) above shall be subject to
review and revision by the Compensation Committee if there is any
future revision to the provisions in the Licensing Agreement
between the Company and Blue Cross and Blue Shield Association
relating to a change in the voting control of the Company.

5. DISABILITY BENEFIT

(a) DISABILITY BEFORE AGE 55. If Executive terminates employment on
account of Disability before age 55, Executive shall be entitled to
a single life annuity commencing as soon as practicable following
such termination from employment. This monthly benefit shall equal
the amount determined under Section 3(b) above, assuming Executive
had reached age 55 and completed 25 Years of Credited Service at the
time of Disability.

(b) DISABILITY AFTER AGE 55. If Executive terminates employment on
account of Disability after reaching age 55, Executive shall be
entitled to a single life annuity commencing as soon as practicable
following such termination from employment. This monthly benefit
shall equal the amount determined under Section 3(b) or 3(c) above
(whichever applies), based on Executive's actual age and Years of
Credited Service at the time of Disability.

5
<PAGE> 6

(c) DISABILITY. Executive shall be treated as having a Disability under
this Agreement if he has any physical or mental condition which, in
the opinion of the Company, prevents Executive from performing his
duties as the Company's President and Chief Executive Officer. Any
condition which is treated as a Disability under Executive's
Employment Agreement shall also be treated as a Disability under
this Agreement. Similarly, any condition which is treated as a
Disability under this Agreement shall also be treated as a
Disability under Executive's Employment Agreement.

6. DEATH BENEFIT

(a) DEATH BEFORE AGE 55. If Executive dies before age 55 while actively
employed, Executive's Beneficiary shall be entitled to a single
life annuity commencing as soon as practicable following
Executive's death. This monthly benefit shall equal the amount that
would have been payable to Executive under Section 3(b) above,
assuming that Executive had retired an the date of his death, and
assuming that Executive had reached age 55 and completed 25 Years
of Credited Service at the time of death.

(b) DEATH AFTER AGE 55. If Executive dies while actively employed after
reaching age 55, Executive's Beneficiary shall be entitled to a
single life annuity commencing as soon as practicable following
Executive's death. This monthly benefit shall equal the amount that
would have been payable to Executive under Section 3(b) or Section
3(c) (whichever applies), assuming Executive had retired on the day
of his death.

(c) BENEFICIARY. Executive may designate any person or persons to be his
Beneficiary under this Agreement. If Executive does not designate a
Beneficiary, or if the Beneficiary designated by Executive is not
living at the time of his death, the Beneficiary shall be
Executive's surviving spouse or, if there is no surviving spouse,
Executive's estate.

6
<PAGE> 7

7. FORM OF PAYMENT

(a) NORMAL FORM OF PAYMENT. Unless Executive elects an option form of
payment under Section 7(b) below, the single life annuity
determined under Section 3, 4, or 5 shall be converted into an
Actuarial Equivalent lump sum payment which shall be paid to
Executive as of the benefit commencement date described in such
Section.

(b) OPTIONAL FORM OF PAYMENT. In lieu of the lump sum payment described
in Section 7(a), Executive may elect to receive his benefit under
this Agreement in any one of the optional forms of payment
permitted under the Qualified Plan. However, an election is valid
under this Section 7(b) only if it is made at least one year before
Executive's termination from employment.

An optional form of payment shall be the Actuarial Equivalent of
the single life annuity calculated under Section 3, 4, or 5
(whichever is applicable).

(c) ACTUARIAL EQUIVALENT. Actuarial Equivalent means a benefit having
the same value as the benefit which it replaces, computed on the
same basis as optional payment forms under the Qualified Plan.

8. FUNDING

The Agreement is intended to constitute an unfunded plan maintained for
a "select group of management or highly compensated employees" with the
meaning of Section 201(2) of the Employee Retirement Income Security Act
of 1974. However, Company shall fully and continuously fund these
benefits through a "grantor trust" which meets the requirements of
subpart E, part I, subchapter J, chapter 1, subtitle A of the
Internal Revenue Code of 1986.

9. DISPUTE RESOLUTION

Any dispute arising from the interpretation or application of this
Agreement shall be submitted to final and binding arbitration. Company
shall appoint one arbitrator and Executive shall appoint one arbitrator.
If these two arbitrators are unable to resolve the dispute,

7
<PAGE> 8

these arbitrators will appoint a third arbitrator who will resolve the
dispute. The award of the arbitrators shall be final and binding upon
the parties and judgment upon the award may be entered in any court
having jurisdiction.

All expenses of the arbitration process shall be borne by Company.

10. MISCELLANEOUS PROVISIONS

(a) WAIVER. The failure of either party to insist in any one or more
instances upon performance of any terms or conditions of this
Agreement shall not be construed as a waiver of future performance
of any such term, covenant, or conditions. The obligations of both
Company and Executive shall continue in full force and effect.

(b) SEVERABILITY. If any provision of this Agreement shall be held
illegal or invalid, the illegality or invalidity shall not effect
its remaining parts. The Agreement shall be construed and enforced
as if it did not contain the illegal or invalid provision.

(d) TAX WITHHOLDING. Company may withhold from any payment under this
Agreement any federal, state, or local taxes required by law to be
withheld with respect to the payment and any sum Company may
reasonably estimate as necessary to cover any taxes for which it
may be liable and that may be assessed with regard to the payment.

(e) GOVERNING LAW. This Agreement shall be governed by and construed in
accordance with the laws of the State of Georgia.

(f) ENTIRE AGREEMENT. This Agreement supersedes the all previous
agreements between Executive and Company and contains the entire
understanding and agreement between the parties with respect to the
subject matter hereof. This Agreement may not be amended, modified,
supplemented, or terminated except by a subsequent written
instrument signed by both parties.

8
<PAGE> 9

IN WITNESS WHEREOF, the parties hereto have executed this Agreement on the date
and year first written above.

COMPANY

BLUE CROSS AND BLUE SHIELD
OF GEORGIA, Inc.

By /s/ James L. LaBoon, Jr.
---------------------------------------
Chairman of the Board

ATTEST:

By /s/ Mitchelle D. Johnson
----------------------------

EXECUTIVE

By /s/ Richard D. Shirk
---------------------------------------
Richard D. Shirk

<PAGE> 1
EXHIBIT 10.3(h)

BLUE CROSS AND BLUE SHIELD OF GEORGIA, INC.
SUPPLEMENTAL EXECUTIVE RETIREMENT PLAN
(Effective July 1,1996)

CONTENTS

<TABLE>
<CAPTION>
SECTION PAGE
<S> <C> <C>
ARTICLE I. THE PLAN

1.1 Establishment of the Plan 1
1.2 Purpose of the Plan 1
1.3 Applicability of the Plan 1

ARTICLE II. DEFINITIONS

2.1 Actuarial Equivalent 2
2.2 Affiliate 2
2.3 Beneficiary 2
2.4 Benefit Commencement Date 3
2.5 Benefit Offset 3
2.6 Board 3
2.7 Change in Control 3
2.8 Code 4
2.9 Committee 4
2.10 Company 4
2.11 Disability 5
2.12 Employee 5
2.13 Employer 5
2.14 ERISA 5
2.15 Good Reason 5
2.16 Just Cause 5
2.17 Normal Retirement Date 6
2.18 Participant 6
2.19 Plan 6
2.20 Plan Administrator 6
2.21 Plan Year 6
2.22 Restoration Plan 6
2.23 Retirement Program 6

ARTICLE III. PARTICIPATION

3.1 Eligibility 7
3.2 Duration 7
</TABLE>

<PAGE> 2

BLUE CROSS AND BLUE SHIELD OF GEORGIA, INC.
SUPPLEMENTAL EXECUTIVE RETIREMENT PLAN
(Effective July 1, 1996)

CONTENTS

<TABLE>
<CAPTION>
SECTION PAGE
<S> <C> <C>

ARTICLE IV. BENEFITS

4.1 Retirement Benefits 8
4.2 Deferred Retirement Benefits 9
4.3 Form of Payment 9
4.4 Forfeiture 10
4.5 Vesting Upon Change in Control 10

ARTICLE V. PRERETIREMENT DEATH BENEFITS

5.1 Eligibility 11
5.2 Amount 11
5.3 Payment 11

ARTICLE VI. FINANCING

6.1 Financing 12
6.2 No Trust Created 12
6.3 Unsecured Interest 12

ARTICLE VII. ADMINISTRATION

7.1 Administration 13
7.2 Appeals from Denial of Claims 13
7.3 Tax Withholding 14
7.4 Expenses 15

ARTICLE VIII. ADOPTION OF THE PLAN BY AFFILIATE;
AMENDMENT AND TERMINATION OF THE PLAN

8.1 Adoption of the Plan by Affiliate 16
8.2 Amendment and Termination 16
</TABLE>

<PAGE> 3

BLUE CROSS AND THUS SHIELD OF GEORGIA, INC.
SUPPLEMENTAL EXECUTIVE RETIREMENT PLAN
(Effective July 1, 1996)

<TABLE>
<CAPTION>
SECTION PAGE
ARTICLE IX. MISCELLANEOUS PROVISIONS
<S> <C> <C>
9.1 No Contract of Employment 17
9.2 Severability 17
9.3 Applicable Law 17
9.4 Assignment 17
</TABLE>

iii

<PAGE> 4

ARTICLE I. THE PLAN

1.1 ESTABLISHMENT OF THE PLAN

Blue Cross and Blue Shield of Georgia, Inc. (the "Company") hereby establishes
this nonqualified retirement plan for eligible employees of the Company and
participating Affiliates, effective as of July 1, 1996. This plan shall be known
as the Blue Cross and Blue Shield of Georgia, Inc. Supplemental Executive
Retirement Plan (the "Plan").

1.2 PURPOSE OF THE PLAN

This Plan is intended to supplement retirement income benefits provided to
certain executives under the Non-Contributory Retirement Program for Certain
Employees of Blue Cross and Blue Shield of Georgia, Inc.

The Plan is intended to be a plan maintained for the purpose of providing
deferred compensation to a "select group of management or highly compensated
employees" within the meaning of ERISA section 201(2). Additionally, benefits
provided under this Plan shall be paid solely from the general assets of the
Company and participating Affiliates. The Plan is intended to be exempt from
the participation, vesting, funding and fiduciary requirement of Title I of
ERISA.

1.3 APPLICABILITY OF THE PLAN

This Plan applies only to eligible Employees who are in the active employ of the
Company or a participating Affiliate on or after July 1, 1996.

<PAGE> 5

ARTICLE II. DEFINITIONS

Whenever used in the Plan, the following terms shall have the meanings set forth
below unless otherwise expressly provided. When the defined meaning is intended,
the term is capitalized. The definition of any term in the singular shall also
include the plural and any masculine terminology shall be deemed to refer to
either a male or female.

2.1 ACTURIAL EQUIVALENT

Actuarial Equivalent means a benefit having the same value as the benefit which
it replaces, computed on the same basis as optional payment forms under the
Retirement Program.

2.2 AFFILIATE

Affiliate means--
(a) any corporation while it is a member of the same "controlled group" of
corporations (within the meaning of Code section 414(b)) as the Company;
(b) 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;
(c) 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
(d) any other entity during any period in which it is required to be aggregated
with the Company under Code section 414(o).

2.3 BENEFICIARY

Beneficiary means the person or persons designated by the Participant to receive
any preretirement death benefits that may become payable on the Participant's
behalf under Article V. If a Participant does not designate a Beneficiary, or if
the Beneficiary designated by the Participant is not living at the time of the
Participant's death, the Beneficiary shall be the Participant's surviving spouse
or, if there is no surviving spouse, the Participant's estate.

<PAGE> 6

2.4 BENEFIT COMMENCEMENT DATE

Benefit Commencement Date means the date on which a Participant's benefits shall
commence under Article IV. Except as otherwise provided under setion 4.2, a
Participant's Benefit Commencement Date shall be the first day of the month next
following the Participant's termination from employment on account of retirement
or Disability.

2.5 BENEFIT OFFSET

Benefit Offset means the sum of (a) and (b) below, expressed as an Actuarial
Equivalent single life annuity commencing on the Participant's Normal Retirement
Date, where --
(a) equals the Participant's vested accrued benefit under the Retirement
Program; and
(b) equals the Participant's vested accrued benefit under the Restoration Plan
and any other nonqualified defined benefit plan sponsored by another Blue
Cross/Blue Shield employer that relates to a period of service for which
credit is given under this Plan for benefit accrual purposes.

2.6 BOARD

Board means the Company's Board of Directors.

2.7 CHANGE IN CONTROL

Change in Control means --
(a) An acquisition by any Person (as used in sections 13(d) and 14(d) of the
Securities Exchange Act of 1934) of Beneficial Ownership (as defined in Rule
13d-3 under the Securities Exchange Act of 1934) of the securities of the
Company that are then outstanding and entitled to vote generally in the
election of directors ("Voting Securities Outstanding"); provided, however,
that such acquisition of Beneficial Ownership would result in the Person's
Beneficially Owning fifty percent (50%) or more of the combined voting
power of Voting Securities Outstanding; and provided further, that
immediately prior to such acquisition such Person was not a direct or
indirect Beneficial Owner of fifty percent (50%) or more of the combined
voting power of Voting Securities Outstanding; or
(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 the (i) election of or
nomination for election of each new director during such period

<PAGE> 7

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-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 of Control shall occur as a result of any acquisition of Voting
Securities Outstanding by any subsidiary of the Company or an employee benefit
plan (or related trust) sponsored by the Company or an Affiliate.

2.8 CODE

Code means the Internal Revenue Code of 1986, as amended, or as it may be
amended from time to time. A reference to a particular section of the Code shall
also be deemed to refer to the regulations under that Code section.

2.9 COMMITTEE

Committee means the Compensation Committee of the Company's Board.

2.10 COMPANY

Company means Blue Cross and Blue Shield of Georgia, Inc. and any successor
thereto that agrees to adopt and continue this Plan.

<PAGE> 8

2.11 DISABILITY

Disability means any condition which entitles the Participant to benefits under
any long-term disability plan maintained by the Company or an Affiliate.

2.12 EMPLOYEE

Employee means any person who is employed by an Employer.

2.13 EMPLOYER

Employer means the Company and each Affiliate which has adopted this Plan for
the benefit of its eligible Employees.

2.14 ERISA

ERISA means the Employee Retirement Income Security Act of 1974, as amended, or
as it may be amended from time to time. A reference to a particular section of
ERISA shall also be deemed to refer to the regulations under that section.

2.15 GOOD REASON

Good Reason means, without the Participant's written consent, the occurrence
after a Change in Control of one of the following:
(a) a reduction in the nature or status of the Participant's responsibilities
from those in effect immediately before the Change in Control; or
(b) a reduction by the Company of the Participant's base salary as in effect
immediately before the Change in Control.

2.16 JUST CAUSE

Just Cause means--
(a) an act of fraud embezzlement, theft, or other felonious criminal act
committed by the Participant;
(b) the Participant's wilful and continued failure to substantially perform his
or her duties for the Company; or
(c) the Participant's wilful engaging in conduct that is demonstrably and
materially injurious to the Company or its Affiliates.
Just Cause shall exist under subsection (b) or (c) only if the Company first
gives the Participant written notice of the conduct that constitutes Just Cause,
and the Participant fails to correct such conduct within 10 days of receiving
this notice.

<PAGE> 9

2.17 NORMAL RETIREMENT DATE

Normal Retirement Date means the first day of the month coinciding with or next
following the Participant's sixty-fifth birthday.

2.18 PARTICIPANT

Participant means an Employee who has met, and continues to meet, the
eligibility requirements of section 3.1.

2.19 PLAN

Plan means this Blue Cross and Blue Shield of Georgia, Inc. Supplemental
Executive Retirement Plan, as amended from time to time.

2.20 PLAN ADMINISTRATOR

Plan Administrator means the most senior executive of the Company's Human
Resources Department.

2.21 PLAN YEAR

Plan Year means initially the period beginning July 1, 1996 and ending December
31, 1996. Thereafter, the Plan Year shall be the calendar year.

2.22 RESTORATION PLAN

Restoration Plan means the Blue Cross and Blue Shield of Georgia, Inc Executive
Benefit Restoration Plan, as amended from time to time.

2.23 RETIREMENT PROGRAM

Retirement Program means the Non-Contributory Retirement Program for Certain
Employees of Blue Cross and Blue Shield of Georgia, Inc., as amended from time
to time.

<PAGE> 10

ARTICLE III. PARTICIPATION

3.1 ELIGIBILITY

To become a Participant in this Plan, an Employee must first be recommended for
participation by the Company's Chief Executive Officer. An Employee who is
recommended for participation by the Company's Chief Executive Officer shall
become a Participant on the later of--
(a) the date on which he or she is designated by the Committee as eligible to
participate in the Plan; or
(b) July 1, 1996.
However, an Employee shall not be eligible to participate in this Plan unless he
or she is also a participant in the Restoration Plan.

3.2 DURATION

An Employee who becomes a Participant under section 3.1 shall remain an active
Participant until the earlier of--
(a) his or her death, retirement, or Disability; or
(b) a declaration by the Committee that he or she is no longer eligible to
participate in the Plan (in which case, the amount of a Participant's
benefit under section 4.1 (if any) shall be determined as of the effective
date of such declaration).
An individual whose active participation is terminated under this section 3.2
shall continue to be an inactive Participant until all benefits to which he or
she is entitled to under this Plan have been paid.

<PAGE> 11

ARTICLE IV. BENEFITS

4.1 RETIREMENT BENEFITS

(a) ELIGIBILITY. Except as otherwise provided in section 4.5, a Participant
shall be eligible for a retirement benefit under this section 4.1 if the
Participant's employment with the Company and its Affiliates ends on account
of retirement or Disability after the Participant--
(1) reaches age 55; and
(2) earns at least five "Years of Employer Service," as that term is defined
in the Retirement Program.
This normal retirement benefit shall be calculated as a single life
annuity commencing on the Participant's Normal Retirement Date.
However, if the Participant's Benefit Commencement Date precedes his or
her Normal Retirement Date, the benefit determined under this section
4.1 shall be reduced in accordance with subsection (b)(2).
(b) AMOUNT
(1) IN GENERAL. Subject to paragraph (2) below, a Participant who is
eligible for a retirement benefits under subsection (a) shall be
entitled to a monthly benefit equal to the difference between (A) and
(B) where--
(A) is the benefit the Participant would be entitled to under the
Retirement Program as of his or her Normal Retirement Date,
calculated assuming that--
(i) the Participant is credited with two "Years of Plans and
Association Service" (as defined in the Retirement Program) for
each such year of actual service (with service considered under
this Plan capped at 30 years); and
(ii) the compensation limit in effect under Code section 401(a)(17)
and the benefit limit in effect under Code section 415 do not
apply; and
(B) is the Participant's Benefit Offset.
(2) EARLY COMMENCEMENT. In the case of a Participant whose Benefit
Commencement Date precedes his or her Normal Retirement Date, the
monthly benefit determined under paragraph (1) shall be reduced by 0.25
percent for each month by which the Benefit Commencement Date precedes
the first day of the month coinciding with or next following the
Participant's sixty-second birthday.

<PAGE> 12

4.2 DEFERRED RETIREMENT BENEFITS

(a) DELAYED COMMENCEMENT. The Committee, in its sole and absolute discretion,
may delay the payment of a retirement benefit payable under section 4.1
beyond the Participant's Benefit Commencement Date. The retirement benefit
may be paid as of the first day of any month following the Benefit
Commencement Date, as determined by the Committee, but in no event may the
Committee delay the payment of benefits beyond the first day of the month
next following the Participant's sixty-fifth birthday.
(b) AMOUNT. If a Participant's delayed commencement date under this section 4.2
precedes his or her Normal Retirement Date, the monthly benefit determined
under section 4.1 shall be reduced for early commencement as described in
section 4.1(b)(2).

4.3 FORM OF PAYMENT

(a) NORMAL FORM OF PAYMENT. Subject to subsection (b), the single life annuity
calculated under section 4.1 shall be converted into an Actuarial Equivalent
lump sum payment which shall be paid to the Participant as of his or her
Benefit Commencement Date (or any later date determined under section 4.2).
(b) OPTIONAL PAYMENT FORMS. In lieu of the normal form of payment described in
subsection (a), a Participant may elect to receive his or her benefit under
the Plan in any one of the optional forms of payment permitted under the
Retirement Program. A Participant's election of an optional form of payment
is valid under this subsection (b) only if it is made in a manner prescribed
by the Plan Administrator--
(1) before the Plan Year in which the Participant reaches age 55 and
completes five "Years of Employer Service" (as defined in the Retirement
Program), in the case of Participant who does not satisfy these vesting
requirements before January 1, 1997; or
(2) at least one year before the Participant's employment with the Company
and its Affiliates ends on account of retirement or Disability, in the
case of a Participant who satisfies the vesting requirements before
January 1, 1997.
An optional payment form elected under this subsection (b) shall be the
Actuarial Equivalent of the single life annuity described in section 4.1.

<PAGE> 13

4.4 FORFEITURE

Notwithstanding any provision in this Plan to the contrary, any amounts to which
a Participant would be entitled under this Plan shall be forfeited if the
Participant terminates his or her employment with an Employer to become an
officer, director, employee, partner, agent, consultant, or any other
representative of a "competitor."

Whether a Participant has terminated employment with an Employer to work for or
represent a competitor shall be determined at the time of such termination by
the Committee, in its sole and absolute discretion. For this purpose, a
"competitor" shall be any business providing health insurance coverage as an
indemnify or managed care provider in competition with the Company in the State
of Georgia, as determined by the Committee in its sole and absolute discretion.

4.5 VESTING UPON CHANGE IN CONTROL

Notwithstanding any provision in this Plan to the contrary, a Participant whose
employment with the Company and its Affiliates is terminated within one year
following a Change in Control for reasons other than death or Disability shall
have a fully vested right to receive all benefits accrued under this Plan as of
the date of such termination if--
(a) the Company terminated the Participant's employment without Just Cause; or
(b) the Participant terminated his or her employment with the Company for Good
Reason.
Any benefits that vest under this section 4.5 shall be paid as of the later of
the first day of the month next following the Participant's termination from
employment or the first day of the month next following the Participant's
fifty-fifth birthday.

<PAGE> 14

ARTICLE V. PRERETIREMENT DEATH BENEFITS

5.1 ELIGIBILITY

(a) GENERAL RULE. If a Participant dies while actively employed, but after
reaching age 55 and completing five "Years of Employer Service" (as defined
in the Retirement Program), the Participant's Beneficiary shall be entitled
to a preretirement death benefit equal to the amount determined under
section 5.2.
(b) NO OTHER DEATH BENEFITS. If a Participant dies before reaching age 55 or
completing five Years of Employer Service, no preretirement death benefit
shall be payable on the Participant's behalf.

5.2 AMOUNT

The death benefit payable to a Participant's Beneficiary under this Article V
shall equal the lump sum payment that would have been made to the Participant
under Article IV assuming the Participant retired under section 4.1 on the date
of his or her death.

5.3 PAYMENT

Payment of the preretirement death benefit under this Article V shall be made to
the Participant's Beneficiary in a single lump sum as soon as practicable
following the Participant's death.

<PAGE> 15

ARTICLE VI. FINANCING

6.1 FINANCING

The benefits under this Plan shall be paid out of the general assets of the
Employers. The benefits shall not be funded in advance of payment in any way.

6.2 NO TRUST CREATED

Nothing contained in this Plan, and no action taken pursuant to the provisions
of this Plan, shall create a trust of any kind or a fiduciary relationship
between an Employer and any Participant or Participant's spouse.

However, nothing in this Article VI shall be construed to prevent the Company
from establishing, in its sole discretion, a "grantor trust" (within the meaning
of subpart E, part I, subchapter J, chapter 1, subtitle A of the Code), with
assets (if any) to be used exclusively for the benefit of Participants,
Beneficiaries, and the Company's general creditors.

6.3 UNSECURED INTEREST

No Participant shall have any interest whatsoever in any specific asset of the
Company or an Affiliate. To the extent that any person acquires a right to
receive payments under this Plan, such right shall be no greater than the right
of any unsecured general creditor of an Employer.

<PAGE> 16
ARTICLE VII. ADMINISTRATION

7.1 ADMINISTRATION

The Plan shall be administered by the Plan Administrator.

The Plan Administrator shall have all powers necessary or appropriate to carry
out the provisions of the Plan. The Plan Administrator may, from time to time,
establish rules for the administration of the Plan and the transaction of the
Plan's business.

The Plan Administrator shall have the exclusive right to make any finding of
fact necessary or appropriate for any purpose under the Plan including, but not
limited to, the determination of eligibility for and amount of any benefit.

The Plan Administrator shall have the exclusive right to interpret the terms
and provisions of the Plan and to determine any and all questions arising under
the Plan or in connection with its administration, including, without
limitation, the right to remedy or resolve possible ambiguities,
inconsistencies, or omissions by general rule or particular decision, all in
its sole and absolute discretion. The Plan Administrator shall also be
responsible for complying with statutory reporting and disclosure requirements.

To the extent permitted by law, all findings of fact, determinations,
interpretations, and decisions of the Plan Administrator shall be conclusive
and binding upon all persons having or claiming to have any interest or right
under the Plan.

The Plan Administrator shall not be subject to liability with respect to the
administration of the Plan.

7.2 APPEALS FROM DENIAL OF CLAIMS

Generally, distribution under this Plan are automatic and no claim for benefits
need be filed. However, a Participant or Beneficiary may submit a claim for
benefits under the Plan in writing to the Plan Administrator.

13
<PAGE> 17

If any claim for benefits under the Plan is wholly or partially denied, the
claimant shall be given notice of the denial. This notice shall be in writing,
within a reasonable period of time after receipt of the claim by the Plan
Administrator. This period shall not exceed 90 days after receipt of the
claim, except that if special circumstances require an extension of time,
written notice of the extension shall be furnished to the claimant, and an
additional 90 days will be considered reasonable.

This notice shall be written in a manner calculated to be understood by the
claimant and shall set forth the following information:
(a) the specific reasons for the denial;
(b) specific reference to the Plan provisions on which the denial is based;
(c) a description of any additional material or information necessary for the
claimant to perfect the claim and an explanation of why this
material or information is necessary;
(d) an explanation that a full and fair review by the Plan Administrator of
the decision denying the claim may be requested by the claimant or an
authorized representative by filing with the Plan Administrator, within 60
days after the notice has been received, a written request for the review;
and
(e) if this request is so filed, an explanation that the claimant or an
authorized representative may review pertinent documents and submit issues
and comments in writing within the same 60-day period specified in
subsection (d).
The decision of the Plan Administrator upon review shall be made promptly, and
not later than 60 days after the Plan Administrator's receipt of the request
for review, unless special circumstances require an extension of time for
processing. In this case the claimant shall be so notified, and a decision
shall be rendered as soon as possible, but not later than 120 days after
receipt of the request for review. If the claim is denied, wholly or in part,
the claimant shall be given a copy of the decision promptly. The decision
shall be in writing, shall include specific reasons for the denial, shall
include specific references to the pertinent Plan provisions on which the
denial is based, and shall be written in a manner calculated to be understood
by the claimant.

7.3 TAX WITHHOLDING

The Company may withhold from any payment under this Plan any federal, state,
or local taxes required by law to be withheld with respect to the payment and
any sum the Company may reasonably estimate as necessary to cover any taxes for
which they may be liable and that may be assessed with regard to the payment.

14
<PAGE> 18

7.4 EXPENSES

All expenses incurred in the administration of the Plan shall be paid by the
Company.

15
<PAGE> 19

ARTICLE VIII. ADOPTION OF THE PLAN BY AFFILIATE; AMENDMENT AND TERMINATION OF
THE PLAN

8.1 ADOPTION OF THE PLAN BY AFFILIATE

An affiliate may adopt the Plan by appropriate action of its board of directors
or authorized officers or representatives, subject to the approval of the
Board.

8.2 AMENDMENT AND TERMINATION

The Company hereby reserves the right to amend, modify, or terminate the Plan
at any time, and for any reason, by action of the Board. However, --
(a) subject to section 4.4, no amendment or termination shall have the effect
of reducing the benefits accrued by a Participant prior to the date of the
amendment or termination; and
(b) following a Change in Control, the Company shall not have the right to
amend Plan provisions relating to the timing or form of distributions
under this Plan.

16
<PAGE> 20
ARTICLE IX. MISCELLANEOUS PROVISIONS

9.1 NO CONTRACT OF EMPLOYEMENT

Nothing contained in the Plan shall be construed to give any Participant the
right to be retained in the service of the Company or its Affiliates or to
interfere with the right of the Company or its Affiliates to discharge a
Participant at any time.

9.2 SEVERABILITY

If any provision of this Plan shall be held illegal or invalid, the illegality
or invalidity shall not affect its remaining parts. The Plan shall be
construed and enforced as if it did not contain the illegal or invalid
provision.

9.3 APPLICABLE LAW

Except to the extent preempted by applicable federal law, this Plan shall be
governed by and construed in accordance with the laws of the state of Georgia.

9.4 ASSIGNMENT

The benefits under the Plan may not be assigned or alienated.

IN WITNESS WHEREOF, the authorized officers of the Company have signed this
document and have affixed the corporate seal on December 13, 1996, but
effective as of July 1, 1996.

BLUE CROSS AND BLUE SHIELD OF
GEORGIA, INC.

ATTEST:
By /S/ JOSEPH R. RADIGAN
-------------------------------

Its SENIOR VP HUMAN RESOURCES
----------------------------

By /S/ MITCHELLE D. JOHNSON
------------------------------

Its SECRETARY (Corporate Seal)
---------------------------

<PAGE> 1
EXHIBIT 10.3(i)

BLUE CROSS AND BLUE SHIELD OF GEORGIA, INC.
EXECUTIVE BENEFIT RESTORATION PLAN
(Effective July 1, 1996)

CONTENTS

- -------------------------------------------------------------------------------

<TABLE>
<CAPTION>
SECTION PAGE
<S> <C> <C>
ARTICLE I. THE PLAN

1.1 Establishment of the Plan 1
1.2 Purpose of the Plan 1
1.3 Applicability of the Plan 1

ARTICLE II. DEFINITIONS

2.1 Actuarial Equivalent 2
2.2 Affiliate 2
2.3 Beneficiary 2
2.4 Benefit Commencement Date 3
2.5 Board 3
2.6 Code 3
2.7 Change in Control 4
2.7 Committee 4
2.8 Company 4
2.9 Disability 4
2.10 Employee 4
2.11 Employer 4
2.12 ERISA 5
2.13 Normal Retirement Date 5
2.14 Participant 5
2.15 Good Reason 5
2.16 Just Cause 5
2.15 Plan 5
2.16 Plan Administrator 6
2.17 Plan Year 6
2.18 Retirement Program 6

ARTICLE III. PARTICIPATION

3.1 Eligibility 7
3.2 Duration 7
</TABLE>

<PAGE> 2
BLUE CROSS AND BLUE SHIELD OF GEORGIA, INC.
EXECUTIVE BENEFIT RESTORATION PLAN
(Effective July 1, 1996)

CONTENTS
- -------------------------------------------------------------------------------

<TABLE>
<CAPTION>
SECTION PAGE
<S> <C> <C>
ARTICLE IV. BENEFITS

4.1 Retirement Benefits 8
4.2 Deferred Retirement Benefits 9
4.3 Form of Payment 9
4.4 Forefeiture 10
4.5 Vesting Upon Change in Control 10

ARTICLE V. PRERETIREMENT DEATH BENEFITS

5.1 Eligibility 11
5.2 Amount 11
5.3 Payment 11

ARTICLE VI. FINANCING

6.1 Financing 12
6.2 No Trust Created 12
6.3 Unsecured Interest 12

ARTICLE VII. ADMINISTRATION

7.1 Administration 13
7.2 Appeals from Denial of Claims 13
7.3 Tax Withholding 14
7.4 Expenses 15

ARTICLE VIII. ADOPTION OF THE PLAN BY AFFILIATE;
AMENDMENT AND TERMINATION OF THE PLAN

8.1 Adoption of the Plan by Affiliate 16
8.2 Amendment and Termination 16
</TABLE>

ii
<PAGE> 3

BLUE CROSS AND BLUE SHIELD OF GEORGIA, INC.
EXECUTIVE BENEFIT RESTORATION PLAN
(Effective July 1, 1996)

CONTENTS

- ----------------------------------------------------------------------------

<TABLE>
<CAPTION>
SECTION PAGE

<S> <C> <C>
ARTICLE IX. MISCELLANEOUS PROVISIONS

9.1 No Contract of Employment 15
9.2 Severability 15
9.3 Applicable Law 15
9.4 Assignment 15
</TABLE>

iii
<PAGE> 4
ARTICLE I. THE PLAN

1.1 ESTABLISHMENT OF THE PLAN

Blue Cross and Blue Shield of Georgia, Inc. (the "Company") hereby establishes
this nonqualified retirement plan for eligible employees of the Company and
participating Affiliates, effective as of July 1, 1996. This plan shall be
known as the Blue Cross and Blue Shield of Georgia, Inc. Executive Benefit
Restoration Plan (the "Plan").

1.2 PURPOSE OF THE PLAN

The purpose of the Plan is to provide for eligible employees whose benefits
under the Retirement Program are restricted by the limitations described in
Code sections 401(a)(17) and 415.

The Plan is intended to be a plan maintained for the purpose of providing
deferred compensation to a "select group of management or highly compensated
employees" within the meaning of ERISA section 201(2). Additionally, benefits
provided under this Plan shall be paid solely from the general assets of the
Company and participating Affiliates. The Plan is intended to be exempt from the
participation, vesting, funding and fiduciary requirements of Title I of ERISA.

1.3 APPLICABILITY OF THE PLAN

This Plan applies only to eligible Employees who are in the active employ of
the Company or a participating Affiliate on or after July 1, 1996.

1
<PAGE> 5

ARTICLE II. DEFINITIONS

Whenever used in the Plan, the following terms shall have the meanings set
forth below unless otherwise expressly provided. When the defined meaning is
intended, the term is capitalized. The definition of any term in the singular
shall also include the plural and any masculine terminology shall be deemed to
refer to either a male or female.

2.1 ACTUARIAL EQUIVALENT

Actuarial Equivalent means a benefit having the same value as the benefit which
it replaces, computed on the same basis as optional payment forms under the
Retirement Program.

2.2 AFFILIATE

Affiliate means--
(a) any corporation while it is a member of the same "controlled group" of
corporations (within the meaning of Code section 414(b)) as the Company;
(b) 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;
(c) 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
(d) any other entity during any period in which it is required to be
aggregated with the Company under Code section 414(o).

2.3 BENEFICIARY

Beneficiary means the person or persons designated by the Participant to
receive any preretirement death benefits that may become payable on the
Participant's behalf under Article V. If a Participant does not designate a
Beneficiary, or if the Beneficiary designated by the Participant is not living
at the time of the Participant's death, the Beneficiary shall be the
Participant's surviving spouse or, if there is no surviving spouse, the
Participant's estate.

2
<PAGE> 6
2.4 BENEFIT COMMENCEMENT DATE

Benefit Commencement Date means the date on which a Participant's benefits
shall commence under Article IV. Except as otherwise provided under section
4.2, a Participant's Benefit Commencement Date shall be the first day of the
month next following the Participant's termination from employment on account
of retirement or Disability.

2.5 BOARD

Board means the Company's Board of Directors.

2.6 CHANGE IN CONTROL

(a) An acquisition by any Person (as used in sections 13(d) and 14(d) of the
Securities Exchange Act of 1934) of Beneficial ownership (as defined in
Rule 13d-3 under the Securities Exchange Act of 1934) of the securities of
the Company that are then outstanding and entitled to vote generally in the
election of directors ("Voting Securities Outstanding"); provided,
however, that such acquisition of Beneficial Ownership would result in the
Person's Beneficially Owning fifty percent (50%) or more of the combined
voting power of Voting Securities Outstanding; and provided further, that
immediately prior to such acquisition such Person was not a direct or
indirect Beneficial Owner of fifty percent (50%) or more of the combined
voting power of Voting Securities Outstanding; or
(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,

<PAGE> 7

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 of Control shall occur as a result of any acquisition of Voting
Securities Outstanding by any subsidiary of the Company or an employee benefit
plan (or related trust) sponsored by the Company or an Affiliate.

2.7 CODE

Code means the Internal Revenue Code of 1986, as amended, or as it may be
amended from time to time. A reference to a particular section of the Code
shall also be deemed to refer to the regulations under that Code section.

2.8 COMMITTEE

Committee means the Compensation Committee of the Company's Board.

2.9 COMPANY

Company means Blue Cross and Blue Shield of Georgia, Inc. and any successor
thereto that agrees to adopt and continue this Plan.

2.10 DISABILITY

Disability means any condition which entitles the Participant to benefits under
any long-term disability plan maintained by the Company or an Affiliate.

2.11 EMPLOYEE

Employee means any person who is employed by an Employer.

2.12 EMPLOYER

Employer means the Company and each Affiliate which has adopted this Plan for
the benefit of its eligible Employees.

4
<PAGE> 8

2.13 ERISA

2.14 GOOD REASON

2.15 JUST CAUSE

Just Cause shall exist under subsection (b) or (c) only if the Company first
gives the Participant written notice of the conduct that constitutes Just
Cause, and the Participant fails to correct such conduct within 10 days of
receiving this notice.

2.16 NORMAL RETIREMENT DATE

Normal Retirement Date means the first day of the month coinciding with or next
following the Participant's sixty-fifth birthday.

2.17 PARTICIPANT

Participant means an Employee who has met, and continues to meet, the
eligibility requirements of section 3.1.

2.18 PLAN

Plan means this Blue Cross and Blue Shield of Georgia, Inc. Executive Benefit
Restoration Plan, as amended from time to time.

5
<PAGE> 9

2.19 PLAN ADMINISTRATOR

Plan Administrator means the most senior executive of the Company's Human
Resources Department.

2.20 PLAN YEAR

Plan Year means initially the period beginning July 1, 1996 and ending December
31, 1996. Thereafter, the Plan Year shall be the calendar year.

2.21 RETIREMENT PLAN

Retirement Program means the Non-Contributory Retirement Program for Certain
Employees of Blue Cross and Blue Shield of Georgia, Inc., as amended from time
to time.

6
<PAGE> 10

ARTICLE III. PARTICIPATION

3.1 ELIGIBILITY

3.2 DURATION

7
<PAGE> 11

ARTICLE IV. BENEFITS

4.1 RETIREMENT BENEFITS

(a) ELIGIBILITY. Except as otherwise provided in section 4.5, a Participant
shall be eligible for a retirement benefit under this section 4.1 if the
Participant's employment with the Company and its Affiliates ends on
account of retirement or Disability after the Participant--
(1) reaches age 55; and
(2) earns at least five "Years of Employer Service," as that term is
defined in the Retirement Program.
This normal retirement benefit shall be calculated as a single life annuity
commencing on the Participant's Normal Retirement Date. However, if the
Participant's Benefit Commencement Date precedes his or her Normal Retirement
Date, the benefit determined under this section 4.1 shall be reduced in
accordance with subsection (b)(2).
(b) AMOUNT
(1) IN GENERAL. Subject to paragraph (2) below, a Participant who is
eligible for a retirement benefit under subsection (a) shall be
entitled to a monthly benefit equal to the difference between (A)
and (B) where --
(A) is the benefit the Participant would be entitled to under the
Retirement Program as of his or her Normal Retirement Date,
calculated without regard to --
(i) the compensation limit in effect under Code section
401(a)(17); and
(ii) the benefit limit in effect under Code section 415; and
(B) is the sum of the benefit payable to the Participant, as of his
or her Normal Retirement Date, under --
(i) the Retirement Program; and
(ii) any nonqualified defined benefit plan sponsored by
another Blue Cross/Blue Shield employer that relates to a
period of service for which credit is given under this
Plan for benefit accrual purposes.
(2) EARLY COMMENCEMENT. In the case of a Participant whose Benefit
Commencement Date precedes his or her Normal Retirement Date, the
monthly benefit determined under paragraph (1) shall be reduced for
early commencement by 0.25 percent for each month by which the
Benefit Commencement Date precedes the first day of the month
coinciding with or next following the Participant's sixty-second
birthday.

8
<PAGE> 12

4.2 DEFERRED RETIREMENT BENEFITS

(a) DELAYED COMMENCEMENT. The Committee, in its sole and absolute discretion,
may delay the payment of a retirement benefit payable under section 4.1
beyond the Participant's Benefit Commencement Date. The retirement benefit
may be paid as of the first day of any month following the Benefit
Commencement Date, as determined by the Committee, but in no event may the
Committee delay the payment of benefits beyond the first day of the month
next following the Participant's sixty-fifth birthday.
(b) AMOUNT. If a Participant's delayed commencement date under this section
4.2 precedes his or her Normal Retirement Date, the monthly benefit
determined under section 4.1 shall be reduced for early commencement as
described in section 4.1(b)(2).
4.3 FORM OF PAYMENT

(a) NORMAL FORM OF PAYMENT. Subject to subsection (b), the single life annuity
calculated under section 4.1 shall be converted into an Actuarial
Equivalent lump sum payment which shall be paid to the Participant as of
his or her Benefit Commencement Date (or any later date determined under
section 4.2)
(b) OPTIONAL PAYMENT FORMS. In lien of the normal form of payment described in
subsection (a), a Participant may elect to receive his or her benefit
under the Plan in any one of the optional forms of payment permitted under
the Retirement Program. A Participant's election of an optional form of
payment is valid under this subsection (b) only if it is made in a manner
prescribed by the Plan Administrator --
(1) before the Plan Year in which the Participant reaches age 55 and
completes five "Years of Employer Service" (as defined in the
Retirement Program), in the case of Participant who does not satisfy
these vesting requirements before January 1, 1997; or
(2) at least one year before the Participant's employment with the
Company and its Affiliates ends on account of retirement or
Disability, in the case of a Participant who satisfies these vesting
requirements before January 1, 1997.
An optional payment form elected under this subsection (b) shall be the
Actuarial Equivalent of the single life annuity described in section 4.1.

9
<PAGE> 13

4.4 FORFEITURE

Notwithstanding any provision in this Plan to the contrary, any amounts to
which a Participant would be entitled under this Plan shall be forfeited if the
Participant terminates his or her employment with an Employer to become an
officer, director, employee, partner, agent, consultant, or any other
representative of a "competitor."

Whether a Participant has terminated employment with an Employer to work for or
represent a competitor shall be determined at the time of such termination by
the Committee, in its sole and absolute discretion. For this purpose, a
"competitor" shall be any business providing health insurance coverage as an
indemnity or managed care provider in competition with the Company in the State
of Georgia, as determined by the Committee in its sole and absolute discretion.

4.5 VESTING UPON CHANGE IN CONTROL

Notwithstanding any provision in this Plan to the contrary, a Participant whose
employment with the Company and its Affiliates is terminated within one year
following a Change in Control for reasons other than death or Disability shall
have a fully vested right to receive all benefits accrued under this Plan as of
the date of such termination if --
(a) the Company terminated the Participant's employment without Just Cause; or
(b) the Participant terminated his or her employment with the Company for Good
Reason.
Any benefits that vest under this section 4.5 shall be paid as of the later of
the first day of the month next following the Participant's termination from
employment or the first day of the month next following the Participant's
fifty-fifth birthday.

10
<PAGE> 14

ARTICLE V. PRERETIREMENT DEATH BENEFITS

5.1 ELIGIBILITY

(a) GENERAL RULE. If a Participant dies while actively employed, but
after reaching age 55 and completing five "Years of Employer Service"
(as defined in the Retirement Program), the Participant's Beneficiary
shall be entitled to a preretirement death benefit equal to the
amount determined under section 5.2.
(b) NO OTHER DEATH BENEFITS. If a Participant dies before reaching age
55 or completing five Years of Employer Service, no preretirement
death benefit shall be payable on the Participant's behalf.

5.2 AMOUNT

5.3 PAYMENT

Payment of the preretirement death benefit under this Article V shall be made
to the Participant's Beneficiary in a single lump sum as soon as practicable
following the Participant's death

11
<PAGE> 15

ARTICLE VI. FINANCING

6.1 FINANCING

The benefits under this Plan shall be paid out of the general assets of the
Employers. The benefits shall not be funded in advance of payment in any way.

6.2 NO TRUST CREATED

6.3 UNSECURED INTEREST

12
<PAGE> 16

ARTICLE VII. ADMINISTRATION

7.1 ADMINISTRATION

The Plan shall be administered by the Plan Administrator.

The Plan Administrator shall not be subject to liability with respect to the
administration of the Plan.

7.2 APPEALS FROM DENIAL OF CLAIMS

Generally, distributions under this Plan are automatic and no claim for
benefits need be filed. However, a Participant or Beneficiary may submit a
claim for benefits under the Plan in writing to the Plan Administrator.

13
<PAGE> 17

Administrator. This period shall not exceed 90 days after receipt of the claim,
except that if special circumstances require an extension of time, written
notice of the extension shall be furnished to the claimant, and an additional
90 days will be considered reasonable.

This notice shall be written in a manner calculated to be understood by the
claimant and shall set forth the following information:
(a) the specific reasons for the denial;
(b) specific reference to the Plan provisions on which the denial is based;
(c) a description of any additional material or information necessary for the
claimant to perfect the claim and an explanation of why this material or
information is necessary;
(d) an explanation that a full and fair review by the Plan Administrator of
the decision denying the claim may be requested by the claimant or an
authorized representative by filing with the Plan Administrator, within 60
days after the notice has been received, a written request for the review;
and
(e) if this request is so filed, an explanation that the claimant or an
authorized representative may review pertinent documents and submit issues
and comments in writing within the same 60-day period specified in
subsection (d).
The decision of the Plan Administrator upon review shall be made promptly, and
not later than 60 days after the Plan Administrator's receipt of the request for
review, unless special circumstances require an extension of time for
processing. In this case the claimant shall be so notified, and a decision shall
be rendered as soon as possible, but not later than 120 days after receipt of
the request for review. If the claim is denied, wholly or in part, the claimant
shall be given a copy of the decision promptly. The decision shall be in
writing, shall include specific reasons for the denial, shall include specific
references to the pertinent Plan provisions on which the denial is based, and
shall be written in a manner calculated to be understood by the claimant.

7.3 TAX WITHHOLDING

14
<PAGE> 18

7.4 EXPENSES

All expenses incurred in the administration of the Plan shall be paid by the
Company.

15
<PAGE> 19

ARTICLE VIII. ADOPTION OF THE PLAN BY AFFILIATE; AMENDMENT AND TERMINATION OF
THE PLAN

8.1 ADOPTION OF THE PLAN BY AFFILIATE

An Affiliate may adopt the Plan by appropriate action of its board of directors
or authorized officers or representatives, subject to the approval of the
Board.

8.2 AMENDMENT AND TERMINATION

The Company hereby reserves the right to amend, modify, or terminate the
Plan at any time, and for any reason, by action of the Board. However, --
(a) subject to section 4.4, no amendment or termination shall have the effect
of reducing the benefits accrued by a Participant prior to the date of the
amendment or termination; and
(b) following a Change in Control, the Company shall not have the right to
amend Plan provisions relating to the timing or form of distributions
under this Plan.

16
<PAGE> 20

ARTICLE IX. MISCELLANEOUS PROVISIONS

9.1 NO CONTRACT OF EMPLOYMENT

9.2 SEVERABILITY

If any provision of this Plan shall be held illegal or invalid, the illegality
or invalidity shall not affect its remaining parts. The Plan shall be construed
and enforced as if it did not contain the illegal or invalid provision.

9.3 APPLICABLE LAW

Except to the extent preempted by applicable federal law, this Plan shall be
governed by and construed in accordance with the laws of the state of Georgia.

9.4 ASSIGNMENT

The benefits under the Plan may not be assigned or alienated.

IN WITNESS WHEREOF, the authorized officers of the Company have signed this
document and have affixed the corporate seal on December 13, 1996, but
effective as of July 1, 1996.

BLUE CROSS AND BLUE SHIELD OF
GEORGIA, INC.

ATTEST:

By /S/ JOSEPH R. RADIGAN
-------------------------------

Its SENIOR VP HUMAN RESOURCES
----------------------------
By /S/ MITCHELLE D. JOHNSON
---------------------------------

Its SECRETARY (Corporate Seal)
------------------------------

<ARTICLE> 7
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM
CERULEAN COMPANIES, INC. FOR THE YEAR ENDED DECEMBER 31, 1997 AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1
<CURRENCY> U.S. DOLLARS

<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<EXCHANGE-RATE> 1
<DEBT-HELD-FOR-SALE> 187,662,551
<DEBT-CARRYING-VALUE> 0
<DEBT-MARKET-VALUE> 0
<EQUITIES> 73,102,814
<MORTGAGE> 0
<REAL-ESTATE> 0
<TOTAL-INVEST> 280,321,240
<CASH> 35,001,855
<RECOVER-REINSURE> 0
<DEFERRED-ACQUISITION> 0
<TOTAL-ASSETS> 553,362,970
<POLICY-LOSSES> 206,412,040
<UNEARNED-PREMIUMS> 8,301,197
<POLICY-OTHER> 25,553,200
<POLICY-HOLDER-FUNDS> 0
<NOTES-PAYABLE> 3,500,000
46,645,042
0
<COMMON> 3,515
<OTHER-SE> 195,033,273
<TOTAL-LIABILITY-AND-EQUITY> 553,362,970
1,514,076,163
<INVESTMENT-INCOME> 17,258,952
<INVESTMENT-GAINS> 11,299,757
<OTHER-INCOME> 0
<BENEFITS> 1,370,961,608
<UNDERWRITING-AMORTIZATION> 0
<UNDERWRITING-OTHER> 0
<INCOME-PRETAX> (386,722)
<INCOME-TAX> (2,050,000)
<INCOME-CONTINUING> 4,397,683
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 4,397,683
<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>