<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington D.C. 20549
FORM 10-Q
[x] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the period ended JUNE 30, 1999
or
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the transition period from _______________ to _________________
Commission File Number : 333-2796
--------
CERULEAN COMPANIES, INC.
(Exact name of registrant as specified in its charter)
Georgia 58-2217138
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
3350 Peachtree Road, N.E., Atlanta, Georgia 30326
(Address of principal executive offices) (Zip Code)
(404) 842-8000
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
YES [X] NO [ ]
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Class: Class A Convertible Common Stock, no par value, $0.01 stated value.
Outstanding as of August 6, 1999 - 409,552 shares
<PAGE> 2
CERULEAN COMPANIES, INC.
FORM 10-Q
JUNE 30, 1999
INDEX
<TABLE>
<CAPTION>
PAGE
NUMBER
------
<S> <C> <C>
PART I. FINANCIAL INFORMATION
----------------------
Item 1. Consolidated Financial Statements
Consolidated Balance Sheets as of June 30, 1999 and December Page 3
31, 1998
Consolidated Statements of Income for the Three and Six Page 4
Months Ended June 30, 1999 and 1998
Consolidated Statements of Comprehensive Income for the Page 4
Three and Six Months Ended June 30, 1999 and 1998
Consolidated Statements of Cash Flows for the Three and Six Page 5
Months Ended June 30, 1999 and 1998
Notes to Consolidated Financial Statements Page 6
Item 2. Management's Discussion and Analysis of Financial Condition Page 10
and Results of Operations
Item 3. Quantitative and Qualitative Disclosure About Market Risk Page 16
PART II. OTHER INFORMATION
-----------------
Item 1. Legal Proceedings Page 17
Item 2. Changes in Securities Page 17
Item 3. Defaults Upon Senior Securities Page 17
Item 4. Submission of Matters to a Vote of Security Holders Page 17
Item 5. Other Information Page 18
Item 6. Exhibits and Reports on Form 8-K Page 18
Signatures Page 19
</TABLE>
2
<PAGE> 3
PART I - FINANCIAL INFORMATION
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS
CERULEAN COMPANIES, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1999 1998
------------------------------
(UNAUDITED)
<S> <C> <C>
ASSETS
Investments:
Fixed maturities:
Available-for-sale, at fair value (amortized cost: $246,156,377;
$235,441,231) $241,737,743 $239,548,185
Equity securities, at fair value (cost: $51,045,895; $55,866,571) 71,910,131 76,906,525
Short-term investments, at fair value (cost: $325,000; $9,215,878) 325,000 9,215,878
------------------------------
Total investments 313,972,874 325,670,588
Cash and cash equivalents 72,779,171 52,159,196
Accounts receivable 68,938,830 61,777,995
Reimbursable portion of estimated benefit liabilities 51,992,000 47,816,000
FEP assets held by agent 38,786,536 38,786,536
Property and equipment 38,553,215 36,898,538
Other assets 25,742,152 24,232,739
------------------------------
Total assets $610,764,778 $587,341,592
==============================
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Estimated benefit liabilities $193,455,313 $184,075,293
Unearned premiums 11,045,998 16,077,960
FEP stabilization reserve 38,786,536 38,786,536
Accounts payable and accrued expenses 54,508,477 43,893,056
Other liabilities 43,544,335 42,184,663
------------------------------
Total liabilities 341,340,659 325,017,508
------------------------------
Mandatorily redeemable preferred stock:
Class B Convertible Preferred Stock, no par value
Authorized, issued and outstanding, 49,900 shares at June 30, 1999 and
December 31, 1998; aggregate liquidation preference $49,900,000;
aggregate mandatory redemption, $44,910,000 46,645,042 46,645,042
------------------------------
Shareholders' equity:
Blank Preferred Stock, no par value
Authorized and unissued 100,000,000 shares -- --
Series A Preferred Stock, no par value, $0.01 stated value
Authorized and unissued 64,000 shares -- --
Class A Convertible Common Stock, no par value, $0.01 stated value
Authorized 50,000,000 shares; issued and outstanding 409,527 and
409,392 shares at June 30, 1999 and December 31, 1998, respectively 4,095 4,094
Additional paid-in capital 45,188,422 45,188,422
Common Stock, no par value
Authorized and unissued 100,000,000 shares -- --
Stock warrants exercisable 29,968,000 29,968,000
Accumulated other comprehensive income (unrealized appreciation on
securities, net of taxes) 12,984,602 19,596,908
Retained earnings 134,633,958 120,921,618
------------------------------
Total shareholders' equity 222,779,077 215,679,042
Commitments and contingencies (Note 6) -- --
------------------------------
Total liabilities and shareholders' equity $610,764,778 $587,341,592
==============================
</TABLE>
See accompanying notes.
3
<PAGE> 4
CERULEAN COMPANIES, INC.
CONSOLIDATED STATEMENTS OF INCOME
UNAUDITED
<TABLE>
<CAPTION>
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
1999 1998 1999 1998
------------ ------------- ------------ -------------
<S> <C> <C> <C> <C>
Revenues:
Premium revenue $366,245,563 $ 276,121,025 $715,883,882 $ 556,681,235
Management services revenue 38,172,226 27,232,001 70,833,388 54,127,756
Investment and other income 5,455,681 4,217,262 10,180,028 8,015,859
Realized gains 3,118,176 3,082,521 4,981,638 6,084,367
------------ ------------- ------------ -------------
Total revenues 412,991,646 310,652,809 801,878,936 624,909,217
Benefits expense 330,217,669 232,456,376 628,844,611 475,878,746
Operating expenses 75,878,830 69,035,171 151,865,119 136,127,774
------------ ------------- ------------ -------------
Operating income 6,895,147 9,161,262 21,169,206 12,902,697
Endowment of a non-profit
foundation (Note 3) -- (76,157,000) -- (76,157,000)
Non-operating income 63,750 63,750 127,500 127,500
------------ ------------- ------------ -------------
Income (loss) before income taxes
and minority interests 6,958,897 (66,931,988) 21,296,706 (63,126,803)
Income tax expense (benefit)
(Note 4) 1,376,000 (1,867,000) 5,030,000 (834,000)
Minority interest in losses (earnings)
of joint venture investments 536,366 (1,396,876) 106,968 (1,895,374)
------------ ------------- ------------ -------------
Net income (loss) $ 6,119,263 $ (66,461,864) $ 16,373,674 $ (64,188,177)
============ ============= ============ =============
</TABLE>
See accompanying notes.
CERULEAN COMPANIES, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
UNAUDITED
<TABLE>
<CAPTION>
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
1999 1998 1999 1998
----------- ------------ ------------ ------------
<S> <C> <C> <C> <C>
Net income (loss) $ 6,119,263 $(66,461,864) $ 16,373,674 $(64,188,177)
Other comprehensive income (loss),
net of tax:
Unrealized holding (losses) gains
arising during period, net of
reclassification adjustment for
gains included in net income of
$2,494,541, $2,446,017,
$3,985,310 and $4,867,494,
respectively (3,035,990) (822,952) (6,612,306) 3,091,231
----------- ------------ ------------ ------------
Comprehensive income (loss) $ 3,083,273 $(67,284,816) $ 9,761,368 $(61,096,946)
=========== ============ ============ ============
</TABLE>
See accompanying notes.
4
<PAGE> 5
CERULEAN COMPANIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
UNAUDITED
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30,
1999 1998
------------- -------------
<S> <C> <C>
OPERATING ACTIVITIES
Net income (loss) $ 16,373,674 $ (64,188,177)
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Non-cash and non-operating items:
Endowment of a non-profit foundation -- 76,157,000
Depreciation 4,958,062 5,325,521
Amortization 366,449 135,007
Uncollectible receivables 934,196 1,237,249
Gain on sale of investments (4,981,638) (6,084,367)
Loss on sale of property and equipment 490,317 34,972
Non-operating income (127,500) (127,500)
(Increase) decrease in certain assets:
Accounts receivable (8,095,031) 3,202,242
Reimbursable portion of estimated benefit liabilities (4,176,000) 125,487
Other assets 579,587 (7,465,315)
Increase (decrease) in certain liabilities:
Estimated benefit liabilities 9,380,020 20,394,033
Unearned premiums (5,031,962) (785,985)
Accounts payable and accrued expenses 10,615,421 7,419,628
Other liabilities (1,301,661) 4,559,122
Minority interest in sale of stock warrants by a (122,500) (122,500)
subsidiary ------------- -------------
Net cash provided by operating activities 19,861,434 39,816,417
INVESTING ACTIVITIES
Investments available-for-sale:
Investments purchased (99,580,662) (141,372,364)
Investments sold or matured 107,192,259 123,047,212
Property and equipment purchased (7,118,403) (7,288,532)
Property and equipment sold 15,347 54,138
------------- -------------
Net cash provided by (used in) investing activities 508,541 (25,559,546)
FINANCING ACTIVITIES
Sale of stock warrants by a subsidiary 250,000 250,000
Repayment of notes payable -- (3,500,000)
------------- -------------
Net cash provided by (used in) financing activities 250,000 (3,250,000)
------------- -------------
Increase in cash and cash equivalents 20,619,975 11,006,871
Cash and cash equivalents at beginning of period 52,159,196 35,001,855
------------- -------------
Cash and cash equivalents at end of period $ 72,779,171 $ 46,008,726
============= =============
</TABLE>
See accompanying notes.
5
<PAGE> 6
CERULEAN COMPANIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1999
UNAUDITED
1. SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION
Cerulean Companies, Inc. (the "Company") was incorporated under the laws of the
State of Georgia on February 2, 1996 to act as the holding company for Blue
Cross and Blue Shield of Georgia, Inc. ("BCBSGA") and other subsidiaries, and
for other lawful purposes.
BASIS OF PRESENTATION
The Company's accompanying unaudited consolidated financial statements have been
prepared in conformity with generally accepted accounting principles ("GAAP")
and require the use of management's estimates. As to the Company's managed care,
health and life insurance operations, GAAP varies in some respects from
statutory accounting practices permitted or prescribed by insurance regulatory
authorities. The Company's health care plan subsidiary, its health maintenance
organization and its life insurance subsidiary are subject to regulation by the
Georgia Insurance Department including minimum capital and surplus requirements
and restrictions on payment of dividends. Because of the nature of the Company's
operations, the results for interim periods are not necessarily indicative of
results expected for the entire year. In the opinion of management, all material
adjustments necessary for a fair presentation of the financial position and
results of operations for the interim periods presented have been made. All such
adjustments are of a normal recurring nature.
PRINCIPLES OF CONSOLIDATION
The Company's accompanying unaudited consolidated financial statements include
the accounts of the Company, BCBSGA and its wholly-owned life insurance
subsidiary, a health maintenance organization subsidiary, a non-insurance
subsidiary and community health partnership network joint ventures ("CHPNs").
All significant intercompany transactions and balances have been eliminated in
consolidation.
The Company owns at least 51% of the voting shares of each CHPN. Under certain
circumstances defined in the CHPN shareholder agreements, supermajority votes of
shareholders are required for amendment of the CHPN articles of incorporation;
liquidation of the CHPN; and issuance and repurchase of CHPN equity. The net
effect of supermajority votes in these circumstances results in consensus of the
shareholders, providing minority shareholders protective rights. Only the
Company is required under the CHPN agreements to provide required additional
capital. Future capital requirements of minority shareholders are limited or
prescribed. Profits of CHPNs are allocated to shareholders in accordance with
their respective stock ownership percentages. Losses are allocated in accordance
with ownership interests up to previously contributed capital; losses exceeding
such amounts are absorbed entirely by the Company.
RECLASSIFICATIONS
Certain prior year balances have been reclassified to conform to the current
year presentation.
2. EARNINGS PER SHARE
Earnings per share are omitted because such data is not meaningful at the
present time due to the possible dilutive events that will occur prior to the
conversion of the Class A Convertible Common Stock (the "Class A Stock") or the
Class B Convertible Preferred Stock. Presently there is no market for the Class
A Stock or any equity securities of the Company.
6
<PAGE> 7
3. JUNE 30, 1998 RESTATEMENT
During June 1998, the Company recorded a nonrecurring charge of $54.4 million
related to the endowment of a non-profit foundation under the terms of a
lawsuit settlement concerning the conversion of the Company to a for-profit
corporation, which, at that time, represented management's best judgment of
the fair value as of the date of the settlement. In connection with the
Company's proposed merger with WellPoint Health Networks, Inc., the staff of
the Securities and Exchange Commission ("the Staff") reviewed the transaction
during fourth quarter 1998. Subsequently, the Company concluded with the
Staff that the fair value determination of the endowment should be revised to
$76.2 million. As a result, the financial statements for the three months and
six months ended June 30, 1998 have been restated to reflect the change in fair
value.
4. INCOME TAXES
The Company's income tax expense consisted primarily of federal alternative
minimum tax in all periods. The effective tax rates (excluding the effect of the
endowment of a non-profit foundation) for the periods are impacted by CHPN
subsidiaries which incur taxes at a 34% rate and which do not join in the filing
of the Company's consolidated tax return, state income taxes and other permanent
book to tax differences, including non-deductible expenses.
5. BUSINESS SEGMENT, CUSTOMER AND PRODUCT INFORMATION
The Company operates predominantly in one industry segment, health insurance
products and services, and reports its operations as one business segment. The
Company's products and services are sold principally in the State of Georgia. A
significant portion of its customer base is concentrated with companies that are
located in the metropolitan Atlanta area.
The Company's premium revenue and management services revenue by primary product
groups are as follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
1999 1998 1999 1998
------------------------------------------------------------------
<S> <C> <C> <C> <C>
Indemnity and PPO insurance products and
services $235,494,194 $172,467,977 $456,970,843 $360,893,723
HMO and POS insurance products and
services 164,409,352 126,574,066 320,730,288 241,739,498
Life insurance and other products and
services 4,514,243 4,310,983 9,016,139 8,175,770
------------------------------------------------------------------
Total $404,417,789 $303,353,026 $786,717,270 $610,808,991
==================================================================
</TABLE>
6. COMMITMENTS AND CONTINGENCIES
PROPOSED MERGER
On July 9, 1998, the Company entered into an agreement and plan of merger (the
"Merger Agreement") with WellPoint Health Networks Inc. ("WellPoint") and a
subsidiary of WellPoint. As of July 9, 1999, the parties agreed upon an
extension of the Merger Agreement until October 15, 1999 and, under certain
circumstances, December 31, 1999. Pursuant to the Merger Agreement, the Company
will become a wholly-owned subsidiary of WellPoint. On June 25, 1999, the
shareholders of the Company approved the transaction. Finalization of the
transaction is subject to, among other things, the approval of the Commissioner
of Insurance of the State of Georgia (the "Georgia Commissioner"), the approval
of the Blue Cross and Blue Shield Association and certain approvals of the
Health Care Financing Administration. The Company expects that the Commissioner
will schedule a public hearing during August or September. Upon closing the
transaction, shareholders of the Company will exchange their shares for
WellPoint shares or cash in a transaction valued at $500 million.
7
<PAGE> 8
6. COMMITMENTS AND CONTINGENCIES (CONTINUED)
LEGAL PROCEEDINGS
On December 17, 1998, Plaintiffs Rickey Underhill, Jim Kerscher, Janice Young,
Richard Collins, Greg Lane and Keith Page, individually and on behalf of all
others similarly situated (collectively, the "Bartow County Plaintiffs"), filed
a lawsuit against the Company and BCBSGA in the Superior Court of Bartow County
("the Court of Bartow"), State of Georgia, bearing Civil Action File No.
CV98-2656. The Bartow County Plaintiffs identify themselves as six individuals
who were entitled to receive shares of the Company's stock in connection with
the conversion of BCBSGA from a non-profit corporation to a regular business
corporation. The Bartow County Plaintiffs assert claims for specific
performance, breach of provisions of the Insurance Code of Georgia, and request
declaratory judgment and certification of a class action consisting of all
persons who were "eligible subscribers" of the Company on September 1, 1995, but
who did not become holders of Class A Stock of the Company because their
eligible coverage terminated prior to February 1, 1996. The Bartow County
Plaintiffs allege that they and the members of the purported class are entitled
to receive shares of Class A Stock in the Company. The Bartow County Plaintiffs
allege alternatively that offering materials disseminated by BCBSGA during 1996
relating to Class A Stock of the Company were not disseminated to the Bartow
County Plaintiffs and that the Bartow County Plaintiffs and the purported class
members are entitled to an award of damages in excess of $2.5 million. On
January 28, 1999, the Company and BCBSGA filed answers and a motion to dismiss.
On March 11, 1999, counsel to the Company and BCBSGA argued the motion to
dismiss. On June 23, 1999, the Bartow County Plaintiffs dismissed their
complaint without prejudice. On June 23, 1999, the Bartow County Plaintiffs
filed a Petition for Declaratory Ruling (the "Bartow County Petition") before
the Georgia Commissioner. The Bartow County Petition seeks a declaration that
the Bartow County Plaintiffs should have been issued shares of Class A Stock. On
July 12, 1999, the Company and BCBSGA filed their Statement of Interested
Parties in opposition to the Bartow County Petition. On August 5, 1999, BCBSGA
and the Company filed their Supplemental Statement of Interested Parties. On
August 10, 1999, the Georgia Commissioner entered an order denying the Bartow
County Plaintiffs' Bartow County Petition. Management of the Company believes
the case to be without merit and, in any event, believes that its impact on the
assets of the Company, if any, would not be material.
On September 18, 1998, Plaintiffs Allen Saravuth, Nga Nguyen, Chansamone
Sengsavath and Fatana Pirzad, individually and on behalf of all others similarly
situated (collectively, the "Richmond County Plaintiffs"), filed a lawsuit
against the Company, BCBSGA, James L. Laboon, Jr., Fred L. Tolbert, Jr., Richard
D. Shirk, James E. Albright, W. Daniel Barker, Elizabeth W. Camp, Louis H.
Felder, M.D., Edward M. Gillespie, Joseph D. Greene, Mel H. Gregory, Jr., Frank
J. Hanna, III, R. Pierce Head, Jr., Charles H. Keaton, James H. Leigh, Jr.,
M.D., Julia L. Mitchell-Ivey, Charles R. Underwood, M.D., W. Jerry Vereen, A.
Max Walker, Dan H. Willoughby, M.D., Joe M. Young, and John B. Zellars
(collectively, the "Defendant Directors") in the Superior Court of Richmond
County ("the Court of Richmond"), State of Georgia, bearing Civil Action File
No. 98-RCCV-806. In addition, the Richmond County Plaintiffs filed a Motion for
Temporary Restraining Order and Interlocutory Injunctive Relief, which was heard
and denied by the Court of Richmond on September 21, 1998. The Richmond County
Plaintiffs identify themselves as four individuals who were entitled to receive
shares of the Company's stock in connection with the conversion of BCBSGA from a
non-profit corporation to a regular business corporation (the "Conversion"). The
Richmond County Plaintiffs assert claims for specific performance, fraud, breach
of provisions of the Insurance Code of Georgia, breach of fiduciary duty, and
requested declaratory judgment and certification of a class action consisting of
all persons who were "eligible subscribers" of BCBSGA as of February 1, 1996,
and who did not become holders of Class A Stock of the Company. The Richmond
County Plaintiffs allege that they and the members of the purported class are
entitled to receive shares of Class A Stock in the Company. The Richmond County
Plaintiffs allege alternatively that offering materials disseminated by BCBSGA
during 1996 relating to Class A Stock of the Company contained materially
misleading and deceptive statements and omissions and that the Richmond County
Plaintiffs and the purported class members are entitled to an award of damages
in excess of $100 million. The Richmond County Plaintiffs also assert derivative
causes of action against the Defendant Directors alleging that the Defendant
Directors breached fiduciary duties by, among other things, approving the
placement and issuance of Class B Stock in the Company during 1996, the issuance
of Class A Stock in the Company, the settlement of the Let's Get Together, Inc.
et al. v. Insurance Commissioner, et al., Civil Action
8
<PAGE> 9
6. COMMITMENTS AND CONTINGENCIES (CONTINUED)
LEGAL PROCEEDINGS
E-61714 (Superior Court of Fulton County, Georgia) lawsuit, and certain
management compensation. On November 9, 1998, Harrell Tiller, Charlie Deal and
Olean Lokey joined the case as additional named plaintiffs. On December 9 and
10, 1998, a hearing was held on the plaintiffs' request for declaratory ruling
on the issue of whether plaintiffs are properly shareholders of the Company and
on December 17, 1998, the Superior Court ruled in favor of the plaintiffs. The
Company filed an appeal with the Georgia Supreme Court which accepted
jurisdiction and granted expedited treatment to the appeal. The Company's Board
of Directors appointed a Special Litigation Committee to review the derivative
claims. On April 14, 1999, the Special Litigation Committee reported to the
Board of Directors that it had concluded that the derivative claims were without
substance. On May 3, 1999, the Georgia Supreme Court reversed the ruling of the
Richmond County Superior Court, holding that the Richmond County Superior Court
erred in considering and ruling upon the plaintiffs' claims. The Georgia Supreme
Court found that the Georgia Commissioner had broad power of review over the
Conversion and that sufficient administrative remedies with the Georgia
Commissioner had been available to the plaintiffs during and following the
Conversion.
The Richmond County Plaintiffs did not file a motion for reconsideration of the
Georgia Supreme Court's decision. On May 5, 1999, BCBSGA and the Company filed
motions for summary judgment on the Richmond County Plaintiffs' fraud claims.
On May 20, 1999, the Company and BCBSGA filed a motion for entry of judgment on
all remaining counts of the Richmond County Plaintiffs' Complaint. Those
motions remain pending before the Court. On July 29, 1999, the Court of
Richmond entered an order dismissing all claims against the Defendant Directors
without prejudice.
On May 17, 1999, Harrell Tiller, Charlie Deal and Olean Lokey, who were among
the Richmond County Plaintiffs, filed two separate Petitions for Declaratory
Ruling (the "Petitions") before the Georgia Commissioner, seeking a declaration
from the Georgia Commissioner that they, and others similarly situated, should
have been issued shares of Class A Stock. On June 22, 1999, the Georgia
Commissioner entered orders on the Petitions denying the relief sought. On June
22, 1999, Harrell Tiller, Charlie Deal and Olean Lokey filed two separate
proceedings in the Court of Richmond. In these cases, styled In Re: Harrell
Tiller, individually and on behalf of all others similarly situated v.
Commissioner of Insurance of the State of Georgia, Civil Action No.
1999-RCCV-471 and In Re: Charlie Deal and Olean Lokey, individually and on
behalf of all others similarly situated v. Commissioner of Insurance of the
State of Georgia, Civil Action No. 1999-RCCV-470, the Petitioners seek judicial
review of the decisions of the Georgia Commissioner of June 22, 1999 (the
"Judicial Review Proceedings"). The Judicial Review Proceedings remain pending.
Management of the Company believes the case to be without merit and, in any
event, believes that its impact, if any, on the assets of the Company would not
be material.
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.
9
<PAGE> 10
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion should be read in conjunction with the unaudited
consolidated financial statements and notes thereto. The Company's actual future
results could differ materially from its historical results, depending on, among
other factors, changing rates of utilization of medical services by its
enrollees and changing rates of medical service costs.
OVERVIEW
Cerulean Companies, Inc. (the "Company") was incorporated under the laws of the
State of Georgia on February 2, 1996 to act as the holding company for Blue
Cross and Blue Shield of Georgia, Inc. ("BCBSGA") and other subsidiaries, and
for other lawful purposes.
RESULTS OF OPERATIONS
Three Months Ended June 30, 1999 Compared to Three Months Ended June 30, 1998
Premium revenues increased $90.1 million to $366.2 million for the three months
ended June 30, 1999 from $276.1 million for the three months ended June 30,
1998. HMO and POS premiums increased $36.8 million to $159.2 million for the
three months ended June 30, 1999 primarily as a result of a 20% increase in
membership and rate increases in the 1999 period. HMO and POS insured membership
grew to 385,000 members at June 30, 1999 from 321,000 members at June 30, 1998.
Premium revenues for indemnity and PPO products increased $53.1 million to
$202.7 million for the three months ended June 30, 1999 as a result of rate
increases in 1999 and a 7% growth in the members served.
Management services revenue increased $10.9 million to $38.2 million for the
three months ended June 30, 1999 compared to $27.2 million for the three months
ended June 30, 1998, due primarily to increased administrative fee revenue from
services provided to self-funded employer groups and other third parties and
network access fees from other Blue Cross Blue Shield plans.
Realized gains on the sale of marketable securities were $3.1 million in both
the three months ended June 30, 1999 and 1998. 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. Results in one period are not
necessarily indicative of results to be expected in the future.
The Company's medical loss ratio (benefits expense as a percentage of premium
revenue) increased to 90.2% for the three months ended June 30, 1999 from 84.2%
for the three months ended June 30, 1998. The loss ratios for all of the
Company's products increased in the 1999 second quarter compared to the same
quarter a year ago, due to higher cost trends identified during the second
quarter 1999 for certain 1999 incurred claims and a change in claims
payment patterns. Under new Georgia legislation ("House Bill #159") effective
July 1, 1999, all insurance companies in Georgia will be required to pay
interest to providers on certain defined claims that take longer than 15
business days to process. Management of the Company took actions during the
second quarter to accelerate the payment of routine claims and to clear aged
claims.
Operating expenses increased 10% to $75.9 million for the second quarter of 1999
compared to the same period a year ago, while premium and management services
revenues increased 33%. As a result, operating expenses as a percentage of
premium and management services revenue improved to 18.8% for the three months
ended June 30, 1999 compared to 22.8% for the second quarter of 1998. Operating
expenses included $0.9 million and $1.2 million for Year 2000 Readiness costs
for the second quarter of 1999 and 1998, respectively. Additionally, the 1999
period includes legal and other professional expenses related to the pending
merger with WellPoint and the litigation referred to in Note 6 of the Notes to
Consolidated Financial Statements (Unaudited).
10
<PAGE> 11
On July 8, 1998, the Company entered into a stipulation and agreement of
settlement of a lawsuit concerning the conversion of the Company to a for-profit
corporation. The Company endowed a new non-profit foundation and issued cash,
Class A Stock and Warrants pursuant to this settlement; in connection with this
transaction, the Company recorded a nonrecurring charge of $76.2 million for the
three months ended June 30, 1998. The Company recorded a tax benefit of $26.7
million related to this settlement, reduced to its expected realizable value of
$4.6 million.
The Company's effective tax rate in both periods (excluding the effect of the
1998 endowment of a non-profit foundation) consists primarily of federal
alternative minimum tax and state income taxes, adjusted for the effect of other
permanent book to tax differences, including non deductible expenses and losses
from CHPN subsidiaries that are not expected to generate a tax benefit currently
or in the foreseeable future.
As a result of the foregoing factors, operating income decreased to $6.9 million
for the three months ended June 30, 1999 from $9.2 million for the three months
ended June 30, 1998. The Company recognized a net income of $6.1 million for the
quarter ended June 30, 1999 compared to a net loss of $66.5 million for the
quarter ended June 30, 1998, after the effect of the nonrecurring endowment of
a non-profit foundation.
Six Months Ended June 30, 1999 Compared to Six Months Ended June 30, 1998
Premium revenues increased $159.2 million to $715.9 million for the six months
ended June 30, 1999 from $556.7 million for the six months ended June 30, 1998.
HMO and POS premiums increased 33% to $311.0 million for the 1999 period
primarily as a result of a 20% increase in membership and rate increases during
the period. New sales, in-group growth, and to a lesser extent, migrations from
traditional indemnity products into HMO and POS products, drove HMO and POS
insured membership to 385,000 members at June 30, 1999 from 321,000 members at
June 30, 1998. Premium revenues for indemnity and PPO products increased $81.4
million to $396.0 million for the six months ended June 30, 1999 as a result of
rate increases in 1999 and a 7% growth in the members served.
Management services revenue increased $16.7 million to $70.8 million for the six
months ended June 30, 1999 compared to $54.1 million for the six months ended
June 30, 1998, due primarily to increased administrative fee revenue from
services provided to self-funded employer groups, and other third parties and
network access fees from other Blue Cross Blue Shield plans. Self-funded
employer group membership was 855,000 at June 30, 1999 compared to 870,000 at
June 30, 1998 principally due to self-funded employer groups shifting to the
national Interplan Teleprocessing System for Blue Cross Blue Shield plans.
Membership served under insurance products and management services arrangements
totaled 1,650,000 at June 30, 1999 compared to 1,620,000 members at December 31,
1998.
Realized gains on the sale of marketable securities of $5.0 million for the six
months ended June 30, 1999 were $1.1 million lower than gains realized for the
six months ended June 30, 1998. 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. Results in one period are not necessarily
indicative of results to be expected in the future.
The Company's medical loss ratio (benefits expense as a percentage of premium
revenue) increased to 87.8% for the six months ended June 30, 1999 up from
85.5% for the six months ended June 30, 1998. In anticipation of the potential
to pay interest after July 1, 1999 to providers under House Bill #159 if a
claim takes longer than 15 business days to process, management of the Company
took actions during the second quarter to accelerate the payment of routine
claims and to clear aged claims. In addition to this change in claims payment
patterns, higher cost trends were identified during the second quarter 1999 for
certain 1999 incurred claims resulting in higher loss ratios for all of the
Company's products in the 1999 period when compared to the same period in 1998.
The increase in benefits expense due to the acceleration of claims payment
patterns is not expected to continue to impact the Company's loss ratios.
11
<PAGE> 12
Operating expenses increased 12% to $151.2 million for the six months ended June
30, 1999 compared to the same period a year ago, while premium and management
services revenues increased 29%. Due to the positive impact from premium
increases in 1999 being realized at a rate higher than operating expense
increases, operating expenses as a percentage of premium and management services
revenue improved to 19.3% for the six months ended June 30, 1999 compared to
22.3% for the six months ended June 30, 1998. Operating expenses included $1.9
million and $2.3 million for Year 2000 readiness costs for the six months of
1999 and 1998, respectively. Additionally, the 1999 period includes
approximately $3.9 million in legal and other professional expenses related to
the pending merger with WellPoint and the litigation referred to in Note 6 of
the Notes to Consolidated Financial Statements (Unaudited).
On July 8, 1998, the Company entered into a stipulation and agreement of
settlement of a lawsuit concerning the conversion of the company to a for-profit
corporation. The Company endowed a new non-profit foundation and issued cash,
Class A Stock and Warrants pursuant to this settlement; in connection with this
transaction, the Company recorded a nonrecurring charge of $76.2 million for the
six months ended June 30, 1998. The Company recorded a tax benefit of $26.7
million related to this settlement, reduced to its expected realizable value of
$4.6 million.
The Company recorded tax expense of $5.0 million for the six months ended June
30, 1999 compared to a tax expense of $3.7 million for the six months ended June
30, 1998. The Company's effective tax rate in both periods (excluding the effect
of the 1998 endowment of a non-profit foundation) consists primarily of federal
alternative minimum tax and state income taxes, adjusted for the effect of other
permanent book to tax differences, including non deductible expenses and losses
from CHPN subsidiaries that are not expected to generate a tax benefit currently
or in the foreseeable future.
As a result of the foregoing factors, operating income increased to $21.2
million for the six months ended June 30, 1999 from $12.9 million for the six
months ended June 30, 1998. The Company recognized net income of $16.4 million
for the six months ended June 30, 1999 compared to a net loss of $64.2 million
for the six months ended June 30, 1998, after considering the nonrecurring
endowment of a non-profit foundation in 1998.
LIQUIDITY AND CAPITAL RESOURCES
Liquidity
The Company has both short-term and long-term liquidity needs and has structured
its investment portfolios accordingly. Short-term liquidity needs to fund
operating costs, as well as payment obligations to its customers, are met from
funds invested primarily in institutional money market accounts and short-term
government agency notes. Assets not required for short-term liquidity needs are
transferred to a portfolio of investments in the fixed income and equity
markets. This portfolio, which provides reserves for future payment obligations
and funds for long-term liquidity needs is managed by several independent
advisory firms. The Company's investment policies are designed to provide
liquidity to meet anticipated payment obligations, to preserve capital and to
maximize yield in conformance with all regulatory requirements. Of the Company's
investment portfolio of $314.0 million, $308.6 million is held at its insurance
subsidiaries and is invested subject to limitations prescribed by Georgia
insurance statutes.
The increase in cash and cash equivalents amounted to $20.6 million for the six
months ended June 30, 1999 compared to $11.0 million for the same period in
1998. The Company generated positive cash flow from operations of $19.9 million
in the 1999 period and $39.8 million in the 1998 period due primarily to
profitability in both periods (excluding the $54.4 endowment of a non-profit
foundation in June 1998 which did not require cash) and to increased operating
liabilities such as estimated benefits and accounts payable and accrued
expenses. Capital and investment purchases exceeded investments sold by $25.6
million during the six months ended June 30, 1998. Additionally, cash of $3.5
million was used for the repayment of a loan during 1998. These investing and
financing activities in 1998 provided offsets to cash provided from operations
in that period. Because of the nature of the Company's business, current cash
flows from operations for interim periods are not necessarily indicative of cash
12
<PAGE> 13
flows from operations expected for the entire year. The Company believes its
future cash resources will be adequate to meet its operating requirements.
Capital Resources
The Company has analyzed its information technology assets and is executing a
comprehensive plan to either modify or replace portions of its software and
hardware so that those systems will properly function when processing
information involving dates after 1999. Total year 2000 computer software
readiness costs are estimated at $18.9 million and are being funded through
operating cash flows. Through June 30, 1999, the Company has incurred $15.6
million in total. Renovation costs expensed total $8.6 million of which $1.9
million was incurred in the 1999 period. Remaining Year 2000 expenses are
estimated at $3.3 million, including $1.9 million of renovation expense.
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. The Company believes future capital
requirements can be met with a combination of (i) the Company's current
resources, (ii) cash flows from operations, (iii) borrowings and (iv) potential
debt or equity offerings. Management believes that the consummation of the
Merger will provide the Company with significant additional capital
alternatives.
Year 2000 Computer Software Readiness
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 two digits rather than four to define
the applicable year. Date sensitive software may recognize a date using "00" as
the year 1900 instead of the year 2000 (the "Year 2000 Issue"). The Company has
analyzed its systems and is executing a comprehensive plan to either modify or
replace portions of its software and hardware so that those systems will
properly function when processing information involving dates beyond December
31, 1999. The Company's Year 2000 plans involve the following phases: (1)
awareness and assessment, which includes identification of significant business
processes, facilities and third party dependencies requiring a Year 2000
solution; (2) renovation, which includes updating and modifying critical systems
and business processes; (3) validation, which includes testing of systems that
have been updated or modified; (4) implementation, which includes placing
systems into production and comprehensive testing to identify and resolve any
remaining Year 2000 issues; and (5) contingency planning.
During 1997, the Company began its assessment of all systems that could be
significantly affected by the Year 2000 Issue. Detailed plans for renovation
were finalized in early 1998. The Company is scheduled to complete its
certification of Year 2000 renovation efforts by November 1, 1999 based on
mandated testing requirements from the Health Care Financing Administration
("HCFA"), Federal Employees Program ("FEP"), and the Blue Cross Blue Shield
Association. A more detailed description and status of Year 2000 activities as
of July 31, 1999 follows:
- - The Company's data center, client server, desk top computers and
standard software, telephone and voice mail systems are Year 2000
compliant. A limited number of specialized desk top software
applications are presently being renovated and will be compliant by
November 1, 1999. Security systems and elevators in leased and owned
facilities have been certified by outside parties as Year 2000
compliant.
- - The Company's claims processing, membership billing and primary payment
system, which currently handles over 70% of the Company's membership,
is renovated, certified and in production. Recertification testing is
scheduled for October 1999.
- - The claims processing system for the Company's remaining membership
(representing the non-HMO membership for one of its largest customers)
is renovated and is scheduled for production implementation during
September 1999. Special contingency plans for this major block of
business will be completed during August. With identification of
specific contingency plans, certification testing for this customer
will continue through the end of October 1999.
- - Electronic data interchange testing and implementation is scheduled for
completion during August 1999.
13
<PAGE> 14
- - Medicare Part A processing system is renovated. Mission critical
applications will be recertified during September 1999.
- - The Company has completed contingency action plans to invoke in case of
high-risk mission-critical failures. These contingency plans will be
tested during August. The tests will include a review by an independent
third party.
- - Enterprise Year 2000 (end-to-end) testing, which includes data
exchanges with selected critical third party business partners, begins
in September 1999 and will continue through November 1999.
- - In order to decrease business risk, the Company will restrict the
amount of software and hardware changes during the fourth quarter of
1999.
The Company utilizes both internal and external resources to renovate, replace,
test and implement the software and equipment to satisfy Year 2000 requirements.
The total cost of the Year 2000 changes is estimated at $18.9 million and is
being funded through operating cash flows. Through June 30, 1999, the Company
has incurred $15.6 million in total. Renovation costs expensed totaled $8.6
million of which $1.9 million was incurred during the six months ended June 30,
1999. Remaining Year 2000 costs are estimated at $3.3 million and include $1.9
million of renovation expense. The increase from $15.6 million, as reported in
the Company's Form 10-Q for the quarter ended March 31, 1999, to $18.9 million
relates to further revisions to cost estimates for the renovation of the claims
processing system for the Company's largest customer and for expanded
contingency planning and testing. Costs of new software and hardware are
included in capital expenditures and will be amortized over three to five years.
The Company conducts business electronically with certain external parties,
including suppliers, customers, physicians, hospitals, HCFA, FEP, financial
institutions and communications service companies. The Company has contacted
substantially all of the external parties with which it interacts to determine
Year 2000 compliance issues. Over 80% of the physicians and hospitals that
provide health care services to the Company's 1.6 million members reported that
they were Year 2000 ready at the end of June 1999. Certification testing of
interfaces with vendors, suppliers, physicians and hospitals will continue
through October 1999.
The Company holds investments in publicly traded domestic fixed-maturity and
equity securities. Non-compliance by the companies which have issued these
securities could have a material impact on the Company's investment earnings
which have accounted for a significant portion of operating income over the last
five years. The Company believes its overall risk should be reduced by the
diversification of its investment portfolio.
The Company has received independent reviews from third parties of all its Year
2000 compliance activities. Due to the general uncertainty inherent in Year 2000
Issues, especially as the uncertainty relates to the readiness of third parties,
there can be no assurances that all potential problems will be mitigated by the
Company's Year 2000 readiness program. Although a Year 2000 failure with a
single internal or external system may cause an intermittent disruption of
operations, the failure of multiple systems may cause a significant disruption
to the Company's business which may have a material adverse effect on the
Company's operations or financial condition.
The projected cost of the Year 2000 program and the expected completion dates
are updated periodically and are based on management's best estimates, using
numerous assumptions about future events. There can be no guarantee that these
estimates will be achieved; actual results could differ materially from expected
results.
COMMITMENTS AND CONTINGENCIES
See the description under the same caption in Note 6 to the Notes to
Consolidated Financial Statements (Unaudited), which description is incorporated
herein by reference.
FORWARD-LOOKING STATEMENTS
The matters discussed in this Form 10-Q contain certain forward-looking
statements made pursuant to the safe harbor provisions of Section 27A of the
Securities Act of 1933, and Section 21E of the Securities Exchange Act of 1934,
that represent the Company's expectations or beliefs including, without
limitation, statements concerning
14
<PAGE> 15
future revenue, future investment earnings and value and certain Year 2000
information. Such statements involve risk and uncertainties that may cause
actual results to differ materially from those implied in this Form 10-Q. Among
other things, these risks and uncertainties include: the need to accurately
predict health care costs and the ability to control future health care costs
through product and benefit design, underwriting criteria, utilization
management and negotiation of favorable provider and hospital contracts; changes
in mandated benefits, utilization rates, demographic characteristics, health
care practices, inflation, new pharmaceuticals and technologies, clusters of
high-cost cases, response to the regulatory environment and numerous other
factors that are beyond the Company's control and may adversely affect its
ability to predict and control health care costs and claims; periodic
renegotiation of hospital and other provider contracts coupled with continued
consolidation of physician, hospital and other provider groups which may result
in increased health care costs, limit the Company's ability to negotiate
favorable rates and control costs and subject the Company to increased credit
risk or risks of network stability related to provider groups; competitive
pressure to contain premium prices; fiscal concerns regarding the continued
viability of government-sponsored programs such as Medicare and the potential of
decreasing reimbursement rates for these programs; and any other limitations on
the Company's ability to increase or maintain its premium levels, design
products, select underwriting criteria or negotiate competitive provider
contracts. Other risk factors are described in the Company's other Securities
and Exchange Commission reports and filings.
15
<PAGE> 16
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
With a primary emphasis on protection of capital, the Board of
Directors-approved investment guidelines seek appropriate asset distribution,
diversification of risk, and use of professional external money managers to
manage levels of risk. The Company maintains two investment portfolios, one
internally managed for short-term liquidity and the other externally managed in
the fixed income and equity markets for long-term liquidity needs. The Company
does not hold derivative financial instruments or derivative commodity
instruments in either portfolio and has no foreign currency exposure. The
Company is subject to market risk exposure associated with changes in interest
rates and equity prices in its investment portfolios. A sensitivity analysis to
measure potential losses in the market value of the Company's fixed income and
equity investments in both portfolios (both portfolios are classified as other
than trading) indicates the following market risk exposures:
As of June 30, 1999, approximately 77.0% of the value ($241.7 million) of
the consolidated portfolios was held in financial instruments with fixed
maturities. The primary market risk exposure is to changes in interest
rates. An immediate one percentage point decrease in interest rates would
increase the net aggregate market value of the fixed income portfolio by
$8.8 million. An immediate one percentage point increase in interest rates
would decrease the net aggregate market value of the fixed income portfolio
by $8.9 million. Corporate Treasury manages interest rate exposure by
maintaining a short duration in its fixed income portfolio. The modeling
technique used by the Company considers the net present value of cash flows
(including duration estimates). Short-term debt instruments, approximately
0.1% of the value ($0.3 million) of the consolidated portfolios, with a
fair value equal to their cost are excluded from the aggregate net market
value market risk exposure analysis.
The fair value of the common equity portfolio, excluding investments in
affiliated entities (1.9% of the common equity portfolio), was $70.5
million as of June 30, 1999. The equity portfolio is highly diversified and
limited to high quality domestic dividend paying stocks. The primary market
risk exposure is therefore an overall decline in market prices for balanced
portfolios composed of the equity securities of seasoned domestic
companies. Assuming an immediate 10% decrease in each equity security
price, the hypothetical pre-tax loss in fair value is $7.1 million.
Likewise, assuming an immediate 10% increase in each equity security price,
the hypothetical pre-tax gain in fair value is $7.1 million. The Company's
unrealized net gains and losses are recorded net of taxes as accumulated
other comprehensive income in the Shareholders' equity section of the
accompanying Consolidated Financial Statements at Item 1 of this Form 10-Q.
The Company does not anticipate any material change in primary market risk
exposure during the remainder of 1999.
16
<PAGE> 17
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Note 6 of the Notes to Consolidated Financial Statements (Unaudited) in Part I,
Item 1 regarding the lawsuit filed on December 17, 1998 in the Superior Court of
Bartow County by six plaintiffs on behalf of themselves and all others similarly
situated is incorporated herein by reference.
Note 6 of the Notes to Consolidated Financial Statements (Unaudited) in Part I,
Item 1 regarding the lawsuit filed on September 18, 1998 in the Superior Court
of Richmond County is incorporated herein by reference.
ITEM 2. CHANGES IN SECURITIES
None
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On June 25, 1999, the Company held a Special Meeting of Shareholders of
Convertible Common Stock ("Class A Stock") in lieu of an Annual Meeting of
Shareholders (the "Meeting"). At this meeting, the holders of Class A Stock,
held of record on May 18, 1999, approved an Agreement and Plan of Merger, dated
as of July 9, 1998 (the "Merger Agreement"), described in Note 6 of the Notes to
Consolidated Financial Statements (Unaudited) in Part I, Item 1. There were
340,130 votes cast for approval of the Merger Agreement with 1,700 against and
3,508 abstaining.
Additionally, after a solicitation of proxies pursuant to Regulation 14 under
the Securities Act of 1933, as amended, with no solicitation in opposition, the
following items were also submitted to vote by the holders of all shares of
Class A Stock held of record on May 18, 1999.
<TABLE>
<CAPTION>
Ratification of Appointment by the Board of Directors of two Class A Designated
Directors
For Against
--- -------
<S> <C> <C>
Warren Y. Jobe to serve until the 2001 annual meeting of shareholders or only 307,161 5,490
until the earlier consummation of the Merger
John W. Robinson, Jr. to serve until the 1999 annual meeting of shareholders or 307,136 5,515
only until the earlier consummation of the Merger
Election of three Class A Designated Directors (all nominees for election)
For Against
--- -------
Elizabeth W. Camp to serve until the 2002 annual meeting of shareholders or 306,961 5,690
only until the earlier consummation of the Merger
John W. Robinson, Jr. to serve until the 2002 annual meeting of shareholders or 306,691 5,690
only until the earlier consummation of the Merger
Arnold M. Tenenbaum to serve until the 2001 annual meeting of shareholders or 306,694 5,957
only until the earlier consummation of the Merger
</TABLE>
17
<PAGE> 18
ITEM 5. OTHER INFORMATION
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------ -----------
<S> <C>
2.1 Agreement and Plan of Merger, dated July 9, 1998, by and among Cerulean Companies, Inc., WellPoint
Health Networks, Inc. and Water Polo Acquisition Corp.(1)
2.2 First Amendment to Agreement and Plan of Merger, dated July 9, 1999, by and among Cerulean Companies,
Inc., WellPoint Health Networks, Inc. and Water Polo Acquisition Corp.*
3.1 Amended Articles of Incorporation of Cerulean Companies, Inc.(2)
3.2 Bylaws of Cerulean Companies, Inc.(3)
4.1 Stock Escrow Agreement among Cerulean Companies, Inc., Blue Cross and Blue Shield of Georgia, Inc.
and SunTrust Bank, Atlanta.(3)
4.2 Specimen form of Class A Convertible Common Stock certificate.(3)
27 Financial Data Schedule.*
</TABLE>
- -------------
*This exhibit is filed herewith.
(1) The Appendix A of Form S-4, Registration No. 333-64955, filed by WellPoint
Health Networks, Inc. on September 30, 1998 is incorporated herein by
reference.
(2) This exhibit to Form 10-Q filed on November 13, 1998 is incorporated herein
by reference.
(3) This exhibit to Form S-1, Registration No. 333-2796, filed on March 27, 1996
and subsequent amendments is incorporated herein by reference.
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the quarter ended June 30, 1999.
18
<PAGE> 19
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
CERULEAN COMPANIES, INC.
Registrant
Date: August 13, 1999 By: /s/ Richard D. Shirk
---------------------------------
Richard D. Shirk, President and
Chief Executive Officer
Date: August 13, 1999 By: /s/ John A Harris
---------------------------------
John A. Harris, Treasurer
19
<PAGE> 1
EXHIBIT 2.2
FIRST AMENDMENT TO
AGREEMENT AND PLAN OF MERGER
This First Amendment (the "Amendment") to the Agreement and Plan of Merger
(the "Agreement") dated as of July 9, 1998, by and among Cerulean, Inc., a
Georgia corporation ("Cerulean"), WellPoint Health Networks Inc., a Delaware
corporation ("WellPoint") and Water Polo Acquisition Corp., a Delaware
corporation ("WPAC"), is dated as of July 9, 1999.
WITNESSETH
WHEREAS, Cerulean, WellPoint and WPAC have previously entered into the
Agreement, pursuant to which Cerulean would merge with and into WPAC upon the
terms and conditions set forth therein. Capitalized terms used herein and not
otherwise defined shall have the meaning set forth in the Agreement; and
WHEREAS, Cerulean, WellPoint and WPAC desire to amend the Amendment as set
forth in this Amendment.
AGREEMENT
NOW, THEREFORE, in consideration of the mutual agreements contained herein,
and upon and subject to the terms and conditions hereinafter set forth, the
parties do hereby agree as follows:
1. Section 7.01(b) of the Agreement shall be amended by (i) deleting the
words "the one year anniversary of this Agreement" and inserting in their place
the words "October 15, 1999 or, if elected by Cerulean or WellPoint in either
party's sole discretion upon written notice to the other party, December 31,
1999 (which notice shall not be given prior to October 1, 1999);" and (ii)
adding to the end of such section the words "and; provided, further, that no
party may exercise its right to unilaterally extend the above time period beyond
October 15, 1999, if the failure to consummate the Merger on or before October
15, 1999 has been caused by (A) such party's material breach or default of its
obligations under this Agreement or (B) such party's failure to satisfy one or
more of the conditions to consummation specified in Article VI of this
Agreement, if the satisfaction of such condition is solely within its control."
2. Except as set forth in this Amendment, the Agreement shall remain
unmodified and shall continue in full force and effect.
<PAGE> 2
IN WITNESS WHEREOF, each of the parties hereof have cause this Amendment to be
duly executed on its behalf as of the date indicated above.
CERULEAN COMPANIES, INC.
By: /s/ Hugh J. Stedman
---------------------------
WELLPOINT HEALTH NETWORKS INC.
By: /s/ Thomas C. Geiser
---------------------------
WATER POLO ACQUISITION CORP.
By: /s/ Thomas C. Geiser
---------------------------
2
<TABLE> <S> <C>
<ARTICLE> 7
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM CERULEAN
COMPANIES, INC. ON FORM 10-Q FOR THE SIX MONTHS ENDED AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> JUN-30-1999
<EXCHANGE-RATE> 1
<DEBT-HELD-FOR-SALE> 241,737,743
<DEBT-CARRYING-VALUE> 0
<DEBT-MARKET-VALUE> 0
<EQUITIES> 71,910,131
<MORTGAGE> 0
<REAL-ESTATE> 0
<TOTAL-INVEST> 313,972,874
<CASH> 72,779,171
<RECOVER-REINSURE> 0
<DEFERRED-ACQUISITION> 0
<TOTAL-ASSETS> 610,764,778
<POLICY-LOSSES> 193,455,313
<UNEARNED-PREMIUMS> 11,045,998
<POLICY-OTHER> 38,786,536
<POLICY-HOLDER-FUNDS> 0
<NOTES-PAYABLE> 0
46,645,042
0
<COMMON> 4,095
<OTHER-SE> 222,774,982
<TOTAL-LIABILITY-AND-EQUITY> 610,764,778
715,883,882
<INVESTMENT-INCOME> 10,180,028
<INVESTMENT-GAINS> 4,981,638
<OTHER-INCOME> 70,833,388
<BENEFITS> 628,844,611
<UNDERWRITING-AMORTIZATION> 0
<UNDERWRITING-OTHER> 0
<INCOME-PRETAX> 21,296,706
<INCOME-TAX> 5,030,000
<INCOME-CONTINUING> 16,373,674
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 16,373,674
<EPS-BASIC> 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>
