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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington D.C. 20549
FORM 10-Q
[x] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the period ended MARCH 31, 2000
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 : 000-22477
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CERULEAN COMPANIES, INC.
(Exact name of registrant as specified in its charter)
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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)
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(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 April 30, 2000 - 409,602 shares
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CERULEAN COMPANIES, INC.
FORM 10-Q
MARCH 31, 2000
INDEX
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PAGE
NUMBER
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PART I. FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements
Consolidated Balance Sheets as of March 31, 2000 and Page 3
December 31, 1999
Consolidated Statements of Income for the Three Months Ended Page 4
March 31, 2000 and 1999
Consolidated Statements of Comprehensive Income for the Page 4
Three Months Ended March 31, 2000 and 1999
Consolidated Statements of Cash Flows for the Three Months Page 5
Ended March 31, 2000 and 1999
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 12
PART II. OTHER INFORMATION
Item 1. Legal Proceedings Page 14
Item 2. Changes in Securities Page 14
Item 3. Defaults Upon Senior Securities Page 14
Item 4. Submission of Matters to a Vote of Security Holders Page 14
Item 5. Other Information Page 14
Item 6. Exhibits and Reports on Form 8-K Page 14
Signatures Page 16
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PART I - FINANCIAL INFORMATION
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS
CERULEAN COMPANIES, INC.
CONSOLIDATED BALANCE SHEETS
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MARCH 31, DECEMBER 31,
2000 1999
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(UNAUDITED)
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ASSETS
Investments:
Fixed maturities:
Available-for-sale, at fair value (amortized cost: $284,523,804;
$265,875,467) $274,261,659 $256,844,521
Equity securities, at fair value (cost: $56,553,778; $55,204,793) 70,907,972 73,036,645
Short-term investments, at fair value (cost: $325,000; $325,000) 325,000 325,000
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Total investments 345,494,631 330,206,166
Cash and cash equivalents 53,437,302 58,522,617
Accounts receivable 95,306,891 76,429,351
Reimbursable portion of estimated benefit liabilities 47,734,000 47,002,000
FEP assets held by agent 26,749,038 26,749,038
Property and equipment 40,937,902 40,063,725
Other assets 32,247,334 33,110,191
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Total assets $641,907,098 $612,083,088
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LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Estimated benefit liabilities $211,296,117 $201,587,264
Unearned premiums 22,800,295 17,873,115
FEP stabilization reserve 26,749,038 26,749,038
Accounts payable and accrued expenses 58,107,912 50,723,056
Other liabilities 39,064,087 37,477,669
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Total liabilities 358,017,449 334,410,142
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Mandatorily redeemable preferred stock:
Class B Convertible Preferred Stock, no par value.
Authorized, issued and outstanding, 49,900 shares at March 31, 2000 and
December 31, 1999; aggregate liquidation preference
$49,900,000; aggregate mandatory redemption, $44,910,000 46,645,042 46,645,042
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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 409,602 and
409,597 shares at March 31, 2000 and December 31, 1999, 4,096 4,096
respectively
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) 3,777,367 7,258,906
Retained earnings 158,306,722 148,608,480
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Total shareholders' equity 237,244,607 231,027,904
Commitments and contingencies (Note 5) -- --
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Total liabilities and shareholders' equity $641,907,098 $612,083,088
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See accompanying notes.
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CERULEAN COMPANIES, INC.
CONSOLIDATED STATEMENTS OF INCOME
UNAUDITED
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THREE MONTHS ENDED MARCH 31,
2000 1999
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Revenues:
Premium revenue $420,105,615 $ 349,638,319
Management services revenue 37,755,002 32,661,162
Investment and other income 5,265,875 4,724,347
Realized gains 1,744,234 1,863,462
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Total revenues 464,870,726 388,887,290
Benefits expense 363,878,811 298,626,942
Operating expenses 86,742,469 75,986,289
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Operating income 14,249,446 14,274,059
Non-operating income -- 63,750
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Income before income taxes and minority interests 14,249,446 14,337,809
Income tax expense 3,704,995 3,654,000
Minority interest in losses (earnings) of joint venture investments 401,292 (429,398)
============ =============
Net income $ 10,945,743 $ 10,254,411
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See accompanying notes.
CERULEAN COMPANIES, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
UNAUDITED
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THREE MONTHS ENDED MARCH 31,
2000 1999
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Net income $ 10,945,743 $ 10,254,411
Other comprehensive income, net of tax:
Unrealized holding (losses) gains arising during period, net of
reclassification adjustment for gains included in net income of
$1,395,387 and $1,490,769, respectively (3,481,537) (3,576,316)
============ =============
Comprehensive income $ 7,464,206 $ 6,678,095
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</TABLE>
See accompanying notes.
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CERULEAN COMPANIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
UNAUDITED
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THREE MONTHS ENDED MARCH 31,
2000 1999
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OPERATING ACTIVITIES
Net income $ 10,945,743 $ 10,254,411
Adjustments to reconcile net income to net cash provided
by operating activities:
Non-cash and non-operating items:
Depreciation 2,785,761 2,602,441
Amortization 9,269 178,433
Uncollectible receivables (233,487) 1,479,174
Gain on sale of investments (1,744,234) (1,863,462)
Loss on sale of property and equipment 974 2,973
Non-operating income -- (63,750)
(Increase) decrease in certain assets:
Accounts receivable (18,644,053) (9,401,873)
Reimbursable portion of estimated benefit liabilities (732,000) (4,176,000)
Other assets 2,093,009 (336,093)
Increase (decrease) in certain liabilities:
Estimated benefit liabilities 9,708,853 8,965,200
Unearned premiums 4,927,180 (6,017,680)
Accounts payable and accrued expenses 7,384,856 2,942,830
Other liabilities 338,917 6,578,159
Minority interest in sale of stock warrants by a subsidiary -- (61,250)
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Net cash provided by operating activities 16,840,788 11,083,513
INVESTING ACTIVITIES
Investments available-for-sale:
Investments purchased (67,970,547) (69,592,911)
Investments sold or matured 49,705,356 75,442,362
Property and equipment purchased (3,660,912) (2,769,104)
Property and equipment sold -- 19,800
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Net cash (used in) provided by investing activities (21,926,103) 3,100,147
FINANCING ACTIVITIES
Sale of stock warrants by a subsidiary -- 125,000
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Net cash provided by financing activities -- 125,000
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Increase (decrease) in cash and cash equivalents (5,085,315) 14,308,660
Cash and cash equivalents at beginning of period 58,522,617 52,159,196
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Cash and cash equivalents at end of period $ 53,437,302 $ 66,467,856
============ =============
</TABLE>
See accompanying notes.
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CERULEAN COMPANIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2000
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 its subsidiaries, and for
other lawful purposes.
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. Because of the nature of the Company's
operations, the results of 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 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"). 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. The Company has made additional capital contributions to certain CHPN's
and may provide additional capital in the future. 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 are not meaningful at the
present time due to likely 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.
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3. INCOME TAXES
The Company's income tax expense consisted primarily of federal alternative
minimum tax in all periods. The effective tax rates 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.
4. 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:
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THREE MONTHS ENDED MARCH 31,
2000 1999
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Indemnity and PPO insurance products and services $253,619,542 $ 221,476,649
HMO and POS insurance products and services 199,463,589 156,320,936
Life insurance and other products and services 4,777,486 4,501,896
============ =============
Total $457,860,617 $ 382,299,481
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5. 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. Effective October 15, 1999, the parties agreed
to extend the Merger Agreement through December 31, 1999. On December 30, 1999,
the parties agreed to further extend the Merger Agreement through December 31,
2000. Pursuant to the Merger Agreement, the Company will become a wholly-owned
subsidiary of WellPoint in consideration for a combination of WellPoint shares
and cash valued at $500 million. 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. Upon final disposition of the litigation commenced by the
Richmond County Plaintiffs described further in Legal Proceedings below, the
Company expects that the Georgia Commissioner will schedule a public hearing.
LEGAL PROCEEDINGS
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, 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 Superior Court of Richmond County 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
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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 request declaratory judgment and certification of
a class action consisting of all persons who were "eligible subscribers" of
BCBSGA as of February 1, 1996, and who did not become holders of Class A Stock
of the Company. The 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 asserted derivative causes of action against the Defendant
Directors alleging that the Defendant Directors breached fiduciary duties by,
among other things, approving the placement and issuance of Class B Stock in the
Company during 1996, the issuance of Class A Stock in the Company, the
settlement of the Let's Get Together, Inc. et al. v. Insurance Commissioner, et
al., Civil Action E-61714 (Superior Court of Fulton County, Georgia) lawsuit,
and certain management compensation. On 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 of 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. On May 28, 1999,
the Richmond County Plaintiffs filed a Second Amended and Restated Class Action
Complaint against the Company, BCBSGA and the Defendant Directors. In addition
to the factual allegations contained in the initial complaint, the Richmond
County Plaintiffs assert that certain persons, including Charlie Deal and Olean
Lokey, were entitled to be offered shares of stock in the Company but never
received an offer. The Richmond County Plaintiffs have asserted claims for
specific performance, deprivation of possession of personal property, fraud,
constructive fraud, direct and derivative claims based on breach of fiduciary
duty, and request declaratory and injunctive relief, damages, punitive damages,
and certification of a class action on behalf of all persons who were "eligible
subscribers" of BCBSGA as of February 1, 1996 who did not become holders of
Class A Stock of the Company. On July 29, 1999, the Superior Court of Richmond
County entered an order dismissing all claims against the Defendant Directors
without prejudice. On September 21, 1999, the Superior Court of Richmond County
entered orders denying the motions for summary judgment and the motion for entry
of judgment. On October 27, 1999, the Company and BCBSGA filed a motion for
reconsideration of the motion for entry of judgment. The case remains pending
before the Superior Court.
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
24, 1999, Harrell Tiller, Charlie Deal and Olean Lokey filed two separate
Petitions for Judicial Review in the Superior Court of Richmond County. 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 sought
judicial review of the decisions of the Georgia Commissioner of June 22, 1999
(the "Judicial Review Proceedings"). On September 21, 1999, the Superior Court
of Richmond County entered orders reversing the Georgia
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Commissioner's orders. On October 12, 1999, the Company and BCBSGA
filed Applications for Discretionary Appeal (the "Applications") with the
Supreme Court of Georgia, seeking to have that court reverse the Superior Court
of Richmond County's decisions. These Applications were transferred to the Court
of Appeals of the State of Georgia on November 12, 1999. On October 21, 1999,
the Georgia Commissioner filed two separate applications for appellate relief
from the Superior Court's decisions with the Court of Appeals of the State of
Georgia, seeking to have that court overturn the Superior Court's decisions. On
November 22, 1999, the Georgia Court of Appeals granted the Applications for
Discretionary Appeal of all parties. The cases were docketed on December 15,
1999, and the parties fully briefed the cases. Oral arguments were presented to
the Court of Appeals on March 22, 2000 on the appeals filed by the Georgia
Commissioner and the Company. A decision from the Court of Appeals is expected
to follow within two to four months. 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.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion should be read in conjunction with the unaudited
consolidated financial statements and notes thereto. The Company's actual future
results could differ materially from its historical results, depending on, among
other factors, changing rates of utilization of medical services by its
enrollees and changing rates of medical service costs.
OVERVIEW
Cerulean Companies, Inc. (the "Company") was incorporated under the laws of the
State of Georgia on February 2, 1996 to act as the holding company for Blue
Cross and Blue Shield of Georgia, Inc. ("BCBSGA") and other subsidiaries, and
for other lawful purposes.
RESULTS OF OPERATIONS
Three Months Ended March 31, 2000 Compared to Three Months Ended March 31, 1999
Premium revenues increased 20% to $420.1 million for the three months ended
March 31, 2000 from $349.6 million for the three months ended March 31, 1999.
HMO and POS premiums increased $42.8 million to $194.7 million for the three
months ended March 31, 2000 primarily as a result of a 15% increase in
membership and rate increases in the 2000 period. New sales, and in-group
growth, continued to drive HMO and POS insured membership growth to 432,000
members at March 31, 2000 from 375,000 members at March 31, 1999. HMO and POS
products accounted for 46% of premium revenues at March 31, 2000, compared to
43% of premium revenues at March 31, 1999. Premium revenues for indemnity and
PPO products increased $27.3 million to $220.7 million for the three months
ended March 31, 2000 as a result of rate increases in 2000 and an 11% growth in
the members served.
Management services revenue increased 16% to $37.8 million for the three months
ended March 31, 2000 compared to $32.7 million for the three months ended March
31, 1999, due primarily to increased membership for self-funded employer groups
and increased fee income for network access fees from other Blue Cross Blue
Shield plans and other third parties. Self-funded employer group membership was
900,000 at March 31, 2000 compared to 852,000 at March 31, 1999.
Realized gains on the sale of marketable securities of $1.7 million for the
three months ended March 31, 2000 were slightly lower than realized gains of
$1.9 million for the three months ended March 31, 1999. 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 86.6% for the three months ended March 31, 2000 from 85.4%
for the three months ended March 31, 1999. The higher loss ratios for the
Company's products for the three months of 2000 compared to the same period a
year ago were in part due to the acceleration of claim payment patterns
initiated by the Company subsequent to March 31, 1999, as well as medical cost
trend increases, particularly for hospital services and prescription drugs.
Operating expenses increased 14% to $86.7 million for the first quarter of 2000
compared to the same period a year ago, while premium revenues increased 20%.
Operating expenses in both periods included approximately $2.4 million in legal
and other professional expenses related to the pending merger with WellPoint and
the litigation referred to in Note 5 of the Notes to Consolidated Financial
Statements (Unaudited). Additionally, the 1999 period included $1.0 million for
Year 2000 Readiness costs. Operating expenses as a percentage of premium and
management services revenue improved to 18.9% for the three months ended March
31, 2000 compared to 19.9% for the first quarter of 1999, due to operating
expense increases being managed to a lower percentage increase than the premium
and fee increases attained by the Company.
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The Company recorded tax expense of $3.7 million for the three months ended
March 31, 2000 and for the three months ended March 31, 1999. The Company's
effective tax rate in both periods 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, net income increased to $10.9 million for
the three months ended March 31, 2000 from $10.3 million for the three months
ended March 31, 1999.
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. Over $336 million of the Company's investment
portfolio is held at its insurance subsidiaries and is invested subject to
limitations prescribed by Georgia insurance statutes.
The Company generated positive cash flow from operations of $16.8 million for
the three months ended March 31, 2000 and $11.1 million for the same period in
1999 due primarily to profitability in both periods and to increased levels of
operating liabilities such as accounts payable, accrued expenses and rate
stabilization reserves. Capital and investment purchases exceeded investments
sold by $21.9 million during the three months ended March 31, 2000. Cash and
cash equivalents declined $5.1 million for the period. Because of the nature of
the Company's business, current cash flows from operations for interim periods
are not necessarily indicative of cash flows from operations expected for the
entire year. The Company believes its future cash resources will be adequate to
meet its operating requirements.
Capital Resources
The Company anticipates that the principal elements of its future capital
requirements are information technology needs, product development, equity
contributions to its CHPN joint ventures and other subsidiaries and strategic
acquisitions. 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 with WellPoint will
provide the Company with significant additional capital alternatives.
COMMITMENTS AND CONTINGENCIES
See the description under the same caption in Note 5 to the Notes to
Consolidated Financial Statements (Unaudited), which description is incorporated
herein by reference.
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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 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 other
Securities and Exchange Commission reports and filings including the
Registration Statement on Form S-4, Registration No. 333-64955, filed by
WellPoint Health Networks Inc. on September 30, 1998.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
With a primary emphasis on adherence to statutory compliance and 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. 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 March 31, 2000, approximately 79% of the value ($273.6 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
$9.5 million. An immediate one percentage point increase in interest rates
would decrease the net aggregate market value of the fixed income portfolio
by $9.6 million. Comparatively, at December 31, 1999, an immediate one
percentage point decrease in interest rates would increase the net
aggregate market value of the fixed income portfolio by $9.0 million. An
immediate one percentage point increase in interest rates would decrease
the net aggregate market value of the fixed income portfolio by $9.1
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% of the common equity portfolio), was $70.9 million
as of March 31, 2000. The equity portfolio is highly diversified and
limited by Georgia statute 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. Comparatively, at December 31, 1999, assuming an immediate 10%
decrease in each equity security price, the hypothetical pre-tax loss in
12
<PAGE> 13
fair value is $7.3 million. Likewise, assuming an immediate 10% increase in
each equity security price, the hypothetical pre-tax gain in
fair value is $7.3 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 2000.
13
<PAGE> 14
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Note 5 of the Notes to Consolidated Financial Statements (Unaudited) in Part I,
Item 1 regarding the 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
None
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.2
2.3 Second Amendment to Agreement and Plan of Merger, dated December 31,
1999, by and among Cerulean Companies, Inc., WellPoint Health Networks
Inc. and Water Polo Acquisition Corp.3
3.1 Amended Articles of Incorporation of Cerulean Companies, Inc.4
3.2 Bylaws of Cerulean Companies, Inc.5
4.1 Stock Escrow Agreement among Cerulean Companies, Inc., Blue Cross and
Blue Shield of Georgia, Inc. and SunTrust Bank, Atlanta.5
4.2 Specimen form of Class A Convertible Common Stock certificate.5
27 Financial Data Schedule (for SEC use only).*
</TABLE>
- -------------
*This exhibit is filed herewith.
1 The Appendix A of the Form S-4 Registration Statement, Registration No.
333-64955, filed by WellPoint Health Networks Inc. on September 30, 1998 is
incorporated herein by reference.
2 This exhibit to the Company's Form 10-Q for the quarterly period ended June
30, 1999, filed on August 16, 1999, is incorporated herein by reference.
14
<PAGE> 15
3 This exhibit to the Company's Form 10-K for the fiscal year ended December
31, 1999, filed on March 29, 2000, is incorporated herein by reference.
4 This exhibit to the Company's Form 10-Q for the quarterly period ended
September 30, 1998, filed on November 13, 1998, is incorporated herein by
reference.
5 This exhibit to the Company's Form S-1 Registration Statement, 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 March 31, 2000.
15
<PAGE> 16
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
CERULEAN COMPANIES, INC.
Registrant
Date: May 11, 2000 By: /s/ Richard D. Shirk
-------------------------------
Richard D. Shirk, President and
Chief Executive Officer
Date: May 11, 2000 By: /s/ John A. Harris
------------------------------
John A. Harris, Treasurer
16
<TABLE> <S> <C>
<ARTICLE> 7
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM CERULEAN
COMPANIES, INC. ON FORM 10-Q FOR THE QUARTER ENDED MARCH 31, 2000 AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
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<FISCAL-YEAR-END> DEC-31-2000
<PERIOD-START> JAN-01-2000
<PERIOD-END> MAR-31-2000
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<DEBT-HELD-FOR-SALE> 274,261,659
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0
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