<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, 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)
Georgia 58-2217138
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
3350 Peachtree Road, N.E., Atlanta, Georgia 30326
(Address of principal executive offices) (Zip Code)
(404) 842-8000
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
YES [X] NO [ ]
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Class: Class A Convertible Common Stock, no par value, $0.01 stated value.
Outstanding as of July 31, 2000 - 409,602 shares
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CERULEAN COMPANIES, INC.
FORM 10-Q
JUNE 30, 2000
INDEX
<TABLE>
<CAPTION>
PAGE
NUMBER
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<S> <C>
PART I. FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements
Consolidated Balance Sheets as of June 30, 2000 and Page 3
December 31, 1999
Consolidated Statements of Income for the Three and Six Page 4
Months Ended June 30, 2000 and 1999
Consolidated Statements of Comprehensive Income for the Page 4
Three and Six Months Ended June 30, 2000 and 1999
Consolidated Statements of Cash Flows for the Six Months Page 5
Ended June 30, 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 14
PART II. OTHER INFORMATION
Item 1. Legal Proceedings Page 15
Item 2. Changes in Securities Page 15
Item 3. Defaults Upon Senior Securities Page 15
Item 4. Submission of Matters to a Vote of Security Holders Page 15
Item 5. Other Information Page 15
Item 6. Exhibits and Reports on Form 8-K Page 16
Signatures Page 17
</TABLE>
2
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PART I - FINANCIAL INFORMATION
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS
CERULEAN COMPANIES, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
2000 1999
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(UNAUDITED)
<S> <C> <C>
ASSETS
Investments:
Fixed maturities:
Available-for-sale, at fair value (amortized cost: $300,398,131;
$265,875,467) $292,107,933 $256,844,521
Equity securities, at fair value (cost: $61,603,743; $55,204,793) 72,042,315 73,036,645
Short-term investments, at fair value (cost: $325,000; $325,000) 325,000 325,000
------------ ------------
Total investments 364,475,248 330,206,166
Cash and cash equivalents 61,702,353 58,522,617
Accounts receivable 94,968,085 76,429,351
Reimbursable portion of estimated benefit liabilities 55,786,000 47,002,000
FEP assets held by agent 27,537,527 26,749,038
Property and equipment 37,615,712 40,063,725
Other assets 37,001,326 33,110,191
------------ ------------
Total assets $679,086,251 $612,083,088
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Estimated benefit liabilities $224,789,307 $201,587,264
Unearned premiums 25,242,296 17,873,115
FEP stabilization reserve 27,537,527 26,749,038
Accounts payable and accrued expenses 58,289,236 50,723,056
Other liabilities 45,797,702 37,477,669
------------ ------------
Total liabilities 381,656,068 334,410,142
------------ ------------
Mandatorily redeemable preferred stock:
Class B Convertible Preferred Stock, no par value
Authorized, issued and outstanding, 49,900 shares at June 30, 2000 and
December 31, 1999; 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 409,602 and
409,597 shares at June 30, 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) 1,714,497 7,258,906
Retained earnings 173,910,126 148,608,480
------------ ------------
Total shareholders' equity 250,785,141 231,027,904
Commitments and contingencies (Note 5) -- --
------------ ------------
Total liabilities and shareholders' equity $679,086,251 $612,083,088
============ ============
</TABLE>
See accompanying notes.
3
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CERULEAN COMPANIES, INC.
CONSOLIDATED STATEMENTS OF INCOME
UNAUDITED
<TABLE>
<CAPTION>
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
2000 1999 2000 1999
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Revenues:
Premium revenue $452,551,094 $366,245,563 $872,656,709 $715,883,882
Management services revenue 37,592,601 38,172,226 75,347,603 70,833,388
Investment and other income 6,077,837 5,455,681 11,343,712 10,180,028
Realized gains 3,678,145 3,118,176 5,422,379 4,981,638
------------ ------------ ------------ ------------
Total revenues 499,899,677 412,991,646 964,770,403 801,878,936
Benefits expense 397,159,411 330,217,669 761,038,222 628,844,611
Operating expenses 82,670,406 75,878,830 169,412,875 151,865,119
------------ ------------ ------------ ------------
Operating income 20,069,860 6,895,147 34,319,306 21,169,206
Non-operating income -- 63,750 -- 127,500
------------ ------------ ------------ ------------
Income before income taxes and
minority interests 20,069,860 6,958,897 34,319,306 21,296,706
Income tax expense (Note 3) 3,298,440 1,376,000 7,003,435 5,030,000
Minority interest in losses of joint
venture investments 79,485 536,366 480,777 106,968
------------ ------------ ------------ ------------
Net income $ 16,850,905 $ 6,119,263 $ 27,796,648 $ 16,373,674
============ ============ ============ ============
</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,
2000 1999 2000 1999
------------ ----------- ------------ ------------
<S> <C> <C> <C> <C>
Net income $ 16,850,905 $ 6,119,263 $ 27,796,648 $ 16,373,674
Other comprehensive income, net of
tax:
Unrealized holding losses arising
during period, net of
reclassification adjustment for
gains included in net income of
$2,942,516, $2,494,541,
$4,337,903 and $3,985,310,
respectively (2,062,870) (3,035,990) (5,544,409) (6,612,306)
------------ ----------- ------------ ------------
Comprehensive income $ 14,788,035 $ 3,083,273 $ 22,252,239 $ 9,761,368
============ =========== ============ ============
</TABLE>
See accompanying notes.
4
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CERULEAN COMPANIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
UNAUDITED
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30,
2000 1999
-------------- --------------
<S> <C> <C>
OPERATING ACTIVITIES
Net income $ 27,796,648 $ 16,373,674
Adjustments to reconcile net income to net cash provided
by operating activities:
Non-cash and non-operating items:
Depreciation 5,789,529 4,958,062
Amortization 166,358 366,449
Uncollectible receivables (1,785,819) 934,196
Gain on sale of investments (5,422,379) (4,981,638)
Loss on sale of property and equipment 88 490,317
Non-operating income -- (127,500)
(Increase) decrease in certain assets:
Accounts receivable (16,752,915) (8,095,031)
Reimbursable portion of estimated benefit liabilities (8,784,000) (4,176,000)
Other assets (2,784,674) 579,587
Increase (decrease) in certain liabilities:
Estimated benefit liabilities 23,202,043 9,380,020
Unearned premiums 7,369,181 (5,031,962)
Accounts payable and accrued expenses 7,566,180 10,615,421
Other liabilities 5,825,031 (1,301,661)
Minority interest in sale of stock warrants by a subsidiary -- (122,500)
------------- -------------
Net cash provided by operating activities 42,185,271 19,861,434
INVESTING ACTIVITIES
Investments available-for-sale:
Investments purchased (116,637,930) (99,580,662)
Investments sold or matured 80,973,999 107,192,259
Property and equipment purchased (4,419,935) (7,118,403)
Property and equipment sold 1,078,331 15,347
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Net cash (used in) provided by investing activities (39,005,535) 508,541
FINANCING ACTIVITIES
Sale of stock warrants by a subsidiary -- 250,000
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Net cash provided by financing activities -- 250,000
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Increase in cash and cash equivalents 3,179,736 20,619,975
Cash and cash equivalents at beginning of period 58,522,617 52,159,196
------------- -------------
Cash and cash equivalents at end of period $ 61,702,353 $ 72,779,171
============= =============
</TABLE>
See accompanying notes.
5
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CERULEAN COMPANIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 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 other 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 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 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 CHPNs 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.
2. EARNINGS PER SHARE
Earnings per share is omitted because such data is 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.
6
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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:
<TABLE>
<CAPTION>
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
2000 1999 2000 1999
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Indemnity and PPO insurance products and
services $275,155,498 $235,494,194 $528,775,040 $456,970,843
HMO and POS insurance products and
services 210,327,374 164,409,352 409,790,963 320,730,288
Life insurance and other products and
services 4,660,823 4,514,243 9,438,309 9,016,139
------------ ------------ ------------ ------------
Total $490,143,695 $404,417,789 $948,004,312 $786,717,270
============ ============ ============ ============
</TABLE>
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. The Blue Cross and Blue Shield Association has already approved
the merger. 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.
7
<PAGE> 8
5. COMMITMENTS AND CONTINGENCIES (CONTINUED)
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 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.
8
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5. COMMITMENTS AND CONTINGENCIES (CONTINUED)
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 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. On June 29, 2000, the Court of Appeals entered a decision affirming the
earlier decision by the Georgia Commissioner which had held that the Petitioners
were not entitled to relief. On July 19, 2000, the Petitioners filed a Petition
for Writ of Certiorari in the Georgia Supreme Court, which remains pending. On
August 1, 2000, the plaintiffs filed a motion in the Richmond County Superior
Court seeking to enforce a purported settlement of the litigation with the
Company. The Company has notified the plaintiffs in writing that the Company
considers the claims in this motion to be frivolous and to constitute abusive
litigation under Georgia law and that the Company intends to seek damages and
attorneys' fees against the plaintiffs, and their counsel, if they do not
withdraw the motion. 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
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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 June 30, 2000 Compared to Three Months Ended June 30, 1999
Premium revenues increased $86.4 million to $452.6 million for the three months
ended June 30, 2000 from $366.2 million for the three months ended June 30,
1999. HMO and POS premiums increased $45.2 million to $204.4 million for the
three months ended June 30, 2000 primarily as a result of a 16% increase in
membership and rate increases in the 2000 period. HMO and POS insured membership
grew to 445,000 members at June 30, 2000 from 385,000 members at June 30, 1999.
Premium revenues for indemnity and PPO products increased $40.8 million to
$243.5 million for the three months ended June 30, 2000 as a result of rate
increases in 2000 and an 11% growth in the members served.
Management services revenue decreased slightly to $37.6 million for the three
months ended June 30, 2000 compared to $38.2 million for the three months ended
June 30, 1999. Increased fee revenue from commercial self-funded employer groups
was offset by lower fee revenue earned as agent for federal and state government
programs.
Realized gains on the sale of marketable securities were $3.7 million and $3.1
million for the three months ended June 30, 2000 and 1999, respectively. 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) improved to 87.8% for the three months ended June 30, 2000 from 90.2%
for the three months ended June 30, 1999. The improved loss ratios for the
Company's products for the quarter ended June 30, 2000 is primarily attributable
to pricing increases and changes in benefit designs implemented since June 1999
and increased membership in products with lower cost benefit designs.
Additionally, the high loss ratios for all of the Company's products in the 1999
second quarter were a result of higher cost trends identified during that
quarter for certain 1999 incurred claims and a change in claims payment
patterns. Management of the Company took actions during the second quarter 1999
to accelerate the payment of routine claims and to clear aged claims.
Operating expenses increased 9% to $82.7 million for the second quarter of 2000
compared to the same period a year ago, while premium and management services
revenues increased 21%. As a result, operating expenses as a percentage of
premium and management services revenue improved to 16.9% for the three months
ended June 30, 2000 compared to 18.8% for the second quarter of 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.
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As a result of the foregoing factors, operating income increased to $20.1
million for the three months ended June 30, 2000 up from $6.9 million for the
three months ended June 30, 1999. The Company recognized a net income of $16.9
million for the quarter ended June 30, 2000 compared to a net income of $6.1
million for the quarter ended June 30, 1999.
Six Months Ended June 30, 2000 Compared to Six Months Ended June 30, 1999
Premium revenues increased 22% to $872.7 million for the six months ended June
30, 2000 from $715.9 million for the six months ended June 30, 1999. HMO and POS
premiums increased 28% to $399.1 million for the 2000 period primarily as a
result of a 16% increase in membership and rate increases during the period. New
sales, in-group growth, and a low cancellation rate, drove HMO and POS insured
membership to 445,000 members at June 30, 2000 from 385,000 members at June 30,
1999. Premium revenues for indemnity and PPO products increased 17% to $464.1
million for the six months ended June 30, 2000 as a result of rate increases in
2000 and an 11% growth in the members served.
Management services revenue increased 6% to $75.3 million for the six months
ended June 30, 2000 compared to $70.8 million for the six months ended June 30,
1999, 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 908,000 at June 30, 2000 compared to 855,000 at June 30, 1999
principally due to a 20% increase in commercial self-funded employer group
members served offset by a 3% decline in members serviced under state government
programs and national service accounts for other Blue Cross Blue Shield plans.
Membership served under insurance products and management services arrangements
totaled 1,817,000 at June 30, 2000 compared to 1,650,000 members at June 30,
1999.
Realized gains on the sale of marketable securities were $5.4 million and $5.0
million for the six months ended June 30, 2000 and 1999, respectively. 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) improved to 87.2% for the six months ended June 30, 2000 down from
87.8% for the six months ended June 30, 1999. The improvement in the loss ratios
for the Company's products for the six months ended June 30, 2000 is primarily
attributable to pricing increases implemented in 2000, changes in benefit
designs such as increased co-pays, improvement in claims trends from prior
year's claims estimates and increased membership in products with lower cost
benefit designs offset by medical cost trend increases for hospital services and
prescription drugs.
Operating expenses increased 12% to $169.4 million for the six months ended June
30, 2000 compared to the same period a year ago, while premium and management
services revenues increased 21%. Due to the positive impact from revenue
increases in 2000 being realized at a rate higher than operating expense
increases, operating expenses as a percentage of premium and management services
revenue improved to 17.9% for the six months ended June 30, 2000 compared to
19.3% for the six months ended June 30, 1999. Operating expenses included $0.5
million and $3.9 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) for the six months ended
June 30, 2000 and 1999, respectively. Additionally, the 1999 period included
approximately $1.9 million for Year 2000 readiness costs.
The Company recorded tax expense of $7.0 million for the six months ended June
30, 2000 compared to a tax expense of $5.0 million for the six months ended June
30, 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
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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 $27.8 million for
the six months ended June 30, 2000 from $16.4 million for the six months ended
June 30, 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 $351.0 million of the Company's
investment portfolio is held at its insurance subsidiaries and is invested
subject to limitations prescribed by Georgia insurance statutes.
The Company generated positive cash flow from operations of $42.2 million for
the six months ended June 30, 2000 and $19.9 million for the same period in 1999
due primarily to profitability in both periods and to increased levels of
operating liabilities such as estimated benefit liabilities and, accounts
payable. Investment purchases exceeded investments sold by $39.0 million during
the six months ended June 30, 2000. Cash and cash equivalents increased $3.2
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 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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<PAGE> 13
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 and future investment earnings
and value. 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.
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<PAGE> 14
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 June 30, 2000, approximately 80% of the value ($292.1 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
$8.9 million. An immediate one percentage point increase in interest rates
would decrease the net aggregate market value of the fixed income portfolio
by $9.0 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 (less than 1% of the common equity portfolio), was
$71.5 million as of June 30, 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 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.
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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
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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.*
</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 filed on August 16, 1999 is
incorporated herein by reference.
(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 June 30, 2000.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
CERULEAN COMPANIES, INC.
Registrant
Date: August 11, 2000 By: /s/ Richard D. Shirk
-------------------------------------
Richard D. Shirk, President and
Chief Executive Officer
Date: August 11, 2000 By: /s/ John A. Harris
------------------------------------
John A. Harris, Treasurer
17
