<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON AUGUST 18, 2000
REGISTRATION NO. 333-64955
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------------
POST-EFFECTIVE AMENDMENT NO. 1
TO
FORM S-4
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
---------------------
WELLPOINT HEALTH NETWORKS INC.
(Exact name of registrant as specified in its charter)
---------------------
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DELAWARE 6324 95-4635504
(State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer
incorporation or organization) Classification Code Number) Identification Number)
</TABLE>
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1 WELLPOINT WAY
THOUSAND OAKS, CALIFORNIA 91362
(818) 703-4000
(Address, including zip code, telephone number, including area code, of
registrant's principal executive offices)
---------------------
THOMAS C. GEISER
EXECUTIVE VICE PRESIDENT, GENERAL COUNSEL AND SECRETARY
1 WELLPOINT WAY
THOUSAND OAKS, CALIFORNIA 91362
(805) 557-6110
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
---------------------
COPIES TO:
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KENNETH M. DORAN, ESQ. THOMAS WARDELL, ESQ.
GIBSON, DUNN & CRUTCHER LLP LONG ALDRIDGE & NORMAN LLP
333 S. GRAND AVENUE 303 PEACHTREE STREET, SUITE 5300
LOS ANGELES, CALIFORNIA 90071 ATLANTA, GEORGIA 30308
</TABLE>
---------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after the effective date of this registration statement and the
satisfaction or waiver of all other conditions to the merger of Cerulean
Companies, Inc., a Georgia corporation, with and into Water Polo Acquisition
Corp., a Delaware corporation and wholly-owned subsidiary of WellPoint Health
Networks Inc., a Delaware corporation, through which Cerulean will become a
wholly-owned subsidiary of WellPoint, as described in the Agreement and Plan of
Merger among Cerulean, WellPoint and Water Polo Acquisition Corp. dated as of
July 9, 1998, as amended on July 9, 1999 and December 31, 1999, and as described
in and attached as Appendix A to the proxy statement/prospectus forming a part
of this registration statement.
If the securities being registered on this form are being offered in
connection with the formation of a holding company and there is compliance with
General Instruction G, check the following box. [ ]
---------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OR UNTIL THIS REGISTRATION STATEMENT SHALL BECOME EFFECTIVE
ON SUCH DATE AS THE SECURITIES AND EXCHANGE COMMISSION, ACTING PURSUANT TO SAID
SECTION 8(A), MAY DETERMINE.
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
<PAGE> 2
CERULEAN COMPANIES, INC.
3350 PEACHTREE ROAD, N.E.
ATLANTA, GEORGIA 30326
1-800-314-2580
August , 2000
Dear shareholder of Class A convertible common stock:
The boards of directors of Cerulean Companies, Inc. and WellPoint Health
Networks Inc. have agreed on a merger that will combine the businesses of
Cerulean and WellPoint. In June 1999, Cerulean held a special shareholders'
meeting at which the Class A shareholders considered and approved the merger by
a 83% favorable vote. However, the merger has not yet been completed. Because of
the intervening time period since the prior approval, the Cerulean board of
directors is resoliciting proxies for the approval of the merger. The board
chose to resolicit proxies to allow you to consider the merger with the benefit
of another year of operating results for each of Cerulean and WellPoint.
Further, Cerulean's management recommended a resolicitation in anticipation of
an upcoming hearing for approval of the merger by the Georgia Department of
Insurance.
If we complete the proposed merger, each Cerulean Class A shareholder who
does not perfect his or her dissenters' rights pursuant to Georgia law will have
the right to receive, in exchange for each share of Class A stock and each share
of Cerulean Series A preferred stock:
- approximately $850 in cash; or
- the equivalent value paid in shares of WellPoint common stock; or
- a combination of cash and WellPoint common stock.
If we complete the proposed merger, each Cerulean Class B shareholder who
does not perfect his or her dissenter's rights pursuant to Georgia law will have
the right to receive approximately $2,220 of WellPoint common stock in exchange
for each share of Class B convertible preferred stock.
In order to complete the merger, we need the approval of the holders of a
majority of the shares of Class A stock entitled to vote at the meeting and the
holders of a majority of the Class B stock entitled to vote at a meeting of the
Class B stock. The holder of a majority of the shares of Class B stock has
indicated that it intends to vote in favor of the merger agreement and the
merger. Accordingly, approval by the holders of Class B stock of the merger
agreement and the merger is reasonably assured.
You are also being asked to elect two Class A designated directors to serve
from the time of the meeting until the annual meeting in 2003 or the completion
of the merger, whichever is earlier. A majority of the outstanding shares of
Class A stock must be present in person or by proxy to establish a quorum for
the election, and the election of the Class A designated directors requires the
affirmative vote of a plurality of shares of Class A stock represented at the
meeting.
Enclosed are the (i) notice of meeting, (ii) proxy statement/prospectus and
(iii) proxy and election form. Please carefully read the proxy
statement/prospectus, which describes the merger agreement and the merger in
more detail, including a description of the conditions to completion of the
merger and the effects of the merger on the rights of Cerulean shareholders. The
proxy statement/prospectus also describes how shareholders may elect the Class A
designated directors.
YOUR BOARD OF DIRECTORS HAS APPROVED THE MERGER AGREEMENT AND DETERMINED
THAT THE TERMS OF THE MERGER AGREEMENT AND THE MERGER ARE FAIR TO YOU, ADVISABLE
AND IN YOUR BEST INTERESTS. THEREFORE, YOUR BOARD OF DIRECTORS RECOMMENDS THAT
YOU VOTE "FOR" THE PROPOSAL TO APPROVE THE MERGER AGREEMENT AND THE MERGER
DESCRIBED IN THE ATTACHED PROXY STATEMENT/PROSPECTUS. YOUR BOARD OF DIRECTORS
ALSO RECOMMENDS THAT YOU VOTE "FOR" ELECTION OF THE NOMINEES FOR CLASS A
DESIGNATED DIRECTORS DESCRIBED IN THE ATTACHED PROXY STATEMENT/PROSPECTUS.
The merger agreement provides that the completion of the merger is subject
to a number of conditions, including approval of each class of shareholders of
Cerulean. Your vote is important, and we
<PAGE> 3
urge you to complete, sign and date the enclosed proxy card and return it
promptly in the enclosed envelope, whether or not you plan to attend the
meeting. If you attend the meeting, you may vote in person, even if you
previously returned your proxy card.
The proxy card is also an election form that allows you to elect to receive
cash as the form of consideration you will receive in the merger. The card also
indicates the information you must provide to us to receive cash or WellPoint
common stock in the merger. This request for information is contained in the
space marked W-9 and requires you to fill in your social security number. IF YOU
WISH TO RECEIVE CASH, YOU MUST ALSO CHECK THE APPROPRIATE BOX FOR THAT ELECTION,
SIGN THE CARD AND RETURN IT SO THAT CERULEAN RECEIVES IT PRIOR TO OR AT THE
MEETING. As soon as possible after the merger is completed, WellPoint's exchange
agent will begin forwarding cash or WellPoint common stock to those Cerulean
shareholders from whom Cerulean has received a proxy and election card, with W-9
information properly completed. EVEN IF YOU COMPLETED AN ELECTION FORM IN
CONNECTION WITH THE 1999 MEETING, YOU MUST COMPLETE A NEW FORM TO RECEIVE CASH.
Even if you plan to attend the meeting, please fill in, date and sign the
enclosed proxy card with your vote and election of cash or WellPoint common
stock. To ensure that your shares will be represented at the meeting, promptly
return the card in the enclosed return envelope, which requires no postage if
mailed in the United States. If you attend the meeting, the proxy can be
disregarded, if you wish, and you may vote your shares in person.
Sincerely,
Richard D. Shirk
President and Chief Executive Officer
<PAGE> 4
CERULEAN COMPANIES, INC.
3350 PEACHTREE ROAD, N.E.
ATLANTA, GEORGIA 30326
1-800-314-2580
---------------------
NOTICE OF MEETING OF SHAREHOLDERS
TO BE HELD AT ON , , 2000
---------------------
To the shareholders of Class A convertible common stock:
We have agreed to merge with a subsidiary of WellPoint Health Networks Inc.
This subsidiary of WellPoint will be the surviving company in the merger. We
have scheduled a special meeting in lieu of annual meeting of shareholders for
the holders of shares of Class A convertible common stock of Cerulean Companies,
Inc. at , Atlanta, Georgia, at .m., local time,
on , , 2000. The purposes of the special meeting are as
follows:
1. The merger. To consider and vote upon a proposal to approve and
adopt the Agreement and Plan of Merger, dated as of July 9, 1998, as
amended on July 9, 1999 and December 31, 1999, among Cerulean, WellPoint
and Water Polo Acquisition Corp., a subsidiary of WellPoint, and the
transactions contemplated by the merger agreement.
2. Election of Class A designated directors. To elect two Class A
designated directors to serve from the time of the meeting until the annual
meeting in 2003 or until the completion of the merger, whichever is
earlier.
3. Other business. To transact such other business as may properly
come before the meeting or any adjournments or postponements of the
meeting.
We have provided information describing these items of business in the
attached proxy statement/prospectus, which provides you with detailed
information about Cerulean, WellPoint and the merger. We have also attached a
copy of the merger agreement as Appendix A to the proxy statement/prospectus.
You are entitled to notice of and to vote at the special meeting only if
you were a shareholder of record of Cerulean at the close of business on
, 2000, the date that your board of directors fixed as the record
date.
We cannot complete the merger unless the holders of a majority of the
shares of Class A stock entitled to vote at the meeting vote to approve the
merger agreement and the merger. The election of Class A designated directors
requires the affirmative vote of a plurality of the shares of Class A stock
represented at the meeting.
THE CERULEAN BOARD OF DIRECTORS RECOMMENDS THAT SHAREHOLDERS VOTE "FOR"
APPROVAL OF THE MERGER AGREEMENT AND COMPLETION OF THE TRANSACTIONS CONTEMPLATED
BY THE MERGER AGREEMENT AND "FOR" THE BOARD'S NOMINEES FOR CLASS A DESIGNATED
DIRECTORS.
Even if you plan to attend the meeting, please fill in, date and sign the
enclosed proxy card with your vote and election of cash or WellPoint common
stock. To ensure that your shares will be represented at the meeting, promptly
return the card in the enclosed return envelope, which requires no postage if
mailed in the United States. If you attend the meeting, you may still vote your
shares in person even if you sent in a proxy card.
<PAGE> 5
You should also complete the W-9 information on the proxy and election card
now. You are not required to complete the W-9 information to vote at the
meeting. Cerulean must, however, receive this information, as certified by you,
before you can receive either cash or WellPoint common stock pursuant to the
merger. Soon after the completion of the merger, we expect to begin to
distribute cash or WellPoint common stock to those Cerulean shareholders from
whom we have received W-9 information. EVEN IF YOU COMPLETED AN ELECTION FORM IN
CONNECTION WITH THE 1999 MEETING, YOU MUST COMPLETE A NEW FORM TO RECEIVE CASH.
By Order of the Board of Directors
Richard D. Shirk
President and Chief Executive Officer
Atlanta, Georgia
, 2000
<PAGE> 6
PROXY STATEMENT
OF
CERULEAN COMPANIES, INC.
---------------------
PROSPECTUS
OF
WELLPOINT HEALTH NETWORKS INC.
---------------------
The boards of directors of Cerulean Companies, Inc. and WellPoint Health
Networks Inc. have approved a merger agreement among Cerulean, WellPoint and
Water Polo Acquisition Corp., a subsidiary of WellPoint. The merger agreement
provides that Cerulean will merge with WellPoint's subsidiary, which will be the
surviving corporation. At the completion of the merger, each Cerulean Class A
shareholder who does not perfect his or her dissenters' rights pursuant to
Georgia law will have the right to receive, in exchange for each share of Class
A convertible common stock and each share of Cerulean Series A preferred stock:
- approximately $850 in cash;
- the equivalent value paid in shares of WellPoint common stock; or
- a combination of cash and WellPoint common stock.
At the completion of the merger, each Cerulean Class B shareholder who does
not perfect his or her dissenters' rights pursuant to Georgia law will have the
right to receive approximately $2,220 worth of WellPoint common stock in
exchange for each share of Cerulean Class B convertible preferred stock.
Cerulean is also providing a copy of this proxy statement/prospectus to the
holders of Class B stock in connection with a meeting of the Class B
stockholders to approve the merger.
We have scheduled a special meeting of shareholders for the holders of
shares of Cerulean Class A stock at , Atlanta, Georgia, at
, local time, on , , 2000. The Cerulean
board of directors recommends that you vote at the meeting in favor of the
merger and the nominees for director named in this proxy statement/prospectus.
The WellPoint common stock is listed on the New York Stock Exchange under
the symbol "WLP." The closing price for the WellPoint common stock on August 15,
2000 was $85 15/16 per share.
SEE "RISK FACTORS" BEGINNING ON PAGE 12 FOR A DISCUSSION OF CERTAIN
IMPORTANT RISKS THAT YOU SHOULD CONSIDER IN EVALUATING THE MERGER AND YOUR
POTENTIAL ACQUISITION OF WELLPOINT COMMON STOCK.
Cerulean cannot complete the merger without the approval of its
shareholders. Cerulean has scheduled the special meeting to vote on the merger
and to elect two Class A designated directors. This proxy statement/prospectus
provides detailed information about the special meeting, the merger and the
director elections. In addition, you may obtain information about WellPoint and
Cerulean from documents we have filed with the Securities and Exchange
Commission.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THE SECURITIES WELLPOINT WILL ISSUE
PURSUANT TO THE MERGER OR PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROXY
STATEMENT/PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
This proxy statement/prospectus is dated , 2000 and we are
mailing it to shareholders of Cerulean on or about , 2000.
<PAGE> 7
TABLE OF CONTENTS
<TABLE>
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PAGE
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Incorporation of Certain Information of WellPoint by
Reference................................................. iv
Annual Report to Stockholders............................... iv
Summary..................................................... 1
Questions and Answers About the Merger.................... 1
The Companies............................................. 6
The Merger................................................ 7
Opinion of Cerulean's Financial Advisor................ 7
Approvals of Regulatory Authorities and the Blue Cross
and Blue Shield Association........................... 8
Accounting Treatment................................... 8
Conditions to the Merger............................... 8
Termination of the Merger Agreement.................... 9
Termination Fees....................................... 9
Interests of Certain Persons in the Merger............. 10
Comparative Market Price and Dividend Information...... 10
Selected Financial Data of WellPoint................... 11
Selected Pro Forma Financial Data of WellPoint......... 11
Federal Income Tax Consequences of the Merger.......... 11
Risk Factors................................................ 12
Risks Relating to the Merger.............................. 12
Risks Relating to the Business of WellPoint, Cerulean and
the Combined Companies................................. 14
Risks Relating Particularly to the Business of
WellPoint.............................................. 18
Risks Relating Particularly to the Business of Cerulean... 20
Forward-Looking Statements.................................. 22
Information Regarding the Cerulean Meeting.................. 23
Date, Time and Place of the Cerulean Meeting.............. 23
Purpose of the Meeting.................................... 23
Record Date............................................... 23
Quorum.................................................... 23
Recommendations of the Board of Directors................. 24
Vote Required............................................. 24
Solicitation and Revocability of Proxies.................. 24
Regulatory and Other Approvals............................ 25
Method of Electing WellPoint Common Stock or Cash; Receipt
of WellPoint Common Stock and/or Cash.................. 25
Proposal 1 -- Approval of the Merger........................ 27
Background of the Merger.................................. 27
Recommendation of the Cerulean Board of Directors......... 32
Reasons for the Merger.................................... 33
Opinion of Cerulean's Financial Advisor Regarding the
Merger................................................. 36
Completion of the Merger.................................. 40
Consideration to be Received in the Merger................ 41
Treatment of Fractional Shares............................ 42
Procedures for Election and Receipt of Merger
Consideration.......................................... 43
Lost, Stolen or Destroyed Certificates.................... 44
Regulatory Approvals; Approval of Blue Cross and Blue
Shield Association..................................... 44
Listing of WellPoint Common Stock on the New York Stock
Exchange............................................... 46
Interests of Certain Persons in the Merger................ 46
Resale of WellPoint Common Stock; Restrictions on Resales
by Affiliates.......................................... 53
Material Federal Income Tax Consequences of the Merger.... 54
Accounting Treatment...................................... 58
</TABLE>
i
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PAGE
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The Merger Agreement........................................ 59
Structure of the Merger................................... 59
Closing of the Merger..................................... 59
Surviving Corporation..................................... 59
Representations and Warranties............................ 59
Covenants of the Parties.................................. 60
Conditions to the Completion of the Merger................ 64
Termination and Termination Fees.......................... 66
Costs and Expenses........................................ 67
Amendment and Waiver...................................... 67
Dissenters' Rights........................................ 67
Related Agreement........................................... 69
Registration Rights Agreement............................. 69
Certain Relationships and Related Transactions.............. 71
Settlement of Cerulean Conversion Litigation.............. 71
Interests of Certain Class A Designated Directors......... 73
Interests of Cerulean Class B Shareholders................ 73
WellPoint Health Networks Inc. Unaudited Pro Forma Combined
Condensed Financial Statements............................ 74
Information Concerning WellPoint............................ 80
WellPoint Management, Executive Compensation And Other
Matters................................................... 80
Information Concerning Cerulean............................. 81
Selected Consolidated Financial and Other Data............ 81
Management's Discussion and Analysis of Financial Condition
and Results of Operations of Cerulean..................... 83
Overview.................................................. 83
Results of Operations..................................... 84
Liquidity and Capital Resources........................... 89
Quantitative and Qualitative Disclosures about Market
Risk................................................... 91
Business of Cerulean........................................ 92
The Conversion; Private Placement of Class B Stock........ 92
Industry Overview......................................... 92
General................................................... 93
Organizational Structure.................................. 94
Strategic Initiatives..................................... 95
Impact of Year 2000....................................... 96
Business Lines and Products............................... 96
Marketing and Sales....................................... 100
Underwriting.............................................. 101
Investment Portfolio...................................... 102
Competition............................................... 103
Employees................................................. 104
Government Regulations.................................... 104
Trade Names, Trade Marks, Service Marks and Licenses...... 105
Properties................................................ 105
Legal Proceedings......................................... 105
Market for Cerulean's Common Equity and Related
Stockholder Matters.................................... 107
Security Ownership of Cerulean Management and Principal
Shareholders.............................................. 107
Management of Cerulean...................................... 109
Comparison of Rights of Cerulean Shareholders and WellPoint
Shareholders.............................................. 110
Board of Directors........................................ 111
Committees of the Board................................... 111
Actions by Shareholders Without a Meeting; Special
Meetings............................................... 112
Amendments to Certificate or Articles of Incorporation.... 113
</TABLE>
ii
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Amendments to Bylaws...................................... 115
General Voting Requirements............................... 115
Vote Required for Certain Transactions.................... 116
Certain Restrictions on Ownership of Securities........... 116
Business Combinations with Interested Shareholders........ 118
Fair Price Provisions..................................... 119
Conflicting Interest Transactions......................... 119
Appraisal Rights.......................................... 120
Par Value; Dividends and Repurchases of Shares............ 121
Proposal 2 -- Election of Class Designated Directors........ 123
Actions to be Taken....................................... 123
Selection of Class A Designated Directors................. 123
Directors................................................. 123
Nominees and Appointees................................... 124
Information Regarding Nominees and Directors.............. 124
Meetings and Committees of the Board of Directors......... 128
Executive Compensation.................................... 129
Long-Term Incentive Compensation.......................... 130
Non-Contributory Retirement Program for Certain Employees
of Blue Cross and Blue Shield of Georgia............... 130
Tax-Favored Savings Program............................... 132
Deferred Compensation Plans............................... 133
Directors Compensation.................................... 133
Compensation Committee; Interlocks and Insider
Participation.......................................... 133
Executive or Other Severance Agreements................... 133
Certain Relationships and Related Transactions............ 134
Compensation Committee Report on Executive Compensation... 135
Section 16(a) of the Securities Exchange Act Beneficial
Ownership Reporting Compliance............................ 137
Shareholder Proposals For 2001 Annual Meeting............... 137
Independent Auditors........................................ 137
Experts..................................................... 137
Legal Matters............................................... 138
Other Matters............................................... 138
Where You Can Find More Information......................... 138
</TABLE>
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APPENDICES:
Appendix A -- Agreement and Plan of Merger dated as of July 9, 1998, by
and among Cerulean, WellPoint and Water Polo Acquisition
Corp.; First Amendment to Agreement and Plan of Merger dated
as of July 9, 1999; Second Amendment to Agreement and Plan
of Merger dated as of December 31, 1999
Appendix B -- Opinion of Morgan Stanley & Co. Incorporated as to the
fairness of the merger to the Cerulean shareholders
Appendix C -- Article 13 of the Georgia Business Corporation Code Relating
to Rights of Dissenting Shareholders
Appendix D -- Certificate of Incorporation of WellPoint
Appendix E -- Bylaws of WellPoint
</TABLE>
iii
<PAGE> 10
INCORPORATION OF CERTAIN INFORMATION OF WELLPOINT BY REFERENCE
The SEC allows WellPoint to "incorporate by reference" the information it
files with the SEC, which means that WellPoint can disclose information to you
by referring to those documents. The information incorporated by reference is
deemed to be part of this proxy statement/prospectus, except for any information
superseded by information in this proxy statement/prospectus. WellPoint has
supplied all information contained or incorporated by reference in this proxy
statement/prospectus relating to WellPoint. Cerulean has supplied all
information contained in this proxy statement/prospectus relating to Cerulean.
WellPoint incorporates by reference the documents listed below and any
future filings made with the SEC under Sections 13(a), 13(c), 14 or 15(d) of the
Exchange Act of 1934 prior to the date of the merger:
- Annual Report on Form 10-K for the fiscal year ended December 31, 1999;
- Quarterly Reports on Form 10-Q for the quarters ended March 31, 2000 and
June 30, 2000; and
- The description of the WellPoint common stock included in WellPoint's
registration statement on Form 8-B, as filed with the SEC on June 12,
1997.
ANNUAL REPORT TO STOCKHOLDERS
A copy of the Cerulean Annual Report on Form 10-K for the fiscal year ended
December 31, 1999 is included with this proxy statement/prospectus.
You may obtain additional copies of documents incorporated by reference and
listed above without charge by writing to the appropriate company at the
following addresses:
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Investor Relations Shareholder Communications
WellPoint Health Networks Inc. Cerulean Companies, Inc.
1 WellPoint Way P.O. Box 4445
Thousand Oaks, California 91362 Atlanta, Georgia 30302
(805) 577-6789 (800) 314-2580
</TABLE>
IN ORDER TO ENSURE THAT YOU RECEIVE THE DOCUMENTS BEFORE THE SPECIAL
MEETING, YOU MUST REQUEST THEM NO LATER THAN , FIVE BUSINESS DAYS
PRIOR TO THE MEETING.
iv
<PAGE> 11
SUMMARY
This summary highlights selected information from this document. To
understand the proposed merger fully and for a more complete description of the
terms of the merger, you should carefully read the entire proxy
statement/prospectus, including the appendices.
QUESTIONS AND ANSWERS ABOUT THE MERGER
WHY SHOULD CERULEAN MERGE WITH WELLPOINT?
Cerulean believes the merger gives it the opportunity to continue the
execution of its strategic plan:
- to expand its services in Georgia through the greater resources of the
combined entity that will result from the merger; and
- to deliver value to its shareholders in the form of cash and freely
transferable securities that will have, as of the time of the completion
of the merger, an aggregate fair market value of $500 million, subject to
the adjustments described in this proxy statement/prospectus.
WHAT DOES CERULEAN'S BOARD OF DIRECTORS RECOMMEND?
Cerulean's board of directors has approved and adopted the merger agreement
and approved the completion of the transactions contemplated by the merger
agreement, and recommends that the Cerulean shareholders vote "for" the proposal
to approve the merger agreement and the merger.
WHY IS CERULEAN HOLDING ANOTHER SHAREHOLDERS' MEETING TO APPROVE THE MERGER?
In June 1999, Cerulean held a shareholders meeting at which the Cerulean
shareholders overwhelmingly approved the merger. However, due primarily to
litigation in Richmond County, Georgia which we discuss at length later in this
proxy statement/prospectus, WellPoint and Cerulean have not yet completed the
merger. Although Cerulean does not believe that applicable federal or state laws
require Cerulean to hold another shareholders' meeting and resolicit proxies,
the Cerulean board of directors has decided to do so, primarily because of the
intervening time period since the June 1999 meeting. In addition, this new
meeting will allow you to consider the merger with the benefit of another year
of operating results for both Cerulean and WellPoint.
WOULD CERULEAN BE ABLE TO EXECUTE ITS BUSINESS PLAN AS AN INDEPENDENT COMPANY?
In considering the various strategic alternatives available to Cerulean,
including remaining an independent company and pursuing its existing business
plan or entering into a strategic transaction with a potential partner, the
board of directors of Cerulean sought to realize Cerulean's goals as a
corporation. Cerulean wanted access to a broader capital base to meet
competitive pressures, and to develop and deliver new products to residents of
Georgia. Cerulean's board, after consultation with its financial advisor,
determined that Cerulean could not obtain the capital required to support
continuing growth of Cerulean's managed care products and otherwise execute its
strategic plan from operational results alone. The board also determined that
the capital available through the private or the public financial markets would
be more expensive and available in smaller amounts than the capital that could
be acquired by entering into a strategic transaction such as the merger. The
board of directors further determined that a strategic transaction could give
Cerulean significantly greater competitive advantage and deliver greater value
to shareholders within a three- to five-year period than maintaining Cerulean's
position as a stand-alone entity. Though the viability of Cerulean as an
independent company was not in question, the board determined that the merger
was a better alternative to enable Cerulean to achieve its objectives.
1
<PAGE> 12
HOW WAS THE ALLOCATION OF THE MERGER CONSIDERATION DETERMINED?
The allocation of the merger consideration was based upon the provision
contained in the Cerulean articles of incorporation that specifies the relative
participation of Class A stock and Class B stock in any conversion of both
classes to common stock. WellPoint will allocate the total merger consideration
among two groups:
- the holders of Cerulean Class B stock, and
- the holders of Cerulean Class A stock, Cerulean Series A stock and any
Cerulean Class A common stock participation rights into which shares of
Series A stock are converted.
The Series A stock and any Cerulean participation rights are securities
held by a Georgia charitable foundation and the foundation's lawyers. The
foundation was formed in connection with the settlement of litigation relating
to the conversion of Blue Cross and Blue Shield of Georgia from a not-for-profit
business to a for-profit business. In the settlement, Cerulean issued shares of
Class A stock and warrants to purchase shares of Series A stock to the
foundation and its lawyers. We refer to the foundation and its lawyers
throughout this document as the foundation shareholders. Whenever there is a
statutory voting right for any class or series of stock, each share of Series A
stock automatically converts into one Cerulean participation right. Please read
the description of the conversion litigation settlement on page 70.
The amount of the merger consideration received by the holders of the Class
B stock will be approximately 22.1876% of the total merger consideration. Class
B stock is held by investors who invested a total of $49.9 million, or $1,000
per share, in Cerulean at the time of the conversion. Holders of Class B stock
cannot receive cash in the merger.
The terms of the settlement agreement relating to the settlement of the
conversion litigation provided that the foundation shareholders were to receive
20% of the total equity of Cerulean. However, because the exercise price of $21
million on the warrants is to be paid by the surrender of shares of Series A
stock underlying a portion of the warrants and not by cash, the total percentage
of equity of Cerulean that the foundation shareholders would receive in the
merger is reduced to approximately 16.7%. We will distribute the remaining
approximately 61.1124% of the merger consideration to the other holders of Class
A stock.
WHAT WILL I RECEIVE FOR MY CLASS A STOCK?
The total amount of merger consideration is approximately $500 million if
no adjustments are required under the merger agreement. The basic merger
consideration is shares of WellPoint common stock. For each share of Class A
stock, you are entitled to a number of shares of WellPoint common stock with a
value equal to approximately $850, or $4,250 for each five shares of Class A
stock. Instead of WellPoint common stock, holders of Class A stock may elect
cash. You may not elect a combination of WellPoint common stock and cash,
although those Class A shareholders who elect WellPoint common stock will
receive cash rather than any fractional share of WellPoint common stock in the
merger. The foundation shareholders may elect to receive a combination of cash
and WellPoint common stock in the merger.
As described in this proxy statement/prospectus, we have structured the
merger as a tax-free transaction to WellPoint and Cerulean, as well as Cerulean
shareholders to the extent that those shareholders receive their merger
consideration in the form of WellPoint common stock. In order to preserve the
tax-free nature of the merger, the maximum amount of cash which will be paid out
to all shareholders in the merger, including cash paid to shareholders who elect
to receive cash, cash paid to dissenting shareholders and cash paid instead of
fractional shares of WellPoint common stock, cannot exceed 45% of the total
merger consideration. This equals a maximum of $225 million if the total merger
consideration is $500 million. If holders of Class A stock as a group elect to
receive more cash in the merger than this maximum amount, each shareholder's
cash election will be reduced on a pro rata basis and the shareholder will
receive shares of WellPoint stock in the amount of that reduction.
2
<PAGE> 13
The following table includes examples of what shareholders who hold five
shares of Class A stock and who elect cash will actually receive if the total
amount of cash requested by Cerulean shareholders exceeds the maximum amount
available to holders of Class A stock. Although neither WellPoint nor Cerulean
currently anticipates any adjustments to the aggregate merger consideration, the
amounts in the examples will change if there are adjustments. We made the
following assumptions in calculating the amounts in the table:
- no adjustments to the total merger consideration;
- a total of 3,000 dissenting holders of Class A stock, holding 15,000
shares;
- the amount required to satisfy dissenting shareholders' claims and cash
payments instead of fractional shares of holders of Class B stock and
holders of Class A stock electing WellPoint common stock is $10 million;
- the closing price of WellPoint common stock on which the exchange ratios
are based is $85.00 per share; and
- the foundation shareholders elect the maximum amount of cash available to
them, which is approximately $37.5 million.
<TABLE>
<CAPTION>
NUMBER OF SHARES OF TOTAL AMOUNT OF
WELLPOINT COMMON MERGER
TOTAL NUMBER OF STOCK EACH AMOUNT OF CASH EACH CONSIDERATION EACH
SHAREHOLDERS SHAREHOLDER SHAREHOLDER SHAREHOLDER
ELECTING CASH RECEIVES RECEIVES RECEIVES
--------------- ------------------------- ------------------- ----------------------
<S> <C> <C> <C> <C>
Example 1............ 35,000 0 $4,250.00 $4,250.00
Example 2............ 43,000 2 4,080.00 4,250.00
Example 3............ 50,000 9 3,485.00 4,250.00
Example 4............ 60,000 16 2,890.00 4,250.00
</TABLE>
Under Georgia law, the value of a dissenting shareholder's claim does not
include any increase in value due to the merger. As a result, we assumed a lower
value per share to satisfy these claims than the value that shareholders who do
not dissent will receive in the merger.
WHAT MUST I DO TO ELECT CASH?
To elect cash you must indicate your election in the place provided on the
proxy card, complete the W-9 information on the card, sign the card and return
it so that Cerulean receives it prior to or at the meeting. You do not need to
vote "for" the merger to receive cash, but you must make the cash election on
the proxy card in order to receive cash. If you wish to vote "against" the
merger and still make the cash election, you must mark the proxy card
accordingly. A signed card with no vote expressed will be voted "for" the
merger.
IF I RETURNED THE PROXY CARD FOR THE JUNE 1999 MEETING TO CERULEAN WITH THE CASH
ELECTION BOX CHECKED, DO I NEED TO SEND IN A NEW PROXY CARD TO RECEIVE CASH IN
THE MERGER?
Yes. To be eligible to receive cash in the merger, you must return the
enclosed proxy card with the W-9 information completed and the cash election box
checked, even if you made a cash election at the time of the June 1999 meeting.
We will only honor cash elections that we receive after we mail this proxy
statement/prospectus to Cerulean shareholders and before or at the time of the
, 2000 meeting. Any cash election that you previously made is no
longer effective and will not preserve your right to receive cash in the merger.
WHEN WILL WE COMPLETE THE MERGER?
We will complete the merger as soon as possible after we receive the
shareholder approvals and obtain all other regulatory approvals and all other
conditions to completion have been satisfied or waived by Cerulean or WellPoint.
As a result of these regulatory approval requirements, WellPoint and Cerulean
3
<PAGE> 14
anticipate that the completion of the merger will occur within approximately 60
to 90 days after the date of the meeting.
WHAT SHOULD I DO NOW?
Holders of Class A Stock
Mail your signed proxy card in the enclosed return envelope as soon as
possible so that your shares may be represented at the meeting. If you wish to
elect cash, you must mark the proxy card appropriately, complete the W-9
information and return it so Cerulean receives it before or at the meeting, even
if you did so last year. It is important that Cerulean receive the proxy card as
soon as possible, and Cerulean must receive it before the meeting.
Holders of Class B Stock
Holders of Class B stock should sign and mail the attached proxy card in
the enclosed return envelope as soon as possible in order to have their shares
of Class B stock represented at the meeting of holders of Class B stock.
CAN I CHANGE MY VOTE AFTER I MAIL MY PROXY CARD?
Yes. You can change your vote at any time before your proxy is voted at the
meeting. You can do this in one of three ways:
- send a written notice stating that you would like to revoke your proxy;
- complete and submit a new proxy card; or
- attend the meeting and vote in person. Simply attending the meeting,
however, will not revoke your proxy. To revoke a prior proxy, you must
sign a new proxy at the meeting.
If you choose either of the first or second methods, you must submit your
notice of revocation or your new proxy card to Cerulean before the meeting. IF
YOU SUBMIT A LATER PROXY CARD AND WISH TO ELECT CASH, YOU MUST ALSO MAKE THE
CASH ELECTION ON THE LATER PROXY CARD.
DO CERULEAN'S OFFICERS OR DIRECTORS HAVE ANY OTHER INTERESTS IN THE MERGER?
Some members of Cerulean management will receive payment under a long-term
incentive plan, because the merger is a triggering event which results in a
right to payment under that plan. Richard D. Shirk, the Chief Executive Officer
and a director of Cerulean, is the only director who has this agreement. Messrs.
Joe M. Young and Frank J. Hanna, III are directors of Cerulean and affiliates of
holders of Class B stock. Mr. Hanna is an affiliate of Georgia Strategic
Healthcare, LLC, which is a substantial holder of Class B stock. Georgia
Strategic Healthcare will receive certain registration rights with respect to
the WellPoint common stock it receives in the merger. Mr. John W. Robinson, Jr.,
a Class A designated director, is also a Class A shareholder, holding five
shares of Class A stock. In addition, one Cerulean director, who has not yet
been identified, will become a director of WellPoint at the time of the merger.
WILL CERULEAN SHAREHOLDERS HAVE DISSENTERS' RIGHTS OF APPRAISAL?
Holders of Class A stock and Class B stock who do not vote in favor of the
merger and who follow the procedures set forth under Georgia law will be
entitled to dissenters' rights under Georgia law. We describe these rights in
more detail on page 66.
HOW WILL I RECEIVE MY SHARES OF WELLPOINT COMMON STOCK OR CASH?
Holders of Class A Stock
On the proxy card that you received with this proxy statement/prospectus,
you are asked to elect if you wish to receive cash. If you wish to receive
WellPoint common stock, do not make the cash election;
4
<PAGE> 15
you will automatically receive WellPoint common stock. In addition, you must
complete the W-9 information on the proxy card before you can receive either
cash or WellPoint common stock.
If you wish to receive cash, you must return the proxy card, properly
marked, so we receive it prior to or at the meeting. We will treat any proxy
cards that we receive after the meeting as having elected WellPoint common
stock, even if you check the cash election box. This limitation is necessary in
order to permit us to determine the total amount of cash which will be paid in
the merger and to provide for appropriate tax-free treatment of the merger.
No holder of Class A stock will receive any merger consideration until the
exchange agent appointed by WellPoint has received the holder's proxy card, with
the W-9 information properly completed.
Holders of Class B Stock
Holders of Class B stock should sign and mail the attached proxy card in
the enclosed return envelope as soon as possible to have their shares of Class B
stock represented at the meeting of holders of Class B stock. As soon as
practicable following the completion of the merger, we will mail to each holder
of Class B stock a letter of transmittal to accompany certificates for shares of
Class B stock. The transmittal letter will set forth instructions for delivering
Class B stock certificates to the exchange agent appointed by WellPoint. No
holder of Class B stock will receive any merger consideration until the exchange
agent has received that holder's properly completed transmittal letter.
WHAT IS THE STATUS OF THE LITIGATION IN THE SUPERIOR COURT OF RICHMOND COUNTY,
GEORGIA IN WHICH THE PLAINTIFFS SEEK TO ESTABLISH THAT THERE ARE MORE HOLDERS OF
CLASS A STOCK?
On September 18, 1998, various plaintiffs filed a lawsuit in the Superior
Court of Richmond County, Georgia against Cerulean and others. The plaintiffs
seek to establish that Cerulean should consider some 70,000 additional
individuals to be holders of Class A stock and should issue to each of them five
shares of Class A stock. The plaintiffs have asserted claims for specific
performance, fraud, breach of provisions of the Insurance Code of Georgia and
breach of fiduciary duty. They also brought derivative claims against Cerulean's
and Blue Cross and Blue Shield of Georgia's directors, asserting that the
directors breached their fiduciary duties in approving the issuance of
Cerulean's Class B stock and the settlement of the conversion litigation. The
Superior Court of Richmond County dismissed the claims against the directors by
a court order dated July 29, 1999.
The Superior Court held a hearing on December 9 and 10, 1998 on the
plaintiffs' motion for declaratory judgment that Cerulean should consider the
additional 70,000 individuals to be holders of Class A stock. These individuals
are those subscribers who:
- were included in the group of subscribers Cerulean identified to receive
the Cerulean prospectus dated May 14, 1996 in connection with the
conversion of Blue Cross and Blue Shield of Georgia to a for-profit
company; and
- unlike the present holders of Class A stock, did not return the necessary
election form to become holders of Class A stock or, in the case of
approximately 12,000 subscribers, affirmatively rejected the Class A
stock.
Cerulean does not believe the claim with respect to the plaintiffs'
standing as shareholders has merit and argued at the hearing to that effect. On
December 17, 1998, however, the Richmond County Superior Court ruled in favor of
the plaintiffs.
Cerulean filed an appeal with the Georgia Supreme Court, which held oral
argument on March 8, 1999. 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 Insurance Commissioner
had broad powers of review over the conversion and that the plaintiffs had
failed to exhaust the available administrative remedies with the Georgia
Insurance Commissioner during and following the conversion.
5
<PAGE> 16
On May 17, 1999, Harrell Tiller, Charlie Deal and Olean Lokey, who were
among the named plaintiffs in the Richmond County litigation, filed two
petitions for declaratory ruling with the Georgia Department of Insurance. These
individuals asked for a declaration that Cerulean and Blue Cross and Blue Shield
of Georgia should have issued shares to them and to other similarly situated
individuals. In addition, Mr. Deal and Ms. Lokey alleged in their petition that
they did not receive the original offer of shares and asked that the Georgia
Insurance Commissioner make the alternative declaration that they were entitled
to receive an offer of shares of Class A stock. On June 22, 1999, the Georgia
Insurance Commissioner entered orders denying the relief sought by these
individuals and holding that they are not shareholders of Cerulean.
On June 22, 1999, Messrs. Tiller, Deal and Lokey appealed the decisions of
the Georgia Insurance Commissioner in two separate proceedings filed in the
Richmond County Superior Court. In these new proceedings, the plaintiffs sought
judicial review of the Georgia Insurance Commissioner's orders. On September 21,
1999, the Richmond County Superior Court reversed the Georgia Insurance
Commissioner's orders.
On November 22, 1999, the Georgia Court of Appeals agreed to hear the
Georgia Insurance Commissioner's appeal of the Richmond County Superior Court's
September 21, 1999 decision. On June 29, 2000, the Georgia Court of Appeals
reversed the decision of the Richmond County Superior Court and affirmed the
Georgia Insurance Commissioner's June 22, 1999 orders. On July 19, 2000, the
plaintiffs filed a petition seeking to appeal the Court of Appeals' decision to
the Georgia Supreme Court. The Georgia Supreme Court has not yet responded as to
whether it will hear the appeal. If the Georgia Supreme Court denies the
petition, the Court of Appeals' decision will be the final decision on these
aspects of the case. The only remaining claims against Cerulean if this occurs
will be the fraud claims brought by the seven named individual plaintiffs. 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 Cerulean.
Cerulean has notified the plaintiffs in writing that Cerulean considers the
claims in this motion to be frivolous and to constitute abusive litigation under
Georgia law and that Cerulean intends to seek damages and attorney's fees
against the plaintiffs, and their counsel, if they do not withdraw the motion.
If the plaintiffs do not withdraw the motion, Cerulean must file a response to
the motion on or before August 31, 2000.
WHO SHOULD SHAREHOLDERS CALL WITH QUESTIONS?
If you have more questions about the merger, you should contact:
<TABLE>
<S> <C>
Shareholder Communications Investor Relations
Cerulean Companies, Inc. WellPoint Health Networks Inc.
P.O. Box 4445 1 WellPoint Way
Atlanta, Georgia 30302 Thousand Oaks, California 91362
Telephone: (800) 314-2580 Telephone: (805) 557-6789
</TABLE>
THE COMPANIES
WellPoint Health Networks Inc.
1 WellPoint Way
Thousand Oaks, California
91362
(805) 557-6789 WellPoint is one of the nation's largest
publicly traded managed health care companies.
As of June 30, 2000, WellPoint had
approximately 7.6 million medical members and
approximately 34.3 million specialty members.
WellPoint offers a broad spectrum of quality
network-based managed care plans. WellPoint
provides these plans to the large and small
employer, individual and senior markets.
WellPoint's managed care plans include
preferred provider organizations, health
maintenance organizations and point-of-service
and other hybrid plans and traditional
indemnity plans. In addition, WellPoint offers
managed care services, including underwriting,
actuarial services,
6
<PAGE> 17
network access, medical cost management and
claims processing. WellPoint also provides a
broad array of specialty and other products and
services, including pharmacy, dental,
utilization management, life, preventive care,
disability, behavioral health, health care
coverage pursuant to the Consolidated Omnibus
Budget Reconciliation Act of 1985 and flexible
benefits account administration. WellPoint
conducts business in California under the
trademark "Blue Cross of California" and in
other states under the trademark "UNICARE."
Cerulean Companies, Inc.
3350 Peachtree Road, N.E.
Atlanta, Georgia 30326
(800) 314-2580 Cerulean, through its subsidiaries, has the
largest health insurance company market share
in Georgia with 942,723 insurance and
administrative service contracts covering or
administering benefits for approximately 1.8
million members as of June 30, 2000. This
represents over 22% of the total Georgia
population. It is a full service provider of
health benefit programs in the Georgia
marketplace. Cerulean markets life, health and
disability insurance products to employer
groups and individuals. Cerulean's overall
product portfolio includes standard indemnity
insurance, preferred provider organizations,
health maintenance organizations and
point-of-service health benefits plans, life
insurance products and ancillary products
including dental insurance, a vision affinity
product, vision insurance and specialty
products for mental health and pharmacy
benefits. Cerulean conducts business in Georgia
under the trademark "Blue Cross and Blue Shield
of Georgia."
THE MERGER
In the merger, Cerulean will merge into a subsidiary of WellPoint. Cerulean
and WellPoint entered into the original merger agreement on July 9, 1998. On
July 9, 1999, Cerulean and WellPoint agreed to extend the merger agreement until
October 15, 1999 and, under certain circumstances, until December 31, 1999. On
October 15, 1999, the parties agreed to extend the merger agreement through
December 31, 1999. Effective December 31, 1999, Cerulean and WellPoint agreed to
further extend the merger agreement through December 31, 2000.
Cerulean believes the merger will provide several potential benefits,
including:
- allowing Cerulean to expand its services in Georgia; and
- providing Cerulean shareholders with cash and freely transferable
securities having a total value of approximately $500 million.
There are risks to the merger, including:
- the potential for incurring a $10 million termination fee under the
merger agreement; and
- the potential for a change in the product mix offered to subscribers.
OPINION OF CERULEAN'S FINANCIAL ADVISOR
Morgan Stanley & Co. Incorporated has given the Cerulean board of directors
its written opinion, as of July 8, 1998, which states that, subject to the
limitations and qualifications in its opinion, the merger consideration that the
holders of Class A stock, Series A stock and Class B stock will receive in the
merger agreement is fair to those holders from a financial point of view. The
opinion is only applicable as of July 8, 1998 and is subject to the limits and
qualifications in the text of the opinion, which is attached to this proxy
statement/prospectus as Appendix B. Cerulean has indicated to Morgan Stanley
that it will
7
<PAGE> 18
request that Morgan Stanley update its opinion prior to the closing of the
merger. We urge you to read the opinion carefully and in its entirety.
APPROVALS OF REGULATORY AUTHORITIES AND THE BLUE CROSS AND BLUE SHIELD
ASSOCIATION
The Commissioner of Insurance of the State of Georgia must approve the
merger. The Blue Cross and Blue Shield Association also must approve the merger
as required under the license agreement of Blue Cross and Blue Shield of
Georgia. The Blue Cross and Blue Shield Association has already approved the
merger.
The Hart-Scott-Rodino Antitrust Improvements Act of 1976 prohibits
WellPoint and Cerulean from completing the merger until:
- each of WellPoint and Cerulean has furnished certain information and
materials to the United States Department of Justice and the Federal
Trade Commission; and
- the required waiting period under the Hart-Scott-Rodino Act has expired
or been terminated.
WellPoint and Cerulean furnished required information and materials to the
Justice Department and the FTC on July 24, 2000. The Justice Department granted
early termination of the waiting period on August 4, 2000.
ACCOUNTING TREATMENT
We will account for the merger under the purchase method of accounting.
CONDITIONS TO THE MERGER
Before we can complete the merger, a number of conditions must be met,
including the following:
- the holders of a majority of the outstanding shares of Class A stock
entitled to vote at the special meeting and the holders of a majority of
the outstanding shares of Class B stock must approve the merger;
- we must obtain the consent of the Georgia Insurance Commissioner and
other state regulatory consents;
- no court or governmental authority can have passed a law or entered an
injunction that prohibits the merger;
- the closing price per share of WellPoint common stock at the time of the
completion of the merger must be greater than or equal to $30.
Additional conditions must be met for Cerulean to complete the merger,
including the following:
- Cerulean must receive a legal opinion from its counsel regarding the tax
consequences of the merger;
- Morgan Stanley must not have withdrawn or amended its opinion that the
value of the consideration to be paid to the shareholders of Cerulean in
the merger is fair;
- WellPoint must nominate one Cerulean director for the election to the
board of directors of WellPoint;
- WellPoint must enter into a registration rights agreement with a
shareholder of Cerulean who, at the time of signing of the merger
agreement, was subject to the resale limitations of Rule 145 under the
Securities Act of 1933;
- WellPoint must not have a material adverse change in its business since
the date of the merger agreement which was caused by the action or
inaction of WellPoint.
8
<PAGE> 19
Additional conditions must be met for WellPoint to complete the merger,
including the following:
- WellPoint must receive a legal opinion from its counsel regarding the tax
consequences of the merger;
- there must not be any litigation or similar proceeding has a significant
likelihood of material liability to either WellPoint or Cerulean relating
to the conversion of Blue Cross and Blue Shield of Georgia from a
not-for-profit business to a for-profit business, or relating to the
distribution of consideration to be paid in connection with the merger;
- Cerulean must not have a material adverse change in its business since
the date of the merger agreement which was caused by the action or
inaction of Cerulean;
- WellPoint must receive a written agreement from each shareholder of
Cerulean who is an "affiliate" of Cerulean acknowledging resale
restrictions on any WellPoint common stock received in the merger;
- all holders of existing warrants to purchase Cerulean Series A stock must
have exercised those warrants;
- the existing shareholders' agreement between Cerulean, Blue Cross and
Blue Shield of Georgia and the holders of Class B stock must be amended.
Any of the closing conditions can be waived by the party that is not
obligated to complete the merger if the condition is not satisfied. If either
WellPoint or Cerulean waives any conditions, Cerulean will consider the facts
and circumstances at that time and determine whether a resolicitation of proxies
from shareholders is appropriate. The Cerulean board of directors will resolicit
shareholder approval of the merger if either company waives a closing condition
that the board believes a reasonable investor would consider important in a
decision on whether to approve the merger.
TERMINATION OF THE MERGER AGREEMENT
WellPoint and Cerulean can terminate the merger agreement in the following
ways:
- by the written agreement of Cerulean and WellPoint;
- by either of Cerulean or WellPoint if the merger is not completed on or
before December 31, 2000, unless the party seeking to terminate caused
the delay;
- by Cerulean if WellPoint materially breaches any of its covenants or
breaches any of its representations or warranties, and this breach
results in a material adverse effect to Cerulean;
- by WellPoint if Cerulean materially breaches any of its covenants or
breaches any of its representations or warranties, and this breach
results in a material adverse effect to WellPoint;
- by Cerulean or WellPoint if any court or governmental authority prohibits
the merger;
- by Cerulean if Cerulean enters into a written agreement with a third
party that is a superior proposal to that offered by WellPoint; or
- by Cerulean or WellPoint if any of the following do not approve the
merger: Cerulean's shareholders, the Georgia Insurance Commissioner, or
the Blue Cross and Blue Shield Association.
TERMINATION FEES
The merger agreement requires Cerulean to pay a termination fee of $10
million to WellPoint if Cerulean chooses to terminate the merger agreement to
accept a superior transaction proposal from a third party or if the holders of
Class B stock do not approve the merger.
9
<PAGE> 20
INTERESTS OF CERTAIN PERSONS IN THE MERGER
As a consequence of the merger, approximately 253 key employees will become
entitled under Cerulean plans and arrangements to receive payments and/or have
obligations funded under these plans. The costs of these obligations may total
approximately $39.5 million, prior to payments by Cerulean of certain applicable
taxes and related gross-up obligations relating to those payments. The total
amount of taxes and related gross-up obligations which may be payable with
respect to some of these amounts may range from zero to as much as $13.8
million.
COMPARATIVE MARKET PRICE AND DIVIDEND INFORMATION
WellPoint. WellPoint common stock has been traded on the New York Stock
Exchange under the symbol "WLP" since WellPoint's initial public offering on
January 27, 1993. WellPoint will list the shares of WellPoint common stock that
it will issue in the merger on the New York Stock Exchange. The following table
shows the high and low sale prices for the WellPoint common stock for the
periods presented.
<TABLE>
<CAPTION>
HIGH LOW
---- ---
<S> <C> <C>
Year Ended December 31, 1998
First Quarter............................................. $70 1/16 $42 1/4
Second Quarter............................................ 74 61 15/16
Third Quarter............................................. 74 11/16 51 1/4
Fourth Quarter............................................ 87 7/8 51 7/16
Year Ended December 31, 1999
First Quarter............................................. 85 9/16 70 1/8
Second Quarter............................................ 97 66 13/16
Third Quarter............................................. 86 11/16 54 3/4
Fourth Quarter............................................ 67 5/8 48 1/4
Year Ended December 31, 2000
First Quarter............................................. 78 1/2 56 15/16
Second Quarter............................................ 79 7/8 66 3/4
Third Quarter (through August 15, 2000)................... 92 5/16 70 3/8
</TABLE>
WellPoint did not pay any dividends on its common stock in 1998 or 1999.
On July 8, 1998, the last trading day immediately preceding the public
announcement of the merger, the closing sale price of WellPoint common stock as
reported on the New York Stock Exchange was $69 per share. On August 15, 2000,
the most recent practicable date prior to the mailing of this proxy
statement/prospectus, the closing sale price of WellPoint common stock as
reported on the New York Stock Exchange was $85 15/16 per share. We urge you to
obtain a current market quotation for shares of WellPoint common stock.
Cerulean. As of the date of this proxy statement/prospectus, there were
409,602 shares of Class A stock outstanding. These shares were owned by 70,293
holders of record. There were 49,900 shares of Class B stock outstanding, which
were owned by 18 holders of record. Since there is no public market for Class A
stock and Class B stock, there is no information as to the market value of the
Class A stock and Class B stock. Cerulean has not paid or declared any cash
dividends on the Class A stock.
10
<PAGE> 21
SELECTED FINANCIAL DATA OF WELLPOINT
<TABLE>
<CAPTION>
SIX MONTHS ENDED YEAR ENDED
JUNE 30, 2000 DECEMBER 31, 1999
---------------------- ----------------------
HISTORICAL PRO FORMA HISTORICAL PRO FORMA
---------- --------- ---------- ---------
<S> <C> <C> <C> <C>
Cash Dividends Declared per share....................... $ -- $ -- $ -- $ --
Income Before Extraordinary Gain and Cumulative Effect
of Accounting Change per share:
Basic................................................. 2.61 2.53 4.50 4.16
Diluted............................................... 2.53 2.46 4.38 4.05
</TABLE>
<TABLE>
<CAPTION>
JUNE 30, 2000
----------------------
HISTORICAL PRO FORMA
---------- ---------
<S> <C> <C>
Book Value per share........................................ $21.58 $24.69
</TABLE>
SELECTED PRO FORMA FINANCIAL DATA OF WELLPOINT
<TABLE>
<CAPTION>
SIX MONTHS ENDED YEAR ENDED
JUNE 30, 2000 DECEMBER 31, 1999
--------------------- ---------------------
(IN THOUSANDS, EXCEPT (IN THOUSANDS,
PER SHARE DATA) EXCEPT
PER SHARE DATA)
<S> <C> <C>
Total Revenue............................................. $5,390,913 $9,122,417
---------- ----------
Income Before Extraordinary Gain and Cumulative Effect of
Accounting Change....................................... 165,839 287,294
---------- ----------
Income Before Extraordinary Gain and Cumulative Effect of
Accounting Change per share:
Basic................................................... 2.53 4.16
Diluted................................................. 2.46 4.05
Cash Dividends Declared per share......................... -- --
---------- ----------
</TABLE>
<TABLE>
<CAPTION>
JUNE 30, 2000
-------------
<S> <C>
Total assets................................................ $5,923,026
Long-term debt.............................................. 624,362
</TABLE>
FEDERAL INCOME TAX CONSEQUENCES OF THE MERGER
WellPoint and Cerulean have received, and as a condition to the completion
of the merger must receive, opinions from their counsel to the effect that the
merger will qualify as a "reorganization" within the meaning of Section 368(a)
of the Internal Revenue Code. We expect that, for federal income tax purposes, a
holder of shares of Class A stock or Class B stock who exchanges those shares
solely for shares of WellPoint common stock generally will not recognize any
gain or loss on that exchange. We also expect, for federal income tax purposes,
that any gain realized by a holder of shares of Class A stock upon the exchange
of those shares for a combination of shares of WellPoint common stock and cash
generally will be recognized to the extent of the lesser of the amount of gain
realized and the amount of cash received, and that no loss will be recognized by
that holder on that exchange. A holder of shares of Class A stock who receives
only cash in the merger generally will recognize any gain or loss realized. For
further details, please read the description of the tax consequences of the
merger on page 53.
TAX MATTERS ARE VERY COMPLICATED AND THE TAX CONSEQUENCES OF THE MERGER TO
EACH CERULEAN SHAREHOLDER WILL DEPEND ON THE SHAREHOLDER'S PARTICULAR FACTS AND
CIRCUMSTANCES. WE URGE YOU TO CONSULT YOUR TAX ADVISOR TO FULLY UNDERSTAND THE
TAX CONSEQUENCES OF THE MERGER TO YOU.
11
<PAGE> 22
RISK FACTORS
In addition to the other information included or incorporated by reference
in this proxy statement/prospectus, you should carefully consider the matters
described below in evaluating an investment in the WellPoint common stock
offered by this proxy statement/prospectus.
RISKS RELATING TO THE MERGER
WellPoint may experience difficulties in integrating Cerulean's business with
the existing business of WellPoint, which could cause WellPoint to lose many
of the anticipated potential benefits of the merger.
Cerulean and WellPoint have entered into the merger agreement because they
believe that the merger will be beneficial to the combined companies. Achieving
the anticipated benefits of the merger will depend in part upon whether the two
companies integrate their businesses in an efficient and effective manner. In
particular, the successful combination of Cerulean and WellPoint will depend on
the integration of their respective information systems. We may not accomplish
this integration process smoothly or successfully. The necessity of coordinating
geographically separated organizations and addressing possible differences in
corporate cultures and management philosophies may increase the difficulties of
integration. The integration of certain operations following the merger will
require the dedication of significant management resources, which may
temporarily distract management's attention from the day-to-day business of the
combined companies. Employee uncertainty and lack of focus during the
integration process may also disrupt the business of the combined companies. If
management is unable to successfully integrate the operations of the two
companies, then this could have a material adverse effect on the business,
results of operations and financial condition of WellPoint.
Other companies in the health care industry have encountered unforeseen
difficulties in integrating acquisitions. Unforeseen difficulties or expenses
may arise in connection with WellPoint's integration of Cerulean's operations
following the merger. Such difficulties or expenses could have a material
adverse effect on WellPoint's revenues and results of operations.
We must obtain several governmental consents to complete the merger, which, if
delayed or not granted, may jeopardize or postpone completion of the merger,
resulting in additional expenditures of money and resources, which may
jeopardize or delay completion of the merger or reduce the anticipated
benefits of the merger.
WellPoint and Cerulean must obtain certain approvals, including consents,
expiration of waiting periods and similar processes, from federal and state
agencies prior to completion of the merger. If we do not receive these
approvals, then neither party is obligated to complete the merger. The agencies
from which WellPoint and Cerulean will seek these approvals have broad
discretion in administering the governing regulations. As a condition to
approval of the merger, agencies may impose requirements or limitations or costs
on the way the combined companies conduct business. These requirements or
limitations or costs could jeopardize or delay completion of the merger. If
WellPoint or Cerulean agree to any material requirements or limitations or costs
in order to obtain any approvals required to complete the merger, these
requirements or limitations or additional costs could adversely affect
WellPoint's ability to integrate the operations of Cerulean with those of
WellPoint or reduce the anticipated benefits of the merger. This could result in
a material adverse effect on WellPoint's revenues and results of operations
following the merger.
After WellPoint and Cerulean made the required filings under the
Hart-Scott-Rodino Act, the Federal Trade Commission granted an early termination
of the waiting period, effective September 4, 1998, which was effective for 12
months. WellPoint and Cerulean subsequently made additional filings to extend
this period through August 16, 2000. On July 24, 2000, WellPoint and Cerulean
made subsequent filings to further extend this period. On August 4, 2000, the
Justice Department granted early termination of the waiting period. The early
termination of the Hart-Scott-Rodino Act waiting period does not preclude the
U.S. Justice Department, the Federal Trade Commission or other parties from
seeking
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actions challenging the merger based on federal antitrust statutes. While
WellPoint and Cerulean do not anticipate any such challenge, we cannot guarantee
that none of these parties will challenge the merger.
WellPoint may incur additional indebtedness to pay the merger consideration to
the Cerulean shareholders, which could affect our ability to finance
operations or pursue desirable business opportunities.
WellPoint currently intends to borrow under its existing revolving credit
facility to finance some or all of the cash payments to be made to Cerulean
shareholders. In addition, WellPoint has received authorization to and has
repurchased shares of WellPoint common stock to offset shares that WellPoint
expects to issue in connection with the merger. WellPoint has made significant
purchases of treasury stock for this purpose, using excess cash as well as
additional borrowings. Upon completion of the merger, WellPoint could incur
significant additional indebtedness to fund not only the cash portion of the
transaction, but to fund any further repurchases of WellPoint common stock. If
WellPoint incurs this additional indebtedness, then WellPoint may need to apply
a significant amount of its cash flow to the payment of interest. WellPoint's
operations may not generate sufficient cash flow to cover required interest and
principal payments.
Any additional indebtedness may adversely affect WellPoint's ability to
finance operations and could limit its ability to pursue desirable business
opportunities. In addition, any additional indebtedness may affect WellPoint's
ability to maintain an investment grade rating for its indebtedness, which could
have a material adverse effect on WellPoint's operations.
Cerulean shareholders who receive shares of WellPoint common stock will have
different rights as stockholders of a Delaware company than they previously
had under Georgia law, which could materially affect the value of their
investment.
If we complete the merger, shareholders of Cerulean, a Georgia corporation,
may become shareholders of WellPoint, a Delaware corporation. There are
significant differences between the corporate laws of Georgia and the corporate
laws of Delaware and between the charter and other corporate governance
documents of Cerulean and WellPoint. We describe some of these differences below
at page 107. These differences may materially affect the rights of Cerulean
shareholders.
The merger could be taxable to Cerulean or to holders of Cerulean common
stock.
The merger is conditioned on Cerulean's and WellPoint's receipt of legal
opinions to the effect that the merger will qualify as a "reorganization" within
the meaning of Section 368(a) of the Internal Revenue Code. The merger agreement
also provides that the party which is entitled to the benefits of such condition
may waive in writing the requirement that it receive the opinions. If either
WellPoint or Cerulean were to waive this condition to the merger and if the
merger were not treated as a reorganization within the meaning of Section 368(a)
of the Internal Revenue Code, then this waiver could constitute a material
change to this proxy statement/prospectus and could necessitate an amendment to
this proxy statement/prospectus and a resolicitation of proxies. Neither
WellPoint nor Cerulean intends to waive this condition. Even if WellPoint and
Cerulean do receive an opinion from each of their tax counsels that the merger
will qualify as a reorganization within the meaning of Section 368(a) of the
Internal Revenue Code, these opinions of counsel are not binding on the Internal
Revenue Service or the courts. If the Internal Revenue Service or the courts
determine that the merger should not be treated as a reorganization within the
meaning of Section 368(a) of the Internal Revenue Code, then the merger would be
treated as a taxable sale of assets by Cerulean, followed by a taxable
liquidation of Cerulean. A taxable sale by Cerulean would give rise to a
material federal income tax liability that could have a material adverse effect
on the value of WellPoint following the merger. In addition, Cerulean
shareholders generally would recognize gain or loss equal to the difference
between the cash received, if any, plus the value of the WellPoint common stock
received in the deemed liquidation and the shareholder's basis in its stock
surrendered in the liquidation.
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RISKS RELATING TO THE BUSINESS OF WELLPOINT, CERULEAN AND THE COMBINED COMPANIES
The following are risks which we believe currently affect the business,
financial condition or results of operations of WellPoint and Cerulean,
individually, and will affect the combined companies following the completion of
the merger.
Our business is subject to extensive regulation, including risk-based capital
requirements, which could restrict our ability to generate profits.
WellPoint's and Cerulean's operations are subject to substantial regulation
by federal, state and local agencies. Regulation may either relate to business
operations or to the financial condition of regulated subsidiaries. With regard
to business operations, regulation typically relates to:
- prescribed benefits;
- relationships with physicians and hospitals;
- marketing and advertising;
- quality assurance; and
- member grievance resolution.
With regard to the financial condition of regulated subsidiaries,
regulation typically governs the amount of capital required to be retained in
regulated subsidiaries and the ability of these subsidiaries to pay dividends.
Future regulatory action by any agencies may have a material adverse effect on
the profitability or marketability of WellPoint's, Cerulean's or the combined
companies' health plans, its ability to access capital from the operations of
regulated subsidiaries or on its financial condition or results of operations.
The California Department of Managed Health Care regulates WellPoint's
principal California operating subsidiary, Blue Cross of California. Among other
requirements, the California Department of Managed Health Care requires Blue
Cross of California to satisfy certain minimum capital standards. The Georgia
Department of Insurance regulates Cerulean's principal operating subsidiary,
Blue Cross and Blue Shield of Georgia, and the other insurance subsidiaries of
Cerulean. Among other requirements, the Georgia Department of Insurance requires
Cerulean's regulated insurance subsidiaries to satisfy certain minimum capital
standards. In addition to these capital requirements, the Blue Cross and Blue
Shield Association requires WellPoint and certain of its subsidiaries and
Cerulean and certain of its subsidiaries to maintain certain levels of capital
to satisfy Blue Cross and Blue Shield Association requirements. During 1998, the
National Association of Insurance Commissioners, the trade association
representing state insurance regulators, adopted a risk-based capital formula
for licensed managed care organizations. The National Association of Insurance
Commissioners also approved an accompanying Risk-Based Capital for Health
Organizations Model Act, which will serve as a model for states considering
enacting new legislation. In the 2000 legislative session in Georgia, the
Georgia legislature adopted this model act. The Blue Cross and Blue Shield
Association also adopted the risk-based capital formula as of December 31, 1999.
The new act in Georgia, the formula that the Blue Cross and Blue Shield
Association adopted, and any new minimum capital requirements adopted in the
future may increase the capital requirements of WellPoint, Cerulean or the
combined companies.
Newly adopted legislation may increase our costs of doing business or force us
to raise the price of our services.
The health care benefits industry has received significant legislative and
media scrutiny in recent years. In 1996, the President signed the Health
Insurance Portability and Accountability Act into law as well as maternity
length of stay and mental health parity measures. Various states have passed
similar legislation, some providing for more extensive benefits than those
required by HIPAA. The United States Congress and state legislatures are
considering a number of proposals relating to health care reform, and
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we expect that some of these proposals will be enacted. In the 1999 legislative
session in Georgia, four new statutes relating to health care were adopted.
These new statutes provide for:
- the creation of a consumer insurance advocate who is authorized to
participate in certain health care rate filings and other proceedings
before the Georgia Insurance Commissioner;
- allowing enrollees of managed care plans to sue the plans, under certain
circumstances, for damages, but not punitive damages, for denial of care;
- allowing patient choice of providers, as long as the providers accept
health plan payment terms; and
- the creation of a new agency which, among other powers, will become the
lead agency in coordinating and purchasing health care benefit plans for
state and other public employees, retirees and their dependents.
In September 1999, the California legislature also adopted a number of
health care reform measures. These new laws provide for, among other things:
- a duty on managed care entities to exercise ordinary care in arranging
for the provision of medically necessary health care services. Managed
care companies are liable for all harm legally caused by their failure to
exercise ordinary care;
- the ability of health plan members to seek independent medical review
whenever a managed care entity or a provider with whom it contracts
denies, modifies or delays the provision of health care services based
upon the finding that the services are not medically necessary;
- mental health parity; and
- the creation of a new Department of Managed Health Care to supervise the
health care operations previously supervised by the Department of
Corporations.
WellPoint and Cerulean expect that recently enacted or future legislation
will increase their costs of operations and may increase their medical loss
ratios or decrease the affordability of their products. As a result, compliance
with legislation may have a material adverse effect on claims expense, financial
condition or results of operations at WellPoint, Cerulean or the combined
companies.
WellPoint and Cerulean participate in government health care programs, which
could expose the combined company to greater liability.
WellPoint provides health coverage for Medi-Cal, the California Medicaid
program, for eligible individuals under contracts with the California Department
of Health Services or a delegated local agency in various California counties.
WellPoint also provides administrative services for the federal Health Care
Financing Administration in various capacities, including serving as a fiscal
intermediary for the Medicare Part A program and providing its Blue Cross Senior
Secure plan. WellPoint has announced that it will no longer serve as a fiscal
intermediary as of December 1, 2000. Cerulean processes and pays claims as
fiscal intermediary for the Medicare Part A program and as administrative agent
for the State of Georgia Employee Health Benefit Plan and the Blue Cross and
Blue Shield Association's Out-of-Area Program. Serving as a government
contractor in these circumstances may increase the risk of heightened scrutiny
of the combined companies by government agencies, particularly in light of
governmental concern with increasing health care costs. From time to time,
WellPoint and its subsidiaries receive requests for information or are notified
that government agencies are conducting reviews, investigations or other
proceedings with respect to their activities. This heightened scrutiny may have
a material adverse effect on WellPoint, Cerulean or the combined company, either
through negative publicity about WellPoint, Cerulean or the combined companies
or through an adverse impact on WellPoint's, Cerulean's or the combined
companies' results of operations.
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We are subject to class action and other lawsuits under evolving theories of
recovery, which could cause us to pay out large amounts of money in defense
costs, damages, or settlements.
In June 2000, the California Medical Association filed a lawsuit in U.S.
district court in San Francisco against Blue Cross of California. This lawsuit
alleges that Blue Cross of California violated the federal Racketeering
Influenced and Corrupt Organizations Act through various misrepresentations to
and inappropriate actions against health care providers. In late 1999, a number
of health plan members brought class-action lawsuits against WellPoint's
competitors, alleging violations of the Racketeering Influenced and Corrupt
Organizations Act through misrepresentations regarding their health plans and
breaches of fiduciary obligations to members. Neither WellPoint nor Cerulean has
been made a party to any of these member lawsuits.
In addition, WellPoint and Cerulean exclude certain health care services
from coverage under their health maintenance organization, preferred provider
organization and other plans. In the ordinary course of business, WellPoint and
Cerulean are subject to the claims of their members from decisions to restrict
reimbursement for certain treatments. The loss of even one such claim, if it
were to result in a significant punitive damage award, could have a material
adverse effect on WellPoint's, Cerulean's or the combined companies' financial
condition or results of operations. The risk of potential liability under
punitive damage theories may significantly increase the difficulty of obtaining
reasonable settlements of coverage claims. New laws adopted in 1999 in
California and Georgia permit plan enrollees to sue plans, under certain
circumstances, for denial of treatment. In addition, plaintiffs in legal actions
are constantly bringing other new types of purported legal claims. We do not
know what the financial and operational impact that these evolving theories of
recovery may have on the managed care industry generally, or WellPoint, Cerulean
or the combined companies in particular.
Rising health care costs or pressure to maintain premiums at current levels
could adversely affect WellPoint's and Cerulean's future results.
WellPoint's and Cerulean's future results will depend in large part on
accurately predicting health care costs and on their ability to control future
health benefit costs through underwriting criteria, utilization management,
product design and negotiation of favorable provider and hospital contracts. A
number of factors affect health care costs, including:
- changes in utilization rates;
- demographic characteristics;
- health care practices;
- inflation;
- new technologies;
- clusters of high-cost cases;
- continued consolidation of physician, hospital and other provider groups;
and
- the regulatory environment.
These factors may adversely affect WellPoint's and Cerulean's ability to predict
and control health care costs as well as their financial condition or results of
operations. Periodic renegotiation of hospital contracts coupled with continued
consolidation of physician, hospital and other provider groups may result in
increased health care costs or limit WellPoint's and Cerulean's ability to
negotiate favorable rates. Recently, large physician practice management
companies have experienced extreme financial difficulties, including bankruptcy,
which may subject WellPoint or Cerulean to increased credit risk related to
provider groups. The aging of the population and other demographic
characteristics and advances in medical technology continue to contribute to
rising health care costs. Government-imposed limitations on Medicare and
Medicaid reimbursement have also caused the private sector to bear a greater
share of increasing health care costs.
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In addition to the challenge of controlling health benefit costs, WellPoint
and Cerulean face competitive pressure to contain premium prices. While health
plans compete on the basis of many factors, including service and the quality
and depth of provider networks, WellPoint and Cerulean expect that price will
continue to be a significant basis of competition. Fiscal concerns regarding the
continued viability of programs such as Medicare and Medicaid may cause
decreasing reimbursement rates for government-sponsored programs. Financial
condition or results of operations would be adversely affected by significant
premium decreases by any major competitors or by any limitation on either
WellPoint's or Cerulean's ability to increase or maintain premium levels.
Historically, competitive price pressures in the group health insurance
industry have resulted in pricing and profitability cycles, the length and
severity of which have varied. The primary causes of this cyclical pattern are:
- price competition among health plans;
- the entry and exit of health care insurance companies from the
marketplace;
- the rate of change in provider pricing and consumer utilization of health
care services;
- "cost shifting" by facilities and physicians to private payors in
response to certain government program constraints, and
- actual or anticipated legislative changes.
From time to time, WellPoint and Cerulean have increased premiums for
certain of their products in response to rising costs. WellPoint and Cerulean
continuously evaluate the need for premium increases, plan design changes and
other appropriate actions. However, any actions that WellPoint or Cerulean takes
may not be successful in addressing any concerns that may arise with respect to
the performance of certain businesses.
We face significant competition in the provision of health insurance, which
could reduce our market share and cause us to generate less profits.
Historically, traditional indemnity insurance has been the most common form
of health insurance in the United States. In recent years, the developing trend
has been away from traditional indemnity products and toward managed care
products such as preferred provider organization, health maintenance
organization and point-of-service products. WellPoint and Cerulean believe that
this trend will continue. A continuation of this trend would result in reduced
sales and profitability of indemnity products.
WellPoint and Cerulean operate in a highly competitive environment that is
subject to significant changes from a variety of factors, including:
- business consolidations;
- new strategic alliances;
- legislative reform; and
- aggressive marketing practices by other managed health care
organizations.
A significant portion of WellPoint's operations are in California, where
the managed health care industry is especially competitive. In addition, the
managed health care industry in California has undergone significant changes in
recent years, including substantial consolidation. Outside of California,
WellPoint faces competition from other regional and national companies, many of
which have significantly greater financial and other resources and market share
than WellPoint. If competition increased in any of its significant markets, then
WellPoint's financial condition or results of operations could be materially
adversely affected.
A substantial portion of WellPoint's California business is in the
individual and small employer group market, where the medical loss ratio is
significantly lower than in the larger employer group market. The
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individual and small employer group business accounted for approximately 37% of
WellPoint's total premium revenue during 1999. WellPoint has experienced
increasing competition in the individual and small employer group market over
the past several years, which could adversely affect WellPoint's medical loss
ratio and future financial condition or results of operations.
Cerulean faces competition in Georgia from other regional and national
companies, many of which have significantly greater financial and other
resources than Cerulean. If competition increased in any of its significant
markets, then Cerulean's financial condition or results of operation could be
materially adversely affected.
Sales of Cerulean's health care benefit products to individuals, which
generally experience lower medical loss ratios than other products, comprised
approximately 17% of the premium and management services revenue of Cerulean in
1999. Cerulean is subject to intense competition in this market, especially in
the senior segment of the market. If Cerulean experienced a reduction in the
relative percentage of its business represented by products sold to individuals,
then Cerulean's overall operating results could be adversely affected.
Our businesses are dependent on the services of non-exclusive independent
agents and brokers who may refer their business to our competitors.
Both WellPoint and Cerulean depend on the services of independent agents
and brokers in the marketing of health care plans, particularly to individual
and small employer group members. Independent agents and brokers are typically
not exclusively dedicated to one company and may frequently market health care
plans of competitors. In addition, WellPoint and Cerulean face intense
competition for the services and allegiance of independent agents and brokers.
Our business will be adversely affected if we cannot attract and retain
skilled personnel.
WellPoint and Cerulean depend on retaining existing employees and
attracting and retaining additional qualified employees to meet their future
needs. Both companies face intense competition for qualified employees,
particularly during the present economic environment of low unemployment. We
cannot guarantee that we will be able to attract and retain these employees or
that competition among potential employers will not result in increasing
salaries. If we are unable to retain existing employees or attract additional
employees, we may experience a material adverse effect on our results of
operations. Due to the importance of information systems to their operations,
both companies are especially dependent on attracting and retaining qualified
information technology personnel and other skilled professionals.
Our businesses are dependent on the use of the Blue Cross and Blue Shield
trademarks and names, and our license to use those trademarks and names are
subject to termination by the Blue Cross and Blue Shield Association.
Under licenses from the Blue Cross and Blue Shield Association, WellPoint
and certain of its subsidiaries have the exclusive right to use the Blue Cross
name and mark for the sale of WellPoint's health products in California.
Cerulean and certain of its subsidiaries have the exclusive right to use the
Blue Cross and Blue Shield names and marks for the sale of Cerulean's health
products in Georgia. Unless the Blue Cross and Blue Shield Association agrees to
a waiver, these licenses automatically terminate upon the occurrence of certain
events, subject to the right of Cerulean or WellPoint to prevent termination
within an applicable cure period.
RISKS RELATING PARTICULARLY TO THE BUSINESS OF WELLPOINT
WellPoint may not be able to successfully integrate previously acquired
businesses, which could divert money and resources from our core business.
One component of WellPoint's business strategy has been to diversify into
new geographic markets, particularly through strategic acquisitions. WellPoint
completed significant acquisitions in March 1996,
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March 1997 and March 2000. During the past four years, WellPoint has worked
extensively on the integration of these acquired businesses, including
consolidating existing operations sites and converting certain accounts to
WellPoint's information systems. WellPoint is continuing the consolidation of
these acquired operations into its operations, which will require considerable
expenditures and a significant amount of management time. The merger integration
process, particularly integrating the information systems designed to serve
these businesses, is complex. As a result, WellPoint may temporarily experience
increases in claims inventory, difficulties in determining member eligibility
and other service-related issues that may negatively affect WellPoint's
relationship with its customers and contribute to increased attrition of
customers. The success of these acquisitions will, among other things, also
require the integration of a significant number of employees into WellPoint's
existing operations and the completion of the integration of separate
information systems. WellPoint cannot guarantee the ultimate success of the
integration of these acquisitions into WellPoint's business.
WellPoint may lose members as it undertakes its strategy of converting
indemnity-based members to managed care plans.
The operations acquired by WellPoint in 1996 and 1997 have some
indemnity-based insurance operations, with a significant number of members
outside of California. Each of these operations experienced varying
profitability or losses in recent periods. WellPoint experienced material loss
of membership related to these businesses in 1998 and 1999, and expects to
continue to experience membership loss in 2000 as it pursues its strategy of
motivating traditional indemnity health insurance members to select managed care
products. WellPoint cannot guarantee that a sufficient number of these members
will accept managed care health plans or that WellPoint will be able to continue
existing relationships with provider networks currently serving those members or
develop satisfactory proprietary provider networks in these geographic areas.
The development of proprietary networks will require WellPoint to expend
considerable funds.
As WellPoint pursues its geographic expansion strategy, WellPoint's market
share in new markets will not be as significant as it is in California.
Additionally, its provider networks will not be as extensive as in California,
and WellPoint will not have the benefit of the Blue Cross mark in all locations.
Each of these factors is an important component of its success in California.
The absence of one or more of these elements may adversely affect the success of
WellPoint's geographic expansion strategy.
WellPoint may be subject to adverse tax consequences resulting from its May
1996 recapitalization.
On May 20, 1996, WellPoint completed a recapitalization with its majority
shareholder, Blue Cross of California. As part of the recapitalization, the
California HealthCare Foundation became the holder of approximately 80% of
WellPoint common stock. In connection with the recapitalization, Blue Cross of
California received a ruling from the Internal Revenue Service that, among other
things, the conversion of Blue Cross of California from a non-profit corporation
to a for-profit corporation qualified as a tax-free transaction and that Blue
Cross of California recognized no gain or loss for federal income tax purposes.
If the Internal Revenue Service subsequently revoked, modified or decided not to
honor the ruling due to a change in law or for any other reason, WellPoint, as
the successor to Blue Cross of California, could be subject to federal income
tax on the difference between the value of Blue Cross of California at the time
of the recapitalization and Blue Cross of California's tax basis in its assets
at the time of the recapitalization. WellPoint currently estimates that the
potential tax liability to WellPoint if Blue Cross of California's conversion is
treated as a taxable transaction is approximately $696 million, plus interest
and possibly penalties. Blue Cross of California and the California Healthcare
Foundation entered into an indemnification agreement that provides, with certain
exceptions, that the California Healthcare Foundation will indemnify WellPoint
against the net tax liability as a result of the Internal Revenue Services's
revocation or modification, in whole or in part, of its ruling, or an Internal
Revenue Service determination that Blue Cross of California's conversion is a
taxable transaction for federal income tax purposes. If a tax liability should
arise against which the California Healthcare Foundation has agreed to indemnify
WellPoint, the California Healthcare Foundation may not have sufficient assets
to pay the
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liability. WellPoint would then bear all or a portion of the liability, which
could have a material adverse effect on WellPoint's financial condition.
WellPoint may face risks from assumed reinsurance business related to its
acquisition of the group health insurance operations of John Hancock, which
could lead to material losses.
In 1997, WellPoint acquired the group benefit operations of John Hancock
Mutual Life Insurance Company, which provide group health insurance. Before
WellPoint acquired the group benefits operations, John Hancock entered into a
number of reinsurance arrangements with respect to personal accident insurance
and the occupational accident component of workers' compensation insurance, a
portion of which was originated through a pool managed by Unicover Managers,
Inc. Under these arrangements, John Hancock assumed risks as a reinsurer and
transferred some of these risks to other companies. These arrangements have
recently become the subject of disputes, including a number of legal proceedings
to which John Hancock is a party. WellPoint believes that it has a number of
defenses to avoid any ultimate liability with respect to these matters.
WellPoint also believes that it did not assume these liabilities from John
Hancock. However, if WellPoint were to bear any of these liabilities, WellPoint
could suffer losses that might have a material adverse effect on its financial
condition, results of operations or cash flows.
WellPoint's stock price is highly volatile, which could lead to sudden, severe
decreases in the value of your investment.
The trading price of WellPoint common stock fluctuates significantly. For
example, during 1999, WellPoint common stock ranged from a low sale price of
$48 1/4 per share to a high sale price of $97 per share. From time to time,
stock prices of companies in the health care industry experience periods of
increased volatility due to company-specific issues and general developments in
the industry and in the regulatory environment. In addition, companies in the
health care industry have recently experienced periods of increased volatility
in the price of their capital stock resulting from difficulties experienced in
integrating two companies' businesses following a consolidation, merger or other
acquisition and from the filing of highly publicized class-action lawsuits.
RISKS RELATING PARTICULARLY TO THE BUSINESS OF CERULEAN
After the merger, Cerulean's operating results will have a significant
impact on the operating results of WellPoint. Cerulean's contribution to the
combined results will depend upon the extent to which Cerulean achieves its own
strategic plan. The following risk factors are ones that Cerulean believes may
inhibit its ability to achieve its plan. In addition, these risks may have a
material adverse effect on the business, financial condition or results of
operations of Cerulean if we do not complete the merger.
Cerulean's results of operations may be adversely affected if the community
health partnership networks do not perform as expected.
Community health partnership network joint ventures have recently been
Cerulean's preferred method of delivering services to support health maintenance
organization and point-of-service medical products in certain geographic areas.
Atlanta Healthcare Partners, Inc. was the first community health partnership
network to become operational. At June 30, 2000, an additional community health
partnership network, jointly owned by Cerulean and health care providers, was
operational in Augusta, Georgia. Cerulean also offers health maintenance
organization and point-of-service products through its subsidiary, HMO Georgia,
Inc., under contracts with physicians and hospitals in Athens, Macon, Savannah,
Columbus and Rome, Georgia. Due to the limited operating history of community
health partnership networks and the fact that the community health partnership
network model is largely untested, Cerulean cannot guarantee the future
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viability or profitability of community health partnership networks. Among the
potential risks of the community health partnership network strategy are the
ability of:
- Cerulean to provide adequate administrative support to the community
health partnership networks;
- the community health partnership network owners to operate favorably when
receiving payments on a basis other than for fee-for-service;
- the community health partnership networks to arrange for the delivery of
cost-effective medical services; and
- the community health partnership networks to respond to adverse
regulation or legislation.
Community health partnership network relationships that were previously
established in Athens, Columbus, Savannah, Rome and Macon, Georgia have
terminated. Due to operational results, Cerulean has made additional capital
contributions to the community health partnership networks in Augusta, Rome,
Macon and Savannah. Continuing execution of the community health partnership
network strategy will require initial capital contributions to be made by
Cerulean to any new community health partnership network upon its establishment
and may require additional on-going capital contributions. Accordingly, Cerulean
may in the future find it necessary to incur additional indebtedness or issue
additional equity securities in order to finance its community health
partnership network strategy.
Cerulean's profitability will suffer if it is not able to successfully renew
subscriber and provider agreements.
Cerulean's profitability depends upon its ability to obtain and maintain
contracts with employer groups and individual consumers. Cerulean's agreements
with employer groups are generally renewable annually. Cerulean's profitability
also depends, in large part, on its ability to enter into favorable agreements
with hospitals, physicians and other health care providers to provide services
under Cerulean's managed care products. Cerulean's contracts with physicians and
hospitals generally are renewable annually, other than contracts between the
community health partnership networks and their owner-providers, which generally
are longer term, but certain contracts are terminable on 60 days to 12 months
prior written notice by either party.
Cerulean has contracts with employer groups and government agencies that
account for a significant portion of Cerulean's total business. One group, the
Federal Employees Program, accounted for 22% of Cerulean's total premium and
management services revenues in 1999. Cerulean's next two largest customers
accounted for less than 9% of premium and management services revenues in 1999.
Cerulean also serves as fiscal intermediary for the Medicare program. Cerulean
processed a total of $4.2 billion in claims for the Medicare program, state
agencies and the Blue Cross and Blue Shield Association Out-of-Area program in
1999. Cerulean receives fees for performing these services.
The State of Georgia renewed Cerulean's contract with it for a one-year
term with six annual renewal options in July 1994. The State of Georgia program
accounts for over 25% of Cerulean's membership and plays an integral part in the
development of Cerulean's long-term provider network strategies. The State of
Georgia has renewed the contract through June 30, 2001, though the State of
Georgia intends to seek competitive bids with respect to certain programs
covered by the contract.
In the 1999 legislative session, the Georgia legislature created a new
agency, the Department of Community Health, which, among other things, has
become the lead agency in coordinating and purchasing health care benefit plans
for state and public employees, retirees and their dependents. The Department of
Community Health also has management authority over state merit and other health
care benefits programs that Blue Cross and Blue Shield of Georgia administers on
behalf of the state, and will be the agency with whom Blue Cross and Blue Shield
of Georgia will negotiate the terms of its contract with the State of Georgia.
The loss of any of these contracts with major employer groups or government
agencies could have a material adverse effect on Cerulean's business, financial
condition and results of operations. Cerulean
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cannot guarantee that subscribers or providers will renew their contracts or
enter into new contracts with Cerulean. In the case of provider contracts,
providers may not seek terms that are less favorable to Cerulean in connection
with any renewal.
The health care industry is changing rapidly and these changes may adversely
affect Cerulean's sales and profitability.
Historically, traditional indemnity insurance has been the most common form
of health insurance offered in the United States. In recent years, the
developing trend has been away from traditional indemnity products and toward
managed care products such as preferred provider organizations, health
maintenance organizations and point-of-service products. Cerulean believes that
this trend will continue over the next several years. If this trend continues,
then sales of indemnity products may decline and this block of business may
become less profitable. At the end of 1996, over 86% of total premium revenue
was derived from its traditional indemnity and preferred provider organization
products, declining to 55% in 1999, with health maintenance organization and
point-of-service premiums growing from 13% prior to 1996 to 44% in 1999. Health
maintenance organization and point-of-service products have become increasingly
more significant to Cerulean's operating results. Cerulean may not be able to
sustain this growth or continue to increase its premium revenues and
profitability from health maintenance organization and point-of-service
products.
FORWARD-LOOKING STATEMENTS
WellPoint and Cerulean have each made "forward-looking statements" within
the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the
Securities Exchange Act of 1934 in this document and in certain documents that
are incorporated by reference in this proxy statement/prospectus. These
statements are subject to risks and uncertainties, many of which are set forth
in detail in the Risk Factors section of this proxy statement/prospectus.
WellPoint and Cerulean have based these statements on the current beliefs and
assumptions of each company's management and on information currently available
to management. Forward-looking statements include the information in this proxy
statement/prospectus concerning possible or assumed future results of operations
of WellPoint and Cerulean, including information regarding cost savings and
operational efficiencies expected to be realized from the merger. You can
identify these statements by our use of the words "believes," "expects,"
"anticipates," "intends," "plans," "estimates" or similar expressions.
Forward-looking statements are not guarantees of performance. By their
nature, they involve risks, uncertainties and assumptions. The future results
and shareholder values of WellPoint and Cerulean may differ materially from
those expressed in these forward-looking statements. Many of the factors that
will determine these results and values are beyond WellPoint's and Cerulean's
ability to control or predict. WellPoint and Cerulean caution shareholders not
to put undue reliance on any forward-looking statements, which speak only as of
the date they were made. For those statements, WellPoint and Cerulean claim the
protection of the safe harbor for forward-looking statements contained in the
Private Securities Litigation Reform Act of 1995.
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INFORMATION REGARDING THE CERULEAN MEETING
DATE, TIME AND PLACE OF THE CERULEAN MEETING
, 2000
, LOCAL TIME
ATLANTA, GEORGIA
PURPOSE OF THE MEETING
The purpose of the meeting is:
- to consider and vote upon a proposal to approve and authorize the merger
agreement and completion of the transactions contemplated by the merger
agreement;
- to elect two Class A designated directors; and
- to transact any other business that may properly come before the meeting
or any adjournments or postponements of the meeting.
The board of directors of Cerulean knows of no business that will be presented
for consideration at the meeting other than the proposals described in this
proxy statement/prospectus.
RECORD DATE
Pursuant to its bylaws, Cerulean has fixed the close of business on
, 2000, as the record date for determining the holders of Class A
stock entitled to receive notice of and to vote at the meeting. Only holders of
record of Class A stock as of the record date are entitled to notice of and to
vote at the meeting. As of the record date, there were 409,602 shares of Class A
stock issued and outstanding and held by 70,293 record holders. Holders of Class
A stock are entitled to one vote on each matter voted on at the meeting for each
share of Class A stock held of record at the close of business on the record
date.
QUORUM
In order to have a quorum, the holders of record of a majority of the
outstanding shares of the Class A stock entitled to vote at the meeting must be
represented in person or by proxy at the special meeting. Cerulean will count
abstentions as shares present for purposes of determining the presence of a
quorum. Pursuant to the Cerulean bylaws, if there is no quorum at the meeting,
the Chairman of the board of directors of Cerulean or the President of Cerulean
may adjourn the meeting to solicit additional votes. Once a share of Class A
stock or Class B stock is represented at the meeting, either in person or by
proxy, other than solely to object to holding the meeting or transacting
business at the meeting, it is deemed present for the purpose of constituting a
quorum for any adjournment of the meeting unless a new record date is set for
the adjourned meeting. Consequently, shares of Class A stock or Class B stock
that are voted against the merger agreement and completion of the transactions
contemplated in the agreement will be counted for the purpose of constituting a
quorum at an adjournment of the special meeting or of the meeting of holders of
Class B stock.
Because the election of Class A designated directors requires the
affirmative vote of a plurality of shares of Class A stock voting at the
meeting, abstentions will have no effect, other than to establish a quorum, on
the election of Class A designated directors. However, because the approval of
the merger requires the approval of a majority of the outstanding shares of the
Class A stock entitled to vote at the meeting, abstentions will have the effect
of a vote against the merger agreement. No directors or officers hold any shares
of Class A stock other than John W. Robinson, Jr., who holds five shares.
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RECOMMENDATIONS OF THE BOARD OF DIRECTORS
The board of directors of Cerulean has approved the merger and believes the
merger is fair to and in the best interests of Cerulean and its shareholders.
Accordingly, the board of directors of Cerulean recommends that shareholders of
Cerulean vote "for" approval of the merger proposal.
VOTE REQUIRED
Nominees for Class A designated directors require the affirmative vote of a
plurality of shares of Class A stock voting at the meeting.
Approval of the merger requires the affirmative vote of a majority of the
outstanding shares of Class A stock entitled to vote at the meeting. The merger
proposal does not require the approval of the shareholders of WellPoint.
In addition to the approval of the holders of the Class A stock, approval
of the merger proposal requires the affirmative vote of the holders of a
majority of the outstanding shares of Class B stock. Georgia Strategic
Healthcare owns 80.16% of the outstanding Class B stock and has indicated its
intention to vote all shares of Class B stock owned by it in favor of the
merger. Accordingly, approval by the holders of Class B stock of the merger is
reasonably assured.
SOLICITATION AND REVOCABILITY OF PROXIES
Shares of Class A stock and Class B stock represented by properly executed
proxies, if such proxies are received in time and are not revoked, will be voted
at the appropriate meeting, in accordance with the instructions indicated on the
proxies. ANY HOLDER OF CLASS A STOCK OR CLASS B STOCK WHO RETURNS A SIGNED PROXY
BUT FAILS TO PROVIDE INSTRUCTIONS AS TO THE MANNER IN WHICH THE HOLDER'S SHARES
ARE TO BE VOTED WILL BE DEEMED TO HAVE VOTED "FOR" APPROVAL OF THE PROPOSALS
LISTED ON THE PROXY CARD. If any other matters properly come before the Class A
meeting or Class B meeting, the persons named as proxies will vote upon such
matters according to their judgment.
Shareholders may revoke their proxies at any time before the vote at the
meeting by:
- giving written notice to the secretary of Cerulean;
- delivering a later dated proxy card; or
- voting in person at the meeting.
Shareholders should address all written notices of revocation and other
communications with respect to revocations of proxies to: Cerulean Companies,
Inc., 3350 Peachtree Road, N.E., Atlanta, Georgia 30326, Attention: Hugh J.
Stedman, Corporate Secretary. If you attend the meeting, your proxy will not
automatically be revoked. Holders of Class A stock who revoke their proxies will
also be revoking any cash election made on the proxy and must make a new
election, if they desire, on any newly executed proxy.
HOLDERS OF CLASS A STOCK AND CLASS B STOCK ARE REQUESTED TO COMPLETE, DATE
AND SIGN THE ACCOMPANYING PROXY AND RETURN IT PROMPTLY TO CERULEAN IN THE
ACCOMPANYING POSTAGE-PAID ENVELOPE.
Cerulean will bear the cost of soliciting proxies for the meeting, although
WellPoint and Cerulean have agreed to share the cost of preparing and mailing
this proxy statement/prospectus. Cerulean will initially solicit proxies by
mail, but directors, officers and selected employees or agents of Cerulean may
solicit proxies from shareholders personally or by telephone, telecopy or other
forms of communication. Such directors, officers and employees will not receive
any additional compensation for such solicitation. Cerulean also will request
nominees, fiduciaries and other custodians to forward soliciting materials to
beneficial owners, and Cerulean will reimburse such persons for their reasonable
expenses incurred in doing so. In addition, Cerulean may use the services of
Georgeson & Company Inc. to solicit proxies from Cerulean shareholders
personally or by telephone, telecopy or other forms of communication at a cost
of approximately $350,000, plus the reimbursement of reasonable out-of-pocket
costs and expenses.
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REGULATORY AND OTHER APPROVALS
Cerulean and WellPoint may not complete the merger until the Georgia
Insurance Commissioner approves it. The approval procedure requires WellPoint to
file a statement regarding change of control with respect to Blue Cross and Blue
Shield of Georgia, HMO Georgia and Greater Georgia Life Insurance Company, Inc.,
called a "Form A." The Georgia Insurance Commissioner must also hold a hearing
on the Form A and issue an order permitting the merger. WellPoint filed the Form
A with the Georgia Insurance Commissioner on November 4, 1998, and the Georgia
Insurance Commissioner has tentatively scheduled the public hearing for
, 2000. However, a public hearing on those dates
is contingent upon the completion of several other matters, most notably an
affirmative vote of the Cerulean shareholders at the meeting and the receipt by
the Georgia Insurance Commissioner of an opinion from an independent financial
advisor that the merger is fair and reasonable to Cerulean's shareholders. The
hearing could also be delayed by other unexpected circumstances, including
further developments in the Richmond County litigation.
We have included with this proxy statement/prospectus a notice of this
hearing, which together with this proxy statement/prospectus satisfies the
notice requirements of the Georgia Insurance Code.
Additionally, Cerulean must make several state regulatory filings due to
the change in control of Blue Cross and Blue Shield of Georgia's subsidiary,
Greater Georgia Life Insurance Company, that will occur upon completion of the
merger. In addition, the Health Care Financing Administration must approve the
transfer of control of the Blue Cross and Blue Shield of Georgia programs that
will occur because of the merger. Neither WellPoint nor Cerulean is aware of any
approval of any other state or federal regulatory body, other than the SEC and
state authorities which regulate the state securities laws, necessary for the
merger to be consummated and the merger consideration to be delivered.
In addition, the Blue Cross and Blue Shield Association must approve the
change in control of Cerulean prior to completion of the merger. Cerulean has
obtained this approval.
On July 24, 2000, Cerulean and WellPoint each filed a Pre-Merger
Notification and Report Form pursuant to the Hart-Scott-Rodino Act, with the
Justice Department and the Federal Trade Commission. Under the Hart-Scott-Rodino
Act, WellPoint and Cerulean cannot complete the merger until at least 30 days
after such filing unless either the Justice Department or the Federal Trade
Commission grant earlier termination of that waiting period. The Federal Trade
Commission granted an early termination of the waiting period, effective August
4, 2000. Cerulean and WellPoint do not have to take any further action under the
Hart-Scott-Rodino Act as long as we complete the merger before August 4, 2001.
The early termination of the Hart-Scott-Rodino Act waiting period does not
prevent the Justice Department, the Federal Trade Commission or other parties
from seeking actions challenging the merger based on federal antitrust statutes.
WellPoint and Cerulean do not anticipate any such challenge.
METHOD OF ELECTING WELLPOINT COMMON STOCK OR CASH; RECEIPT OF WELLPOINT COMMON
STOCK AND/OR CASH
Holders of Class A stock
On the proxy card included with this proxy statement/prospectus, we are
asking each holder of Class A stock to elect cash if the shareholder wishes to
receive cash and to return the proxy card in its return envelope so that it is
received before or at the meeting. To receive cash, a holder of Class A stock
must:
- check the box provided on the proxy card;
- fill in his or her social security number in the space marked "W-9";
- sign the proxy card; and
- return it so that it is received before or at the meeting.
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Because shares of Class A stock are not represented by a physical stock
certificate (other than shares held by the foundation shareholders) holders of
Class A stock do not need to furnish a physical stock certificate in exchange
for the consideration to be received in the merger. If you no longer have the
registration notification you received upon receipt of your Class A stock, this
will not impede your ability to receive your cash or shares of WellPoint common
stock in the merger.
If you do not elect cash on the proxy card, you will receive WellPoint
common stock. If you wish to receive cash, you must return the proxy card
properly marked for a cash election, and Cerulean must receive it, before or at
the meeting. All proxy cards that Cerulean receives after that date will be
treated as having elected WellPoint common stock. These two limitations are
necessary in order to permit us to determine the total amount of cash which will
be paid in the merger and to provide for appropriate tax-free treatment of the
merger. YOU MUST COMPLETE THE W-9 INFORMATION AND SIGN AND RETURN THE PROXY CARD
BEFORE YOU CAN RECEIVE THE MERGER CONSIDERATION, EITHER IN CASH OR WELLPOINT
COMMON STOCK. You do not need to vote "for" the merger in order to receive
merger consideration, although if you wish to vote "against" the merger, you
must mark your proxy card accordingly. Signed proxy cards without a choice
indicated will be voted "for" the merger.
Holders of Class B Stock
Holders of Class B stock should sign and mail the attached proxy card in
the enclosed return envelope as soon as possible in order to have their shares
of Class B stock represented at the meeting of holders of Class B stock. As soon
as practicable following the effective time of the merger, Chase Mellon
Shareholder Services, which is serving as exchange agent, will mail a letter of
transmittal to each holder of Class B stock to accompany certificates for shares
of Class B stock. The letter of transmittal will set forth instructions for
delivering Class B stock certificates to the exchange agent. No holder of Class
B stock will receive any merger consideration until the exchange agent has
received a properly completed letter of transmittal.
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<PAGE> 37
PROPOSAL 1 --
APPROVAL OF THE MERGER
BACKGROUND OF THE MERGER
Cerulean
Since the conversion of Blue Cross and Blue Shield of Georgia to a
for-profit corporation, several Blue Cross Blue Shield licensees have expressed
interest in considering strategic transactions with Cerulean. On or about
September 20, 1997, Cerulean received a letter of inquiry from one such Blue
Cross Blue Shield licensee regarding a possible combination or alliance of the
two companies. At a meeting held on October 1, 1997, the board of directors of
Cerulean discussed the continued interest expressed by other parties and
Cerulean's initiative to grow by select business combinations. The board of
directors considered the various strategic alternatives available to Cerulean to
realize its goals as a corporation most effectively. Cerulean's stated objective
was to be able to access a broader capital base in order to meet competitive
pressures and to develop and deliver new products to residents of Georgia. The
board of directors reaffirmed its belief that this remained a principal
corporate objective. In view of its duty to maximize shareholder value, the
board appointed a special committee to examine, on behalf of the full board of
directors, the strategic alternatives available to Cerulean to realize its
objectives. Among its alternatives, the board specifically identified:
- Cerulean remaining an independent company and pursuing its existing
business plan; or
- Cerulean entering into a joint venture, alliance or other strategic
transaction with a potential partner.
The special committee consisted of James L. LaBoon, Jr., Chairman,
Elizabeth W. Camp and Frank J. Hanna, III. The board of directors authorized the
special committee to retain a financial advisor and to work with legal counsel
in connection with fulfilling its charge. The organizational meeting of the
special committee was held on October 6, 1997, and the committee retained Morgan
Stanley as its financial advisor and Long Aldridge & Norman LLP as its legal
counsel. At this meeting, the special committee requested that Morgan Stanley
preliminarily:
- review the environment within the health care benefit and managed care
industry segment, including analyzing comparative profitability within
the industry;
- analyze the probable range of values of Cerulean;
- review the comparative managed care company values, including the current
and historical value ranges; and
- analyze the potential for increased value associated with:
- remaining an independent company and continued execution of Cerulean's
business plan; and
- entering into various strategic transactions with potential partners.
There is no market for the securities of Cerulean. Consequently, the
special committee was able to consider, with its advisors, all avenues of
advancing Cerulean's strategic plans without the constraints imposed by the need
to consider the short-term market impact of any strategy.
From its inception, the special committee regularly consulted with members
of Cerulean management, particularly Richard D. Shirk, Chief Executive Officer;
John A. Harris, Executive Vice President; Hugh J. Stedman, General Counsel; and
Joseph M. Feuer, Deputy General Counsel. From its appointment on October 1, 1997
until WellPoint and Cerulean signed the merger agreement on July 9, 1998, the
special committee met in person or by telephonic meeting on 29 occasions, and,
in addition, consulted informally on numerous other occasions.
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At the October 11, 1997 meeting of the Cerulean board of directors, Morgan
Stanley reviewed several topics with the board, including:
- the strategic market environment;
- the Georgia managed care market;
- then current and historical marketing and financial results of Blue Cross
and Blue Shield of Georgia;
- certain strategic alternatives; and
- potential valuation methodologies for Cerulean.
At its November 10, 1997 meeting, the special committee authorized Morgan
Stanley to contact a designated group of potential strategic partners to further
the special committee's effort to establish and explore all of the various
strategic alternatives available to Cerulean. After due consideration, the
special committee chose to include in the designated group only companies that,
like Cerulean, were licensees of the Blue Cross and Blue Shield Association. The
special committee based this decision on Cerulean's concern about providing
information to competitors in the negotiation process. Furthermore, after
discussions with Morgan Stanley, the special committee believed that a potential
transaction or alliance with another Blue Cross and Blue Shield Association
licensee would achieve greater value than a transaction with an entity that was
not a licensee. The special committee also identified a group of non-Blue Cross
Blue Shield entities whom it might consider for contact if other strategic
alternatives were not available. The special committee instructed Morgan Stanley
to obtain indications of interest from the designated group on or before
November 14, 1997 and to encourage the parties contacted to submit to Morgan
Stanley initial proposals by December 8, 1997. At its November 17, 1997 meeting,
Morgan Stanley reported to the special committee that six entities meeting its
criteria had expressed an interest in making a strategic proposal within the
time constraints the special committee had established.
By the special committee's December 9, 1997 meeting, four of the six Blue
Cross Blue Shield licensees expressing interest had submitted initial proposals
for consideration by the committee. The licensees based their proposals on
limited due diligence information contained in a confidential information
memorandum distributed to interested parties who entered into a confidentiality
agreement with Cerulean. Two of the submitted proposals proposed a joint
venture, through the creation of a new third entity, and two proposed a merger.
The proposals submitted placed a value on Cerulean ranging from $225 million to
$425 million. Each indicated an approximate value or range of values, contingent
on reviewing more information. The nature of the consideration for Cerulean
ranged from all cash to equity in a new third entity. The operating structures
and suggested combinations of management varied as well. At its December 9, 1997
and December 11, 1997 meetings, in order to obtain more certain prospects as to
structures, operations, products and services under the proposals and more
definite valuations of Cerulean, the special committee established a process for
a more complete diligence review of Cerulean to be undertaken by all parties
considering making a detailed strategic transaction proposal. At that time, the
special committee established a due diligence calendar which provided for the
completion of due diligence by January 7, 1998. To facilitate the diligence
review, Cerulean collected materials and made them available to the four parties
at the offices of Long Aldridge & Norman in Atlanta, Georgia. At its December
22, 1997 meeting, the special committee established January 14, 1998 as the date
for receiving revised proposals from the parties based on the additional
materials that Cerulean had provided to them.
During the course of diligence review, the special committee became aware
of each party's concern regarding the litigation surrounding the conversion of
Blue Cross and Blue Shield of Georgia to a for-profit business and their desire
that Cerulean reach a settlement in that litigation prior to completing any
strategic transaction with Cerulean. Thereafter, the special committee sought to
combine the schedule for its work concerning strategic transactions with that of
the court calendar concerning the conversion
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litigation. At its January 12, 1998 meeting, the special committee concluded
that it should extend the deadline for the submission of proposals to allow
adequate time for Cerulean to:
- conduct due diligence with respect to potential strategic partners;
- receive a definitive ruling on Cerulean's motion for summary judgment in
the conversion litigation or, in the absence of such a ruling, assess the
court's treatment of the motion and the effect of such treatment on the
entire case; and
- assess the regulatory approval process which a strategic transaction
would require.
The special committee extended the deadline for submission of revised
proposals to January 23, 1998.
At the special committee's January 27, 1998 meeting, Morgan Stanley advised
the committee that four parties had submitted revised proposals and presented a
summary of those proposals. These proposals again contemplated various
structures, including forming a joint venture, forming a new combined entity and
merging outright. Consideration proposed included:
- all stock in a new entity;
- cash and stock in a new entity; and
- outright merger entirely for cash, entirely for stock of the merger
partner and a combination of cash and stock of the merger partner.
The values of the revised proposals ranged from $270 million to $425
million. The operating structure, use of management and employees, and mix of
products and services also varied as before. At its February 2, 1998 meeting,
the special committee considered each of the proposed strategic transactions in
depth and considered the various advantages and disadvantages of each proposal.
As a result of this analysis, the special committee concluded that one of the
potential joint venture transactions was not feasible and should be eliminated,
and that another, also a joint venture, required further diligence review by the
committee in order to fully analyze the potential of the transaction. The
special committee agreed to complete this review and to notify the other two
parties with viable proposals, both for mergers, that their proposals were being
actively considered. The special committee also agreed to inform these parties
that its response was being postponed in order to complete full consideration of
another proposal.
After completion of the diligence review, and pursuant to the special
committee's instructions, Morgan Stanley indicated to each of the three
remaining parties, one of which was WellPoint, that best and final proposals
should be submitted to the special committee by February 23, 1998. These final
proposals ranged in value from $363 million to $460 million and were structured
similarly to the prior proposals. The special committee rejected one of the
proposals and held a meeting on March 3, 1998 in preparation for its
presentation of a report reviewing its actions since its appointment to the full
board of directors on March 6, 1998. The special committee continued to
carefully manage the process that it had put in place for evaluating the
strategies available to Cerulean for best realizing its overall business plan
and for realizing value to its shareholders. Through consultation with Morgan
Stanley, the special committee and the Cerulean board of directors continued to
evaluate Cerulean on a stand-alone basis and to evaluate the strategic
proposals, including the implications to operations and value, that had been
elicited over the preceding four months. At the meeting on March 3, 1998, the
special committee reviewed further each of the remaining proposals. It concluded
that the joint venture proposal should be eliminated for a number of reasons
which, in the special committee's judgment, indicated it was of questionable
viability and, in any event, was of substantially less value to shareholders. In
addition, the rejected proposal, in the special committee's opinion:
- would have provided less potential for new future products for customers;
- would not have provided liquidity for shareholders; and
- would have entailed a difficult regulatory approval process.
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In formulating its report for the board, the special committee also reviewed the
possible effects on customers, management and employees of each of the proposals
and reviewed the value to shareholders of remaining independent and of entering
into a proposed transaction.
Prior to the special committee's report to the full board of directors on
March 6, 1998, the Chairman of the special committee reported to the committee
that he had received a revised proposal from one of the parties that previously
had submitted a merger proposal. The special committee, after considering the
revised proposal at a meeting on March 5, 1998, concluded that it should
recommend that the board of directors consider the two merger proposals. The
special committee also concluded that it should provide the proposing parties
with further access to materials concerning Cerulean and a further opportunity
to conduct due diligence and submit improved proposals.
At Cerulean's board meeting on March 6-7, 1998, the special committee
presented its report to the full board of directors of Cerulean. The board of
directors received the special committee's report and a presentation from Morgan
Stanley on the proposals submitted to the committee, as well as an analysis of
Cerulean's stand-alone value and the financial strategies available to Cerulean
to achieve its business plan operating as an independent entity. The directors
reviewed in this context their fiduciary duties to shareholders and their
ability to consider other constituencies, and considered the proposals
recommended by the special committee. The directors considered the proposals of
the several parties, explored the possibility of a joint venture and reviewed
the limitations of that strategy. Ultimately, the board of directors adopted the
special committee's recommendation that Cerulean proceed with negotiations with
each of two proposing parties, one of which was WellPoint. At this time, the
board authorized the special committee to set a deadline for the completion of
negotiations with the two parties and to select the proposal that the committee
decided was superior considering all factors, including the best interests of
the shareholders. The board of directors further authorized the special
committee to proceed with negotiations to finalize the terms of a proposed
transaction, as long as the special committee obtained final approval of the
terms of the proposed transaction from the full board of directors.
After the Cerulean board meeting, the special committee gave the two
remaining parties the opportunity to conduct an in-depth diligence review on
Cerulean in Atlanta, Georgia during the weeks of March 16 and March 23, 1998. In
connection with further discussions with each party, each party emphasized to
the special committee the importance of Cerulean negotiating a settlement of the
conversion litigation prior to the final negotiation and execution of a
strategic transaction. In the ensuing period, the special committee met on
numerous occasions to monitor progress in the settlement negotiations of the
conversion litigation and to review its status with management representatives
and legal counsel conducting the negotiations. During this period, two parties
whose proposals had previously been rejected by the special committee presented
a combined proposal pursuant to which the parties would join with Cerulean in
forming a third entity. The special committee considered this proposal at length
at its meetings on May 19, May 21, May 25, May 29, June 1 and June 4, but
ultimately rejected it. The special committee decided to reject the proposal
because of:
- the uncertainty of obtaining required regulatory approvals;
- the unwillingness of the parties proposing the transaction to guarantee
financial ability to consummate a transaction; and
- the limited ability of Cerulean shareholders to participate in future
appreciation in value of the proposed combined entity.
As the settlement discussions conducted by Cerulean's management and
counsel in the conversion litigation appeared to be reaching a satisfactory
result, the special committee set a deadline of June 3, 1998 for submission of
"best and final" strategic transaction proposals by the two parties. The two
remaining parties submitted these proposals to the special committee on June 3,
1998. The proposals were based on access to additional diligence materials and
were valued at $460 million and $500 million, net of amounts payable under
applicable change of control agreements. At its June 5, 1998 meeting, the
special committee again reviewed its course of action since its formation on
October 2, 1997, specifically its
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directions received from the board of directors on that date and at the board of
directors meeting on March 6-7, 1998. In addition, Morgan Stanley made a
presentation to the special committee comparing the two final proposals. Based
on this presentation, and after due consideration, the special committee
unanimously voted to recommend to the board of directors that the special
committee proceed to final negotiations with WellPoint only. At a meeting of the
full board of directors held on June 5, 1998, the board of directors authorized
the special committee to seek to conclude a strategic transaction with
WellPoint. The board further authorized Cerulean management to proceed to a
settlement of the conversion litigation in the manner presented to the board of
directors.
Thereafter, the special committee, members of Cerulean management, the
special committee's financial advisors and legal counsel proceeded to the
negotiation of a final agreement with representatives of WellPoint. The special
committee met on July 1, July 6, July 7 and July 8, 1998 to address specific
issues as they emerged in the negotiations. The special committee also
considered a further indication of interest in a merger transaction from one of
the other previously proposing parties and analyzed and compared that indication
of interest to the transaction under negotiation with WellPoint.
The process of approving the transaction also included:
- a presentation to the full board of directors by the Chairman and Chief
Executive Officer of WellPoint on June 15, 1998;
- a telephonic meeting of the full board of directors on July 5, 1998 to
authorize and approve the settlement of the conversion litigation; and
- a telephonic meeting of the full board of directors on July 8, 1998 at
which the board reviewed the transaction negotiated with WellPoint,
including a review of a draft merger agreement, as well as the further
indication of interest received from another party and the special
committee's reasons for rejecting such indication of interest.
Following this presentation, the board of directors voted to approve the merger
and the merger agreement and to authorize the execution and delivery of the
merger agreement and the related documents embodying the merger.
WellPoint
WellPoint has an ongoing acquisition program as part of its regional
expansion strategy and regularly considers strategic acquisition opportunities.
On or about November 10, 1997, Morgan Stanley contacted WellPoint and requested
that WellPoint submit an indication of interest regarding a potential business
combination with Cerulean. WellPoint subsequently entered into a confidentiality
agreement with Morgan Stanley, which was acting on behalf of Cerulean. On
December 5, 1997, WellPoint submitted a non-binding indication of interest to
Morgan Stanley.
In early December 1997, Morgan Stanley contacted WellPoint and informed
WellPoint that Cerulean had established a due diligence process. As part of this
due diligence process, representatives of WellPoint met at the offices of Long
Aldridge & Norman in Atlanta, Georgia on December 15, 16, 17 and 18, 1997.
Various representatives of Cerulean, including members of its senior management,
attended these meetings. In addition, Cerulean made various documents available
for WellPoint's review. As a result of this due diligence process and subsequent
conversations with Cerulean and Morgan Stanley, WellPoint submitted a revised
non-binding indication of interest to Morgan Stanley on January 23, 1998.
As part of the ongoing due diligence process, members of Cerulean's senior
management met with various representatives of WellPoint at WellPoint's offices
in Woodland Hills, California on February 24, 1998. WellPoint further revised
its indication of interest and resubmitted it to Morgan Stanley on February 26,
1998.
Cerulean made additional due diligence materials available to
representatives of WellPoint at the offices of Long Aldridge & Norman on March
17, 18 and 19, 1998. At these meetings, representatives of Cerulean participated
in discussions with WellPoint's representatives.
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Over the course of its various conversations with WellPoint, Cerulean
discussed the status of the litigation involving the conversion of Blue Cross
and Blue Shield of Georgia from a not-for-profit business to a for-profit
business. At various points, WellPoint indicated its concern that this
litigation could adversely affect the completion of a merger with Cerulean.
After the completion of the March 1998 due diligence meetings, WellPoint and
Cerulean further discussed the status of the conversion litigation. Cerulean
informed WellPoint that it intended to attempt to settle the litigation and that
Cerulean would reconsider its various strategic alternatives while it continued
to pursue these settlement discussions.
WellPoint and Cerulean reinitiated their merger discussions beginning in
mid-May 1998. Morgan Stanley then requested that WellPoint submit a further
revised indication of interest. WellPoint submitted a revised indication on June
3, 1998. On or about June 5, 1998, Morgan Stanley informed WellPoint that
Cerulean had selected WellPoint as the sole party with which Cerulean intended
to conduct final negotiations.
On various dates between June 11, 1998 and July 8, 1998, members of
WellPoint management and its legal counsel met with members of Cerulean
management and its legal counsel to negotiate a final merger agreement.
At various times between December 1997 and June 1998, WellPoint's senior
management and its advisors provided the WellPoint board of directors, at
regularly scheduled meetings, with updates regarding the discussions and
negotiations with Cerulean. On July 2, 1998, the WellPoint board of directors
met by telephone and received detailed information regarding the proposed
transaction, including comprehensive analyses by WellPoint's financial advisors
and its outside legal counsel.
The WellPoint board of directors met again on July 6, 1998 by telephone and
received from WellPoint senior management a further update regarding the
negotiations. At this meeting, the WellPoint board of directors approved the
transaction, assuming that WellPoint and Cerulean could negotiate a mutually
satisfactory merger agreement. The board of directors established a special
committee consisting of W. Toliver Besson, Sheila Burke and Julie Hill. The
WellPoint board delegated to this special committee the authority to approve the
final documents for the merger.
The special committee met by telephone on July 8, 1998. At this meeting,
WellPoint senior management and outside advisors provided the WellPoint special
committee with an analysis of the final documents. At this meeting, the
WellPoint special committee authorized the signing of the merger agreement and
the proposed ancillary documents. On the morning of July 9, 1998, WellPoint and
Cerulean signed the merger agreement.
On July 9, 1999, Cerulean and WellPoint entered into an amendment to the
merger agreement to extend the time by which the merger could be completed until
October 15, 1999, or until December 31, 1999 at the election of either Cerulean
or WellPoint. On October 14, 1999, WellPoint notified Cerulean that it elected
to extend the merger agreement until December 31, 1999. Effective December 31,
1999, Cerulean and WellPoint entered into a second amendment to the merger
agreement to extend the time by which the merger could be completed until
December 31, 2000.
RECOMMENDATION OF THE CERULEAN BOARD OF DIRECTORS
The board of directors of Cerulean has approved the merger agreement and
the related transactions and believes the merger is fair to and in the best
interests of Cerulean and its shareholders. In considering the various strategic
alternatives available to Cerulean, Cerulean's board of directors compared the
alternative of remaining an independent company and pursuing its existing
business plan with the alternative of entering into a strategic transaction with
a potential partner. The board weighed the advantages of entering into a
strategic transaction, including:
- the effect that the various structures proposed could have on Cerulean's
operations and the services it could provide to Georgia subscribers;
- the potentially higher value to shareholders that a strategic transaction
could provide;
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- the potential for an increase in the quality and number of products
offered to subscribers;
- the uncertainties associated with predicting future business results; and
- Cerulean's access to capital as an independent company.
The Cerulean board of directors also considered the potential
disadvantages, including:
- the possibility of not obtaining required regulatory approvals; and
- the potential for a decrease in the product mix offered to subscribers.
Although the viability of Cerulean as an independent company was not in
question, the board of directors of Cerulean determined that entering into a
strategic transaction was in the best interests of Cerulean and its shareholders
because this would allow Cerulean to access a broader capital base in order to
meet competitive pressures and to develop and deliver new products to residents
of Georgia. The Cerulean board of directors further determined that entering
into the merger with WellPoint is the best strategic alternative because of,
among other things;
- the attractive financial condition of WellPoint and the resulting access
to capital;
- the superior financial terms of the merger;
- WellPoint's interest in increasing the quality and number of products
offered to subscribers;
- WellPoint's interest in expanding services in Georgia; and
- WellPoint's interest in taking advantage of similar organizational
structures, thereby minimizing staffing dislocations and reductions.
Accordingly, the board of directors of Cerulean recommends that shareholders of
Cerulean vote "for" approval of the merger agreement and the completion of the
merger.
REASONS FOR THE MERGER
Cerulean's Reasons for the Merger
After consideration of relevant business, financial, legal and market
factors, the board of directors, on July 8, 1998, approved the merger agreement
and the related transactions by a vote of 16 for and one against. The board of
directors voted by the same vote to recommend that Cerulean shareholders vote
for the approval of the merger agreement and the related transactions. On
, 2000, the Cerulean board of directors affirmed its prior vote for
the merger and voted to recommend that the shareholders reaffirm the merger.
In deciding to approve the merger agreement and to recommend that Cerulean
shareholders approve the merger, the Cerulean board of directors considered a
number of factors, including particularly the factors listed below. In view of
the number and wide variety of factors that the board of directors considered in
connection with its evaluation of the merger, the Cerulean board of directors
did not consider it practicable to, nor did it attempt to, quantify or otherwise
assign relative weights to the specific factors considered in reaching its
determination. The Cerulean board of directors viewed its position and
recommendations as being based on all of the information and factors that it
received and considered. In addition, individual directors may have given
different weight to different information and factors.
The Financial Terms of the Merger. The board of directors of Cerulean
believes that the consideration that WellPoint will deliver to shareholders of
Cerulean is fair to the shareholders based upon:
- Cerulean's current financial condition and future prospects;
- the current financial condition and future prospects of WellPoint; and
- the Cerulean board's perception of the future prospects of the combined
entities.
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In coming to this conclusion, the Cerulean board of directors relied upon the
recommendations of the Cerulean special committee and the reports of its
financial advisors and legal counsel evaluating the strategic alternatives
available to Cerulean.
Comparing Cerulean's Value as a Continuing Independent Entity with its
Value in Combination with WellPoint. Based upon the information and analysis
the Cerulean special committee received and provided to the board of directors,
the Cerulean board of directors considered that the value that Cerulean
shareholders would receive in the merger is substantially greater than that
available in Cerulean as a continuing independent entity currently and for the
foreseeable future.
Liquidity for Cerulean Shareholders. The merger provides liquidity to
Cerulean shareholders, which they do not currently have, in the form of
WellPoint common stock and, to the extent provided in the merger agreement,
cash.
Availability of Additional Resources. The Cerulean board of directors
considered the need for additional capital resources in order to achieve
Cerulean's own business plan and the fact that these resources were more readily
available to Cerulean in combination with WellPoint than as a continuing
independent entity. These resources were more readily available to Cerulean in a
transaction with WellPoint than in a transaction with any of the other potential
parties.
Changes and Consolidations in the Health Care Industry. The board of
directors of Cerulean considered the current environment of the health care
industry, especially:
- the continuing shift from traditional indemnity products to managed care
products, such as health maintenance organizations and preferred provider
organizations; and
- the trend toward consolidation in the industry in order to obtain the
advantage of scale in developing and delivering products in a
cost-effective manner.
The Cerulean board of directors and special committee considered that the merger
afforded Cerulean and its customers and shareholders a stronger vehicle with
which to address these changes in the industry.
Tax Free Nature of the Transaction. The Cerulean board of directors and
special committee considered the fact that for federal income tax purposes the
merger will qualify as a tax-free reorganization for those Cerulean shareholders
who do not elect to receive cash in the merger.
Opinion of Morgan Stanley. The Cerulean board of directors and special
committee considered the fact that Morgan Stanley has rendered its opinion that,
subject to the limitations and qualifications in its opinion, the consideration
WellPoint will provide to the holders of Class A stock, Series A stock and Class
B stock in the merger agreement is fair from a financial point of view to those
holders.
In addition to the positive factors set forth above, the board of directors
of Cerulean considered several factors that it believed were potential negative
aspects of Cerulean's entering into a merger transaction. With respect to the
Cerulean board's consideration of the merger agreement and the merger, the
specific factors considered include:
- the potential for incurring a termination fee in the event of a
termination of the merger agreement because:
- Cerulean enters into binding written agreement for a superior
transaction; or
- the holders of Class B stock fail to approve the merger; and
- the potential negative effects of a change in the product mix offered to
subscribers.
The terms of the termination fee, particularly the amount, were the subject
of negotiations between the parties. The board ultimately accepted the size and
terms of the termination fee contained in the merger agreement as necessary to
limit subsequent competing offers to those that should be seriously considered.
On balance, the Cerulean board of directors concluded that the positive factors
outweighed the
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negative factors and supported its recommendation to the Cerulean shareholders
to approve the merger agreement and the merger.
WellPoint's Reasons for the Merger
In approving the merger, the WellPoint board of directors considered a
number of factors, including the factors discussed in the following paragraphs.
In view of the number and wide variety of factors considered in connection with
its evaluation of the merger, the WellPoint board of directors did not consider
it practicable to, and did not attempt to, quantify or otherwise assign relative
weights to the specific factors that it considered in reaching its
determination. The WellPoint board of directors viewed its position and
recommendations as being based on all of the information and factors presented
to and considered by it. In addition, individual directors may have given
different weight to different information and factors.
In reaching its decision, the WellPoint board of directors consulted with
WellPoint management with respect to strategic and operational matters. The
WellPoint board of directors also consulted with legal counsel with respect to
the merger agreement and the registration rights agreement and related issues.
The board of directors also consulted a financial advisor with respect to the
financial aspects of the transaction.
Strategic Combination. The WellPoint board of directors considered the
strategic importance of the merger in that:
- it represents the first significant merger of two public, for-profit
licensees of the Blue Cross and Blue Shield Association; and
- it provides the combined company with an immediate material competitive
position in Georgia, a state which WellPoint had previously targeted as a
key priority for its national expansion efforts.
The Financial Terms of the Merger. The WellPoint board of directors
considered information concerning the business, earnings, operations, financial
condition and prospects of WellPoint and Cerulean, both individually and on a
combined basis, including, but not limited to, information with respect to
recent and historic stock and earnings performance. The WellPoint board of
directors also considered the financial analyses and other information with
respect to WellPoint and Cerulean presented to the board of directors by
WellPoint's financial advisor, as well as the board of directors' own knowledge
of WellPoint and Cerulean and their respective businesses.
Complementary business. The WellPoint board of directors considered the
complementary aspects of the businesses of the two companies. In particular, the
WellPoint board noted that:
- Cerulean is a Blue Cross and Blue Shield Association licensee;
- Cerulean has a diverse membership with significant components of large
employer groups and small groups; and
- Cerulean has a broad product range consisting of traditional indemnity
insurance, preferred provider organization products, health maintenance
organization products and administrative services products.
Status of the Health Care Industry. The WellPoint board of directors
considered a variety of factors affecting the status of the managed health care
industry, including:
- increasing competition;
- limited pricing flexibility;
- proposed regulatory initiatives;
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<PAGE> 46
- the advantages of relative size in negotiating favorable provider
agreements and achieving favorable operating results;
- the continued consolidation within the managed health care industry; and
- the importance of market position.
OPINION OF CERULEAN'S FINANCIAL ADVISOR REGARDING THE MERGER
Cerulean retained Morgan Stanley to act as Cerulean's financial advisor in
connection with the merger and related matters based upon Morgan Stanley's
qualifications, expertise and reputation. On July 8, 1998, Morgan Stanley
rendered an opinion to the Cerulean board of directors that, as of that date,
and based upon and subject to the considerations set forth in the opinion, the
consideration to be received by the holders of shares of Class A stock, Series A
stock and Class B stock pursuant to the merger agreement is fair from a
financial point of view to those holders.
THE FULL TEXT OF MORGAN STANLEY'S OPINION, WHICH SETS FORTH, AMONG OTHER
THINGS, THE ASSUMPTIONS MADE, PROCEDURES FOLLOWED, MATTERS CONSIDERED AND
LIMITATIONS ON THE REVIEW UNDERTAKEN, IS ATTACHED AS APPENDIX B TO THIS PROXY
STATEMENT/PROSPECTUS. WE URGE YOU TO READ THIS OPINION CAREFULLY AND IN ITS
ENTIRETY. MORGAN STANLEY'S OPINION IS DIRECTED ONLY TO THE FAIRNESS OF THE
CONSIDERATION TO BE RECEIVED BY THE HOLDERS OF CLASS A STOCK, SERIES A STOCK AND
CLASS B STOCK FROM A FINANCIAL POINT OF VIEW AS OF THE DATE OF THE OPINION. THE
OPINION DOES NOT ADDRESS ANY OTHER ASPECT OF THE MERGER OR CONSTITUTE A
RECOMMENDATION TO ANY CERULEAN SHAREHOLDER AS TO HOW A SHAREHOLDER SHOULD VOTE
AT THE SPECIAL MEETING. THIS SUMMARY IS QUALIFIED IN ITS ENTIRETY BY REFERENCE
TO THE FULL TEXT OF THE OPINION. THE MORGAN STANLEY OPINION IS DATED JULY 8,
1998. CERULEAN HAS INDICATED TO MORGAN STANLEY THAT IT WILL REQUEST THAT MORGAN
STANLEY UPDATE ITS OPINION PRIOR TO THE COMPLETION OF THE MERGER.
In connection with rendering its opinion, Morgan Stanley, among other
things:
- reviewed certain publicly available financial statements and other
information of Cerulean and WellPoint;
- reviewed certain internal financial statements and other financial and
operating data concerning Cerulean and WellPoint prepared separately by
their managements;
- analyzed certain financial projections prepared by the management of
Cerulean;
- discussed the past and current operations and financial condition and the
prospects of Cerulean with senior executives of Cerulean;
- discussed the past and current operations and financial condition and the
prospects of WellPoint with senior executives of WellPoint;
- reviewed the reported prices and trading activity for the WellPoint
common stock;
- compared the financial performance of Cerulean and WellPoint and the
trading activity of the WellPoint common stock with that of certain
comparable publicly-traded companies and their securities;
- reviewed the financial terms, to the extent publicly available, of
certain comparable acquisition transactions;
- participated in discussions and negotiations among representatives of
Cerulean and WellPoint and their financial and legal advisors;
- reviewed the draft merger agreement and certain related documents; and
- performed such other analyses as Morgan Stanley deemed appropriate.
Morgan Stanley assumed and relied upon, without independent verification,
the accuracy and completeness of the information reviewed by Morgan Stanley for
the purposes of its opinion. With respect
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<PAGE> 47
to the financial projections, Morgan Stanley assumed that they were reasonably
prepared on bases reflecting the best currently available estimates and
judgments of the future financial performance of Cerulean. In addition, Morgan
Stanley assumed that the merger would be consummated in accordance with the
terms set forth in the merger agreement, including, among other things, that the
merger would be treated as a tax-free reorganization and/or exchange each
pursuant to the Internal Revenue Code. Morgan Stanley assumed that in connection
with the receipt of all necessary regulatory approvals for the proposed merger,
no restrictions would be imposed that would have a material adverse effect upon
the contemplated benefits expected to be derived from the proposed merger.
Morgan Stanley did not make any independent valuation or appraisal of the assets
or liabilities of Cerulean, nor was Morgan Stanley furnished with any such
appraisals. Morgan Stanley noted that the holders of Class B stock would not
have an election to receive cash in the merger and, in receiving shares of
WellPoint common stock in the transaction, may assume the market risk of holding
such WellPoint common stock. Morgan Stanley also noted that the capital
structure of Cerulean is comprised of three classes of stock, the Class A stock,
the Series A stock and the Class B stock, and Morgan Stanley expressed no
opinion as to the relative fairness of the consideration to be received among
the various classes or series of stock. The opinion of Morgan Stanley is
necessarily based on economic, market and other conditions as in effect on, and
the information made available to Morgan Stanley as of the date of Morgan
Stanley's opinion.
The following is a summary of some of the financial analyses performed by
Morgan Stanley in rendering its opinion to the Cerulean board of directors on
July 8, 1998. In order to fully understand the financial analyses used by Morgan
Stanley, you should read this summary together with the opinion. The summary
alone does not constitute a complete description of the financial analyses.
Comparable Company Analysis. As part of its analysis, Morgan Stanley
compared certain financial information of Cerulean with the corresponding
publicly available financial information of a selected group of 16 other managed
care companies similar to Cerulean and WellPoint. The group of selected managed
care companies included Aetna Inc., Cigna Corp, United Healthcare Corp.,
Foundation Health Systems, Maxicare Health Plans, PacifiCare Holding, Coventry
Corporation, Health Power, Inc., Mid Atlantic Medical Services, Inc., Oxford
Health Plans, RightCHOICE Managed Care, Sierra Health Services Inc., Trigon
Healthcare, Inc., United American Healthcare Corp., United Wisconsin Services
and WellCare Management Group.
For each of the selected managed care companies, Morgan Stanley calculated
price to next 12 months earnings ratio and price to estimated calendar year 1998
earnings ratio to similar statistics for the selected managed care companies.
Morgan Stanley based these calculations on market information as of June 9,
1998, the latest publicly available information, and estimates of earnings per
share and five-year projected growth rates based on First Call Corporation
estimates as of June 9, 1998, among other things. Morgan Stanley then applied
these multiples to corresponding financial data for Cerulean, which were based
on certain financial projections prepared by the management of Cerulean. This
exercise resulted in a range of possible equity values of $233,000,000 to
$369,000,000 in the aggregate for Cerulean.
In addition, Morgan Stanley compared, as of June 9, 1998, among other
things, Cerulean's latest 12 months and estimated fiscal 1998 margins, based on
the latest publicly available 10-Ks and 10-Qs and the Cerulean financial
projections, to similar statistics for the selected managed care companies. A
comparison of margins included, among other things, margins for latest 12 months
medical loss ratio, latest 12 months earnings before interest, taxes,
depreciation and amortization, and latest 12 months net income. Morgan Stanley
observed that the margins for Cerulean were slightly worse than the median of
similar statistics for the selected managed care companies.
No company used in the analysis of selected managed care companies is
identical to Cerulean. In evaluating the selected managed care companies, Morgan
Stanley made judgments and assumptions with regard to industry performance,
general business, economic, market and financial conditions and other matters.
Many of these matters are beyond the control of Cerulean, such as the impact of
competition on the business of Cerulean and the health care industry generally,
industry growth and the absence of any adverse material change in the financial
condition and prospects of Cerulean or the industry, or in the
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financial markets in general. Mathematical analysis, such as determining the
average or median, is not in itself a meaningful method of using selected
companies' transaction data.
Precedent Transactions Analysis. Morgan Stanley reviewed certain publicly
available information regarding 21 selected change of control business
combinations in the managed care industry. These precedent transactions included
the acquisition of HMO America by United Healthcare; the acquisition of Ramsay
by United Healthcare; the acquisition of TakeCare by FHP International Corp.;
the acquisition of CareFlorida by Foundation Health; the acquisition of
Intergroup by Foundation Health; the acquisition of GenCare by United
Healthcare; the acquisition of Provident's health care lines by Healthsource;
the acquisition of MetraHealth by United Healthcare; the acquisition of Emphesys
Financial by Humana; the acquisition of the group life and health subsidiary of
Massachusetts Mutual Life Insurance Company by WellPoint; the acquisition of
HealthWise by United Healthcare; the acquisition of U.S. Healthcare by Aetna;
the acquisition of FHP International Corp. by PacifiCare; the acquisition of
Foundation Health by Health Systems International; the acquisition of the group
benefits operations of John Hancock Mutual Life Insurance Company by WellPoint;
the acquisition of Healthsource by CIGNA; the acquisition of Physicians Health
Services by Foundation Health Systems; the acquisition of Physician Corporation
of America by Humana; the acquisition of ChoiceCare by Humana; the acquisition
of NYLCare by Aetna; and the formerly pending acquisition of Humana by United
Healthcare.
For each of these precedent transactions, Morgan Stanley calculated equity
value paid for the acquired company as a multiple of, among other things:
- next 12 months earnings;
- next fiscal year earnings, based on First Call estimates; and
- the premium paid above the market price of each acquired company's stock
price one day prior to the announcement of the transaction.
Morgan Stanley then applied these multiples to corresponding financial data
for Cerulean, based on the Cerulean management's financial projections and the
analysis of selected managed care companies. This resulted in a range of
possible equity values of $295,000,000 to $456,000,000 in the aggregate for
Cerulean.
No transaction used in the precedent transactions analysis is identical to
the merger. In evaluating precedent transactions, Morgan Stanley made judgments
and assumptions with regard to industry performance, general business, economic,
market and financial conditions and other matters. Many of these matters are
beyond the control of Cerulean and WellPoint, such as the impact of competition
on the business of Cerulean and WellPoint and the industry generally, industry
growth and the absence of any adverse material change in the financial condition
and prospects of Cerulean or WellPoint or the industry, or in the financial
markets in general. Mathematical analysis, such as determining the average or
median, is not in itself a meaningful method of using comparable transaction
data.
Discounted Cash Flow Analysis. Morgan Stanley performed discounted cash
flow analyses of Cerulean to determine a range of present values for Cerulean
based on the Cerulean management's financial projections. Unlevered free cash
flow was calculated as the after-tax operating earnings of Cerulean, excluding
any interest income and interest expense, plus depreciation and amortization,
plus or minus net changes in non-cash working capital, minus projected capital
expenditures. Morgan Stanley calculated terminal values by applying a range of
multiples to net income in fiscal 2003 from 12.0x to 14.0x. The unlevered free
cash flows and terminal values were then discounted to present values using a
range of discount rates from 12.5% to 14.5%. Based on this analysis and the
assumptions set forth above, Morgan Stanley calculated a range of possible
equity values of $260,000,000 to $308,000,000 in the aggregate for Cerulean.
Comparable Companies Trading Analysis. As part of its analysis, Morgan
Stanley reviewed the recent stock price performance of WellPoint and compared
its performance with that of the Morgan Stanley HMO Payor Index and the S&P 400.
Morgan Stanley also reviewed selected publicly available
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research analysts' reports regarding WellPoint. In addition, Morgan Stanley
compared the actual quarterly earnings for WellPoint versus the First Call
median analysts' expectations as of the day of the earnings announcement and the
First Call median analysts' expectations as of the day six months prior to the
earnings announcement. Morgan Stanley observed that over the period from January
31, 1997 to June 9, 1998, the market price of WellPoint appreciated
approximately 97% compared with an approximate appreciation of 31% for the
Morgan Stanley HMO Payor Index and 41% for the S&P 400. Morgan Stanley also
noted that the selected research analysts' price targets for the WellPoint
common stock were all higher than the WellPoint market price at the time of
their respective research reports. Morgan Stanley also observed that over the
period from first quarter 1996 to first quarter 1998, with the exception of the
first quarter 1998 actual earnings versus the First Call median analysts'
expectations as of the day six months prior to the earnings announcement,
WellPoint's actual earnings were equal to or higher than the First Call median
analysts' expectations as of the day of the earnings announcement and the First
Call median analysts' expectations as of the day six months prior to the
earnings announcement.
No company used in the analysis of selected managed care companies is
identical to WellPoint. In performing the analysis of selected managed care
companies, Morgan Stanley made judgments and assumptions with regard to industry
performance, general business, economic, market and financial conditions and
other matters, many of which are beyond the control of WellPoint, such as the
impact of competition on the business of WellPoint and the industry generally,
industry growth and the absence of any adverse material change in the financial
condition and prospects of WellPoint, or the industry, or in the financial
markets in general. Mathematical analysis, such as determining the average or
median, is not in itself a meaningful method of using comparable transaction
data.
Contribution Analysis. Morgan Stanley analyzed the pro forma contribution
of each of Cerulean and WellPoint to the combined company. This analysis
included relative contributions of revenue, net income and membership at various
time periods, as well as the review of a publicly available research report
regarding WellPoint, which Morgan Stanley advised the senior management of
WellPoint it would be using in performing its analysis. Based upon the WellPoint
research report and the Cerulean management's financial projections, Cerulean's
fiscal 1998 contribution to the combined companies on a pro forma basis would be
approximately:
<TABLE>
<CAPTION>
CERULEAN CONTRIBUTION
---------------------
<S> <C>
1998 Projected Revenues..................................... 21.3%
1998 Projected Net Income................................... 5.6
1998 Projected Membership................................... 14.7
</TABLE>
These contribution percentages did not take into account any assumptions
regarding synergies or cost savings from the merger, nor did they take into
account any purchase accounting adjustments or changes in capital structure as a
result of the merger. Morgan Stanley observed that the contribution percentages
for Cerulean would compare to Cerulean's pro forma common stock ownership of
approximately 9.9%, assuming that the merger consideration was comprised
entirely of shares of WellPoint common stock.
Pro forma Analysis of the Merger. Morgan Stanley performed pro forma
analyses of the merger on the earnings per share, capitalization and other
financial ratios of the combined companies. These analyses were based on the
Cerulean financial projections and estimates of synergies and the publicly
available research report regarding WellPoint.
The preparation of a fairness opinion is a complex process and is not
necessarily susceptible to a partial analysis or summary description. In
arriving at its opinion, Morgan Stanley considered the results of all of its
analyses as a whole and did not attribute any particular weight to any
particular analysis or factor considered by it. Furthermore, selecting any
portion of Morgan Stanley's analyses, without considering all analyses, would
create an incomplete view of the process underlying the opinion of Morgan
Stanley. In addition, Morgan Stanley may have deemed various assumptions more or
less probable than other assumptions, so that the ranges of valuations resulting
from any particular analysis described above should not be taken to be Morgan
Stanley's view of the actual value of Cerulean.
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In performing its analysis, Morgan Stanley made numerous assumptions with
respect to industry performance, general business and economic conditions and
other matters, many of which are beyond the control of Cerulean and WellPoint.
The analyses performed by Morgan Stanley are not necessarily indicative of
actual values, which may be significantly more or less favorable than suggested
by these analyses. Morgan Stanley prepared these analyses solely as a part of
Morgan Stanley's analysis of the fairness of the consideration to be received by
the holders of shares of Class A stock, Series A stock and Class B stock
pursuant to the merger agreement from a financial point of view to those
holders, and were provided to the Cerulean board of directors in connection with
the delivery by Morgan Stanley of its opinion. The analyses do not purport to be
appraisals or to reflect the prices at which Cerulean might actually be sold. In
addition, as described above, the opinion of Morgan Stanley was one of many
factors taken into consideration by the Cerulean board of directors in making
its determination to approve the merger. The consideration that WellPoint will
pay pursuant to the merger agreement was determined through arm's-length
negotiations between Cerulean and WellPoint and was approved by the Cerulean
board of directors. Morgan Stanley did not recommend any specific consideration
amount to Cerulean or that any consideration amount constituted the only
appropriate consideration amount for the merger. Consequently, you should not
view the Morgan Stanley analysis described above as determinative of whether the
Cerulean board of directors would have agreed to a different consideration
amount.
Cerulean retained Morgan Stanley based upon its experience and expertise.
Morgan Stanley is an internationally recognized investment banking and advisory
firm. Morgan Stanley, as part of its investment banking business, is regularly
engaged in the valuation of businesses and their securities in connection with
mergers and acquisitions, negotiated underwritings, competitive biddings,
secondary distributions of listed and unlisted securities, private placements
and valuations for corporate, estate and other purposes. Morgan Stanley makes a
market in WellPoint common stock and may continue to provide investment banking
services to the combined companies in the future. In the course of its
market-making and other trading activities, Morgan Stanley may, from time to
time, have a long or short position in, and buy and sell the debt or equity
securities and senior loans of WellPoint. Morgan Stanley has also acted as the
co-lead underwriter and as a member of the lead group of underwriters in public
offerings of WellPoint common stock, for which it received fees. Morgan Stanley
and its affiliates have, in the past, provided financial advisory services to
Cerulean and WellPoint and their affiliates and have received fees for the
rendering of such services.
Pursuant to a letter agreement dated October 31, 1997 between Cerulean and
Morgan Stanley, Cerulean has agreed to pay Morgan Stanley a fee for its
financial advisory services in connection with the business combination.
Cerulean has agreed to pay Morgan Stanley a transaction fee of $5.4 million if
the merger is successfully completed and a quarterly advisory fee of $250,000
throughout the engagement.
Morgan Stanley will give Cerulean a credit against the transaction fee
equal to the advisory fees paid for the last two quarters prior to completion of
the merger. In addition, Cerulean has agreed to reimburse Morgan Stanley for its
expenses related to the engagement. Cerulean has also agreed to indemnify Morgan
Stanley and its affiliates, their respective directors, officers, agents and
employees and each person, if any, controlling Morgan Stanley or any of its
affiliates against certain liabilities, including liabilities under federal
securities laws, and expenses, related to or arising out of Morgan Stanley's
engagement and the transactions in connection with that engagement.
COMPLETION OF THE MERGER
The completion of the merger will occur no later than 30 days after the
satisfaction or waiver of the closing conditions set forth in the merger
agreement, unless WellPoint and Cerulean agree to another date. On the date of
completion of the merger, WellPoint and Cerulean will file certificates of
merger with the Secretaries of State of Delaware and Georgia. The merger will be
effective at the time of filing of the certificates of merger, or at any
subsequent date or time that WellPoint and Cerulean agree to and specify in the
certificates of merger. We anticipate that, assuming all conditions are met, the
merger will occur within approximately 60 to 90 days after the date of the
special meeting.
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CONSIDERATION TO BE RECEIVED IN THE MERGER
The merger agreement provides for a total amount of merger consideration of
$500 million, subject to adjustments as provided in the merger agreement.
Neither Cerulean nor WellPoint currently anticipates any adjustments to the
merger consideration. Under the merger agreement, holders of each of the Class A
stock and the Class B stock will receive a portion of the total merger
consideration according to exchange ratios which, according to their formulas,
make a total allocation of merger consideration among:
- the holders of Class B stock; and
- the holders of Class A stock, Series A stock and any Class A common stock
participation rights into which the shares of Series A stock are
converted.
The Series A stock and any Class A participation rights are securities of
Cerulean held by the foundation shareholders under the terms of the settlement
relating to the litigation involving the conversion of Blue Cross and Blue
Shield of Georgia from a not-for profit business to a for-profit business. The
exchange ratios are based upon the conversion provisions of Article IV of the
articles of incorporation of Cerulean. Under the Class A stock exchange ratio,
holders of Class A stock, Series A stock and Class A participation rights will
receive a total amount of approximately $389 million of cash or an equivalent
value of WellPoint common stock in the merger, assuming no adjustment to the
total consideration. Other than the foundation shareholders, all holders of
Class A stock were subscribers of Blue Cross and Blue Shield of Georgia during
the conversion period who received their Class A stock as a part of the
conversion. Assuming a cashless exercise of the warrants held by the foundation
shareholders and no adjustments to the total merger consideration, the
foundation shareholders will receive approximately $83.5 million in cash or an
equivalent value of WellPoint common stock. The remaining $305.5 million will be
distributed to all other holders of Class A stock. This results in a value for
each share of Class A stock in the merger of approximately $850 per share, or
$4,250 for each five shares of Class A stock.
Under the exchange ratios, the holders of Class B stock will receive a
total amount of approximately $111 million of WellPoint common stock, assuming
no adjustment to the total merger consideration. Holders of Class B stock are
not entitled to receive cash in the merger.
Merger Consideration to be Received by Holders of Class A Stock in the Merger
Merger Consideration to be Received by Holders of Class A Stock in the
Merger who Received Their Stock as a Result of the Conversion. At the
completion of the merger, each share of Class A stock issued to "eligible
subscribers" of Blue Cross and Blue Shield of Georgia pursuant to its conversion
to a for-profit company will be converted into the right to receive either:
(i) a number of shares of WellPoint common stock equal to
approximately $850, assuming no adjustment to the merger consideration,
divided by the average closing price per share for WellPoint common stock,
as traded on the New York Stock Exchange for the 20 business days
immediately prior to the day that is two business days prior to the date of
completion of the merger; or
(ii) cash in an amount equal to approximately $850, assuming no
adjustment to the merger consideration, as long as no more than
approximately 220,500 shares of this Class A stock are converted into the
right to receive cash.
A holder of the Class A stock received as a result of the conversion will
be entitled to receive cash for his or her Class A stock only if the holder has
elected to receive cash for all of his or her Class A stock. However, if holders
of this Class A stock, in the aggregate, elect to convert more than
approximately 220,500 shares of Class A stock into cash, WellPoint will reduce
each electing holder's cash election on a pro rata basis. Any shares exceeding a
holder's pro rata portion will convert into shares of WellPoint common stock
according to the Class A exchange ratio described above.
Holders of Class A stock received as a result of the conversion who want to
elect cash consideration will be able to make a cash election in connection with
the solicitation of proxies to approve the merger. If a holder of this Class A
stock does not elect to receive cash, each share of that holder's Class A stock
will
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convert into WellPoint common stock according to the Class A exchange ratio
described above. A holder's total number of shares will convert only into whole
shares of WellPoint common stock, along with cash instead of fractional shares.
Merger Consideration to be Received by Holders of Securities Issued as a
Result of the Conversion Litigation Settlement. At the completion of the
merger, each outstanding share of Class A stock issued to the foundation
shareholders, or each share of Series A stock and each outstanding Class A
participation right, will be converted into the right to receive either:
(i) a number of shares of WellPoint common stock equal to
approximately $850, assuming no adjustment to the merger consideration,
divided by the average closing price per share for WellPoint common stock,
as traded on the New York Stock Exchange for the 20 business days prior to
the day that is two business days prior to the date of completion of the
merger; or
(ii) cash in an amount equal to approximately $850, as long as no more
than approximately 44,200 shares or units are converted into the right to
receive cash. If holders of Class A stock issued in connection with the
conversion of Blue Cross and Blue Shield of Georgia elect to convert less
than approximately 220,500 shares of Class A stock into cash, then the
number of shares or units issued in connection with the conversion
litigation settlement which may be converted into the right to receive cash
will increase by an equal number of shares or units.
If the holders of securities issued in connection with the conversion
litigation settlement elect to convert more than the number of shares or units
specified above into cash, WellPoint will reduce each electing holder's cash
election on a pro rata basis. Any shares or units exceeding that pro rata
portion will be converted into shares of WellPoint common stock equal to the
exchange ratio described above.
Cerulean will provide holders of stock issued as a result of the conversion
litigation settlement who elect cash consideration with an additional form to
make that election. If a holder does not elect to receive cash, each share or
unit held by that holder will be converted into WellPoint common stock according
to the exchange ratio described above.
Merger Consideration to be Received by Holders of Class B Stock in the Merger
At the completion of the merger, holders of Class B stock will receive for
each share of Class B stock a number of shares of WellPoint common stock equal
to approximately $2,220 divided by the average closing price per share of
WellPoint common stock for the 20 business days prior to the day that is two
business days before the date of completion of the merger.
Cash Holdback
Regardless of any other provision of the merger agreement, if Cerulean and
its legal counsel, in consultation with counsel to WellPoint, determine that the
cash that WellPoint would otherwise pay to Cerulean shareholders under the
merger agreement, when combined with other cash payable or potentially payable
to a dissenting shareholder or otherwise in connection with the merger, would
jeopardize the merger qualifying as a reorganization under Section 368(a) of the
Internal Revenue Code, WellPoint, at the direction of Cerulean, will reserve
payment of a portion of the cash consideration otherwise payable to such holders
on a pro rata basis until Cerulean reasonably determines that the payment of the
withheld cash would not jeopardize that qualification. If Cerulean ultimately
determines that payment of all or a portion of the withheld cash cannot be made
without jeopardizing the qualification of the merger as a reorganization,
WellPoint will pay the shareholders in shares of WellPoint common stock instead
of cash.
TREATMENT OF FRACTIONAL SHARES
WellPoint will not issue any fractional shares of its common stock in
connection with the merger. Instead of receiving fractional shares, Cerulean
shareholders will receive an amount of cash, without interest, equal to the
fraction of WellPoint common stock a Cerulean shareholder would otherwise have
been entitled to receive, multiplied by the average closing price per share of
WellPoint common stock for
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the 20 business days prior to the day that is two business days before the date
of completion of the merger. In the event that Cerulean and its legal counsel,
after consultation with legal counsel for WellPoint, determine that the payment
of cash for fractional share interests would jeopardize the treatment of the
merger as a tax-free reorganization under Section 368(a) of the Internal Revenue
Code, Cerulean will be entitled to require that WellPoint issue to shareholders
electing to receive cash a whole share of WellPoint common stock in lieu of a
cash payment for a fractional share. If this occurs, WellPoint will subtract an
amount equal to the difference between the average closing price of WellPoint
common stock and the cash value of the fractional share interest from the cash
consideration to be paid to shareholders electing to receive cash.
PROCEDURES FOR ELECTION AND RECEIPT OF MERGER CONSIDERATION
Holders of Class A Stock
Each holder of Class A stock has received a proxy card with this proxy
statement/prospectus. IN ORDER TO RECEIVE THE MERGER CONSIDERATION, EACH HOLDER
OF CLASS A STOCK MUST COMPLETE THE W-9 PORTION OF THE PROXY CARD AND RETURN THE
COMPLETED PROXY CARD TO CERULEAN. After completion of the merger, the exchange
agent appointed by WellPoint will deliver to the Class A shareholder a
certificate representing the number of whole shares of WellPoint common stock
into which the shares of Cerulean Class A stock owned by the holder have been
converted and, if appropriate, cash for any shares converted to cash and for
fractional shares, together with any dividends or other distributions to which
the holder is entitled.
In order to receive cash, a holder of Class A stock of Cerulean must
complete the W-9 certification with the cash election box appropriately checked
and return the proxy card in its return envelope. Cerulean must receive the
proxy card before or at the special meeting for holders of Class A stock. If
WellPoint declares dividends or distributions on its common stock after the
completion of the merger, such dividends or distributions will be payable on all
shares of WellPoint common stock issued and outstanding, including those with
respect to which no W-9 certification has been delivered. However, WellPoint
will not pay any dividends or distributions to any holder of Cerulean Class A
stock who is to receive WellPoint common stock until the W-9 certification has
been received. After completion of the merger and upon delivery of the W-9
certification, WellPoint will pay all dividends or distributions which have
become payable with respect to shares of WellPoint common stock between the
completion of the merger and the date of delivery of the W-9 certification.
However, that payment will not include interest or any amount of taxes that
WellPoint must withhold or pay.
Holders of Class B stock
After the completion of the merger, the exchange agent appointed by
WellPoint will mail a letter of transmittal to each holder of outstanding shares
of Class B stock. The letter of transmittal will inform those holders of the
procedures to follow in forwarding stock certificates representing their shares
of Class B stock to the exchange agent. Once the exchange agent receives a
certificate representing Class B stock, the exchange agent will deliver to the
Class B shareholder a certificate representing the number of whole shares of
WellPoint common stock to which the Class B shareholder is entitled. In
addition, the exchange agent will deliver cash instead of fractional shares
under the terms of the merger agreement and in accordance with the letter of
transmittal, together with any dividends or other distributions to which the
holders are entitled.
No holder of any certificate representing Class B stock will receive any
certificates representing WellPoint common stock or a cash payment until the
holder surrenders its stock certificates to the exchange agent appointed by
WellPoint. After the completion of the merger, each certificate representing
Class B stock that converts into the right to receive WellPoint common stock
will represent ownership of the number of shares of WellPoint common stock that
the holder of the certificate is entitled to receive. Whenever WellPoint
declares a dividend or distribution on stock after the completion of the merger,
these dividends or distributions will be payable on all shares of WellPoint
common stock issued and outstanding. However, WellPoint will not pay any
dividends or distributions to any holder of Class B stock until the
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holder surrenders the certificates representing such shares to the exchange
agent. Upon delivery of these certificates, or as soon as practicable after the
delivery, WellPoint will pay all dividends or distributions which have become
payable with respect to shares of WellPoint common stock represented by such
surrendered Cerulean certificates between the completion of the merger and the
date of delivery of those certificates. This payment will not include any
interest or the amount of taxes, if any, that WellPoint must withhold or pay.
LOST, STOLEN OR DESTROYED CERTIFICATES
Holders of Class B stock of Cerulean who are unable to furnish certificates
for their shares must furnish an affidavit of loss in place of the lost, stolen
or destroyed Cerulean certificate. WellPoint will use the affidavit of loss as
the basis upon which it will deliver the WellPoint common stock to be received
by that shareholder.
WellPoint will not require Class A shareholders to furnish the registration
notifications which Cerulean previously provided to its Class A shareholders in
connection with the conversion of Blue Cross Blue Shield of Georgia as evidence
of ownership. Therefore, no Class A shareholder will need to provide an
affidavit of loss. Instead, WellPoint will require holders of the Class A stock
to certify on the proxy card their ownership to the exchange agent appointed by
WellPoint.
At the time of completion of the merger, Cerulean will close its stock
transfer books and will not make any further transfers of shares of Class A
stock, Class B stock, or Series A stock or units of Class A participation
rights.
REGULATORY APPROVALS; APPROVAL OF BLUE CROSS AND BLUE SHIELD ASSOCIATION
The merger agreement provides that we must obtain the following approvals
as a condition to our obligations to complete the merger:
- any waiting period applicable to the merger under the Hart-Scott-Rodino
Act must have expired, or the Federal Trade Commission must have granted
earlier termination of the waiting period;
- we must obtain the consent of the Georgia Insurance Commissioner to the
merger, together with any other state regulatory consents; and
- the Blue Cross and Blue Shield Association must approve the merger.
U.S. Antitrust Filing
Under the Hart-Scott-Rodino Act and the rules and regulations under the
act, specified waiting period requirements must expire or terminate before
certain transactions, including the merger, may be completed. On August 25,
1998, WellPoint filed a Pre-Merger Notification and Report Form, as required by
the Hart-Scott-Rodino Act, with the Justice Department and the Federal Trade
Commission. Cerulean made a similar filing on August 26, 1998. Under the
Hart-Scott-Rodino Act, WellPoint and Cerulean cannot complete the merger until
30 days after the initial filing, unless the Federal Trade Commission grants
early termination of this waiting period. In addition, if the Justice Department
or the Federal Trade Commission issues a Request for Documents and Other
Additional Information, WellPoint and Cerulean cannot complete the merger until
20 days after they comply with that request, unless the Federal Trade Commission
grants an early termination that shortens this period. The Federal Trade
Commission granted an early termination of the waiting period, effective
September 4, 1998. The Hart-Scott-Rodino Act would not have required any further
action if the merger had been consummated prior to the one year anniversary of
the effective date of the early termination.
On July 28, 1999, WellPoint and Cerulean filed a second Pre-Merger
Notification and Report Form because they had not yet completed the merger. The
Federal Trade Commission granted an early termination of the second waiting
period, effective August 16, 1999. Due to the continued delay in the completion
of the merger, WellPoint and Cerulean filed a third Pre-Merger Notification and
Report Form
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on July 24, 2000. The Federal Trade Commission granted an early termination of
the third waiting period, effective August 4, 2000. Despite the grant of early
termination, however, the Federal Trade Commission, the Justice Department or
others could still take action under the antitrust laws with respect to the
merger, including seeking to enjoin the completion of the merger, to rescind the
merger, or to require the divestiture of certain assets of WellPoint or
Cerulean.
Georgia Insurance Commissioner
Under the Georgia Insurance Code, in order to complete the merger, the
Georgia Insurance Commissioner must approve the change of control of Cerulean.
To accomplish this, WellPoint filed a Form A, as required by the Georgia
Insurance Code, with the Georgia Insurance Commissioner on November 4, 1998.
Under the Georgia Insurance Code and regulations under the code, Cerulean must
forward a copy of the Form A filing to all of its shareholders. As permitted by
the Georgia Insurance Code, Cerulean will use this proxy statement/prospectus to
satisfy many of the informational requirements of the Form A filing. The Georgia
Insurance Code requires that a public hearing be held within 30 days after the
Georgia Insurance Commissioner deems the Form A filing complete. Cerulean must
give notice of the hearing to its shareholders. The Georgia Insurance
Commissioner has set , 2000 as the tentative
date for the public hearing. However, a public hearing on those dates is
contingent upon the completion of several other matters, most notably an
affirmative vote of the Cerulean shareholders at the meeting and the receipt by
the Georgia Insurance Commissioner of an opinion from an independent financial
advisor that the merger is fair and reasonable to Cerulean's shareholders. The
hearing could also be delayed by other unexpected circumstances, including
further developments in the Richmond County litigation.
We have included a notice of the Form A hearing with this proxy
statement/prospectus, which is the only notice you will receive for the public
hearing. The Georgia Insurance Commissioner is obligated to make a determination
with respect to the proposed change of control within 30 days after the
conclusion of the public hearing. The consumer advocate created by legislation
adopted in the 1999 Georgia legislative session may participate in the
proceeding.
The Georgia Insurance Code provides that the Georgia Insurance Commissioner
must approve the change of control unless the commissioner finds that:
- following the transaction, Cerulean's regulated subsidiaries would be
unable to satisfy requirements for the issuance of insurance licenses;
- the merger would substantially lessen competition or create a monopoly;
- the financial condition of WellPoint might jeopardize the financial
condition of Cerulean or its subsidiaries or prejudice the interests of
policyholders or remaining security holders who are unaffiliated with
WellPoint;
- the merger is unfair and unreasonable to security holders of Cerulean;
- plans of WellPoint regarding the business, assets, structure or
management of Cerulean are unfair and unreasonable to policyholders of
insurance subsidiaries of Cerulean, including Blue Cross and Blue Shield
of Georgia, and not in the public interest; or
- permitting the merger would not be in the interest of policyholders of
insurance subsidiaries of Cerulean, including Blue Cross and Blue Shield
of Georgia, and the public because of the competence, experience and
integrity of the persons who would control the operations of Cerulean
after the merger.
Other State and Federal Approvals and Notices
Several of the states in which Greater Georgia Life Insurance Company
conducts business have statutes that require regulatory filings that allow the
various state departments of insurance to assess the effects, if any, that
certain transactions would have on competition in their respective states.
Concentration
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of the market above certain thresholds triggers these filings. Cerulean does not
believe that the merger triggers any of these filing requirements, but will file
courtesy notifications with the insurance departments of Alabama, Mississippi,
North Carolina, South Carolina and Tennessee confirming that the merger does not
trigger applicable market concentration thresholds. These filings do not require
either hearings or approvals.
In addition, the Health Care Financing Administration must approve the
transfer of control of the Blue Cross and Blue Shield of Georgia programs that
will occur because of the merger.
Blue Cross Blue Shield Association
Pursuant to the bylaws of the Blue Cross and Blue Shield Association, the
Blue Cross and Blue Shield Association must approve any change of control of any
Blue Cross Blue Shield licensee, such as the change of control of Cerulean, Blue
Cross and Blue Shield of Georgia and HMO Georgia. The entity seeking the license
initiates the process for obtaining approval. The Blue Cross and Blue Shield
Association then considers the application and its board of directors takes
action within 90 days of the filing of the application. In October 1998,
WellPoint and Cerulean jointly submitted an application to the Blue Cross and
Blue Shield Association seeking its approval. In November 1998, the Blue Cross
and Blue Shield Association approved the application.
LISTING OF WELLPOINT COMMON STOCK ON THE NEW YORK STOCK EXCHANGE
WellPoint common stock is currently listed on the New York Stock Exchange
under the symbol "WLP." WellPoint has filed an application to list any newly
issued shares of WellPoint common stock to be issued in the merger on the New
York Stock Exchange. The New York Stock Exchange has approved this application,
subject to official notice of issuance. The listing on the New York Stock
Exchange of the shares of WellPoint common stock to be issued in the merger is a
condition to the completion of the merger in the merger agreement.
INTERESTS OF CERTAIN PERSONS IN THE MERGER
In considering the recommendation of the Cerulean board of directors,
Cerulean shareholders should be aware that some of the members of Cerulean's
management and the Cerulean board of directors may have interests in the merger
that are different from, or in addition to, the interests of Cerulean
shareholders generally, and that may create potential conflicts of interest.
Payments to Management Resulting from the Merger
Completion of the merger triggers certain obligations of Cerulean to make
payments to some members of its management or to make contributions to a trust
on behalf of some members of management. These payments and contributions are
attributable to plans and individual agreements that Cerulean has adopted for
these members of management. Each of the named executive officers of Cerulean
will participate in the payments made under these plans and arrangements.
Cerulean and WellPoint estimate that, assuming a completion date of
December 31, 2000, upon completion of the merger:
- the total amount payable to participants of Cerulean's Performance Unit
Plan will be approximately $27,890,000;
- the amount necessary to fund Blue Cross and Blue Shield of Georgia's
Supplemental Executive Retirement Plan and an agreement with Richard D.
Shirk to provide him a nonqualified retirement benefit to supplement the
benefit provided to him under the Non-Contributory Retirement Program for
Certain Employees of Blue Cross and Blue Shield of Georgia will be
approximately $14,669,570; and
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- the excise tax on these amounts, including amounts paid to benefit
recipients for the payment of their taxes on benefits received, may be as
much as $13,755,702.
Accordingly, Cerulean estimates that the total cost of the obligations
under these arrangements payable as a result of the completion of the merger to
some 253 key employees of Cerulean and Blue Cross and Blue Shield of Georgia who
are participants, including excise taxes and amounts paid to benefit recipients
for the payment of their taxes due on benefits received, may be as much as
$56,315,272. Cerulean has used the following assumptions in order to provide a
conservative estimate of the total cost of these obligations:
- an interest rate of 5.25%, for calculating present values for purposes of
the funding obligation under the general Supplemental Executive
Retirement Plan and 6.15% for the Supplemental Executive Retirement Plan
for Mr. Shirk;
- a per unit value of $50.00 for calculating the obligation under the
Performance Unit Plan; and
- an individual tax rate of 44.67%.
This amount does not include certain annual bonuses which may be accelerated as
a result of the completion of the merger. Specifically, if the completion of the
merger occurs on a date prior to December 31, Cerulean has an obligation to pay
immediately a pro rata portion of the annual incentive bonuses for key employees
who have change-in-control severance agreements with Cerulean. If the bonuses
become payable before they would normally be earned, they may be subject to
excise taxes. No director other than Mr. Shirk, the Chief Executive Officer of
Cerulean, is a participant in these plans.
A description of the plans and agreements and the payments resulting from
the merger follows.
Performance Unit Plan. On July 30, 1997, the compensation committee of the
board of directors of Cerulean adopted the Performance Unit Plan, effective
February 2, 1996, to replace the Cerulean Long-Term Incentive Plan. The
objective of the Performance Unit Plan was to provide a reward to management for
the growth in value of Cerulean. The compensation committee of the Cerulean
board of directors administers the Performance Unit Plan, which provides that
the compensation committee will award up to an aggregate of one million units to
designated key employees. The terms of the Performance Unit Plan established a
beginning value of Cerulean of $221,100,000, as determined as of February 2,
1996, with a beginning unit value of $22.11. Under the Performance Unit Plan,
participants become vested in their units upon the occurrence of the earliest of
a "change in control" of Cerulean, the participant's death, disability or
retirement under the Cerulean tax-qualified retirement plan, the end of a
measurement period or December 31, 1999. The Performance Unit Plan defines the
term "measurement period" as the period beginning on February 2, 1996 and ending
on the date when Cerulean's value is first determinable. This would occur upon a
market event that creates a definite value for Cerulean and results in liquidity
for Cerulean's shareholders. The Cerulean board of directors has the authority
to determine when such a market event has occurred, until the time when
Cerulean's common stock is listed or traded on a recognized United States stock
exchange. Cerulean must make payments at the end of the measurement period.
However, if a change in control of Cerulean occurs first, Cerulean must make
payment as soon as practicable after that change in control. The compensation
committee of Cerulean's board of directors, consistent with Georgia law (which
does not permit the change of control of an insurance holding company such as
Cerulean without the written approval of the Georgia Insurance Commissioner) has
interpreted the definition of "change of control" for the purposes of the
Performance Unit Plan to mean a liquidity event for Cerulean's shareholders.
Under this definition, the completion of the merger with WellPoint will
constitute a change in control for purposes of the Performance Unit Plan.
For any amount to be payable under the Performance Unit Plan, the value of
Cerulean must have increased sufficiently from the beginning unit value to meet
the performance hurdle established under the Performance Unit Plan, which is the
average yield of One-Year Treasury Bills, as specified in The Wall Street
Journal on the published date nearest to the end of each quarter for the
preceding year, compounded over the measurement period. Assuming that the value
exceeds the performance hurdle, Cerulean must make a payment to eligible people
equal to the amount of the difference between the
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beginning unit value and the unit value at the end of the measurement period
multiplied by the number of units awarded. Cerulean must make the payment in
cash, Cerulean stock or any combination of the two, subject to withholding for
taxes. It must make the payment as soon as practicable after the end of the
later of when vesting occurs or the end of a measurement period. The merger with
WellPoint establishes a value that satisfies the performance hurdle.
As of June 30, 2000 Cerulean has granted 945,295 unit awards to 253 key
employees. Assuming a purchase price of $500 million, the per unit value under
the Performance Unit Plan will be $27.89. Awards to the named executive officers
of Cerulean and the amounts that become payable to them under the Performance
Unit Plan due to the merger are as follows:
- Richard D. Shirk: 138,000 units, $3,848,820;
- Richard F. Rivers: 30,000 units, $836,700;
- John A. Harris: 67,000 units, $1,868,630;
- Mark Kishel: 55,000 units, $1,533,950; and
- Stuart G. Wright: 25,000 units, $697,250.
The total of all payments for the 1,000,000 units under the Performance Unit
Plan is $27,890,000. The total of all payments under the Performance Unit Plan
to key employees other than the named executive officers is $17,578,927. These
employees hold 630,295 units. Cerulean anticipates that it will award the
remaining units prior to the completion of the merger.
Blue Cross and Blue Shield of Georgia, Inc. Supplemental Executive
Retirement Plan. Effective as of July 1, 1996, Blue Cross and Blue Shield of
Georgia adopted the Supplemental Executive Retirement Plan to provide
additional, nonqualified retirement benefits to a designated group of management
employees. Blue Cross and Blue Shield of Georgia's compensation committee
administers the plan, which supplements the Non-Contributory Retirement Program
for Certain Employees of Blue Cross and Blue Shield of Georgia. The Chief
Executive Officer of Blue Cross and Blue Shield of Georgia recommends
participants and the compensation committee designates those employees who
participate. In general, each participant in the Supplemental Executive
Retirement Plan becomes entitled to receive a retirement benefit equal to the
difference between:
- the benefit that the participant would be entitled to under the
Non-Contributory Retirement Program calculated as if the participant were
credited with two years of service for each year of actual service up to
a maximum of 30 years, and without application of the compensation or
annual additions limitations imposed under Sections 401(a)(17) and 415 of
the Internal Revenue Code; and
- the sum of the participant's vested accrued benefit under the
Non-Contributory Retirement Program and his vested accrued benefit under
the Blue Cross and Blue Shield of Georgia, Inc. Executive Restoration
Plan and any other nonqualified defined benefit plan sponsored by Blue
Cross and Blue Shield of Georgia or any affiliate which pertains to the
same periods of service.
Benefits under the Supplemental Executive Retirement Plan generally become
payable upon the participant's termination of employment due to disability or
retirement after reaching age 55 and completion of five years of service.
Cerulean may make payments in a lump sum or any form offered under the
Non-Contributory Retirement Program. If payment commences before the participant
reaches age 65, the benefit amount is reduced by 0.25% for each month by which
payment precedes the first day of the month coinciding with or next following
the participant's attainment of age 62.
The Supplemental Executive Retirement Plan provides that if Cerulean
terminates the employment of a participant within one year following a change in
control for reasons other than death or disability, the participant becomes
vested and entitled to receive all benefits accrued under the Supplemental
Executive Retirement Plan as of the date of that termination if the termination
arose from voluntary termination for "good reason" or dismissal without "just
cause." In this instance, Cerulean must pay the participant as of
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the later of the first day of the month following the termination of employment
or the first day of the month following the participant's 55th birthday.
The Supplemental Executive Retirement Plan contains a definition of "change
in control" that is similar to that contained in the Performance Unit Plan, and
the completion of the merger will meet the definition of a change in control.
The plan defines the term "good reason" as the occurrence after a change in
control of either a reduction in the nature or status of the participant's
responsibilities or a reduction of the participant's base salary. The plan
defines the term "just cause" as:
- an act of fraud, embezzlement, theft or other felonious criminal act;
- willful and continued failure to substantially perform his duties; or
- willful engagement in conduct that is demonstrably and materially
injurious to Blue Cross and Blue Shield of Georgia and its affiliated
companies.
The Supplemental Executive Retirement Plan is generally an unfunded
obligation of Blue Cross and Blue Shield of Georgia. As of January 1, 1997, Blue
Cross and Blue Shield of Georgia entered into a trust agreement with Wachovia
Bank of North Carolina, N.A., as Trustee, to establish the Blue Cross and Blue
Shield of Georgia, Inc. Nonqualified Retirement Trust. Blue Cross and Blue
Shield of Georgia contributes assets to the trust for the purpose of payment of
the benefits under the Supplemental Executive Retirement Plan, the Supplemental
Executive Retirement Plan for Richard D. Shirk and other nonqualified plans,
subject to the claims of Blue Cross and Blue Shield of Georgia's creditors in
the event of its insolvency or bankruptcy. The terms of the trust provide that
no later than 30 days following a change in control, Blue Cross and Blue Shield
of Georgia will make an irrevocable contribution to the trust in an amount
sufficient to fund more than 100% of the benefits accrued under the various
nonqualified plans of Blue Cross and Blue Shield of Georgia. For these purposes,
the definition of "change in control" is similar to that contained in the
Performance Unit Plan and the Supplemental Executive Retirement Plan documents.
The Blue Cross and Blue Shield of Georgia board of directors has the
responsibility of informing the trustee that a change in control has occurred. A
change of control does not accelerate the timing of payment under the
nonqualified plans.
Eight individual key management employees participate in the Supplemental
Executive Retirement Plan. The funding obligation of the trust will require Blue
Cross and Blue Shield of Georgia to make a contribution to the trust within 30
days following the shareholders' approval of the proposed merger. Four of the
named executive officers participate in the Supplemental Executive Retirement
Plan, and the contributions attributable to their accrued benefits as of
December 31, 2000 are estimated as follows:
- Richard F. Rivers -- $311,161;
- John A. Harris -- $870,183;
- Mark Kishel -- $957,787;
- Stuart G. Wright -- $1,192,573.
The trust requires contributions for the remaining executives estimated at
$3,871,877.
Agreement for Supplemental Executive Retirement Plan between Blue Cross and
Blue Shield of Georgia, Inc. and Richard D. Shirk. On December 1, 1996, Blue
Cross and Blue Shield of Georgia entered into the Supplemental Executive
Retirement Plan for Mr. Shirk, which was amended on March 7, 1998 with an
effective date of January 1, 1998. Mr. Shirk becomes eligible for benefits under
the plan upon the termination of his employment for any reason other than his
voluntary termination without good reason. Mr. Shirk's employment agreement with
Cerulean defines the term "good reason" as:
- any assignment of duties significantly different from those contemplated
by the employment agreement or any material limitation in his authority,
powers or responsibilities;
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- failure to be elected or removal as a member of the board of directors of
either Cerulean or Blue Cross and Blue Shield of Georgia unless a change
in Georgia law requires the removal or non-election;
- receipt of any notice limiting the term of the employment agreement to
two years;
- a material breach by either Cerulean or Blue Cross and Blue Shield of
Georgia of any of the material provisions of the employment agreement
which is not cured within 30 days after notice; and
- a change in control.
For purposes of the employment agreement and Mr. Shirk's supplemental plan,
the term "change in control" is defined as:
- the acquisition of ownership of stock or securities of either Cerulean or
Blue Cross and Blue Shield of Georgia representing 5% or more of the
voting power of any class of stock or securities of either Cerulean or
Blue Cross and Blue Shield of Georgia, except as may be acquired by
institutional investors if the stock or securities are traded on a
recognized exchange or through the Nasdaq Stock Market;
- the date on which a majority of the members of the board of either
Cerulean or Blue Cross and Blue Shield of Georgia are no longer
continuing directors, as defined in the license agreement between
Cerulean and the Blue Cross and Blue Shield Association, originally dated
February 2, 1996;
- approval by the shareholders of Cerulean or Blue Cross and Blue Shield of
Georgia of any merger, consolidation or share exchange as a result of
which the securities of Cerulean or Blue Cross and Blue Shield of Georgia
will be changed, converted or exchanged into the shares of another
corporation, the liquidation of Cerulean or Blue Cross and Blue Shield of
Georgia or the sale or disposition of 50% or more of the assets or
earning power of either Cerulean or Blue Cross and Blue Shield of
Georgia; or
- approval by the shareholders of any plan of consolidation, merger or
share exchange which would result in the persons who were shareholders
immediately prior to such transaction retaining less than 50% of the
voting power to elect directors of the surviving corporation.
The completion of the merger with WellPoint would constitute a change in control
under this definition.
The benefits payable under Mr. Shirk's supplemental plan vary, depending on
his age at the time of his termination of employment. If he is less than age 55
at the time of his termination, his monthly benefit equals 2% of his final
average earnings times his years of credited service, minus 21%, which
represents a reduction of 3% per year for each year that the benefit begins
before age 62, minus the monthly annuity amount he would receive from the
Non-Contributory Retirement Program, and minus the actuarial equivalent value of
the monthly benefit he would receive from Social Security at age 62. If
termination occurs after age 55 but before age 60, his monthly benefit would
equal 2% of his final average earnings for each of his first 25 years of
credited service, minus 0.25% for each month that his termination precedes his
62nd birthday, plus 3% of his final average earnings for each of his next five
years of credited service, minus the monthly annuity amount he would receive
from the Non-Contributory Retirement Program, and minus the actuarial equivalent
of the monthly benefit he would receive from Social Security at age 62. If his
employment is terminated after age 60, his monthly benefit would equal 65% of
his final average earnings, minus the monthly annuity amount he would receive
from the Non-Contributory Retirement Program, minus the actuarial equivalent
value of the monthly benefit he would receive from Social Security at age 62.
Mr. Shirk's supplemental plan deems him to have completed 25 years of
credited service at age 55. For each year after age 55, he will earn an
additional year of service, up to a maximum of 30 years. The first amendment to
the plan, dated December 1, 1996, defines the term "final average earnings" to
equal
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one-twelfth of the final average earnings amount determined under the
Non-Contributory Retirement Program, with the following modifications:
- the plan would not limit final average earnings to the compensation
limits imposed by Section 401(a)(17) of the Internal Revenue Code;
- the plan would include cash incentive payments, regardless of whether Mr.
Shirk received or deferred them;
- if his market target rate for any given calendar year exceeds his base
salary rate, the plan uses the market target rate in the calculation, and
market target rate is to equal the 50th percentile market rate as
determined by the compensation committee on an annual basis.
Mr. Shirk's supplemental plan provides that Blue Cross and Blue Shield of
Georgia should continuously fund the benefits through a grantor trust. Blue
Cross and Blue Shield of Georgia has made contributions to the previously
mentioned trust for this purpose.
If Mr. Shirk terminates employment following a change in control for any
reason other than voluntarily without good reason, the amount of his monthly
benefit is the greater of the normal calculation described above, depending on
his age at that time, or 60% of his final average earnings. This amount would
not include any reduction for early commencement, but would include reductions
for benefits payable under the Non-Contributory Retirement Program and Social
Security. Cerulean may pay benefits in a lump sum payment or any optional form
of payment permitted under the Non-Contributory Retirement Program.
Because Mr. Shirk's employment agreement defines "good reason" to include a
change in control, he may voluntarily terminate his employment at any time
following a change in control of Cerulean or Blue Cross and Blue Shield of
Georgia, at which point he would be entitled to immediate payment of the
benefits under his supplemental plan. In addition, due to the continuous funding
requirement of Mr. Shirk's supplemental plan and the change in control funding
requirement of the trust, Cerulean anticipates that the trust will require
contributions within 30 days of a change in control to prefund Mr. Shirks'
entire benefit. As of December 31, 2000, Cerulean estimates that the amount of
Mr. Shirk's benefit under his supplemental plan will be $7,465,989. The trust
held assets valued at $3,678,134 as of June 30, 2000 and Cerulean estimates that
the trust will hold assets valued at approximately $4,067,042 as of December 31,
2000.
In addition, as of January 1, 1997, Cerulean amended Mr. Shirk's employment
agreement to state that Cerulean will provide Mr. Shirk an additional cash
payment sufficient to cover any excise tax imposed on him under Sections 280G or
4999 of the Internal Revenue Code on the total payments he receives under any
plan or arrangement as a result of a change in control. The employment agreement
also requires an additional payment to cover the state and federal income taxes
and employment taxes on the excise tax payment.
Change in Control Severance Agreements. In January 1998, Cerulean entered
into individual change in control severance agreements with 38 key employees.
Ten executives entered into Tier I agreements, and 28 key employees entered into
Tier II agreements. These agreements each have an initial term that ends on
December 31, 2001, which automatically extends for an additional year absent
notice from either party or upon a public announcement of an intended change in
control of Cerulean.
The agreements provide that if, during the term of the agreement, Cerulean
terminates the employment of the employee without "cause," the employee
terminates his or her employment for "good reason" or due to disability
following a public announcement of an intended change in control of Cerulean, or
if Cerulean fails to renew the agreement within 90 days prior to the public
announcement of an intended change in control, then Cerulean must pay the
employee severance benefits in a lump sum no later than 30 days following
termination of employment.
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The severance benefits for employees under the agreements include:
- all earned but unpaid base salary, earned and accrued vacation pay,
universal leave pay, unreimbursed business expenses and other amounts
that Cerulean owes;
- an amount equal to two times the sum of (a) and (b) where (a) equals the
greater of annual base salary at the time of termination or annual base
salary prior to public announcement of intended change in control, and
(b) equals the average of any bonuses that the employee receives under
the Cerulean Annual Incentive Plan during the two-year period that ended
immediately before the year in which the public announcement of the
intended change in control occurs, or, for Tier II agreements, an amount
equal to one times that sum;
- if the employee is at least age 50 or has completed ten years of service
as of the date of termination, for purposes of calculating his benefits
under the Non-Contributory Retirement Program, the Supplemental Executive
Retirement Plan, the Restoration Plan or any other tax-qualified or
nonqualified defined benefit pension plan, he is considered to be 100%
vested as of the date of his termination and he is considered to have
either three additional years of service or three additional years of
age, whichever produces the greater benefit payable to the employee,
except that the additional three years of service will not be eligible
for the double counting under the Supplemental Executive Retirement Plan;
- an amount sufficient for the employee to purchase health and dental
insurance, life insurance and long-term disability insurance coverage for
himself and his dependents for 24 months, at the same cost and level of
coverage as the employee had at his date of termination, with the
continuation period required by the Consolidated Omnibus Budget
Reconciliation Act of 1985 beginning on date of termination; and
- up to $20,000 of outplacement services from a nationally recognized
outplacement firm chosen by the employee, or, for Tier II agreements, up
to $10,000 of these services.
The change in control severance agreements also provide that if a change in
control occurs during the term of the agreement, or if Cerulean publicly
announces an intended change in control within 90 days after the term of the
agreement has ended, certain benefits become payable regardless of whether
Cerulean terminates the employee. These benefits include:
- the bonus, if any, which the employee would have earned under the
Cerulean Annual Incentive Plan if Cerulean annualizes the level of goal
achievement, adjusted on a pro rata basis for the number of days that
Cerulean actually employed the employee during the year; and
- the amount payable under the award to the employee under the Performance
Unit Plan.
Cerulean must pay these amounts no later than 30 days following the change in
control. In addition, all stock options, restricted stock or performance shares
that Cerulean has granted to the employee during the term of the agreement
become fully vested upon a change in control. The definition of "change in
control" in these agreements is similar to that contained in the Performance
Unit Plan. Completion of the merger with WellPoint will be a change in control.
Each of the change in control severance agreements contains provisions
requiring Cerulean to provide the employee an additional cash payment sufficient
to cover any excise tax payment and an additional gross up payment to cover the
state and federal income taxes and employment taxes on the excise tax payment.
The four named executive officers who have entered into Tier I change in
control severance agreements are Richard F. Rivers, John A. Harris, Mark Kishel,
and Stuart G. Wright.
Interests of Cerulean Directors
The merger agreement provides that, from and after the time of completion
of the merger, WellPoint and Cerulean will not take any action which would have
the effect of eliminating or impairing the rights of
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current or former officers and directors of Cerulean to be indemnified in
accordance with the Cerulean articles of incorporation and bylaws and applicable
law.
The merger agreement also provides that, as of the completion of the
merger, one person who was a member of the board of directors of Cerulean on the
date of the merger agreement will be nominated for election to the board of
directors of WellPoint. As of the date of this proxy statement/prospectus,
WellPoint and Cerulean have not designated this director.
Mr. Shirk is also a director of Cerulean. Joe M. Young is a director of
Cerulean and an affiliate of a holder of Class B stock. Frank J. Hanna, III, a
director of Cerulean, is an affiliate of Georgia Strategic Healthcare, which
holds 80.16% of the Class B stock. WellPoint will enter into a registration
rights agreement with Georgia Strategic Healthcare. John W. Robinson, Jr. is a
director of Cerulean and holds five shares of Class A stock.
RESALE OF WELLPOINT COMMON STOCK; RESTRICTIONS ON RESALES BY AFFILIATES
WellPoint has registered under the Securities Act of 1933 the shares of
WellPoint common stock that it will issue to Cerulean shareholders in the
merger. Those shareholders not deemed to be "affiliates" of Cerulean may trade
these shares freely and without restriction. An affiliate of Cerulean, as
defined by the rules under the Securities Act, is a person who directly or
indirectly, through one or more intermediaries, controls, is controlled by, or
is under common control with, Cerulean. Any subsequent transfer by an affiliate
of Cerulean must comply with the resale provisions of Rule 145 under the
Securities Act or other applicable rules under the Securities Act.
The merger agreement provides that WellPoint will enter into a registration
rights agreement with each shareholder of Cerulean who will be subject to the
resale limitations of Sections (c) and (d) of Rule 145 as of the date of the
merger agreement. This agreement will provide each of these shareholders
approximately the ability of all other Cerulean shareholders receiving WellPoint
common stock to sell any or all of their WellPoint common stock at any time
after completion of the merger. These restrictions will apply to Georgia
Strategic Healthcare, which owns 80.16% of the outstanding Class B stock and of
which Frank J. Hanna, III, a director of Cerulean, is an affiliate. Accordingly,
WellPoint will enter into the registration rights agreement with Georgia
Strategic Healthcare. Under the terms of the registration rights agreement,
WellPoint must, at the time of completion of the merger, have an effective
registration statement under the Securities Act with respect to any shares of
WellPoint common stock that Georgia Strategic Healthcare receives in the merger.
The registration statement must allow for sales of these shares on a delayed and
continuous basis for at least 90 days following the merger. In addition, Georgia
Strategic Healthcare will have certain demand registration rights in accordance
with the terms of the registration rights agreement.
To the best of Cerulean's knowledge, no Cerulean shareholder, other than
Georgia Strategic Healthcare, will have any limitations on that shareholder's
ability to sell all or any part of the shares of WellPoint common stock received
by the shareholder in the merger at any time after the shareholder's receipt of
those shares.
MATERIAL FEDERAL INCOME TAX CONSEQUENCES OF THE MERGER
In the opinion of Gibson, Dunn & Crutcher LLP, counsel to WellPoint, and
Long Aldridge & Norman LLP, counsel to Cerulean, the following discussion
describes the federal income tax consequences of the merger that are material to
you as a Cerulean shareholder. The following discussion is not a complete
analysis of all potential tax consequences that may be relevant to you as a
Cerulean shareholder. This discussion does not address the state, local or
foreign tax aspects of the merger, or the consequences of transactions completed
before or after the merger. In addition, it does not discuss the federal income
tax considerations that may be relevant to certain persons, including the
foundation shareholders and
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holders of options or others receiving compensation in connection with the
merger. Furthermore, this discussion may not apply to:
- holders subject to special tax rules, including dealers in securities,
banks, insurance companies or tax-exempt organizations;
- holders subject to the alternative minimum tax;
- holders who hold their shares as part of a hedge, straddle or other risk
reduction transaction;
- holders who do not hold their shares of Cerulean stock as a capital
asset;
- foreign holders; and
- holders who acquired their shares of Class A stock or Class B stock
pursuant to the exercise of options or otherwise as compensation.
We have based this discussion on current provisions of the Internal Revenue
Code, treasury regulations issued under the Internal Revenue Code, and current
administrative rulings and court decisions. All of these sources are subject to
change, possibly on a retroactive basis, and any change could affect the
continuing validity of this discussion.
THE PARTICULAR TAX ATTRIBUTES OF EACH CERULEAN SHAREHOLDER WILL VARY.
FURTHERMORE, THE TAX CONSEQUENCES OF THE MERGER TO EACH CERULEAN SHAREHOLDER
WILL VARY DEPENDING UPON WHETHER THE SHAREHOLDER RECEIVES SOLELY WELLPOINT
COMMON STOCK, A COMBINATION OF CASH AND WELLPOINT COMMON STOCK, OR SOLELY CASH.
CONSEQUENTLY, WE URGE EACH CERULEAN SHAREHOLDER TO CONSULT HIS, HER, OR ITS OWN
TAX ADVISOR AS TO THE SPECIFIC TAX CONSEQUENCES OF THE MERGER, INCLUDING THE
APPLICATION AND EFFECT OF ANY STATE, LOCAL, AND FOREIGN TAX LAWS.
Gibson, Dunn & Crutcher LLP has rendered an opinion to WellPoint, and Long
Aldridge & Norman LLP has rendered an opinion to Cerulean, that the merger will
be treated as a "reorganization" within the meaning of Section 368(a) of the
Internal Revenue Code. We have filed these opinions as exhibits to the
registration statement of which this proxy statement/prospectus is a part. The
opinions are subject to the limitations, qualifications and assumptions referred
to in this section and in the opinions. As a condition to closing the merger,
WellPoint and Cerulean each must receive an opinion from its tax counsel
reaffirming that the merger will be treated as a reorganization for federal
income tax purposes. If either Cerulean or WellPoint waive this condition
because the merger would not be treated as a reorganization, that waiver would
constitute a material change to this proxy statement/prospectus. As a result, we
would have to amend this proxy statement/prospectus and resolicit proxies. In
rendering their opinions with respect to this discussion and the status of the
merger as a reorganization, tax counsel to WellPoint and Cerulean have relied
and will rely upon, and have assumed and will assume the accuracy of:
- certain factual matters;
- information contained in this proxy statement/prospectus; and
- representations as to factual matters made by WellPoint and Cerulean.
Any inaccuracy or change in the information, representations or
assumptions, or any past or future actions by WellPoint or Cerulean contrary to
the information, representations or assumptions could adversely affect the
conclusions reached in the opinions and the tax discussion set forth below.
These opinions will not, however, be binding on the Internal Revenue
Service or the courts. If, contrary to the conclusions reached in the opinions
and as discussed under "Risk Factors" on page 12, the merger is not treated as a
reorganization for federal income tax purposes, the merger will be a fully
taxable transaction to Cerulean and to the Cerulean shareholders. This treatment
could give rise to a material tax liability to Cerulean and Cerulean
shareholders. We have based the balance of this discussion on the conclusion in
the opinions that the merger will be treated as a reorganization.
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Tax Consequences of the Merger to Cerulean Shareholders. The federal
income tax consequences of the merger to the Cerulean shareholders will depend
on whether the shareholders receive solely WellPoint common stock, solely cash,
or a combination of cash WellPoint common stock in the merger.
Cerulean Shareholders Who Receive Solely WellPoint Common Stock in Exchange
for Cerulean Class A or Class B Stock in the Merger. A Cerulean shareholder who
exchanges shares of Class A stock or Class B stock solely for shares of
WellPoint common stock will not recognize any gain or loss on the exchange,
except for gain or loss attributable to any cash received instead of a
fractional share of WellPoint common stock, as we discuss below. The aggregate
tax basis of the shares of WellPoint common stock received by the shareholder in
the merger will be the aggregate tax basis of the shares of Cerulean stock
surrendered in the merger. Also, the shareholder's holding period for federal
income tax purposes for the WellPoint common stock received in the merger will
include the period during which the shareholder held shares of Cerulean stock
that the shareholder surrendered in exchange for the shares of WellPoint common
stock.
Cerulean Shareholders Who Receive a Combination of WellPoint Common Stock
and Cash in Exchange for Cerulean Class A Stock in the Merger. If a Cerulean
shareholder realizes a loss upon the exchange of Class A stock for a combination
of cash and WellPoint common stock, the shareholder cannot recognize that loss,
except for any loss attributable to any cash received instead of a fractional
share of WellPoint common stock as discussed below. If the Cerulean shareholder
realizes gain, he or she will recognize that gain in an amount equal to the
lesser of:
- the amount of cash received by the shareholder; and
- the amount of gain realized by the shareholder, except that cash received
instead of a fractional share of WellPoint common stock will be treated
as discussed below.
The gain or loss realized equals the difference between the sum of cash and
fair market value of WellPoint common stock received by the shareholder and the
shareholder's tax basis in the Class A stock that the shareholder surrendered.
The character of the gain recognized depends on the particular facts and
circumstances relating to each Cerulean shareholder. Any gain that the
shareholder recognizes as a result of the receipt of cash will generally be
characterized as capital gain. This capital gain will be long-term capital gain
if the holding period for the shares of Class A stock that are surrendered in
the merger is greater than one year as of the time of completion of the merger.
However, the gain that a shareholder recognizes as a result of the receipt of
cash likely will be treated as a dividend distribution if the receipt of the
cash is treated as having "the effect of the distribution of a dividend" for
federal income tax purposes. If any portion of the distribution is taxable as a
dividend to a corporate shareholder, it may qualify for the "dividends received
deduction." This dividend may, however, be subject to the "extraordinary
dividend" provisions of the Internal Revenue Code.
To determine whether gain is capital gain or a dividend distribution, the
Internal Revenue Service deems a redemption to occur under which a Cerulean
shareholder that receives a combination of cash and WellPoint common stock is
treated as hypothetically:
- receiving solely shares of WellPoint common stock in exchange for all of
the shareholder's Class A stock; and
- having WellPoint redeem a portion of those shares of WellPoint common
stock equal in amount to the cash that the shareholder actually received
in the merger.
This is called a "deemed redemption." Under this analysis, in general, if
the receipt of cash by the holder in the deemed redemption results in a
"substantially disproportionate" reduction in the holder's voting stock interest
in WellPoint or is "not essentially equivalent to a dividend," the receipt of
the cash will not have the effect of the distribution of a dividend. In applying
this deemed redemption analysis, particular constructive ownership rules apply
in determining a Cerulean shareholder's ownership interest in WellPoint
immediately after the merger but before the deemed redemption, and after the
deemed
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redemption. Under those rules, a Cerulean shareholder is deemed to own stock
held by specific family members, estates and trusts of which the shareholder is
a beneficiary, a partnership in which the shareholder is a partner, and a
corporation in which the shareholder is a direct or indirect 50% shareholder, as
well as stock subject to options that are held by the shareholder or the
entities in which the shareholder owns an interest. Because these constructive
ownership rules are complex, each Cerulean shareholder who believes that he or
she may be subject to these rules should consult his or her tax advisor.
The deemed redemption will be "substantially disproportionate" with respect
to a Cerulean shareholder if:
- the percentage of the total combined voting power of all classes of
outstanding voting stock of WellPoint the shareholder owns immediately
after the deemed redemption is less than 50%;
- the percentage of the voting stock of WellPoint the shareholder owns
immediately after the hypothetical redemption is less than 80% of the
percentage of the voting stock of WellPoint that the shareholder is
deemed to own immediately before the deemed redemption; and
- the percentage of the value of the WellPoint common stock the shareholder
owns immediately after the deemed redemption is less than 80% of the
percentage of the value of the WellPoint common stock that the
shareholder is deemed to own immediately before the deemed redemption.
For example, a Cerulean shareholder, who receives a combination of cash and
stock in the merger and who would have owned 5% of the outstanding stock of
WellPoint had he or she received solely stock in the merger, will satisfy the
"substantially disproportionate" test if the shareholder owns less than 4% of
the outstanding stock of WellPoint after the merger.
If the deemed redemption from a Cerulean shareholder fails to satisfy the
"substantially disproportionate" test, a shareholder may still be treated as
receiving capital gain by satisfying the "not essentially equivalent to a
dividend" test. A payment to a Cerulean shareholder will satisfy the "not
essentially equivalent to a dividend" test if it results in a "meaningful
reduction" in that shareholder's proportionate stock interest in WellPoint. If a
shareholder with a relatively minimal stock interest in WellPoint and no right
to exercise control over corporate affairs reduces his or her proportionate
interest in WellPoint as a result of the deemed redemption, the Internal Revenue
Service should regard that shareholder as having meaningfully reduced his or her
interest in WellPoint. For example, the Internal Revenue Service has held in a
published ruling that in the case of a less than 1% shareholder who does not
have management control over the corporation, any reduction in proportionate
interest will constitute a "meaningful reduction."
Because the typical holder of shares of Class A stock is less than a 1%
shareholder, if that holder:
- undergoes a reduction in his or her proportionate stock interest in
WellPoint;
- does not own any WellPoint common stock other than that actually received
or deemed to have been received in the merger; and
- is not considered to own any stock attributed to the shareholder under
the constructive ownership rules,
then the gain that the shareholder recognizes as the result of the receipt of
cash would be characterized as capital gain.
However, the deemed redemption tests that we describe above and the
application of the constructive ownership rules are complex and will depend upon
each Cerulean shareholder's particular facts and circumstances. We urge each
Cerulean shareholder who elects to receive a portion of the merger consideration
as cash to consult his or her tax advisor to determine the character of any gain
that the shareholder may recognize as a result of the merger.
The aggregate tax basis of the WellPoint common stock received by a
Cerulean shareholder who exchanges his or her shares of Class A stock for a
combination of WellPoint common stock and cash in
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the merger will be the same as the aggregate tax basis of the Class A stock that
the shareholder surrendered in the merger, less any portion of such basis
allocable to any fractional share interest of WellPoint common stock for which
the shareholder received cash, decreased by the amount of cash received, and
increased by the amount of gain recognized, including any portion of the gain
that is treated as a dividend. The holding period of the WellPoint common stock
received will include the holding period of the shares of Class A common stock
surrendered in exchange for the WellPoint common stock.
Cerulean Shareholders Who Receive Solely Cash in Exchange for Cerulean
Class A Stock in the Merger. A Cerulean shareholder who exchanges all of his or
her shares of Class A stock solely for cash and who owns no shares of WellPoint
common stock either actually or constructively after the merger will generally
recognize gain or loss equal to difference between the amount of cash received
and adjusted tax basis of the Class A stock surrendered in the merger. Any such
gain or loss will generally be treated as capital gain or loss, and will
generally be long-term capital gain or loss if the holding period of the shares
is greater than one year as of the effective time of the merger. If, however,
the Cerulean shareholder either actually or constructively owns any shares of
WellPoint common stock following the merger, the cash received by the
shareholder may be treated as a dividend distribution. The determination of
whether a shareholder constructively owns any shares of WellPoint common stock
is based on the constructive ownership rules discussed above. Because these
constructive ownership rules are complex, if a Cerulean shareholder believes
that he or she may be subject to these rules, the shareholder should consult his
or her tax advisor.
Cash Received for Fractional Shares. A Cerulean shareholder who receives
cash instead of a fractional share of WellPoint common stock will recognize gain
or loss equal to the difference between the amount of cash received and the
portion of the adjusted tax basis of the shareholder's shares of Cerulean common
stock that are allocable to the fractional share of WellPoint common stock. The
gain or loss will constitute capital gain or loss, and will generally be
long-term capital gain or loss if the holding period for the shares was greater
than one year as of the effective time of the merger.
Cerulean Shareholder Reporting Requirements. A Cerulean shareholder who
exchanges Class A stock or Class B stock for WellPoint common stock or exchanges
Class A stock for a combination of WellPoint common stock and cash in connection
with the merger will be required to retain records and file with that
shareholder's federal income tax return for the taxable year in which the merger
takes place a statement setting forth all relevant facts in respect of the
nonrecognition of gain or loss upon such exchange. The statement must include:
- the shareholder's basis in the shares of Class A stock or Class B stock
surrendered in the merger;
- the value of WellPoint common stock received, using fair market value as
of the effective time of the merger; and
- the amount of any cash received in the merger.
Backup Withholding. Under the Internal Revenue Code, a Cerulean
shareholder may be subject, under some circumstances, to backup withholding at a
31% rate with respect to the amount of consideration received in connection with
the merger unless the holder provides proof of an applicable exemption or a
correct taxpayer identification number and otherwise complies with applicable
requirements of the backup withholding rules. Any amounts withheld under the
backup withholding rules are not an additional tax and may be refunded or
credited against the holder's federal income tax liability, if the required
information is furnished to the Internal Revenue Service.
Treatment of Cerulean, WellPoint, and Water Polo Acquisition
Corp. Cerulean, WellPoint, and Water Polo Acquisition Corp. will not recognize
any gain or loss as a result of the merger.
ACCOUNTING TREATMENT
We expect that we will treat the merger as a purchase for accounting and
financial reporting purposes.
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THE MERGER AGREEMENT
This section is a summary of the material provisions of the merger
agreement. We encourage you to read carefully the entire copy of the merger
agreement, which is attached as Appendix A to this proxy statement/prospectus,
before you decide how to vote.
STRUCTURE OF THE MERGER
The merger agreement provides that Cerulean will merge into Water Polo
Acquisition Corp., a subsidiary of WellPoint formed for purposes of the merger.
Water Polo Acquisition Corp. will continue as the surviving corporation and will
change its name to "Cerulean Companies, Inc." As a result of the merger,
WellPoint will operate Cerulean's business as a subsidiary of WellPoint.
CLOSING OF THE MERGER
The merger agreement provides that the closing of the merger will take
place 30 days after all pre-closing conditions have been satisfied or waived,
unless WellPoint and Cerulean agree upon another time. If the Cerulean
shareholders approve the merger at the special meeting on , 2000,
we anticipate that the closing will take place approximately 60 to 90 days
later. On the closing date of the merger, Water Polo Acquisition Corp. and
Cerulean will file a certificate of merger with the Secretaries of State of the
States of Delaware and Georgia. The merger will be completed and effective when
those Secretaries of State have accepted and filed the certificate of merger. If
the merger does not occur by December 31, 2000, Cerulean or WellPoint may
terminate the merger agreement, unless the party seeking to terminate the merger
agreement has prevented the completion of the merger by failing to perform its
obligations under the agreement.
SURVIVING CORPORATION
After the merger, the certificate of incorporation and bylaws of Water Polo
Acquisition Corp., as in effect immediately prior to the merger, will be the
certificate of incorporation and bylaws of the surviving corporation, until
amended in accordance with applicable law. At the time of the merger, the
certificate of incorporation of Water Polo Acquisition Corp. will be amended to
change its name to "Cerulean Companies, Inc." The directors and officers of
Water Polo Acquisition Corp. immediately prior to the merger will be the
directors and officers of the surviving corporation after the merger until their
successors are elected and qualified.
REPRESENTATIONS AND WARRANTIES
The merger agreement contains customary mutual representations and
warranties by WellPoint and Cerulean relating, among other things, to the
following matters:
- corporate organization, standing, qualification and similar corporate
matters;
- capitalization;
- absence of claims against capital stock or any other equity security;
- financial statements;
- absence of undisclosed liabilities;
- accuracy of information supplied by each of WellPoint and Cerulean for
inclusion in this proxy statement/prospectus or the registration
statement;
- documents filed by each of WellPoint and Cerulean with the SEC and the
accuracy of the information contained in those documents;
- absence of conflict of the merger agreement with charter documents, laws
or agreements;
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- required filings, consents and approvals for the execution of the merger
agreement and the completion of the transactions contemplated by the
merger agreement;
- absence of changes or events with respect to each of WellPoint and
Cerulean since March 31, 1998 that would have a material adverse effect
on the collective business, assets, or financial condition of WellPoint
and its material subsidiaries or Cerulean and its material subsidiaries;
- the absence of material untrue statements in the merger agreement or any
certificates or other writings delivered pursuant to the merger
agreement.
In addition, the merger agreement contains certain additional
representations and warranties by Cerulean relating to:
- compliance with applicable laws;
- title to real and personal property;
- indebtedness;
- intellectual property matters;
- employee benefits matters;
- absence of litigation that could reasonably be expected to have a
material adverse effect on the collective business, assets, or financial
condition of Cerulean and its material subsidiaries;
- absence of collective bargaining agreements;
- absence of labor disputes that would have a material adverse effect on
the collective business, assets, or financial condition of Cerulean and
its material subsidiaries;
- environmental matters;
- required licenses and permits;
- maintenance of insurance;
- contracts and commitments;
- tax matters;
- absence of any broker or finder;
- Year 2000 compliance matters;
- computation of reserves; and
- financial statements filed with the Georgia Department of Insurance and
the fair presentation of the financial condition and results of
operations of Cerulean contained in those financial statements.
Under the merger agreement, each of Cerulean and WellPoint have agreed to
disclose promptly in writing to the other any new information which would cause
any of their representations and warranties to become untrue.
COVENANTS OF THE PARTIES
Conduct of Business of Cerulean Pending the Merger
The merger agreement contains restrictions on Cerulean's conduct of
business pending the completion of the merger. These restrictions are designed
to prevent major changes in Cerulean until the merger takes place, except to the
extent that WellPoint consents to the changes in writing. In general, Cerulean,
on
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behalf of itself and its material subsidiaries, has agreed to operate and
conduct its business only in the ordinary course of business in accordance with
past practices, including the following:
- maintaining its assets in their present state of repair;
- using its reasonable best efforts to keep available the services of its
employees; and
- preserving the goodwill of its business and relationships with the
customers, licensors, suppliers, distributors and brokers.
Cerulean has also agreed that neither it, nor its material subsidiaries
will, without the prior written consent of WellPoint:
- sell, transfer or dispose of its assets;
- enter into new contracts or commitments with liabilities exceeding $5
million individually or $10 million in the aggregate;
- mortgage or pledge its assets;
- purchase capital assets exceeding $2 million individually or $10 million
in the aggregate;
- amend or terminate material agreements;
- amend its charter or bylaws;
- acquire any corporation, joint venture or other business, except for a
purchase price less than $5 million individually or $10 million in the
aggregate;
- take any action that could cause the merger to fail to qualify as a
reorganization within the meaning of Section 368(a) of the Internal
Revenue Code;
- split, combine or reclassify its outstanding capital stock,
- issue, sell or pledge any additional shares;
- incur indebtedness;
- adopt or amend any employment or other benefit plan or arrangement; or
- modify its current investment policies.
Conduct of Business of WellPoint Pending the Merger
Under the merger agreement, WellPoint has also agreed to certain
restrictions on the conduct of its business. Without the written consent of
Cerulean, pending the completion of the merger, WellPoint will:
- maintain its assets in their present state of repair;
- use its reasonable best efforts to keep available the services of its
employees;
- preserve the goodwill of its business and relationships with the
customers, licensors, suppliers, distributors and brokers with whom it
has business relations; and
- refrain from amending its charter or bylaws in any manner which would
adversely affect the ability of WellPoint to consummate the transactions
contemplated by the merger agreement.
Transition Team
Each of WellPoint and Cerulean has appointed an equal number of members to
a transition team who will be the principal parties interacting with each other
for purposes of preparing for the merger. Cerulean and WellPoint anticipate that
the limitations provided in the merger agreement will not unduly interfere with
Cerulean's management of its own operations during the period prior to the
merger.
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In addition, under the merger agreement, the transition team will be
responsible for developing an action plan for the combination of the businesses,
including an information systems action plan. The transition team will meet
monthly to review the financial performance of Cerulean and its affiliates. At
such meetings Cerulean will advise the transition team of the status of
Cerulean's then-current operating plan, as previously presented to WellPoint,
including all of the operating plan's material components, such as sales,
enrollment, revenues, investment income, quarterly claim trends, medical loss
ratio, administrative expenses, net income, reserves and statutory capital.
Cerulean will inform the transition team at each quarterly meeting of the
applicable trends and retention experience arising from Cerulean's business
planning and underwriting process.
Access to Information
From and after the date of the merger agreement, WellPoint will have
access, during regular business hours, to Cerulean's and any Cerulean
subsidiary's books, records, offices, personnel, counsel, accountants and
actuaries as WellPoint may reasonably request. WellPoint's use of this
information is governed by a confidentially agreement between WellPoint and
Cerulean.
Transfer Taxes
WellPoint has agreed to pay all sales or transfer taxes, including stock
transfer taxes, document recording fees, real property transfer taxes and excise
taxes, in connection with the merger.
Consents and Further Assurances
Under the merger agreement, Cerulean and WellPoint have agreed to use their
best efforts to take all actions and do all things necessary under applicable
law to complete the merger, including:
- cooperating to make all fillings;
- obtaining consents of all third parties and governmental authorities
necessary to complete the merger;
- contesting any legal proceedings relating to the merger; and
- executing any additional instruments.
WellPoint and Cerulean have agreed to not take any action which could
reasonably be anticipated to have the effect of delaying or impairing the
receipt of any required consents or approvals.
Public Announcements
Cerulean and WellPoint have each agreed not to issue a press release or any
other announcement regarding the merger without the prior written consent of the
other. In the case of any announcement required by law or securities
regulations, Cerulean and WellPoint will permit the other party to review any
announcement prior to its release or filing.
Dividend on Class B Stock
Immediately before the merger, Cerulean will pay the accrued, but unpaid
dividend on each share of Class B stock, as provided in Cerulean's articles of
incorporation.
Obligations with Respect to Blue Cross and Blue Shield of Georgia
Cerulean and WellPoint currently anticipate that WellPoint will maintain
Blue Cross and Blue Shield of Georgia as a Georgia corporation or other Georgia
legal entity separate from WellPoint and will fill a majority of the seats of
the board of directors of Blue Cross and Blue Shield of Georgia with residents
of the State of Georgia.
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Appointment of Director of WellPoint
At the time of the merger, the nominating committee of the board of
directors of WellPoint will nominate one of Cerulean's directors to the
WellPoint board of directors.
Non-solicitation
The merger agreement prohibits Cerulean and its material subsidiaries from
soliciting any proposal for the acquisition of Cerulean or any other similar
material transaction with Cerulean from any third party other than WellPoint.
However, Cerulean is allowed to:
- make any disclosure of information required by law;
- communicate any information to its shareholders to the extent necessary
to comply with the fiduciary duties of Cerulean's board of directors; or
- provide non-public information to, or negotiate with, any third party who
makes an unsolicited proposal to acquire or otherwise complete a similar
material transaction with Cerulean, so long as Cerulean's board of
directors has determined in good faith and after consulting with its
outside legal counsel and financial advisors that the third party's
proposal is likely to be superior to the WellPoint offer.
If Cerulean terminates the merger agreement in connection with the receipt
of a superior proposal from a third party, Cerulean must pay WellPoint a
termination fee of $10 million.
Settlement of Conversion Litigation
WellPoint and Cerulean have agreed that Cerulean was authorized to pay out
a settlement consisting of cash, Class A stock and a warrant to purchase shares
of Series A stock, and do all other acts and pay all other expenses and fees
reasonably necessary settle the litigation relating to the conversion of Blue
Cross and Blue Shield of Georgia from a not-for-profit business to a for-profit
business, all in compliance with the terms of a settlement agreement dated July
8, 1998. Actions taken pursuant to this settlement agreement are specifically
exempted from violating any conditions to completion of the merger set forth in
the merger agreement and will not be included in any amount used in connection
with the calculation of an amount constituting a material adverse effect on
Cerulean.
Agreements with Affiliates
Cerulean will deliver to WellPoint a letter identifying all persons who
may, in the reasonable opinion of counsel to Cerulean, be deemed to be
"affiliates" of Cerulean for purposes of Rule 145 under the Securities Act at
the time of the merger. Cerulean will use its best efforts to cause all
affiliates to deliver to WellPoint a customary written agreement reasonably
satisfactory to WellPoint with respect to the shares of WellPoint common stock
that WellPoint is to issue to such affiliate in connection with the merger.
Adjustments to the Merger Price
The merger agreement provides that the aggregate merger price that
WellPoint will pay to Cerulean shareholders in connection with the merger could
be adjusted under the following circumstances:
- Cerulean was entitled to seek a private letter ruling from the Internal
Revenue Service, which, if resolved in Cerulean's favor, could have
resulted in up to $10 million in tax savings which would have then been
added to the aggregate merger price. Cerulean decided not to file a
request for such ruling, and consequently, no adjustment will be made
pursuant to that subsection;
- the aggregate merger price can be reduced to the extent that specified
change in control payments to Cerulean executives under certain
management plans described on page 46 and certain credits, described in a
memorandum referred to in the merger agreement, result in a net cost of
more than $39.5 million; or
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- any amounts that Cerulean pays to repurchase its own stock pursuant to
the settlement of the conversion litigation, as described on page 70,
will be deducted from the aggregate merger price.
Employee Benefits
WellPoint agrees to provide to the retained employees of Cerulean and its
material subsidiaries employee benefits comparable to the employee benefits
offered by WellPoint to its employees.
CONDITIONS TO THE COMPLETION OF THE MERGER
Conditions to Each Party's Obligations
The obligations of Cerulean and WellPoint to complete the merger are
conditioned on the following conditions being fulfilled:
- Shareholder Approval; Completion of Merger. Cerulean's shareholders will
have properly approved the merger, and the merger will have been
completed at the same time as the closing;
- No Injunction. No court or governmental authority will have enacted or
enforced any law or order preventing the merger, and each party has
agreed to use its best efforts to remove any such impediment to the
completion of the merger;
- Hart-Scott-Rodino Act. Any waiting period applicable to the merger under
the Hart-Scott-Rodino Act will have expired, or have been subject to
earlier termination;
- Effective Registration Statement. The registration statement containing
this proxy statement/prospectus will have been declared effective by the
SEC and will not be subject to any stop order or proceeding seeking a
stop order;
- New York Stock Exchange Listing. The WellPoint common stock issuable in
the merger will have been approved for listing on the New York Stock
Exchange;
- Consent of Georgia Insurance Commissioner and Other State
Regulators. Cerulean and WellPoint will have obtained the consent of the
Georgia Insurance Commissioner and any other necessary state regulatory
authority, other than those consents that would not have a material
adverse effect on WellPoint's business if they are not obtained. If any
of these governmental authorities conditions its consent on WellPoint's
or Cerulean's compliance with unusual and materially burdensome orders,
then the parties would not be required to obtain that consent as a
condition to closing;
- Approval of the Blue Cross Blue Shield Association. The parties will
have obtained the approval of the Blue Cross Blue Shield Association;
- Closing Price. The 20-day average trading price for WellPoint's common
stock will be at least $30 per share, as adjusted for any stock splits or
similar recapitalizations; and
- Superior Proposal. If Cerulean has provided WellPoint with written
notice of its intent to terminate the merger agreement as a result of
Cerulean's acceptance of a superior proposal from a third party, the
seven-day period within which WellPoint may block termination by
submitting an equivalent or superior offer will have expired.
Conditions to Obligations of Cerulean
Cerulean's obligation to complete the merger also depends on the following
conditions being fulfilled. Cerulean may waive any of these conditions in
writing.
- Representations and Warranties True at Closing Date. Other than minor
exceptions, the representations and warranties of WellPoint in the merger
agreement must be true and correct in all material respects at the time
of the merger. Those representations and warranties not qualified by a
material adverse effect must be true and correct in all material respects
unless the failure of those
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representations and warranties to be true and correct, whether
individually or in the aggregate, would not result in a material adverse
effect on WellPoint.
- Certificate Delivered. WellPoint will have delivered to Cerulean a
certificate executed by an authorized executive officer stating that
WellPoint has performed its obligations under the merger agreement and
that all of its representations and warranties are true at the date of
completion of the merger.
- Opinion of Counsel to Cerulean. Cerulean's counsel will have delivered
to Cerulean an opinion, dated as of the date of completion of the merger,
that the merger will be treated for federal income tax purposes as a
reorganization within the meaning of Section 368(a) of the Internal
Revenue Code.
- Fairness Opinion. Morgan Stanley will not have withdrawn or materially
amended its opinion, dated as of July 8, 1998, stating that the value of
the consideration that Cerulean shareholders will receive pursuant to the
merger is fair to those shareholders from a financial point of view.
- Certificate of Merger. Water Polo Acquisition Corp. will have executed
and delivered the certificate of merger as required by the merger
agreement.
- Appointment of Cerulean Director. WellPoint will have taken all action
necessary to appoint to Cerulean's nominee to the WellPoint board of
directors, as required by the merger agreement.
- Rule 145 Shares. WellPoint will have entered into a registration rights
agreement with each shareholder of Cerulean as of the date of the merger
agreement that will be subject to the resale limitations of Sections (c)
and (d) of Rule 145 under the Securities Act.
- Required Consents. WellPoint will have obtained any required material
consents or approvals that it is required to obtain prior to the
completion of the merger. Those consents and approvals will be in full
force and effect at the time of the completion of the merger.
- No Material Adverse Change. There will not have been any material
adverse effect in WellPoint's business resulting from an action or
inaction of WellPoint since the date of the merger agreement.
- Private Letter Ruling. If Cerulean obtains the private letter ruling
from the Internal Revenue Service discussed on page 62, Cerulean and
WellPoint will have agreed upon the resulting amount of tax savings.
Obtaining this letter ruling is not a condition to the completion of the
merger, and Cerulean is not obtaining this letter ruling.
Conditions to Obligations of WellPoint and Water Polo Acquisition Corp.
WellPoint and Water Polo Acquisition Corp. will not be obligated to
complete the merger unless the following conditions are fulfilled. WellPoint may
waive any of these conditions in writing.
- Representations and Warranties True at Date of Completion of the
Merger. Except for minor defects, Cerulean's representations and
warranties must be true and correct in all material respects on the date
of completion of the merger. Those representations and warranties not
qualified by a material adverse effect must be true and correct in all
material respects unless the failure of those representations and
warranties to be true and correct, whether individually or in the
aggregate, would not result in a material adverse effect on Cerulean. In
addition, no representation or warranty may become untrue because of the
expiration of any of Cerulean's material contracts.
- Certificate Delivered. Cerulean will have delivered to WellPoint a
certificate executed by an authorized executive officer stating that
Cerulean has performed its obligations under the merger agreement and
that all of its representations and warranties are true at the date of
completion of the merger.
- Opinion of Counsel to WellPoint. WellPoint's counsel will have delivered
WellPoint its opinion, dated the date of completion of the merger,
stating that the merger will be treated for federal
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income tax purposes as a reorganization within the meaning of Section
368(a) of the Internal Revenue Code.
- Certificate of Merger. Cerulean will have executed and delivered the
certificate of merger in accordance with the terms of the merger
agreement.
- Required Consents. Cerulean will have obtained any required material
consents or approvals that it is required to obtain prior to the
completion of the merger. Those consents and approvals will be in full
force and effect at the time of the merger.
- Settlement of Conversion Litigation. Cerulean will have settled the
litigation relating to the conversion of Blue Cross and Blue Shield of
Georgia. The Superior Court of Fulton County will have approved that
settlement in a final order and dismissed all claims brought by the
plaintiffs with prejudice. This condition was met on August 21, 1998.
- No Other Litigation. No other litigation or other similar proceeding
relating to the conversion of Blue Cross and Blue Shield of Georgia to a
for-profit company, or to the distribution of consideration contemplated
by the merger agreement, will be pending that has a significant
likelihood of material liability to either WellPoint, Cerulean or any of
their affiliates. This litigation or similar proceeding is referred to in
the merger agreement as a "material case." If WellPoint notifies Cerulean
that it considers a matter to be a material case, Cerulean has the right
under the merger agreement to refer the matter to an arbitrator for a
determination as to whether the matter is a material case.
- No Material Adverse Effect. There will not have been any material
adverse effect in Cerulean's business resulting from any action or
inaction of Cerulean since the date of the merger agreement.
- Delivery of Agreements of Affiliates. Each person who has been
identified as an "affiliate" of Cerulean for purposes of Rule 145 under
the Securities Act will have delivered a customary written agreement with
respect to the shares of WellPoint common stock the affiliate is to
receive in the merger.
- Conversion of Warrants. Prior to the merger, all outstanding warrants to
purchase Series A stock will have been exercised pursuant to cashless
exercise.
- Amendment of Shareholders' Agreement. At least ten days before the
merger, the shareholders' agreement between Cerulean, Blue Cross and Blue
Shield of Georgia, Inc. and holders of Cerulean Class B stock will have
been amended to eliminate from the definition of "Registrable Stock" any
shares of WellPoint common stock issued in the merger pursuant to a
registration statement on Form S-4.
TERMINATION AND TERMINATION FEES
Termination
The merger agreement may be terminated at any time before the merger's
completion, whether before or after approval by the shareholders of Cerulean,
under the following circumstances:
- By the mutual written agreement of Cerulean and WellPoint, without
liability;
- By either Cerulean or WellPoint, without liability, if the merger has not
been completed by December 31, 2000, unless the party seeking to
terminate caused the delay;
- By Cerulean, if WellPoint has materially breached any covenants or any
representations or warranties in the merger agreement resulting in a
material adverse effect on WellPoint, if WellPoint has not cured that
breach within 30 days after notice from Cerulean;
- By WellPoint in writing, if Cerulean has materially breached any
covenants or any representations or warranties in the merger agreement
resulting in a material adverse effect on Cerulean, if Cerulean has not
cured that breach within 30 days after notice from WellPoint;
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- By either Cerulean or WellPoint, without liability, if any court or other
governmental authority has issued an order prohibiting the merger that
WellPoint and Cerulean, after using their best efforts, have not been
able to have vacated within 30 days after entry;
- By Cerulean, subject to a termination fee, if the board of directors
receives a superior proposal from a third party and authorizes Cerulean
to execute a binding written agreement with respect to that transaction;
but only if:
- Cerulean's board of directors determines in good faith that the board's
fiduciary duty requires it to accept the superior proposal and terminate
the merger agreement;
- Cerulean notifies WellPoint in writing that it intends to enter into an
agreement with a third party and provides WellPoint with the most
current proposed documentation for the transaction; and
- WellPoint has not, within seven days after receiving the written notice,
provided a written offer that the board of directors of Cerulean
determines in good faith, after application of the analysis set forth in
the merger agreement, to be at least as favorable as the superior
proposal from the third party; or
- By either of Cerulean or WellPoint in writing, generally without
liability, if any of:
- Cerulean's shareholders,
- the Georgia Insurance Commissioner,
- the Federal Trade Commission or the Justice Department under the
Hart-Scott-Rodino Act, or
- the Blue Cross Blue Shield Association declines to approve the merger.
Termination Fees
Cerulean has agreed to pay WellPoint a termination fee of $10 million as
liquidated damages and reimbursement of expenses incurred by WellPoint up to the
date of termination if Cerulean's board accepts a superior proposal from a third
party and complies with the requirements of the merger agreement to give
WellPoint prompt notice and an opportunity to match the third party offer.
Cerulean will also pay WellPoint this $10 million termination fee if the holders
of Cerulean's Class B stock fail to approve the merger. Under the circumstances
just described, WellPoint and Cerulean have agreed that the termination fee will
constitute WellPoint's total damages and sole remedy upon the termination of the
merger agreement.
COSTS AND EXPENSES
Except for the termination fees described above, each party will bear its
own costs and expenses incurred in connection with the merger agreement, subject
to the rights of such party contemplated under the termination provisions of the
merger agreement with respect to a willful breach, violation or default by the
other party.
AMENDMENT AND WAIVER
The merger agreement may be amended only by a written, signed agreement of
the parties. At any time before the merger, either party may waive the other
party's compliance with any of the terms or conditions of the merger agreement
in writing. Waiver of one provision of the merger agreement will not constitute
a waiver of any other provision of the merger agreement.
DISSENTERS' RIGHTS
Cerulean shareholders have the right to dissent from the merger and receive
cash payment for their shares of Class A stock or Class B stock by following the
procedures set forth in Sections 14-2-1301
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through 14-2-1332 of the Georgia Business Corporation Code. The right to
exercise dissenters' rights was granted to the holders of Class A stock and
holders of Class B stock by resolution of the Cerulean board of directors and
the provisions of the Georgia Business Corporation Code, respectively. The
following is only a summary of the provisions of the Georgia Business
Corporation Code and is qualified in its entirety by reference to the full text
of such provisions, a copy of which is attached as Appendix C to this proxy
statement/prospectus.
The Georgia Business Corporation Code provides that any dissenting
shareholder who wants to object to the merger and receive payment in cash for
the fair value of his or her Class A stock or Class B stock must deliver written
notice of his or her intent to dissent and demand payment of the fair value of
his or her shares prior to the vote of the Class A or Class B stock, as may be
appropriate. The notice must be delivered to Cerulean Companies, Inc., 3350
Peachtree Road, N.E., Atlanta, Georgia 30326, Attention: Hugh J. Stedman,
Corporate Secretary. Voting in favor of the merger proposal will waive a
shareholder's dissenters' rights.
If the Cerulean shareholders approve the merger, Cerulean is required to
send by registered or certified mail a form of dissenters' notice to each of the
dissenting shareholders who filed a written notice of his or her intent to
dissent. This dissenters' notice must:
- state where the dissenting shareholders' first payment demand must be
sent;
- inform the holders of uncertificated shares to what extent transfer of
these shares will be restricted after payment demand is made;
- state the date by which Cerulean must receive the first payment demand,
as fixed by Cerulean between 30 and 60 days after the date the
dissenter's notice is delivered; and
- contain a copy of Article 13 of the Georgia Business Corporation Code
relating to dissenters' rights.
Cerulean is required to send the dissenters' notice to each of the
dissenting shareholders no later than ten days after the date on which the
Cerulean shareholders vote to authorize the merger. The dissenters' notice will
be sent to each dissenting shareholder at his or her address as it appears in
the stock transfer books of Cerulean, unless the dissenting shareholder provides
Cerulean with a different address.
Each dissenting shareholder to whom Cerulean sends a dissenter's notice
must submit a first payment demand for his or her shares to Cerulean in
accordance with the terms of the dissenters' notice. The first payment demand
must contain the name and address of the dissenting shareholder, the number of
shares as to which the dissenting shareholder is demanding payment, which must
be all of the shares of capital stock of Cerulean which he or she owns, and a
demand for payment of the fair value of his or her shares. Any dissenting
shareholder who does not submit a first payment demand as set forth in the
dissenters' notice loses his or her rights to dissent and will not be entitled
to payment for his or her shares pursuant to the dissenters' rights provisions
of the Georgia Business Corporation Code.
Within ten days of the later of the date of completion of the merger or
Cerulean's receipt of the first payment demand, Cerulean shall offer to pay the
dissenting shareholders who have complied with the provisions of the Georgia
Business Corporation Code the amount Cerulean estimates to be the fair value of
the shares, plus any accrued interest. Cerulean's offer of payment shall be
accompanied by:
- Cerulean's balance sheet as of the fiscal year ended not more than 16
months before the date of payment;
- Cerulean's income statement for that year;
- a statement of changes in Cerulean's shareholders' equity for that year;
- Cerulean's latest available interim financial statements, if any;
- a statement of Cerulean's estimate of the fair value of the shares;
- an explanation of how Cerulean calculated the interest on the shares;
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<PAGE> 78
- a statement of the dissenting shareholder's right to demand payment of a
different amount if the dissenting shareholder is dissatisfied with the
offer; and
- a copy of Article 13 of the Georgia Business Corporation Code.
A dissenting shareholder may accept Cerulean's offer by providing written
notice to Cerulean within 30 days after the date that Cerulean made the offer. A
dissenting shareholder is deemed to have accepted Cerulean's offer by failure to
respond within the 30 days. If the offer is accepted or deemed accepted,
Cerulean will pay for the dissenting shareholder's Class A stock or Class B
stock within 60 days after the date Cerulean made the offer or the date of the
merger, whichever date is later. If a dissenting shareholder is dissatisfied
with Cerulean's offer, that dissenting shareholder may make a second payment
demand, notifying Cerulean in writing of, and demanding payment of, his or her
own estimate of the fair value of his or her shares and the amount of interest
due. A dissenting shareholder waives his or her right to demand payment of a
different amount than that offered by Cerulean unless that dissenting
shareholder makes a second payment demand within 30 days after the date Cerulean
makes its offer.
If a dissenting shareholder's second payment demand remains unsettled
within 60 days after Cerulean receives the dissenting shareholder's second
payment demand, Cerulean will submit the matter to the Superior Court of Fulton
County, Georgia to determine the fair value of the shares and accrued interest.
Cerulean will make all dissenting shareholders whose second payment demand
remains unsettled parties to the court proceeding. In the proceeding, the court
will fix a value of the shares and may appoint one or more appraisers to receive
evidence and recommend a decision on the question of fair value. If Cerulean
does not commence the proceeding within 60 days after receiving the dissenting
shareholder's second payment demand, Cerulean will pay each dissenting
shareholder whose second payment demand remains unsettled the amount demanded by
that dissenting shareholder in his or her second payment demand.
The determination of a "fair value" necessarily involves matters of
judgment upon which reasonable persons may disagree. The Georgia Business
Corporation Code provides that, for purposes of dissenters' rights, the value of
the Class A stock or Class B stock is determined immediately before the merger
and that the fair value excludes any appreciation or depreciation in
anticipation of the merger.
At the time of the Cerulean special meeting, Cerulean will calculate the
total number of shares of Class A stock and of Class B stock which are the
subject of appropriate notices from dissenting shareholders, and Cerulean and
WellPoint will determine the appropriate amount to be withheld from the cash
available to other shareholders who elect to receive cash in the merger.
RELATED AGREEMENT
REGISTRATION RIGHTS AGREEMENT
General. Under the terms of the merger agreement, WellPoint agreed to
enter into a registration rights agreement with Georgia Strategic Healthcare.
Because Georgia Strategic Healthcare is an affiliate of Cerulean, any shares of
WellPoint common stock that it receives in the merger will be subject to the
resale restrictions of Rule 145 under the Securities Act. These restrictions are
described on page 53. The other Cerulean shareholders receiving WellPoint common
stock in the merger are not subject to the same resale restrictions. In order to
put Georgia Strategic Healthcare in a position comparable to the other Cerulean
shareholders, WellPoint granted Georgia Strategic Healthcare certain rights to
have its shares of WellPoint common stock registered under the Securities Act.
Shelf Registration Rights. The registration rights agreement provides that
at the time of the merger, WellPoint will have in effect a shelf registration
statement under the Securities Act that will allow Georgia Strategic Healthcare
to resell its shares of WellPoint common stock pursuant to that registration
statement. WellPoint will keep the shelf registration statement in effect for 90
days after the completion of the merger. However, beginning 30 days after the
completion of the merger, WellPoint has a one-time right, upon written notice to
Georgia Strategic Healthcare, to prevent Georgia Strategic Healthcare from
selling any shares pursuant to the registration statement for a period of up to
ten days. WellPoint will
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<PAGE> 79
extend the 90-day effective period of the shelf registration statement by the
number of days that Georgia Strategic Healthcare refrains from selling shares
pursuant to WellPoint's request.
Demand Registration Rights. Georgia Strategic Healthcare is entitled to
make up to four demands that WellPoint register shares of WellPoint common stock
owned by Georgia Strategic Healthcare, so long as the aggregate market value of
the shares to be registered on each occasion is at least $1 million. WellPoint
has the option to repurchase any shares that Georgia Strategic Healthcare makes
the subject of a registration demand. If WellPoint does not exercise this
repurchase option, it must use its best efforts to cause the shares to be
registered under the Securities Act. If WellPoint has begun an offering of its
securities before it receives Georgia Strategic Healthcare's registration
request, and that registration at the time and on the terms requested could
materially and adversely affect that offering, WellPoint can delay registration
of Georgia Strategic Healthcare's shares. However, WellPoint must register the
shares requested on the earliest of:
- the time WellPoint abandons the offering;
- 30 days after WellPoint terminates the offering;
- the time any "hold back" period obtained by the underwriters of the
offering is terminated; or
- 30 days after Georgia Strategic Healthcare receives the written notice
from WellPoint of the request to delay.
WellPoint may also delay registration if the filing of a registration
statement:
- could jeopardize or delay any other material transaction contemplated by
WellPoint;
- would require WellPoint to disclose material information that it needs to
preserve as confidential; or
- would otherwise put WellPoint in a position where it would be unable to
comply with the requirements of the SEC.
In any of the above situations, WellPoint will not be required to effect a
registration until the date that it completes or abandons the contemplated
transaction, the date the material information is otherwise disclosed to the
public or ceases to be material or the date when WellPoint is able to comply
with applicable SEC requirements. In no event may this date be more than 30 days
after WellPoint makes such good-faith determination that a delay is necessary.
In all cases, WellPoint may only delay Georgia Strategic Healthcare's demand for
registration once during the term of the registration rights agreement.
WellPoint must keep any registration statement that is filed pursuant to
Georgia Strategic Healthcare's demand effective for 30 days. One of Georgia
Strategic Healthcare's demands may be for an underwritten offering, so long as
the shares to be registered pursuant to that demand have an aggregate market
value of at least $20 million.
Piggyback Registration Rights. Subject to certain limitations set forth in
the registration rights agreement, if, at any time during the term of the
registration rights agreement WellPoint proposes to register any of its common
equity securities under the Securities Act, Georgia Strategic Healthcare will
have certain rights to include its shares of WellPoint common stock in the
applicable registration statement. Georgia Strategic Healthcare's "piggyback"
rights are not applicable to offerings of debt instruments or preferred stock
convertible into WellPoint's common equity securities, nor to any securities
registered on Form S-4 or Form S-8.
The California HealthCare Foundation's Registration Rights. Under the
Amended and Restated Registration Rights agreement between WellPoint and the
California HealthCare Foundation dated as of August 4, 1997, the California
HealthCare Foundation holds registration rights consisting of one demand right
per year, plus a single additional demand registration right and unlimited
piggyback registration rights. The registration rights agreement provides that
WellPoint will not effect more than one registration statement pursuant to a
demand from the California HealthCare Foundation so long as the shelf
registration statement is pending. Once WellPoint has filed that demand
registration statement, if the
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<PAGE> 80
California HealthCare Foundation so requests, Georgia Strategic Healthcare will
not request registration of its shares of WellPoint common stock and will
suspend sales under any then-effective registration statement. Georgia Strategic
Healthcare will continue to refrain from selling its shares until the California
HealthCare Foundation has completed its offering, provided that this standstill
period will expire no later than 45 days after Georgia Strategic Healthcare
first receives the request to suspend sales. WellPoint will extend the effective
period of the shelf registration statement by the number of days that Georgia
Strategic Healthcare was unable to effect transactions pursuant to a request by
the California HealthCare Foundation.
Term. The registration rights agreement will expire upon the date on which
Georgia Strategic Healthcare no longer owns any shares of WellPoint common stock
or other securities convertible into WellPoint common stock that require
registration under the Securities Act as a condition of resale, or upon the one
year anniversary of the date of the registration rights agreement, whichever is
earlier.
Expenses and Indemnification. WellPoint will pay all registration expenses
in connection with any registration made under the registration rights
agreement, except any commissions or underwriting discount. WellPoint has agreed
to indemnify Georgia Strategic Healthcare against specified liabilities in
connection with any registration statement.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
SETTLEMENT OF CERULEAN CONVERSION LITIGATION
On September 3, 1997, plaintiffs Let's Get Together, Inc.; Statewide
Independent Living Council of Georgia, Inc.; Living Independence for Everybody,
Inc.; Aids Survival Project, Inc.; Women's Policy Education Fund, Inc.;
Disability Connections -- The Middle Georgia Center for Independent Living,
Inc.; Physicians for a National Health Program, Inc.; Campaign for a Prosperous
Georgia, Inc.; and Friends and Survivors Standing Together, Inc., on behalf of
themselves and others similarly situated, filed a Complaint for Declaratory
Judgment and Other Relief against defendants the Georgia Insurance Commissioner,
Blue Cross and Blue Shield of Georgia and Cerulean in the Superior Court of
Fulton County, Georgia. The plaintiffs alleged in the complaint that they are
non-profit charitable organizations under Section 501(c)(3) of the Internal
Revenue Code and sought to represent a class of plaintiffs consisting of all
non-profit corporations under Section 501(c)(3) of the Internal Revenue Code in
the State of Georgia on December 27, 1995, excluding any subsidiaries or
affiliates of Blue Cross and Blue Shield of Georgia or Cerulean. In the
complaint, the plaintiffs sought a declaratory judgment that:
- the statute pursuant to which Blue Cross and Blue Shield of Georgia
converted from a non-profit corporation to a for-profit business
corporation is unconstitutional under the Constitution of the State of
Georgia and the Constitution of the United States of America;
- the provisions of the statute, as applied to the conversion and
acquisition of Blue Cross and Blue Shield of Georgia by Cerulean,
unconstitutionally took the fair market value of the assets of Blue Cross
and Blue Shield of Georgia from the public trust in violation of vested
rights, due process, the anti-gratuities doctrine, the separation of
powers doctrine, and the cy pres doctrine;
- the conversion order issued by the Georgia Insurance Commissioner on
December 27, 1995 was null and void because it was based on
unconstitutional statutory provisions; and
- the fair market value of the assets of Blue Cross and Blue Shield of
Georgia as of December 27, 1995 is subject to a charitable trust of which
the plaintiffs and their class members are designated beneficiaries.
The plaintiffs also sought an order from the Superior Court that the fair
market value of the assets of Blue Cross and Blue Shield of Georgia be returned
to a public charitable trust for the benefit of plaintiffs and their class
members and that the plaintiffs be awarded their expenses of litigation and
attorneys fees.
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<PAGE> 81
The plaintiffs subsequently amended their complaint to include claims for money
had and received and unjust enrichment arising out of these same allegations.
On October 3, 1997, Blue Cross and Blue Shield of Georgia and Cerulean
filed answers to the complaint denying liability and asserting affirmative
defenses. On October 31, 1997, they filed a Motion to Dismiss Or, In the
Alternative, Motion for Summary Judgment, along with supporting pleadings and
evidence. The motion to dismiss sought an order from the Superior Court
dismissing all of the plaintiffs' claims against Blue Cross and Blue Shield of
Georgia and Cerulean in their entirety. The parties conducted discovery,
including depositions and document production. The motion to dismiss was pending
before the Superior Court at the time of the settlement of the conversion
litigation.
On November 3, 1997, the plaintiffs, as petitioners, filed a Petition for
Judicial Review in the Superior Court of Fulton County, Georgia seeking to have
that Superior Court set aside an order entered by the Georgia Insurance
Commissioner on October 3, 1997. The October 3, 1997 order of the Georgia
Insurance Commissioner denied a petition filed by the plaintiffs on September 3,
1997 seeking substantially the same relief from the Georgia Insurance
Commissioner as was set forth in the complaint in Fulton County Superior Court.
On November 21, 1997, Blue Cross and Blue Shield of Georgia and Cerulean filed a
response to the judicial review petition, seeking its dismissal. On July 16,
1998, the Superior Court of Fulton County entered an order affirming the Georgia
Insurance Commissioner's October 3, 1997 decision. Plaintiffs filed a Motion to
Vacate Order on July 22, 1998 and a Motion for Reconsideration on July 28, 1998.
On August 14, 1998, the Superior Court of Fulton County entered an order
vacating the July 16, 1998 order.
On July 8, 1998, Cerulean and Blue Cross and Blue Shield of Georgia entered
into the settlement of the conversion litigation which was filed with the
Superior Court on that day. On July 9, 1998, the Superior Court entered a
preliminary order setting a final approval hearing for the settlement for August
20, 1998. On August 17, 1998, six individuals, including two shareholders of
Cerulean, filed a motion to intervene in the lawsuit and an objection to the
settlement. On August 20, 1998, Blue Cross and Blue Shield of Georgia and
Cerulean filed an opposition to the motion to intervene. On August 20, 1998, the
Court conducted the final approval hearing and heard arguments from the parties,
the proposed intervenors and a potential member of the plaintiffs' class. On
August 21, 1998, the judge denied the motion to intervene filed by the proposed
intervenors and entered a final order approving the settlement.
Pursuant to the terms of the settlement, the parties formed a Georgia
non-profit corporation named "Healthcare Georgia, Inc. Endowed by Blue Cross and
Blue Shield of Georgia," a charitable foundation whose purpose is the
advancement of health care for all Georgians. Cerulean issued to the foundation
and its lawyers shares of Class A stock amounting to approximately 9.5% of the
total equity of Cerulean outstanding after issuance of the securities issued in
the settlement. Cerulean also issued the foundation and its lawyers warrants for
the acquisition of Series A stock amounting to approximately 10.5% of the total
equity of Cerulean, for an aggregate warrant exercise price of $21 million.
Together, the Class A stock and Series A stock represented by the warrants will
equal 20% of the total equity of Cerulean after the issuance of the Series A
stock upon the exercise of the warrants. Pursuant to the terms of the
settlement, six months after the effective date of the settlement and before the
one year anniversary of that effective date, the foundation and its lawyers may
tender a number of shares of the Class A stock issued in the settlement
aggregating one-half of one percent of the total equity of Cerulean to Cerulean,
and Cerulean is obliged to purchase these shares for an aggregate purchase price
of $1 million. The foundation shareholders did not, however, tender these shares
within the specified time period and this tender right has expired. In addition,
Blue Cross and Blue Shield of Georgia paid $1 million to the foundation and its
lawyers on the effective date of the settlement. The effective date of the
settlement was September 21, 1998, the date on which all appeal periods expired
after the entry of the final order. Pursuant to the settlement, the Georgia
Insurance Commissioner was dismissed with prejudice in the judgment.
The shares of Class A stock issued to the foundation and its lawyers have
all of the same terms and provisions as the other shares of Class A stock as
provided in the Cerulean articles of incorporation, except that, as described
above, the foundation and its lawyers have the right to tender for redemption
shares of
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<PAGE> 82
Class A stock for an aggregate redemption price of $1 million. The Cerulean
articles of incorporation required this redemption right to be separately
authorized by holders of a majority of the shares of Class B stock. These
holders granted authorization at a meeting of holders of Class B stock held on
September 15, 1998.
The warrants are exercisable for shares of Series A stock. The Series A
stock is a new series of preferred stock created specifically for the
settlement. Series A stock has all of the economic attributes of Class A stock,
and each share of Series A stock is the economic equivalent of one share of
Class A stock. The Series A stock, however, has no voting rights. If an event
occurs in which Georgia law grants the right to vote to any class or series of
capital stock, each share of Series A stock automatically converts into one
Class A common stock participation right. Each of these participation rights is
the economic equivalent of one share of Class A stock but has no voting rights.
Consequently, the effect of the issuance of the warrants and the Series A stock
is that there are no circumstances under which the equity interest represented
by the warrants has any voting rights.
The warrants also provide that upon the occasion of so-called "major
events," the foundation and its lawyers must exercise the warrants in a cashless
exercise. The merger is a major event. The effect of this provision is that the
warrants will be automatically converted into shares of Series A stock according
to a formula provided in the warrants. This provision of the warrants pays the
exercise price of the warrants from the appreciated value represented by the
underlying Series A Stock and therefore reduces the overall percentage
participation by the Series A stock in the merger consideration. Based upon the
purchase price reflected in the merger agreement, the number of shares of Series
A stock issuable upon exercise of the warrants will represent approximately 6.3%
of the total merger consideration. The Cerulean board of directors and holders
of a majority of the outstanding shares of Series B stock have authorized the
Series A stock, and Cerulean filed an amendment to its articles of incorporation
creating and authorizing the Series A stock with the Georgia Secretary of State,
effective September 22, 1998.
Pursuant to the shareholders agreement, dated September 22, 1998, between
Cerulean and the foundation in connection with the settlement of the conversion
litigation, the foundation is not entitled to vote any shares in excess of 5% of
the total outstanding Class A stock, or 20,480 shares of Class A stock as of
August 3, 2000. Cerulean has waived this provision with respect to the merger.
Therefore, the foundation will be entitled to vote all 53,150 shares of Class A
stock it holds with respect to the merger.
INTERESTS OF CERTAIN CLASS A DESIGNATED DIRECTORS
John W. Robinson, Jr., a director of Cerulean, holds five shares of Class A
stock.
INTERESTS OF CERULEAN CLASS B SHAREHOLDERS
Joe M. Young, a Cerulean director, is an affiliate of a holder of Class B
stock, and Georgia Strategic Healthcare, of which Frank J. Hanna, III, a
Cerulean director, is an affiliate, is the majority holder of Class B stock.
Georgia Strategic Healthcare will receive a substantial number of shares of
WellPoint common stock which are the subject of a registration rights agreement.
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<PAGE> 83
WELLPOINT HEALTH NETWORKS INC.
UNAUDITED PRO FORMA COMBINED CONDENSED FINANCIAL STATEMENTS
The following sets forth the unaudited pro forma combined condensed balance
sheet for WellPoint as of June 30, 2000 and the unaudited pro forma combined
condensed income statements for the six months ended June 30, 2000 and the year
ended December 31, 1999. The unaudited pro forma combined condensed financial
statements include historical amounts of WellPoint and Cerulean, adjusted to
reflect WellPoint's acquisition of Cerulean. The Cerulean balance sheet is
presented on a classified basis to be consistent with WellPoint's presentation.
For the purpose of presenting the unaudited pro forma combined condensed balance
sheet, we consider the merger to have occurred as of June 30, 2000. The
unaudited pro forma combined condensed income statements are presented on the
basis that the merger occurred as of January 1, 1999. The unaudited pro forma
combined condensed financial statements also assume that WellPoint has reissued
treasury shares with an aggregate value of $275.0 million. WellPoint is assuming
that it finances the remainder of the merger consideration with $225.0 million
of indebtedness, which represents the maximum cash payments to Cerulean
shareholders under the terms of the merger agreement.
As further discussed in the notes to the unaudited pro forma combined
condensed financial statements, WellPoint is accounting for the merger using the
purchase method of accounting. Under this method, WellPoint records the
respective assets and liabilities of Cerulean at their estimated fair value.
The unaudited pro forma combined condensed balance sheet is not necessarily
indicative of the financial condition of WellPoint had WellPoint and Cerulean
completed the merger as of June 30, 2000. The unaudited pro forma combined
condensed income statements are not necessarily indicative of the results of
operations of WellPoint had WellPoint and Cerulean completed the merger on the
date shown. In addition, the unaudited pro forma combined condensed financial
statements are not necessarily indicative of WellPoint's financial condition or
results of operations. You should read the pro forma financial information in
conjunction with the historical consolidated financial statements of Cerulean,
which are included in this proxy statement/prospectus, and the historical
financial statements of WellPoint, which are incorporated by reference in this
proxy statement/prospectus.
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<PAGE> 84
WELLPOINT HEALTH NETWORKS INC.
PRO FORMA COMBINED CONDENSED BALANCE SHEET
AS OF JUNE 30, 2000
(UNAUDITED)
<TABLE>
<CAPTION>
WELLPOINT CERULEAN ADJUSTMENTS TOTAL
---------- -------- ----------- ----------
(IN THOUSANDS, EXCEPT SHARE DATA)
<S> <C> <C> <C> <C>
ASSETS
Cash and current investments............. $3,199,244 $426,178 $3,625,422
Other current assets..................... 777,395 158,589 $ (4,962)(1)(2) 931,022
---------- -------- --------- ----------
Total current assets........... 3,976,639 584,767 (4,962) 4,556,444
Intangible assets and goodwill, net...... 570,211 279,846(1) 850,057
Other non-current assets................. 422,206 94,319 516,525
---------- -------- --------- ----------
Total non-current assets....... 992,417 94,319 279,846 1,366,582
---------- -------- --------- ----------
Total assets................... $4,969,056 $679,086 $ 274,884 $5,923,026
========== ======== ========= ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Medical claims payable and reserves for
future policy benefits................. $1,382,524 $224,789 $1,607,313
Unearned premiums........................ 263,248 25,242 288,490
Experience rated and other refunds....... 216,884 2,908 219,792
Other current liabilities................ 924,029 75,080 $ 72,314(1)(2) 1,071,423
---------- -------- --------- ----------
Total current liabilities...... 2,786,685 328,019 72,314 3,187,018
Long-term reserves for future policy
benefits............................... 275,638 275,638
Long-term debt........................... 399,362 225,000(3)(4) 624,362
Other non-current liabilities............ 113,359 53,637 166,996
---------- -------- --------- ----------
Total liabilities.............. 3,575,044 381,656 297,314 4,254,014
Mandatorily redeemable preferred stock... 46,645 (46,645)(1) --
Common stock -- $0.01 par value,
300,000,000 shares authorized,
71,390,971 issued historically and pro
forma.................................. 714 714
Class A common stock..................... 4 (4)(1) --
Treasury stock, at cost, 9,041,022 and
6,023,189 shares historically and pro
forma, respectively.................... (566,379) 189,037(3)(4) (377,342)
Additional paid-in capital............... 962,084 45,188 40,775(1)(3)(4) 1,048,047
Stock warrants exercisable............... 29,968 (29,968)(1) --
Accumulated other comprehensive income... (4,424) 1,715 (1,715)(1) (4,424)
Retained earnings........................ 1,002,017 173,910 (173,910)(1) 1,002,017
---------- -------- --------- ----------
Total stockholders' equity............... 1,394,012 250,785 24,215 1,669,012
---------- -------- --------- ----------
Total liabilities and
stockholders' equity......... $4,969,056 $679,086 $ 274,884 $5,923,026
========== ======== ========= ==========
</TABLE>
See Notes to Unaudited Pro Forma Combined Condensed Financial Statements.
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WELLPOINT HEALTH NETWORKS INC.
PRO FORMA COMBINED CONDENSED INCOME STATEMENT
FOR THE SIX MONTHS ENDED JUNE 30, 2000
(UNAUDITED)
<TABLE>
<CAPTION>
WELLPOINT CERULEAN ADJUSTMENTS TOTAL
---------- -------- ----------- ----------
(IN THOUSANDS, EXCEPT EARNINGS PER SHARE)
<S> <C> <C> <C> <C>
Revenues.................................... $4,434,081 $964,770 $ (7,938)(5) $5,390,913
Expenses.................................... 4,153,499 930,451 5,762(5)(6) 5,089,712
---------- -------- -------- ----------
Operating and other income.................. 280,582 34,319 (13,700) 301,201
Interest expense............................ 12,773 7,549(7) 20,322
---------- -------- -------- ----------
Income before provision for income taxes and
minority interests........................ 267,809 34,319 (21,249) 280,879
Provision for income taxes.................. 104,498 7,003 4,020(8) 115,521
Minority interest in losses of joint venture
investments............................... 481 481
---------- -------- -------- ----------
Net income (loss)........................... $ 163,311 $ 27,797 $(25,269) $ 165,839
========== ======== ======== ==========
Earnings per share.......................... $ 2.61 $ 2.53
========== ==========
Earnings per share assuming full dilution... $ 2.53 $ 2.46
========== ==========
Weighted average number of shares
outstanding............................... 62,520 3,018(9) 65,538
========== ======== ==========
Weighted average number of shares
outstanding including potential common
stock..................................... 64,835 3,018(9) 67,853
========== ======== ==========
</TABLE>
See Notes to Unaudited Pro Forma Combined Condensed Financial Statements.
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<PAGE> 86
WELLPOINT HEALTH NETWORKS INC.
PRO FORMA COMBINED CONDENSED INCOME STATEMENT
FOR THE YEAR ENDED DECEMBER 31, 1999
(UNAUDITED)
<TABLE>
<CAPTION>
WELLPOINT CERULEAN ADJUSTMENTS TOTAL
---------- ---------- ----------- ----------
(IN THOUSANDS, EXCEPT EARNINGS PER SHARE)
<S> <C> <C> <C> <C>
Revenues.................................. $7,485,427 $1,655,635 $(18,645)(5) $9,122,417
Expenses.................................. 6,977,928 1,614,524 8,755(5)(6) 8,601,207
---------- ---------- -------- ----------
Operating and other income................ 507,499 41,111 (27,400) 521,210
Interest expense.......................... 20,178 15,098(7) 35,276
---------- ---------- -------- ----------
Income before provision for income taxes,
minority interests, extraordinary gain
and cumulative effect of accounting
change.................................. 487,321 41,111 (42,498) 485,934
Provision for income taxes................ 190,110 9,061 262(8) 199,433
Minority interest in losses of joint
venture investments..................... 793 793
---------- ---------- -------- ----------
Income (loss)before extraordinary gain and
cumulative effect of accounting
change.................................. $ 297,211 $ 32,843 $(42,760) $ 287,294
========== ========== ======== ==========
Earnings per share........................ $ 4.50 $ 4.16
========== ==========
Earnings per share assuming full
dilution................................ $ 4.38 $ 4.05
========== ==========
Weighted average number of shares
outstanding............................. 66,070 3,018(9) 69,088
========== ======== ==========
Weighted average number of shares
outstanding including potential common
stock .................................. 68,096 3,018(9) 71,114
========== ======== ==========
</TABLE>
See Notes to Unaudited Pro Forma Combined Condensed Financial Statements.
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<PAGE> 87
WELLPOINT HEALTH NETWORKS INC.
NOTES TO UNAUDITED PRO FORMA COMBINED
CONDENSED FINANCIAL STATEMENTS
On July 9, 1998, WellPoint and Cerulean signed the merger agreement.
WellPoint and Cerulean expect to complete the merger by the end of 2000.
(1) The net increase in intangible assets of $279.8 million is a result of the
excess of cost over the fair market value of the net assets of Cerulean (at
a purchase price of $500 million) and certain estimated purchase price
adjustments related to the merger. The purchase results in the elimination
of the Cerulean mandatorily redeemable preferred stock ($46.6 million) and
equity ($250.8 million) and increases liabilities by $77.3 million. This
increase in liabilities is net of an increase in the deferred tax asset of
$9.3 million for expected costs related to the merger, including estimated
change in control payments to Cerulean management of $47.6 million and
approximately $34.0 million related to severance and other employee
payments. WellPoint intends to complete a study on the allocation of the
identified intangible assets of Cerulean, such as the Blue Cross Blue Shield
name and service mark, employer groups, provider contracts and goodwill,
upon completion of the merger. Although WellPoint has not yet completed this
allocation, WellPoint is presenting the following preliminary allocation of
the intangible assets for informational purposes. WellPoint has assigned
preliminary values and lives to these assets consistent with the methodology
used in WellPoint's previous acquisitions.
<TABLE>
<CAPTION>
ASSIGNED VALUE LIFE
-------------- ----------
(IN MILLIONS) (IN YEARS)
<S> <C> <C>
Blue Cross Blue Shield name and mark........................ $ 85.6 40
Employer relationships -- Experience-rated.................. 173.3 14
-- Direct pay...................... 2.2 5
Company-developed software.................................. 18.7 1.5
------
$279.8
======
</TABLE>
(2) Represents the elimination of $14.3 million of accounts receivable/payable
arising from transactions between a subsidiary of WellPoint and Cerulean.
(3) Reflects WellPoint's payment of $225.0 million cash related to the maximum
cash component of the merger, financed through the incurrence of
indebtedness, and WellPoint's reissuance of WellPoint common stock held in
treasury with a value of $275.0 million in connection with the merger. These
pro forma financial statements assume that WellPoint has reissued WellPoint
common stock from treasury at the market value on August 14, 2000. Please
refer to note 4 for a more complete description of the assumptions used
regarding WellPoint's financing of the merger. From time to time, WellPoint
may also incur additional indebtedness in order to, among other things, fund
additional repurchases of WellPoint common stock.
(4) These pro forma financial statements assume that WellPoint finances the
merger primarily through the reissuance of treasury shares having a value of
$275.0 million based on the fair market value of WellPoint common stock on
August 14, 2000, and through WellPoint's incurrence of indebtedness of
$225.0 million, representing the maximum cash payment to Cerulean
shareholders of $225.0 million. The WellPoint board of directors has
authorized WellPoint to repurchase additional shares of WellPoint common
stock, if necessary, prior to and following the merger in an amount equal to
the number of shares WellPoint issues in connection with the merger. Through
August 14, 2000, WellPoint had repurchased an aggregate of 9.0 million
shares in anticipation of the merger at an average purchase price of $62.64
per share.
(5) Represents the elimination of $7.9 million and $18.6 million for the six
months ended June 30, 2000 and the year ended December 31, 1999,
respectively, of revenue and expense related to transactions between a
subsidiary of WellPoint and Cerulean.
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WELLPOINT HEALTH NETWORKS INC.
NOTES TO UNAUDITED PRO FORMA COMBINED
CONDENSED FINANCIAL STATEMENTS -- (CONTINUED)
(6) Reflects the adjustment required to amortize, for the six months ended June
30, 2000 and the year ended December 31, 1999, the intangible assets of
$279.8 million estimated to be created as a result of the merger on a
straight-line basis over the life of each of the identified intangible
assets. This results in $13.7 million of amortization expense for the six
months ended June 30, 2000 and $27.4 million of amortization expense for the
year ended December 31, 1999.
(7) The increase in interest expense of $7.5 million for the six months ended
June 30, 2000 and $15.1 million for the year ended December 31, 1999
reflects the cost of $225.0 million of indebtedness incurred to finance the
merger (see note 3) at an assumed fixed rate of 6.71% per year. This
interest rate represents an estimate of WellPoint's effective interest rate
as a result of its currently effective interest rate swap agreements. A 1/8%
increase in the effective interest rate results in a decrease in income
before extraordinary gain and cumulative effect of accounting change of
$0.01 per basic share and no change per diluted share for the six months
ended June 30, 2000 and no impact to earnings per share for the year ended
December 31, 1999.
(8) Reflects the tax effect of the pro forma adjustments to effect the merger to
bring the pro forma tax expense in line with the projected effective tax
rate, which results in an increase in tax expense of $4.0 million for the
six months ended June 30, 2000 and an increase in tax expense of $0.3
million for the year ended December 31, 1999. WellPoint has increased the
projected effective tax rate to reflect the assumption that the goodwill
generated as a result of the merger will not be deductible.
(9) The increase in the weighted average shares outstanding for the six months
ended June 30, 2000 and the year ended December 31, 1999 results from the
impact of WellPoint's reissuance, as a result of the merger, of 3.0 million
shares of WellPoint common stock held in treasury.
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INFORMATION CONCERNING WELLPOINT
WellPoint is one of the nation's largest publicly traded managed care
companies. As of June 30, 2000, WellPoint had approximately 7.6 million medical
members and approximately 34.3 million specialty members. WellPoint offers a
broad spectrum of quality network-based managed care products. WellPoint
provides these plans to the large and small employer, individual and senior
markets. WellPoint's managed care plans include preferred provider
organizations, health maintenance organizations and point-of-service and other
hybrid plans and indemnity plans. In addition, WellPoint offers managed care
services, including underwriting, actuarial services, network access, medical
cost management and claims processing. WellPoint also provides a broad array of
specialty and other products and services, including pharmacy, dental,
utilization management, life, preventive care, disability, behavioral health,
post-employment continuation benefits and flexible benefits account
administration. WellPoint markets its products in California primarily under the
name Blue Cross of California and outside of California primarily under the name
UNICARE.
Historically, WellPoint's primary market for managed care products has been
California. WellPoint holds the exclusive right in California to market its
products under the "Blue Cross" name and mark. WellPoint's California customer
base is diversified, with extensive membership among large and small employer
groups and individuals, and a growing presence in the Medicare and Medicaid
markets. For more information concerning WellPoint, we encourage you to consult
and review information previously filed by WellPoint with the SEC and
incorporated by reference in this proxy statement/prospectus.
WELLPOINT MANAGEMENT, EXECUTIVE COMPENSATION AND OTHER MATTERS
The directors and officers of WellPoint after the merger will remain
unchanged except for the election of one of the present Cerulean directors to
the board of directors of WellPoint after completion of the merger. Information
concerning other directors and the executive officers of WellPoint, including
compensation information, is incorporated by reference from the information
previously filed with the SEC and incorporated by reference elsewhere in this
proxy statement/prospectus. For more information concerning WellPoint, we
encourage you to consult and review information previously filed by WellPoint
with the SEC and incorporated by reference in this proxy statement/prospectus.
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INFORMATION CONCERNING CERULEAN
The information provided in this section is provided pursuant to the
provisions of the registration requirements under the Securities Act of 1933.
This information should be considered with the information provided concerning
WellPoint, including the information incorporated by reference in this proxy
statement/prospectus and the pro forma financial information for the combined
companies on page 73.
SELECTED CONSOLIDATED FINANCIAL AND OTHER DATA
The following is selected consolidated financial and operating data of Blue
Cross and Blue Shield of Georgia, HMO Georgia and all subsidiaries for the
periods shown prior to the conversion of Blue Cross and Blue Shield of Georgia
from a not-for-profit business to a for-profit business and of Cerulean for the
period following the conversion. You should read the following data which has
been prepared in accordance with generally accepted accounting principles, in
conjunction with the accompanying consolidated financial statements and the
related notes to those financial statements.
<TABLE>
<CAPTION>
SIX MONTHS
ENDED
JUNE 30, YEAR ENDED DECEMBER 31,
------------------- ----------------------------------------------------------
2000 1999 1999 1998 1997 1996 1995
-------- -------- ---------- ---------- ---------- -------- --------
(UNAUDITED) ($ IN THOUSANDS)
($ IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF INCOME DATA:
Revenues:
Premium revenue.......................... $872,657 $715,884 $1,486,294 $1,189,665 $ 989,789 $818,351 $709,425
Management services revenue.............. 75,347 70,833 142,186 117,963 96,470 87,262 74,297
Investment and other income.............. 11,344 10,180 19,687 17,183 17,259 14,358 11,980
Realized gains........................... 5,422 4,982 7,214 9,254 11,300 4,113 15,265
-------- -------- ---------- ---------- ---------- -------- --------
Total revenues..................... 964,770 801,879 1,655,381 1,334,065 1,114,818 924,084 810,967
Benefits expense........................... 761,038 628,845 1,300,923 1,032,520 881,554 702,234 613,031
Operating expenses......................... 169,413 151,865 313,603 279,218 233,651 202,072 176,387
-------- -------- ---------- ---------- ---------- -------- --------
Operating income (loss).................... 34,319 21,169 40,855 22,327 (387) 19,778 21,549
Endowment of a non-profit foundation (1)... -- -- -- (76,157) -- -- --
Non-operating income....................... -- 128 255 255 1,275 1,275 --
-------- -------- ---------- ---------- ---------- -------- --------
Income (loss) before income taxes and
minority interests....................... 34,319 21,297 41,110 (53,575) 888 21,053 21,549
Income tax expense (benefit) (2)........... 7,003 5,030 9,061 2,073 (2,050) 3,159 3,857
Minority interests in (earnings) losses of
joint venture investments................ 481 107 794 (1,520) 1,460 (421) (282)
-------- -------- ---------- ---------- ---------- -------- --------
Net income (loss).................. $ 27,797 $ 16,374 $ 32,843 $ (57,168) $ 4,398 $ 17,473 $ 17,410
======== ======== ========== ========== ========== ======== ========
</TABLE>
---------------
(1) During 1998, Cerulean endowed a non-profit foundation. See note 8 of the
accompanying consolidated financial statements and "Management's Discussion
And Analysis Of Financial Condition And Results Of Operations Of Cerulean."
(2) Cerulean pays taxes under the alternative minimum tax system as the result
of a special deduction available under Section 833(b) of the Internal
Revenue Code. If the deduction were no longer available, Blue Cross and Blue
Shield of Georgia would be subject to federal income taxes at the regular
corporate tax rate, which is currently 35%. However, in 1997, the use of net
operating loss carryforwards, not the special deduction under Section
833(b), subjected Cerulean to alternative minimum tax.
We have omitted earnings per share because such data is not meaningful at
the present time due to the likely dilutive events that will occur prior to or
in conjunction with the conversion of the Class A stock or the Class B stock.
Currently there is no public trading market for Class A stock or any equity
securities of Cerulean.
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<PAGE> 91
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30, YEAR ENDED DECEMBER 31,
------------------- ----------------------------------------------------------
2000 1999 1999 1998 1997 1996 1995
-------- -------- ---------- ---------- ---------- -------- --------
(UNAUDITED) ($ IN THOUSANDS)
($ IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
OPERATING DATA BY PRODUCT GROUP:
Premium revenue by product group:
Health maintenance organization and
point-of-service................... $399,074 $311,043 $ 658,352 $ 503,135 $ 331,393 $180,432 $ 89,943
Indemnity and preferred provider
organization....................... 464,145 396,001 810,598 670,588 643,626 627,155 611,211
Life................................. 9,438 8,840 17,344 15,942 14,770 10,764 8,271
-------- -------- ---------- ---------- ---------- -------- --------
Total premium revenue.......... 872,657 715,884 1,486,294 1,189,665 989,789 818,351 709,425
Management services revenue............ 75,347 70,833 142,186 117,963 96,470 87,262 74,297
-------- -------- ---------- ---------- ---------- -------- --------
Total premium revenue and
management services
revenue...................... $948,004 $786,717 $1,628,480 $1,307,628 $1,086,259 $905,613 $783,722
======== ======== ========== ========== ========== ======== ========
As a percentage of premium revenue:
Health maintenance organization and
point-of-service................... 45.7% 43.5% 44.3% 42.3% 33.5% 22.1% 12.7%
Indemnity and preferred provider
organization....................... 53.2% 55.3% 54.5% 56.4% 65.0% 76.6% 86.2%
Life................................. 1.1% 1.2% 1.2% 1.3% 1.5% 1.3% 1.1%
-------- -------- ---------- ---------- ---------- -------- --------
Total.......................... 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
======== ======== ========== ========== ========== ======== ========
Loss ratio (benefits expense as a
percentage of premium revenue):
Health maintenance organization and
point-of-service................... 86.1% 86.7% 86.8% 85.6% 89.5% 84.7% 80.0%
Indemnity and preferred provider
organization....................... 88.9% 89.5% 88.9% 88.5% 89.6% 86.7% 87.8%
Life................................. 54.4% 53.7% 50.5% 52.6% 52.9% 53.9% 56.5%
-------- -------- ---------- ---------- ---------- -------- --------
Total loss ratio............... 87.2% 87.8% 87.5% 86.8% 89.1% 85.8% 86.4%
======== ======== ========== ========== ========== ======== ========
Operating expense ratio (operating
expenses as a percentage of premium
revenue and management services
revenue)............................. 17.9% 19.3% 19.3% 21.4% 21.5% 22.3% 22.5%
======== ======== ========== ========== ========== ======== ========
Effective income tax rate(1)........... 20.4% 23.6% 22.0% -3.9% -230.9% 15.0% 17.9%
======== ======== ========== ========== ========== ======== ========
BALANCE SHEET DATA (AT PERIOD END):
Cash & investments..................... $426,177 $386,752 $ 388,729 $ 377,830 $ 315,323 $307,190 $223,994
Total assets........................... 679,086 610,765 612,083 587,342 496,532 459,131 353,468
Total estimated benefit liabilities.... 224,789 193,455 201,587 184,075 149,581 119,511 110,374
Total liabilities...................... 381,656 341,341 334,410 325,018 254,850 224,916 180,429
Mandatorily redeemable preferred
stock................................ 46,645 46,645 46,645 46,645 46,645 46,645 --
Common stock........................... 4 4 4 4 4 4 --
Additional paid-in capital(2).......... 45,188 45,188 45,188 45,188 -- -- --
Stock warrants exercisable(2).......... 29,968 29,968 29,968 29,968 -- -- --
Shareholders' equity................... 250,785 222,779 231,028 215,679 195,037 187,570 173,039
</TABLE>
---------------
(1) Cerulean pays taxes under the alternative minimum tax system as the result
of a special deduction available under Section 833(b) of the Internal
Revenue Code. If the deduction were no longer available, Blue Cross and Blue
Shield of Georgia would be subject to federal income taxes at the regular
corporate tax rate, which is currently 35%. However, in 1997, the use of net
operating loss carryforwards, not the special deduction under Section
833(b), subjected Cerulean to alternative minimum tax.
(2) During 1998, Cerulean endowed a non-profit foundation. See note 8 of the
accompanying consolidated financial statements and "Management's Discussion
And Analysis Of Financial Condition And Results Of Operations Of Cerulean."
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS OF CERULEAN
The following discussion should be read in conjunction with the
accompanying consolidated financial statements and the related notes to those
financial statements contained in this proxy statement/ prospectus. Cerulean'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 was organized on February 2, 1996 to become a holding company for
Blue Cross and Blue Shield of Georgia and its subsidiaries upon its conversion
to a for-profit corporation on February 2, 1996. During 1997, Blue Cross and
Blue Shield of Georgia made a distribution of its investments in certain
subsidiaries, including HMO Georgia, Inc. and Group Benefits of Georgia, Inc.,
to the holding company. The discussions below relate to the historical
operations of Blue Cross and Blue Shield of Georgia, HMO Georgia and all
subsidiaries prior to February 2, 1996 and to Cerulean, including Blue Cross and
Blue Shield of Georgia, HMO Georgia and all subsidiaries on a consolidated
basis, for the period following the conversion.
Historically, Cerulean derived substantially all of its premium and
management services revenues from its traditional indemnity and preferred
provider organization business. The growth of revenues and earnings in recent
years, however, is the result of a strategic shift in focus that began in 1992.
As a result of the change in strategy, health maintenance organization and
point-of-service premiums have grown to 44% at the end of 1999 from 13% of total
premiums at the end of 1995. Membership for fully insured health maintenance
organization and point-of-service products has grown to over 409,000 members at
the end of 1999 from 81,000 members at the end of 1995. Additionally, health
maintenance organization and point-of-service membership under management
services agreements totaled 97,000 and 51,000 at the end of 1999 and 1995,
respectively, bringing total health maintenance organization and
point-of-service membership served to over 506,000 and 132,000 for the same
periods. The growth in the health maintenance organization and point-of-service
products is attributable to new sales, in-group-growth and, to a lesser degree,
migration of business from other traditional indemnity products offered by
Cerulean. In 1999, Cerulean's community health partnership network joint
ventures provided over 80% of total medical services for the health maintenance
organization and point-of-service products Cerulean sold, compared to 59% in
1995.
Management services revenue consists of fees for administrative services
provided to commercial employer groups under self-funded arrangements, including
claims processing, access to provider networks and other services rendered to
third parties. Management services revenue also includes reimbursements for
administrative expenses incurred in performing services as agent for federal and
state government programs and for the national Blue Cross Blue Shield interplan
system. Membership in these administrative services contracts has declined to
850,000 members at the end of 1999 from 888,000 members at the end of 1995. The
decline in administrative services membership is due primarily to the migration
of a segment of the State of Georgia employees from traditional indemnity
benefit designs to health maintenance organization plans including Cerulean's
health maintenance organization. Additionally, certain self-funded employer
groups have shifted to the national Interplan Teleprocessing System for Blue
Cross Blue Shield plans.
Membership served under insurance products and management services
arrangements totaled 1,689,000 members at the end of 1999 compared to 1,333,000
members at the end of 1995.
Cerulean's prudent management of its investments has played a significant
role in developing and maintaining Cerulean's financial strength. Investment
earnings, including realized gains on sales of investments, have represented an
average of over 123% of operating income during the period January 1, 1995
through December 31, 1999.
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Benefits expense consists primarily of health care claims and payments to
physicians, hospitals and other health care providers. Cerulean's profitability
largely depends on its ability to accurately predict and effectively manage
these health care costs. Accordingly, Cerulean continues its efforts to improve
contractual terms with providers for the delivery of medical services, and
effectively manage business mix changes from indemnity and preferred provider
organization products into health maintenance organization and point-of-service
products.
Cerulean's level of operating expenses as a percentage of premium and
management services revenues, an average of 21% over the last five years,
reflects its emphasis on managed care products, and the expenses associated with
the change in its infrastructure to support managed care products and its
investment in a strategic information systems plan.
The State of Georgia requires insurers to pay a tax on insurance premiums
in lieu of a state income tax. The insurance subsidiaries charge premium taxes
to operating expenses as they are incurred.
Cerulean pays federal taxes under the alternative minimum tax system as the
result of a special deduction available under Section 833(b) of the Internal
Revenue Code. If the deduction were no longer available, Blue Cross and Blue
Shield of Georgia would be subject to federal income taxes at the regular
corporate tax rate, which is currently 35%. However, in 1997, Cerulean was
subject to alternative minimum tax due to the utilization of net operating loss
carryforwards, not the special deduction under Section 833(b).
Both the federal and state legislatures have been proposing, and continue
to propose, significant health care legislation. Any new health care legislation
could have a material impact on Cerulean's business. With or without
legislation, Cerulean expects consumers and employer groups to continue to exert
pressure on pricing of health care products. To meet these demands, Cerulean
must provide more predictable, lower cost products.
Results of operations are directly affected by:
- premium rate adequacy, which depends on pricing and underwriting
decisions;
- the level of membership serviced by and the performance of Cerulean's
physician, hospital, pharmacy and ancillary health care services
networks, and since January 1995, by Cerulean's community health
partnership network joint ventures;
- estimates of medical benefits;
- health care utilization;
- estimates of health care cost trends;
- effective administration of benefit payments;
- operating efficiencies;
- investment returns; and
- federal and state laws and regulations.
RESULTS OF OPERATIONS
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. Health
maintenance organization and point-of-service 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 health maintenance organization and
point-of-service insured membership to 445,000 members at June 30, 2000 from
385,000 members at June 30, 1999. Premium revenues for
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indemnity and preferred provider organization 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.
Cerulean's medical loss ratio 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 Cerulean'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 in Richmond County, Georgia.
Additionally, the 1999 period included approximately $1.9 million for Year 2000
readiness costs.
Cerulean 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. Cerulean'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 community health partnership network subsidiaries that Cerulean
does not expect to generate a tax benefit currently or in the foreseeable
future.
As a result of the factors described above, 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.
1999 Compared to 1998
Premium revenues increased $296.6 million to $1,486.3 million for the year
ended December 31, 1999 from $1,189.7 million for the year ended December 31,
1998. Health maintenance organization and point-of-service premiums increased
31% to $658.4 million for the 1999 period from $503.1 million in 1998 primarily
as a result of a 14% increase in membership and rate increases in the 1999
period. Health maintenance organization and point-of-service insured membership
increased to 409,000 members at December 31, 1999 from 358,000 members at
December 31, 1998 due to new sales and in-group growth. Premium revenues for
indemnity and preferred provider organization products increased 21%, or $140.0
million, to $810.6 million for the year ended December 31, 1999 as a result of
rate increases in 1999 and a 10% growth in the members served.
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Management services revenue increased $24.2 million to $142.2 million for
the year ended December 31, 1999 compared to $118.0 million for the year ended
December 31, 1998, as Cerulean has continued to experience increased
administrative fee revenue from services provided to self-funded employer groups
and other third parties and interplan network access fees from other Blue Cross
Blue Shield plans. Self-funded employer group membership of 850,000 at December
31, 1999 declined from 870,000 members at December 31, 1998 as certain
self-funded employer groups have shifted to the national Interplan
Teleprocessing System for Blue Cross Blue Shield plans.
Membership served under insurance products and management services
arrangements totaled 1,689,000 members at December 31, 1999, an increase of 4%
over total membership of 1,620,000 at December 31, 1998.
Realized gains of $7.2 million on the sale of marketable securities for the
year ended December 31, 1999 were lower than gains realized of $9.3 million for
the prior year.
Cerulean's medical loss ratio increased to 87.5% for the year ended
December 31, 1999 up from 86.8% for the year ended December 31, 1998. Cerulean
identified higher cost trends resulting in higher loss ratios for all of its
employer group products for services received in 1999 periods.
Operating expenses were $313.6 million for the year ended December 31,
1999, an increase of 12% over the same period a year ago, while premium revenue
and management services revenues increased 25%. 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 revenue and management
services revenue continued to improve. Operating expenses were 19.3% of premium
revenue and management services revenue for the year ended December 31, 1999
compared to 21.4% for the year ended December 31, 1998. Year 2000 readiness
costs of $4.6 million for each of 1999 and 1998 were included in operating
expenses. Additionally, the 1999 period includes approximately $7.6 million in
legal and other professional expenses related to the pending merger with
WellPoint and the litigation in Richmond County, Georgia, compared to $4.9
million incurred in the 1998 period.
On July 8, 1998, Cerulean entered into a settlement of the lawsuit
concerning the conversion of Blue Cross and Blue Shield of Georgia to a
for-profit corporation. Cerulean endowed a new non-profit foundation and issued
cash, Class A stock and warrants pursuant to this settlement. In connection with
this transaction, Cerulean recorded a non-recurring charge of $76.2 million for
the year ended December 31, 1998. Cerulean recorded a tax benefit of $26.7
million related to this settlement, which was reduced to its expected realizable
value of $4.6 million.
Cerulean recorded tax expense of $9.1 million for the year ended December
31, 1999 compared to a tax expense of $2.1 million for the year ended December
31, 1998. Cerulean'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 community health partnership network joint venture subsidiaries that are
not expected to generate a tax benefit currently or in the foreseeable future.
As a result of these factors, operating income increased to $40.9 million
for the year ended December 31, 1999 from $22.3 million for the year ended
December 31, 1998. Cerulean recognized net income of $32.8 million for the year
ended December 31, 1999 compared to net income of $14.4 million for the year
ended December 31, 1998, excluding the $76.2 million endowment of the non-profit
foundation, net of a tax benefit of $4.6 million.
1998 Compared to 1997
Premium revenue increased 20% to $1,189.7 million for the year ended
December 31, 1998 from $989.8 million for the year ended December 31, 1997.
Cerulean's membership in its indemnity and managed care insurance products
increased to 750,000 members as of December 31, 1998 compared to 649,000 members
as of December 31, 1997. Health maintenance organization and point-of-service
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premiums increased $171.7 million to $503.1 million for the year ended December
31, 1998 resulting from a 34% increase in insured membership and rate increases
in the 1998 period. New sales, in-group growth, and to a lesser extent,
migrations from traditional indemnity products into health maintenance
organization and point-of-service products, continued to drive health
maintenance organization and point-of-service membership growth to 358,000
members at December 31, 1998 from 267,000 members at December 31, 1997. Premium
revenue for indemnity and preferred provider organization products increased
$27.0 million to $670.6 million for the year ended December 31, 1998, primarily
as a result of rate increases during the 1998 period, offset in part by a shift
in product mix as consumers selected products with lower cost benefit design in
the 1998 period.
Management services revenue increased to $118.0 million for the year ended
December 31, 1998 compared to $96.5 million for the year ended December 31,
1997. This increase was due primarily to increased administrative fee revenue
from services provided to self-funded employer groups, other third parties and
interplan network access fees from other Blue Cross Blue Shield plans in the
1998 period. Membership in self-funded employer groups increased to 870,000
members at December 31, 1998 from 863,000 members at December 31, 1997.
Investment and other income for the year ended December 31, 1998 was $17.2
million, slightly below investment and other income for the prior year. Although
Cerulean's average investment portfolio increased year over year, the investment
yield, excluding realized gains and losses, declined to 5.1% in 1998 due to
lower interest rates compared to an investment yield of 5.4% in 1997.
Additionally, other income in 1997 included $0.6 million related to
non-recurring income.
Realized gains of $9.3 million on the sale of marketable securities for the
year ended December 31, 1998 were $2.0 million lower than gains realized in the
year ended December 31, 1997.
Cerulean's medical loss ratio improved to 86.8% for the year ended December
31, 1998 from 89.1% for the year ended December 31, 1997. This was primarily a
result of rate increases in the 1998 period, actions to control medical costs
implemented in late 1997 and early 1998, and in part to an improvement in
payment patterns and claims trends from prior year's claims estimates,
principally for Cerulean's health maintenance organization and point-of-service
products. The loss ratio for health maintenance organization and
point-of-service products improved to 85.6% for 1998 from 89.5% for 1997. The
loss ratio for indemnity and preferred provider organization products improved
to 88.5% for the 1998 period from 89.6% for the same period in 1997.
Operating expenses increased 20% to $279.2 million for the year ended
December 31, 1998 from $233.7 million for the year ended December 31, 1997,
principally due to growth in Cerulean's infrastructure necessary to support the
increased health maintenance organization and point-of-service membership base,
information technology changes, Year 2000 readiness costs and Medicare Risk
product development. Year 2000 readiness costs were $4.6 million in 1998.
Additionally, during the year ended December 31, 1998, Cerulean recognized
increased operating expenses of $4.9 million related to the settlement of the
lawsuit arising from its conversion to a for-profit corporation and from the
proposed merger with WellPoint. Operating expenses as a percentage of premium
revenue and management services revenue were 21.4% for the year ended December
31, 1998, compared to 21.5% for the year ended December 31, 1997.
On July 8, 1998, Cerulean entered into a stipulation and agreement of
settlement of the conversion lawsuit. Cerulean endowed a new non-profit
foundation and issued cash, Class A stock and warrants to the foundation
shareholders pursuant to the settlement. In connection with this transaction,
Cerulean recorded a nonrecurring charge of $76.2 million for the year ended
December 31, 1998.
In January 1998, a hospital purchased stock warrants exercisable for common
stock of one of Cerulean's community health partnership network subsidiaries in
exchange for a note receivable. In January 1997, a hospital purchased a 5%
interest in one of Cerulean's community health partnership network subsidiaries.
These transactions were recorded as non-operating income for the years ending
December 31, 1998 and 1997.
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Cerulean recorded tax expense of $2.1 million for the 1998 period compared
to a tax benefit of $2.1 million for the 1997 period. Net tax expense in 1998 is
from the alternative minimum tax, increased for losses from community health
partnership networks that are not expected to generate benefit in the
foreseeable future, offset by tax benefits related to the lawsuit settlement,
and the difference in book and tax bases in community health partnership network
investments both reduced to expected realizable value. The net tax benefit in
1997 included the utilization of loss carryforwards and tax benefits from
Cerulean's long-lived tax assets and the difference in book and tax bases of its
community health partnership network investments reduced to expected realizable
value.
As a result of the factors above, operating income increased to $22.3
million for the year ended December 31, 1998 from an operating loss of $0.4
million for the year ended December 31, 1997.
After the endowment of the non-profit foundation, non-operating income and
minority interests in (earnings) losses of joint venture investments, Cerulean
recognized a net loss of $57.2 million for the year ended December 31, 1998
compared to net income of $4.4 million for the year ended December 31, 1997.
LIQUIDITY AND CAPITAL RESOURCES
Liquidity
Cerulean 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. Cerulean'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
Cerulean's investment portfolio as of June 30, 2000 is held at its insurance
subsidiaries and is invested subject to limitations prescribed by Georgia
insurance statutes.
Cash and investments were $426.2 million or 63% of total assets at June 30,
2000 and $388.7 million or 64% of total assets at December 31, 1999. Cerulean
has consistently maintained the allocation of its external investment portfolio
with approximately 70% in fixed maturities, all of which are investment grade,
and the balance in equity securities. Corporate and government bonds are in
issues with ratings of "A" or better by Moody's Investors Service and Standard &
Poor's Rating Group and investments in equity securities are in domestic,
dividend-paying companies. Cerulean's portfolio currently does not contain any
derivative securities or instruments, or any real estate investments or equity
investments in corporations engaged solely in real estate activities. Cerulean
believes that its conservative investment portfolio contributes to its financial
stability.
Cerulean's balance sheet has improved steadily since 1995, with total
assets growing to $679.1 million at June 30, 2000 and $612.1 million at December
31, 1999, up from $353.5 million at December 31, 1995. A substantial portion of
the increase was a result of growth in Cerulean's cash and investment portfolio
as it invested excess cash generated from operating activities and investment
earnings.
Cerulean has historically satisfied its ordinary cash requirements from
operations. Net cash provided by operating activities amounted to $42.2 million
for the six months ended June 30, 2000 compared to net cash provided by
operating activities of $19.9 million for the same period in 1999. Net cash
provided by operating activities amounted to $39.6 million for 1999 compared to
$66.0 million for 1998. Cerulean generated cash flow from operations of $39.6
million for 1999 and $66.0 million for 1998 due primarily to profitability in
both periods and to increased levels of operating liabilities such as estimated
benefits liabilities, accounts payable, accrued expenses and rate stabilization
reserves with increased operating liabilities increasing faster during the 1998
period than the 1999 period. The increased levels of operating liabilities for
the 1998 period followed growth in business volume for Cerulean's health
maintenance organization and point-of-service products of over 30% in 1998 and
50% during 1997. Growth for these products tapered off to only 15% for the 1999
period. Because of the nature of Cerulean's business,
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Cerulean does not expect its current cash flows from operations to be indicative
of future results. Cerulean does believe, however, that its future cash
resources will be adequate to meet its operating requirements.
Blue Cross and Blue Shield of Georgia maintains a $55.0 million insolvency
line of credit with a group of banks. Blue Cross and Blue Shield of Georgia may
draw upon the insolvency line of credit solely in the event of its insolvency to
pay authorized insurance policy claims. The insolvency line of credit is
designed to satisfy certain membership standards of the Blue Cross and Blue
Shield Association from which Cerulean and certain of its subsidiaries have the
exclusive license to do business in Georgia under the name "Blue Cross and Blue
Shield", and to use the Blue Cross and Blue Shield names, trademarks and service
marks with respect to Cerulean's indemnity, preferred provider organization,
health maintenance organization, point-of-service and life insurance products.
Cerulean does not anticipate making draws on the insolvency line of credit.
Blue Cross and Blue Shield of Georgia, HMO Georgia and Greater Georgia Life
Insurance Company are domiciled in the State of Georgia and prepare their
statutory statements in accordance with accounting principles and practices
prescribed by the Georgia Insurance Department. These entities may distribute
dividends only out of realized profits, which are the undistributed,
accumulated, net earnings of the entity since organization. The amount of
dividends distributable each year is limited to the greater of the prior year's
net income determined on a statutory basis or 10% of prior year statutory
surplus. In addition, the conversion order approved by the Georgia Insurance
Commissioner on December 27, 1995 in connection with Blue Cross and Blue Shield
of Georgia's conversion to a for-profit corporation further limits dividends
distributable by Blue Cross and Blue Shield of Georgia. Blue Cross and Blue
Shield of Georgia, HMO Georgia and Greater Georgia Life Insurance Company must
make a filing with, and in some cases obtain special approval from, the Georgia
Insurance Commissioner prior to making dividend distributions that are above
these defined limits.
Capital Resources
Cerulean 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 community health partnership networks and
other subsidiaries; and
- strategic acquisitions.
Development of medical access points includes acquisition of physician
practices, establishment of urgent care, 24-hour, or primary care clinic
facilities, or physician recruitment or relocation costs. Capital for medical
access points could be required if the community health partnership networks are
not able to adequately cover the geography or range of services desired. The
capital cost to develop a medical access point varies because of differing
factors such as available facilities and extent of existing infrastructure.
Cerulean anticipates that the development of a single medical access point could
cost in the range of $0.5 million to $2.0 million. To date, no community health
partnership network has produced an access need that has translated into
additional capital requirements.
In late 1999, Cerulean completed its remediation and testing of systems for
Year 2000 readiness. As a result of those planning and implementation efforts,
Cerulean experienced no disruptions in information technology and
non-information technology systems and believes those systems successfully
responded to the Year 2000 date change. After monitoring its computer
applications through June 2000, Cerulean is not aware of any material problems
resulting from Year 2000 issues, either with its products, its internal systems,
or the products and services of third parties. In the three years ended December
31, 1999, Cerulean expended $19.6 million for Year 2000 readiness costs. Capital
expenditures for new hardware and software totaled $8.3 million. Cerulean
expensed renovation expenses of $11.3 million when incurred, with
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$4.6 million expensed in the 1999 period. Cerulean funded these expenditures
from cash flows from operations.
Cerulean believes that it can meet future capital requirements with a
combination of:
- its current resources;
- cash flows from operations;
- borrowings; and
- potential debt or equity offerings.
Cerulean believes that the completion of the merger will provide it with
significant additional capital alternatives.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
With a primary emphasis on protection of capital, the investment guidelines
approved by the board of directors seek appropriate asset distribution,
diversification of risk and use of professional external money managers to
manage levels of risk. Cerulean 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. Cerulean does
not hold derivative financial instruments or derivative commodity instruments in
either portfolio and has no foreign currency exposure. Cerulean 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 Cerulean's fixed income and equity investments in both
portfolios, which are classified as other than trading, indicates the following
market risk exposures:
As of June 30, 2000, approximately 80%, or $292.1 million, of the
value of the consolidated portfolios were held in financial instruments
with fixed maturities. Cerulean's primary market risk exposure is to
changes in interest rates. At June 30, 2000, 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. Cerulean manages
interest rate exposure by maintaining a short duration in its fixed income
portfolio. The modeling technique Cerulean uses considers the net present
value of cash flows, including duration estimates. Cerulean excludes
short-term debt instruments, approximately 0.1%, or $0.3 million, of the
value of the consolidated portfolios, with a fair value equal to their
cost, from the aggregate net market value market risk exposure analysis.
The fair value of the common equity portfolio, excluding investments
in affiliated entities, which constitute less than 1.0% of the common
equity portfolio, was $71.5 million as of June 30, 2000. 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. At June 30, 2000,
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. Cerulean records unrealized net
gains and losses net of taxes as accumulated other comprehensive income in
the shareholders' equity section of the consolidated financial statements
accompanying this proxy statement/prospectus.
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Cerulean does not anticipate any material change in primary market risk
exposure for the remainder of 2000.
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BUSINESS OF CERULEAN
Cerulean 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. and its subsidiaries. Blue Cross and Blue Shield of Georgia was
established in 1937 and through a series of business combinations and subsidiary
operations had, by 1985, and has currently, the largest health insurance company
market share in Georgia. As of December 31, 1999, Blue Cross and Blue Shield of
Georgia and HMO Georgia, Inc., Cerulean's health maintenance organization
subsidiary, had 873,000 insurance and administrative service contracts covering
or administering benefits for approximately 1.7 million members. This represents
more than 22% of the total Georgia population and includes approximately 46% of
the over 3.7 million residents of the metropolitan Atlanta area.
THE CONVERSION; PRIVATE PLACEMENT OF CLASS B STOCK
On February 2, 1996, Cerulean acquired all of the outstanding capital stock
of Blue Cross and Blue Shield of Georgia, following Blue Cross and Blue Shield
of Georgia's conversion from a not-for-profit corporation to a for-profit
corporation, pursuant to a plan of conversion approved by the Commissioner of
Insurance of the State of Georgia on December 27, 1995. As a part of the
conversion, Cerulean agreed to offer to each of Blue Cross and Blue Shield of
Georgia's eligible subscribers five shares of its Class A stock, no par value,
at no cost. Upon completion of the offering, eligible subscribers accepted
351,545 shares of Class A stock. The registration of the Class A stock became
effective under the Securities Act of 1933 on May 14, 1996 and under Section
12(g) of the Securities Exchange Act of 1934 on June 30, 1997. As of August 15,
2000, there were 409,602 shares of Class A stock outstanding, held by 70,293
holders. Currently, the Class A stock is not publicly traded.
Following the conversion, Cerulean issued 49,900 shares of Class B stock to
raise $49.9 million in capital. After deducting offering costs, Cerulean
received net proceeds of $46.6 million.
INDUSTRY OVERVIEW
According to the Health Care Financing Administration, health care spending
in the U.S. rose from $836.5 billion in 1992 to $1.1 trillion in 1998, an
average annual increase of approximately 5.0%. This rate was considerably more
than the average annual increase of the consumer price index of approximately
2.6% for the same period. Health care spending accounted for over 13% of the
gross domestic product from 1992 through 1998. On an absolute dollar basis, as
well as on a percentage of gross domestic product basis, the United States
spends more on health care than any other country in the world. Several factors
have contributed to the dramatic increase in health care expenditures,
including:
- the aging of the population;
- increased use of high-technology treatments and tests;
- the rising cost of malpractice insurance; and
- higher operating costs for hospitals, physicians and other health care
providers.
Prior to the development of managed health care, most health insurers offered
health care benefit plans known as indemnity, or fee-for-service plans, which do
not typically provide incentives to use particular providers for the most cost
effective care or include other cost-containment features.
Due to the escalating cost of health care services, both group and
individual customers began to demand lower cost alternatives to traditional
indemnity insurance plans. Managed health care plans were developed to attempt
to provide access to appropriate health care services in an affordable manner.
Typically, health maintenance organization and preferred provider organization
plans develop networks of health care providers to deliver health care at
favorable rates while participating in quality initiatives together with
utilization management and other cost control measures. An important factor in
controlling
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costs is the number of enrolled members that a managed care benefit plan can
direct to providers. Under many managed care plans, providers are reimbursed
based on:
- capitation, which is a fixed monthly fee per member regardless of
frequency of service, generally used by health maintenance organizations
for physicians and ancillary medical services such as laboratory
services;
- a negotiated per diem or daily rate, generally used for hospitals; or
- limited fee schedules, generally used for specialty physicians.
Managed health care plans also feature a variety of methods of health care
utilization management. Utilization management programs encourage providers to
use health care resources effectively.
Different types of health care utilization management and cost control
methods differentiate managed health care plans. Health maintenance
organizations generally require members to use network providers exclusively,
except in emergency cases, and to consult with a primary care physician prior to
obtaining treatment from specialists. In addition, health maintenance
organizations generally include capitated payment arrangements with network
providers who charge members only modest copayments. A point-of-service network
plan provides members with a health maintenance organization service option for
network coverage and also permits the member, at the time medical service is
required, to choose a provider that is not a member of the health maintenance
organization network at additional cost. Point-of-service plans generally
require the use of a primary care physician within the network to coordinate
health care services for the members, while preferred provider organization
plans often do not. Preferred provider organization and point-of-service plans
also provide members with the option of using non-network providers under
indemnity-type coverage terms which require higher coinsurance payments by
members and higher deductibles. These member payments are generally limited to
an out-of-pocket maximum. Coinsurance and higher deductible requirements for
non-network care in point-of-service and preferred provider organization plans
encourage greater utilization of the network care by members, thereby reducing
costs.
According to a compilation of industry sources, in 1998 the total number of
health maintenance organization members nationwide grew by an estimated 15.4
million people, to 104.4 million. Since 1992, health maintenance organization
enrollment nationally has more than doubled. The Georgia marketplace is
extremely diverse, ranging from the major metropolitan area of Atlanta with a
1998 population in excess of 3.7 million to several mid-sized cities to very
rural areas. The southern half of the State of Georgia is primarily rural and
dominated by an agrarian economy. Georgia has a health maintenance organization
market penetration of only 19%. Based on industry sources, the five states with
the highest health maintenance organization penetration in the country at the
end of 1998 have health maintenance organization market shares ranging from 55%
to 64%. Health maintenance organization membership in Georgia for 1998 increased
approximately 250% over 1992, at a rate greater than the rate of growth
nationally, due in part to the state's low health maintenance organization
market penetration in the 1990s. Health maintenance organization membership for
1998 in the metropolitan Atlanta area, where the 1998 health maintenance
organization market penetration was approximately 40%, increased more than 231%
over 1992, reflecting the increased consumer demand for managed care plans in
the Atlanta area.
Cerulean's rate of growth in health maintenance organization membership
exceeded both the national and state rates of growth, increasing over 1000% for
the 1992-1998 period. The higher rate of growth for Cerulean is attributable to
its growth in health maintenance organization membership specifically in the
metropolitan Atlanta area. Cerulean experienced a rate of growth in the Atlanta
market of over 630% for the 1992-1998 period.
GENERAL
Cerulean, through its subsidiaries, has the largest health insurance
company market share in Georgia, with 873,000 insurance and administrative
service contracts covering or administering benefits for approximately 1.7
million members as of December 31, 1999, including health maintenance
organization, preferred provider organization and point-of-service members. This
represents over 22% of the total
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Georgia population. Blue Cross and Blue Shield of Georgia has one of Georgia's
largest preferred provider organization memberships, serving approximately
417,000 members as of December 31, 1999. HMO Georgia, a health maintenance
organization which also offers point-of-service products, serves an additional
506,000 members. Greater Georgia Life Insurance Company, Inc., a subsidiary of
Blue Cross and Blue Shield of Georgia, and Group Benefits of Georgia, Inc., an
inactive subsidiary of Cerulean, are also part of the consolidated group.
Greater Georgia Life Insurance Company offers group life, accident and
disability insurance products that are sold in conjunction with Cerulean's
health products. Greater Georgia Life Insurance Company has an "A" rating from
A.M. Best and is licensed to offer its products in Alabama, Georgia,
Mississippi, North Carolina, South Carolina, Tennessee and Virginia.
Cerulean's core business products are its traditional indemnity products
and its health maintenance organization, point-of-service and preferred provider
organization products. Cerulean's current business strategy centers around the
belief that development of managed care products, with a strong health
maintenance organization at the core, represents the most prudent response to
current marketplace demands. In areas where there is no managed care, Cerulean's
strategy is to solidify market presence through preferred provider organization
network expansion, favorable changes in provider reimbursement and benefit
design alterations that meet employers' needs.
Cerulean offers its traditional indemnity products and its health
maintenance organization, point-of-service and preferred provider organization
products exclusively within the boundaries of the State of Georgia. Cerulean and
certain of its subsidiaries are licensed by the Blue Cross and Blue Shield
Association to use the Blue Cross and Blue Shield names and logos only in
Georgia. While there are only limited Blue Cross and Blue Shield Association
restrictions on the conduct of business by Cerulean or its subsidiaries outside
Georgia under a different name, substantially all of Cerulean's revenue is
currently associated with Georgia business.
Blue Cross and Blue Shield of Georgia and HMO Georgia have a comprehensive
quality management program which focuses on assessment, management and
monitoring of inpatient and ancillary service costs. The quality management
program monitors, collects data on and evaluates inpatient and outpatient
medical care, inclusive of preventive and mental health services, as well as the
level of customer service provided to members by physicians and other medical
providers. Cerulean has a disciplined credentialing function which monitors the
recruitment and retention of its provider panels throughout the state. Blue
Cross and Blue Shield of Georgia's preferred provider organization was the first
preferred provider organization in Georgia to receive full accreditation from
the Utilization Review Accreditation Commission. Additionally, in 2000, the
National Committee for Quality Assurance awarded HMO Georgia its second full,
three year accreditation. The National Committee for Quality Insurance is a
nationwide organization which evaluates quality assurance programs for health
maintenance organizations.
At present, HMO Georgia is licensed and operational as a health maintenance
organization in eight markets in Georgia representing more than 6.0 million
residents, including Atlanta. Networks of primary care physicians, specialist
physicians and hospitals service HMO Georgia's health maintenance organization
and point-of-service products. Beginning in January 1995, HMO Georgia also began
supporting its products through community health partnership networks which are
currently operational in two of the eight health maintenance organization market
areas of the state.
ORGANIZATIONAL STRUCTURE
Cerulean organizes its primary operating subsidiaries, Blue Cross and Blue
Shield of Georgia and HMO Georgia, in a business unit, support unit and
governance unit structure. Business units have responsibility to sell products,
at appropriate prices, and to manage the effective delivery of product benefits
at acceptable levels. Support units manage the delivery of administrative
services to individual or multiple business units within defined cost
parameters, while meeting customer service expectations. The governance units
establish policy, provide direction for Blue Cross and Blue Shield of Georgia
and HMO Georgia and monitor compliance.
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Within the individual business unit, health insurance products are sold to
individuals or families of individuals under age 65, or to persons over age 65
who are eligible for Medicare. Local market business units offer a full line of
health insurance products for employer groups of less than 500 employees. The
major national business unit offers a full line of health benefit products to
employer groups with 500 or more covered employees and the national par business
unit supports participating plan accounts of Georgia employees of national
employers sold through other Blue Cross and Blue Shield plans.
STRATEGIC INITIATIVES
Community Health Partnership Networks
As a result of concern with rising health care costs and changing trends in
the health care industry, Cerulean determined to develop its own integrated
delivery systems for managed health care products. Cerulean's community health
partnership networks are the cornerstone of this strategy. Community health
partnership networks have facilitated the introduction of Cerulean's health
maintenance organization and point-of-service products into new markets which
have provided alternatives to group customer demand for lower cost health care.
Community health partnership networks are locally based equity ventures between
Cerulean and a local physician group and/or hospital, which owns the remaining
equity interests in the network. Cerulean owns at least 51% of the equity
interests in each community health partnership network it has organized, and the
local physician group and/or hospital own the remaining equity interest. The
physician or hospital partners, as well as other providers with which the
community health partnership network maintains contracts, provide clinical
services. Blue Cross and Blue Shield of Georgia provides sales, management and
administrative services, including information systems and data management
services through service contracts with the community health partnership
networks. HMO Georgia collects premium and fee revenues from subscribers and
retains a flat percentage for administration and as a contribution to surplus.
After deduction for premium taxes, the community health partnership network uses
remaining premium revenue for payment of medical expenses and for contribution
to its retained earnings.
Cerulean has taken several actions to support the community health
partnership networks, including:
- providing initial and additional capita;
- hiring experienced managers to oversee sales, medical network management
and financial performance in the local markets;
- providing dedicated claims processing and membership services;
- developing a strategic information systems plan that addresses the
information requirements, applications needs and systems architecture
necessary to support the community health partnership networks; and
- enhancing medical management activities and continued development of
National Committee for Quality Insurance processes and Health Plan
Employer Data and Information Set reporting.
Atlanta Healthcare Partners, Inc., which operates in the Atlanta
metropolitan area and surrounding counties, was the first community health
partnership network to become operational. At the end of June 2000, an
additional community health partnership network, jointly owned by Cerulean and
health care providers, was also operational in the Augusta market. Cerulean and
the health care providers that were parties to the community health partnership
networks entered into termination agreements during 1999 for the networks in the
Macon and Athens markets and in June 2000 for the Savannah market. The medical
cost outcomes under these three joint venture arrangements were unsatisfactory
for the partnerships during the first three years of operation.
Information technology
Cerulean's comprehensive multi-year strategic information systems plan
identified the capital, equipment, software and intellectual property necessary
to employ and support traditional kinds of systems
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effectively in an evolving managed care and customer service environment. The
software applications and hardware architecture necessary to support Cerulean's
strategic community health partnership network business initiative were
essential requirements of the strategic information systems plan.
Cerulean believes that the information technology strategies employed in
the execution of the strategic information systems plan have resulted in more
efficient interrelated uses of information both through systems targeted to
specific uses and through the use of networks to deploy solutions company-wide.
Historically, Cerulean used a mixture of systems and processing platforms
to meet its information requirements. Integral features of the strategic
information systems plan include:
- a principal software application, GTE's Q/Care product, as modified for
Cerulean, for claims processing and membership billing;
- a single hardware platform for claims processing;
- client server technology; and
- an enterprise data warehouse, which is a database repository of business
information.
At the end of 1999, Cerulean processed all of its membership through the
Q/Care system. Cerulean retired all previously used systems during 1999. The
enterprise data warehouse has been operational with medical management and
claims data since December 1997. During 1999, the enterprise data warehouse
included membership and premium revenue data, completing the initial phase of
the evolution of Cerulean's enterprise data warehouse. With the update to the
enterprise data warehouse and the migration of all membership to Q/Care during
1999, Cerulean's technical infrastructure can provide highly available, reliable
and responsive business and clinical systems that will position Cerulean to
continue to excel in the dynamic health care marketplace.
Cerulean also performs paperless claim clearinghouse/electronic data
interchange for providers as well as on-line eligibility, claims status and
preauthorization/referral processing options. For certain large employer groups,
Cerulean provides on-line access to their eligibility and summary claims
information. Provider and employer on-line functionality has strengthened
Cerulean's position for health care electronic commerce.
IMPACT OF YEAR 2000
Prior to December 31, 1999, Cerulean developed several plans to become Year
2000 ready. In late 1999, Cerulean completed its remediation and testing of
systems. As a result of those planning and implementation efforts, Cerulean
experienced no disruptions in information technology and non-information
technology systems and believes those systems successfully responded to the Year
2000 date change. After monitoring its computer applications through June 2000,
Cerulean is not aware of any material problems resulting from Year 2000 issues,
either with its products, its internal systems, or the products and services of
third parties.
BUSINESS LINES AND PRODUCTS
Overview
Cerulean operates predominantly in one industry segment, health insurance
products and services. As a full service provider of health benefit programs in
the Georgia marketplace, Cerulean markets life, health and disability insurance
products to employer groups and individuals. The overall product portfolio
available includes standard indemnity insurance, preferred provider
organization, health maintenance organization and point-of-service health
benefits plans, life insurance products and ancillary products including dental
insurance, a vision affinity product, vision insurance and specialty products
for mental health and pharmacy benefits.
Cerulean provides various funding arrangements for each health benefit
product. These arrangements range from fully insured to administrative services
only, called "ASO/Cost Plus" arrangements. For
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example, under a fully insured indemnity arrangement, Blue Cross and Blue Shield
of Georgia assumes the full risk, subject to deductibles and other adjustments,
with direct payment by Blue Cross and Blue Shield of Georgia, generally to the
provider. In an ASO/Cost Plus indemnity arrangement, Blue Cross and Blue Shield
of Georgia administers the health insurance program for its customer and is
compensated according to the terms of the contract for its services by
management services fees. The formula for compensation in ASO/Cost Plus
arrangements varies from contract to contract, but conceptually in such
arrangements, Blue Cross and Blue Shield of Georgia receives reimbursement for
benefit payments processed and related management services fees. ASO/Cost Plus
funding is generally used by employers with at least 500 covered enrollees. Some
employers may choose individual member or aggregate reinsurance to protect
against catastrophic losses. Additionally, Cerulean provides access to its
provider networks and other services to employer groups and other third parties
under various management services arrangements.
Shown below is certain information on each of Cerulean's major product
lines.
PERFORMANCE BY PRODUCT
<TABLE>
<CAPTION>
AT YEAR ENDED
DECEMBER 31, 1999 DECEMBER 31, 1999
----------------- -----------------------
MEMBERS(1) PREMIUMS LOSS RATIO
----------------- ---------- ----------
($ IN THOUSANDS)
<S> <C> <C> <C>
INSURANCE PRODUCTS
Indemnity and preferred provider organization........... 429,257 $ 810,598 88.9%
Health maintenance organization and point-of-service.... 409,426 658,352 86.8
Life.................................................... -- 17,344 50.5
--------- ---------- ----
Total......................................... 838,683 $1,486,294 87.5%
--------- ========== ====
MANAGEMENT SERVICES PRODUCTS (2)
Indemnity and preferred provider organization
networks.............................................. 753,592
Health maintenance organization and point-of-service
networks.............................................. 96,873
---------
Total......................................... 850,465
---------
Total -- All Products......................... 1,689,148
=========
</TABLE>
---------------
(1) Includes actual membership for health maintenance organization and
point-of-service products and indemnity and preferred provider organization
products with estimates for the Federal Employees Program and certain
national participating business.
(2) Revenues for these administrative services arrangements in 1999 totaled
$142.2 million.
Health Maintenance Organization and Point-of-Service Products
Cerulean has offered its health maintenance organization product through
HMO Georgia since 1986. From 1986 through 1993, the product did not experience
substantial growth. However, in 1993, new management and an increased emphasis
on sales of managed care products dramatically increased the market acceptance
of HMO Georgia's products. HMO Georgia's health maintenance organization and
point-of-service products are now Cerulean's fastest growing products. At
present, HMO Georgia is licensed and operational as a health maintenance
organization in eight separate markets in Georgia, including Athens, Atlanta,
Augusta, Columbus, Gainesville, Macon, Rome and Savannah, representing more than
6.0 million residents. HMO Georgia's health maintenance organization and
point-of-service products are offered to group subscribers as "Blue Choice
Healthcare Plan," which is a prepaid coverage and preventive care product, and
as "Blue Choice Option," which is a point-of-service product that allows members
to choose between HMO Georgia network providers and out-of-network providers.
HMO Georgia collects premiums and management services fees on a monthly basis
from employers. Some employers allow members to elect, at annual enrollment,
whether they wish to be in the "Blue Choice Healthcare Plan" or the "Blue Choice
Option."
Under Cerulean's health maintenance organization product, health
maintenance organization members select a primary care physician who provides
basic medical care for the member pursuant to a contract
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with HMO Georgia. The primary care physician coordinates all of the medical and
health care for each health maintenance organization member, including physical
examinations, specialist care and hospitalization. Cerulean credentials and
periodically re-credentials each primary care provider to maintain physician
network standards. The primary care physician coordinates with the member and
Cerulean to assure that members receive contract benefits in a cost-effective
manner. Health maintenance organization benefit plans require varying copayments
for health care services. Coverage for non-emergency hospitalization services
requires prior approval by the member's primary care physician and must be
provided in network facilities, except for certain specified services. Health
maintenance organization benefit plans also provide coverage for preventive
treatment and wellness programs. Members may purchase benefits such as dental
services, pharmacy services and vision care as options to the basic benefit plan
with a variety of copayment levels.
The Blue Choice Option product requires members to use a primary care
physician for basic medical services and pre-certification of specialist
services whether performed by network or non-network providers. Network
hospitalization is fully covered. Non-network services and services obtained
without primary care physician approval are subject to deductibles and
significant coinsurance requirements.
BlueChoice Platinum
The Health Care Financing Administration approved HMO Georgia's application
to offer a Medicare Risk health maintenance organization product in nine
counties within the Atlanta metropolitan statistical area in December 1996. This
product, "BlueChoice Platinum," became operational in April 1997 and had over
16,000 members as of December 31, 1999. The individual BlueChoice Platinum
product has no member premium and includes all traditional Medicare benefits
plus preventive services, immunizations, annual vision screening, annual hearing
screening and limited outpatient prescription coverage. The core benefits of the
group BlueChoice Platinum product are those of the BlueChoice Platinum
individual product with additional benefits defined by each employer.
Preferred provider organization
Cerulean introduced its first preferred provider organization in Georgia in
the mid-1980's and began offering the preferred provider organization as "Blue
Choice PPO" in 1995. Cerulean's preferred provider organization is one of the
three largest statewide provider networks in Georgia, serving approximately
417,000 members as of December 31, 1999.
Cerulean designs its preferred provider organization products to deliver
health care benefits to employer groups at lower premium costs than traditional
indemnity products due to benefit design, favorable pricing arrangements with
network providers and utilization management and other cost control arrangements
with network providers. Cerulean introduced its first preferred provider
organization product for the individual market in February 1999. At December 31,
1999 there were 26,000 members served in the preferred provider organization
individual market. Typically, Cerulean's preferred provider organization benefit
plans cover 80% to 90% of the cost of covered health care services received by a
subscriber through the preferred provider organization network. The plans
generally cover non-network services at 60% to 70%, subject to higher deductible
and coinsurance requirements.
The preferred provider organization benefit plans provide full coverage for
covered services after a member has paid coinsurance, or a specified annual
out-of-pocket maximum. Cerulean offers a broad range of preferred provider
organization benefit plans which enables the employer to choose the mix of
benefits that suits its employees' needs. Higher deductibles, coinsurance and
out-of-pocket maximums and other financial incentives encourage subscribers to
use network provider services. Cerulean's preferred provider organization also
offers preventive health benefit coverage, such as health assessments,
immunizations and prenatal visits. Premiums and management services fees for
Cerulean's preferred provider organization product are collected monthly from
employers.
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Indemnity
Cerulean's traditional indemnity product line includes benefit options for
both the individual and group markets through products that reimburse for
covered health care services on a fee-for-service basis. Cerulean collects
premiums and management services fees on a monthly basis. Traditional indemnity
products may utilize the statewide networks that Cerulean has established for
physicians, hospitals and pharmacies. The majority of new business opportunities
for traditional indemnity group business are in the rural markets where,
Cerulean believes, the flexibility of its indemnity products, in terms of
provider access, is an advantage.
Cerulean offers its indemnity products to group subscribers as "New CHIP,"
the traditional indemnity insurance product with certain managed care features.
Cerulean offers indemnity products to individual subscribers as:
- "Flex Plus," a comprehensive major medical product for people under age
65, that provides a full range of benefits related to hospital, surgical,
pharmacy and other associated medical expenses with varying deductible
and coinsurance options;
- "hospital/surgical," a lower cost product than "Flex Plus" which insures
only catastrophic non-routine services associated with a more serious
medical condition related to a surgical procedure or inpatient hospital
stay and which Cerulean also offers to people under 65; and
- "65 PLUS," a guaranteed issue plan that acts as a supplement to the
federally insured Medicare program.
Life Insurance
Greater Georgia Life Insurance Company offers group life and disability
products to employers of all sizes and is licensed to do business in seven
states throughout the Southeast, although its revenues are derived primarily
from business in Georgia. Greater Georgia Life Insurance Company commonly offers
term life insurance with accidental death and dismemberment coverage for all
groups with less than 100 employees. For larger groups, it may offer the life
product with health insurance. In addition to the standard term life and
accidental death and dismemberment products, Greater Georgia Life Insurance
Company also offers a contributory, voluntary life insurance product as well as
a dependent life insurance product. Greater Georgia Life Insurance Company
offers a variety of plan designs and coverage amounts. Greater Georgia Life
Insurance Company also offers short-term and long-term disability insurance.
Ancillary and Specialty Network Benefits
Cerulean offers a variety of ancillary and specialty network benefits to
enhance its competitive position and is developing other such products. Offering
an array of ancillary products and specialty networks permits Cerulean to
capitalize on its name recognition and to appeal to employer groups that are
increasingly seeking a variety of benefit options. Currently, Cerulean offers
these ancillary and specialty network benefits in conjunction with its medical
benefit plan designs.
Cerulean has offered dental insurance since 1982. Cerulean typically
offers dental insurance as a benefit enhancement that may be purchased in
conjunction with group products. A number of major commercial carriers and other
entities are offering managed dental care products, although Blue Cross and Blue
Shield of Georgia does not currently offer such a product.
Cerulean offers vision, mental health/substance abuse and pharmacy benefits
as part of certain of its medical plan designs. Cerulean has not designed these
benefits as stand-alone products and does not sell them separately from medical
products.
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MARKETING AND SALES
General
Cerulean's marketing operations vary depending upon the market at which it
directs its sales efforts, which consist of:
- individuals (i.e., direct pay);
- small employer groups, defined as groups of two to 50 employees;
- large employer groups, defined as groups of 50 or more employees; and
- major national groups, defined as groups of 500 or more employees.
Local market managers in each of the established local market regions, as
well as an assistant vice-president of major/national accounts and a director of
individual sales, coordinate Cerulean's marketing efforts. The executive
vice-president of local market operations supervises each of these individuals.
From a competitive perspective, Cerulean addresses its market generally by
geography, product and customer group size. Significant competition exists in
the Atlanta, Macon, Columbus, Athens and Augusta markets for managed care
products. In other metropolitan areas, the majority of competition is generally
for indemnity or preferred provider organization products, although new market
entrants with managed care capabilities continue to enter these areas.
Cerulean has also been highly successful in developing major and national
account business, especially for its health maintenance organization and
point-of-service products, because of its unique position regarding statewide
capabilities.
Internal Sales and Service Force
Cerulean employs an internal sales staff of account executives and group
sales representatives to sell and service all of Cerulean's group product lines.
The sales force works with other members of the distribution channel, including
independent agents and brokers. They also make direct calls on selected target
accounts and work with nationally recognized consulting firms. Each geographic
area has a local market manager and a sales manager directly responsible for the
results of the unit. In addition, a centralized communications department
develops direct mail advertising and promotional material that targets specific
audiences for potential distribution of products. Cerulean assigns specific
accounts to service representatives, who work directly with the internal sales
force and independent agents and brokers. Service representatives become the
principal administrative contact for employers and their benefit managers. Their
duties include conducting on-site meetings, providing health data reports and
resolving potential service issues. Cerulean also maintains an additional
fully-commissioned staff of sales employees who sell Cerulean's individual
indemnity insurance products, other than the Medicare supplement. A
telemarketing staff sells the Medicare supplement.
Independent insurance agents and brokers
Cerulean's group sales representatives also market health insurance and
managed care products through independent agents, brokers and consultants to
whom Cerulean may pay commissions from the premiums it receives. Brokers who
meet selected production and underwriting criteria are also eligible for a
"Preferred Producer" bonus. These independent agents and brokers are responsible
for a significant portion of Cerulean's enrollment growth over the past three
years. Any future growth in ensuing calendar years will also be dependent on
Cerulean's ability to continue productive relationships with these independent
agents and brokers. Independent agents and brokers are not salaried employees of
any insurance company or managed care company and are free to sell multiple
products from multiple insurance firms. Some agents and brokers are career
agents of other insurance companies whom they represent, and for whom they may
be required to maintain product exclusivity for a given type of product but are
able to sell group health insurance and managed care products from a number of
carriers, including Cerulean. Independent
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agents and brokers dominate the distribution channel for the majority of sales
opportunities in the Georgia market, particularly in rural areas, and most
insurance companies use them to distribute their products.
UNDERWRITING
In determining whether to accept groups and to establish appropriate rates
for its plans, Cerulean uses specific underwriting criteria based on its
accumulated actuarial data, with adjustments for factors such as claims
experience, member mix and risk characteristic differences, to evaluate
anticipated health care costs. The risk selection criteria that Cerulean uses
employ generally accepted risk characteristics and a flexible underwriting
formula to generate new business and renewal rates. Cerulean monitors rates and
the rating process monthly and makes appropriate adjustments quarterly. Cerulean
applies new business ratings for all groups with 100 or fewer employees through
the use of an automated proposal system, with field sales personnel implementing
rates and risk selection criteria. For employer groups with 100 or more
employees, home office underwriting personnel determine all rates. These
personnel utilize the same screening of risk characteristics that is conducted
for employer groups of smaller size, but they attempt to blend actual claim
experience, utilizing a flexible credibility formula and underwriting
intervention, in order to establish an appropriate rate based on Cerulean's
desired competitive position. Georgia law regulates rates for groups smaller
than 51.
Customers
Cerulean has contracts with certain employer groups and government agencies
that account for a significant portion of Cerulean's total business. One group
accounted for 22% of Cerulean's total premium revenues and management services
revenues in 1999. Cerulean's next two largest customers accounted for less than
9% of premium revenues and management services revenues in 1999. Cerulean also
serves as fiscal intermediary for the Medicare Part A program. Claims processed
for the Medicare Part A program, state agencies and the National Blue Cross Blue
Shield interplan system totaled $4.2 billion in 1999. Cerulean receives fees for
performing these services.
Cerulean's contract with the State of Georgia for self-funded benefits
expires June 30, 2001. In February 2000 Georgia awarded a contract for the
delivery of medical services for its new preferred provider organization program
to a hospital provider network system. Blue Cross and Blue Shield of Georgia
will retain its role as sole administrator for Georgia's indemnity benefit plan
and the new preferred provider organization program through June 30, 2001.
The State of Georgia's program accounts for over 25% of Cerulean's
membership. Cerulean cannot currently estimate the number of members that will
migrate from Georgia's indemnity plan to the new preferred provider organization
product, but Cerulean does not expect that the migration will unfavorably impact
Cerulean's management services revenue. Cerulean does expect an increase in
health maintenance organization insured membership for the State of Georgia
account, as part of the benefit program change and due to the contribution
levels set by the State. Cerulean anticipates a nominal decline in operating
margin for 2000 for the aggregation of all products and services provided to the
State of Georgia. Cerulean does not anticipate any impact on hospital
contracting for its health maintenance organization, point-of-service and
preferred provider organization products as a result of the introduction of the
new State of Georgia preferred provider organization product. Cerulean expects
nominal impact on hospital contracting arrangements for indemnity products this
year as Cerulean's membership continues to shift to lower benefit cost products
such as health maintenance organization and preferred provider organization.
During the 1999 legislative session, the Georgia legislature created a new
agency, the Department of Community Health, which, among other things, will
become the lead agency in coordinating and purchasing health care benefit plans
for state and public employees and their dependents, as well as retirees.
Cerulean expects the Department of Community Health to begin a bid process
during the second half of this year for the administration of the state's health
benefit plans for the periods beginning after July 1, 2001.
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INVESTMENT PORTFOLIO
Cerulean's conservative management of its investment process has played an
integral role in creating and maintaining its financial strength. Earnings from
the investment portfolio have contributed significantly to the profits of
Cerulean. Over the five-year period from January 1, 1995 to December 31, 1999,
investment income plus gains realized on sales of investments represented 123%
of consolidated operating income. In 1999, such income and gains were $26.9
million compared to consolidated operating income of $40.9 million.
Investment guidelines which comply with the Georgia Insurance Code govern
investment discretion of Cerulean's insurance subsidiaries. Cerulean has
established a two-tiered investment portfolio. It meets liquidity needs through
an internally managed investment portfolio which it invests primarily in
institutional money market accounts and short-term government agency notes.
Cerulean transfers those assets not required for liquidity to external money
managers for long-term investment in the fixed income and equity markets. State
Street Bank currently holds applicable assets in both portfolios in custody. All
bonds in the investment portfolios must have quality ratings of "A" or higher by
Moody's Investors Service and Standard & Poor's Ratings Group. The equity
investments in Cerulean's investment portfolios are highly diversified and
limited to high quality, dividend paying, domestic equity securities. There are
no derivative securities or instruments in Cerulean's investment portfolios. The
board of directors of each insurance subsidiary reviews and approves investment
related activities at least quarterly.
Blue Cross and Blue Shield of Georgia's investment portfolio represented
65% of Cerulean's consolidated investment portfolio at December 31, 1999.
Management staff manage Blue Cross and Blue Shield of Georgia's internal
portfolio. This staff reports to the treasurer and chief financial officer of
Blue Cross and Blue Shield of Georgia who in turn reports to the treasurer of
Cerulean. Independent advisory firms manage Blue Cross and Blue Shield of
Georgia's external portfolio. These firms are subject to the review of Blue
Cross and Blue Shield of Georgia's chief financial officer and the finance
committee of Blue Cross and Blue Shield of Georgia's board of directors. The
chief financial officer monitors the performance of Blue Cross and Blue Shield
of Georgia's investment managers and compares their performance on a monthly
basis to predetermined benchmarks. The finance committee formally reviews
performance of each investment manager on a quarterly basis. An outside
consultant, Register & Akers Investments Inc., also calculates performance
quarterly, including benchmarking to an extensive group of other professionally
managed investment portfolios. The investment process is dynamic, and Cerulean
continually reviews it for improvements and refinements.
The tables below show Cerulean's consolidated invested assets by category.
The following tables should be read in conjunction with the consolidated
financial statements and the related notes thereto accompanying this proxy
statement/prospectus and with the discussion above at "Quantitative and
Qualitative Disclosures About Market Risk."
INVESTMENTS BY CATEGORY
<TABLE>
<CAPTION>
AS OF AS OF
DECEMBER 31, 1999 DECEMBER 31, 1998
------------------- -------------------
% OF % OF
CARRYING CARRYING CARRYING CARRYING
VALUE VALUE VALUE VALUE
-------- -------- -------- --------
($ IN MILLIONS)
<S> <C> <C> <C> <C>
Fixed maturities......................................... $256.8 77.8% $239.5 73.6%
Equity securities........................................ 73.1 22.1 76.9 23.6
Short-term investments................................... 0.3 0.1 9.2 2.8
------ ----- ------ -----
Total investments.............................. $330.2 100.0% $325.6 100.0%
====== ===== ====== =====
</TABLE>
Cerulean's consolidated portfolio is comprised primarily of highly liquid
investment securities. Cerulean's fixed maturities consist of United States
Government securities and corporate securities. At
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December 31, 1999, all of Cerulean's fixed maturities consisted of instruments
bearing fixed, rather than variable, rates of interest. The following table
summarizes Cerulean's fixed maturities by category.
FIXED MATURITIES BY CATEGORY
<TABLE>
<CAPTION>
AS OF
DECEMBER 31, 1999
-------------------
% OF
CARRYING CARRYING
VALUE VALUE
-------- --------
($ IN MILLIONS)
<S> <C> <C>
U.S. Treasury securities and obligations of U.S. government
agencies.................................................. $162.1 63.1%
Corporate securities........................................ 72.3 28.2
Mortgage-backed securities.................................. 22.4 8.7
------ -----
Total fixed maturities............................ $256.8 100.0%
====== =====
</TABLE>
The following table summarizes Cerulean's fixed maturities by contractual
maturity. Expected maturities will differ from contractual maturities because
borrowers may have the right to call or prepay obligations with or without a
call or prepayment premium.
FIXED MATURITIES BY MATURITY CATEGORY
<TABLE>
<CAPTION>
AS OF
DECEMBER 31, 1999
-------------------
% OF
CARRYING CARRYING
VALUE VALUE
-------- --------
($ IN MILLIONS)
<S> <C> <C>
Due in one year or less..................................... $ 28.4 11.1%
Due after one year through five years....................... 109.8 42.8
Due after five years through ten years...................... 94.3 36.7
Due after ten years......................................... 1.9 0.7
Mortgage-backed securities.................................. 22.4 8.7
------ -----
Total fixed maturities............................ $256.8 100.0%
====== =====
</TABLE>
COMPETITION
The market for each of Cerulean's products in Georgia is highly competitive
on both a regional and statewide basis and has undergone significant changes in
recent years. From a competitive perspective, Cerulean generally addresses its
market by geography, product and employer group size. Significant competition
exists in the metropolitan Atlanta market for managed care products, while
outside of this area the majority of competition currently is for either
traditional indemnity or preferred provider organization products, although new
market entrants with managed care capabilities are beginning to penetrate this
area. Cerulean has many competitors in its indemnity, preferred provider
organization and health maintenance organization operations, many of which have
substantially greater financial and other resources than Cerulean. However,
based upon current data available in publications circulated generally and
within the health care industry, no single competitor is dominant in any one of
Cerulean's eight geographic markets in the state.
Price competition among benefit plans in Cerulean's markets, particularly
the Atlanta metropolitan area, has intensified. According to public information,
as of September 1999, Cerulean and three national competitors: the health
maintenance organization operations based in Georgia for Aetna and Prudential;
Kaiser Foundation Health Plan of Georgia, Inc.; and United Health Care of
Georgia, Inc., held 88% of the Georgia health maintenance organization and
point-of-service market. Cerulean's share was 34% and the largest competitor's
share, Aetna/Prudential, was 24%. Because Cerulean's existing business
operations
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are confined to markets within the State of Georgia, Cerulean currently is
unable to subsidize losses in these markets with profits from other markets as
national companies can. Cerulean believes that certain larger, national
competitors are able to subsidize losses in the Georgia market with profits from
other markets in which they operate and could pursue such a strategy in
Cerulean's markets in an effort to increase market share. The national health
care industry has recently seen a consolidation of companies that offer health
care insurance, including traditional indemnity and managed care products. In
addition to intensifying competition, this consolidation may result in
corporations with enhanced financial resources positioned to pursue a strategy
of subsidizing losses to increase their market position in Georgia.
Further, future legislation at the federal and state levels may also create
increased competition in Cerulean's markets. Independent agents and brokers who
sell Cerulean's health care benefit plans as well as the benefit plans of
Cerulean's competitors may also affect competition. Additionally, provider-
sponsored initiatives, through which certain hospital and physician alliances
compete with traditional means of health care financing, are developing in some
market segments. Cerulean may not be able to compete effectively with
competition in the future.
EMPLOYEES
Cerulean had 2,822 full time employees at June 30, 2000. No Cerulean
employees are represented by any union, and Cerulean believes that its relations
with its employees are satisfactory.
GOVERNMENT REGULATIONS
Holding company regulation
Cerulean is an insurance holding company and as such is subject to
regulation by the Georgia Insurance Department. Georgia regulations require the
filing of financial and other information concerning the operations and
interrelationships of entities within an insurance holding company system. Such
regulations extend to contracts, loans, dividends, distributions, management
agreements and other transactions between holding company entities. Insurance
holding companies must submit certain of these agreements to the Georgia
Insurance Department for approval, based on concepts of fair and reasonable
terms, reasonable charges and fees, and the condition that following any such
related party transaction the insurer's surplus with regard to policyholders
must be reasonable in relation to the insurer's outstanding liabilities and
adequate to meet its financial needs.
Regulation of insurance subsidiaries
Blue Cross and Blue Shield of Georgia, HMO Georgia and Greater Georgia Life
Insurance Company are subject to comprehensive regulation. The Georgia Insurance
Department has broad authority to regulate, among other things:
- licenses to transact the business of insurance;
- investment activity of insurers;
- premium rates for certain insurance products;
- trade practices of insurers;
- agent licensing;
- policy forms;
- insurance underwriting and claims practices; and
- reserve adequacy and solvency.
The Georgia Insurance Department requires Blue Cross and Blue Shield of
Georgia, HMO Georgia and Greater Georgia Life Insurance Company to file detailed
annual reports with the department. The Georgia Insurance Department also
periodically examines Blue Cross and Blue Shield of Georgia, HMO
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Georgia and Greater Georgia Life Insurance's accounts. The regulation of
insurance holding company systems includes the acquisition and sales of licensed
entities, payment of dividends by regulated entities, the terms of affiliate
transactions and other related matters. HMO Georgia is a licensed health
maintenance organization under Georgia insurance law. Georgia law considers
health maintenance organizations to be insurers and, except as specifically
provided to the contrary, regulates them under the same provisions that apply
with respect to Blue Cross and Blue Shield of Georgia and Greater Georgia Life
Insurance Company.
Change or acquisition of control
Georgia insurance law requires the Georgia Insurance Commissioner's prior
approval of any transaction affecting change of control of, or other acquisition
of, a domestic insurer, or of any person or entity that controls a domestic
insurer. In general, a presumption of control exists if any person or entity
beneficially owns or controls 10% or more of the voting securities of a domestic
insurer or of a person that controls a domestic insurer. Any direct or indirect
change in control of a domestic insurer or an entity which controls a domestic
insurer is subject to the approval of the Georgia Insurance Commissioner,
following a public hearing.
Examinations
Blue Cross and Blue Shield of Georgia, HMO Georgia and Greater Georgia Life
Insurance Company are each subject to examination of their affairs by the
Georgia Insurance Department. The Georgia Insurance Department conducts
triennial examinations of insurance companies domiciled in Georgia. During the
last quarter of 1999, the Georgia Insurance Department completed its financial
examination and market conduct examination of Blue Cross and Blue Shield of
Georgia, HMO Georgia and Greater Georgia Life Insurance Company for the period
January 1, 1995 through December 31, 1997. As a result of those examinations,
the Georgia Insurance Department did not raise any matters that would have a
material impact upon the statutory financial statements of either Blue Cross and
Blue Shield of Georgia, HMO Georgia or Greater Georgia Life Insurance Company.
TRADE NAMES, TRADE MARKS, SERVICE MARKS AND LICENSES
Pursuant to licenses from the Blue Cross and Blue Shield Association,
Cerulean has the exclusive right to conduct business under the name "Blue Cross
and Blue Shield of Georgia" and to use the Blue Cross and Blue Shield names,
trademarks and service marks for all of the indemnity, life and managed health
care products and services it offers in all 159 counties in Georgia. Cerulean
believes that the well-recognized Blue Cross and Blue Shield names, trademarks
and service marks will continue to provide a significant marketing advantage in
its licensed service area, particularly as competitive pressures narrow
differences among health care benefit plans. Cerulean cannot do business using
the Blue Cross and Blue Shield names, trademarks and service marks outside of
its licensed service area.
PROPERTIES
Cerulean's corporate headquarters occupies approximately 265,000 square
feet of leased space in a 17-story building located in Atlanta, Georgia, and its
main claims operations center occupies approximately 176,000 square feet of
owned space in a four-story building located in Columbus, Georgia. Both
facilities are in desirable and accessible locations. Cerulean leases space in
16 other buildings in communities throughout Georgia to support its operations.
If the current rate of Cerulean's business growth continues, Cerulean may
require additional space.
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, filed a lawsuit against Cerulean, Blue Cross and Blue Shield of
Georgia, 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.
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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 in the Superior Court of Richmond County, State of
Georgia, bearing Civil Action File No. 98-RCCV-806. In addition, these
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 plaintiffs identify themselves as four individuals who were entitled to
receive shares of Cerulean's stock in connection with the conversion of Blue
Cross and Blue Shield of Georgia from a non-profit business to a for-profit
business. The plaintiffs assert claims for specific performance, fraud, breach
of provisions of the Insurance Code of Georgia and breach of fiduciary duty.
They request declaratory judgment and certification of a class action consisting
of all persons who were "eligible subscribers" of Blue Cross and Blue Shield of
Georgia as of February 1, 1996, and who did not become holders of Class A stock.
The plaintiffs allege that they and the members of the purported class are
entitled to receive shares of Class A stock. They allege alternatively that
offering materials disseminated by Blue Cross and Blue Shield of Georgia during
1996 relating to Class A stock contained materially misleading and deceptive
statements and omissions and that these plaintiffs and the purported class
members are entitled to an award of damages in excess of $100 million. The
plaintiffs also asserted derivative causes of action against the named directors
alleging that these directors breached fiduciary duties by, among other things,
approving the placement and issuance of Class B stock during 1996, the issuance
of Class A stock, 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, the
Superior Court held a hearing on the plaintiffs' request for declaratory ruling
on the issue of whether plaintiffs are properly shareholders of Cerulean. On
December 17, 1998, the Superior Court ruled in favor of the plaintiffs. Cerulean
filed an appeal with the Georgia Supreme Court, which accepted jurisdiction and
granted expedited treatment of the appeal. Cerulean'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 Insurance Commissioner had broad power of review
over the conversion of Blue Cross and Blue Shield of Georgia and that sufficient
administrative remedies with the Georgia Insurance Commissioner had been
available to the plaintiffs during and following the conversion.
The plaintiffs in the Richmond County litigation did not file a motion for
reconsideration of the Georgia Supreme Court's decision. On May 5, 1999, Blue
Cross and Blue Shield of Georgia and Cerulean filed motions for summary judgment
on the plaintiffs' fraud claims. On May 20, 1999, Cerulean and Blue Cross and
Blue Shield of Georgia filed a motion for entry of judgment on all remaining
counts of the plaintiffs' complaint. On July 29, 1999, the Superior Court of
Richmond County entered an order dismissing without prejudice all claims against
the directors named in the lawsuit. 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, Cerulean and Blue Cross and
Blue Shield of Georgia 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 plaintiffs in the Richmond County litigation, filed two separate
Petitions for Declaratory Ruling before the Georgia Insurance Commissioner.
These petitions sought a declaration from the Georgia Insurance Commissioner
that Cerulean should have issued Class A stock to them and others similarly
situated. On June 22, 1999, the Georgia Insurance 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 Superior
Court of Richmond County. In these cases, styled In Re: Harrell Tiller,
individually and on behalf of all
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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 Insurance
Commissioner of June 22, 1999. On September 21, 1999, the Superior Court of
Richmond County entered orders reversing the Georgia Insurance Commissioner's
orders. On October 12, 1999, Cerulean and Blue Cross and Blue Shield of Georgia
filed Applications for Discretionary Appeal 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
Insurance Commissioner filed an application 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.
On June 29, 2000, the Court of Appeals entered a decision affirming the
earlier decision by the Georgia Insurance 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
Cerulean. Cerulean has notified the plaintiffs in writing that Cerulean
considers the claims in this motion to be frivolous and to constitute abusive
litigation under Georgia law and that Cerulean intends to seek damages and
attorneys' fees against the plaintiffs, and their counsel, if they do not
withdraw the motion. If the plaintiffs do not withdraw the motion, Cerulean must
file a response to the motion on or before August 31, 2000.
Cerulean believes the case is without merit and, in any event, believes
that its impact, if any, on the assets of Cerulean would not be material.
In the normal course of business, Cerulean is involved in and subject to
claims, contractual disputes and other uncertainties. Cerulean, 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 its financial
position or results of operations.
MARKET FOR CERULEAN'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
As of August 15, 2000, Cerulean had 70,293 holders of Class A stock of
record. There is no established public trading market for the Class A stock.
Transfer of the Class A stock was restricted until December 1, 1998; thereafter,
during the period December 1, 1998 through December 2001, any sale of Class A
stock is subject to Cerulean's first right of refusal. Cerulean does not
anticipate that any dividends will be paid on Class A stock.
SECURITY OWNERSHIP OF CERULEAN MANAGEMENT AND PRINCIPAL SHAREHOLDERS
Currently, no shares of common stock are outstanding or beneficially owned
by any person, and no shares of blank preferred stock are outstanding or
beneficially owned by any person.
As of August 15, 2000, a total of 70,293 holders held 409,602 shares of
Class A stock, all of which were outstanding.
The charitable foundation formed in connection with the settlement of the
conversion litigation owns 53,150 shares, or approximately 13% of the Class A
stock. The address of the foundation is: Healthcare Georgia, Inc., Endowed by
Blue Cross & Blue Shield of Georgia c/o Long Aldridge & Norman LLP, 303
Peachtree Street, Suite 5300, Atlanta, Georgia 30308.
No directors, nominees for director or officers of Cerulean or of Blue
Cross and Blue Shield of Georgia beneficially own any shares of capital stock of
Cerulean except Frank J. Hanna, III and John W. Robinson, Jr. Mr. Robinson, a
Class A designated director, owns five shares, which is less than 1%, of the
Class A stock outstanding. Georgia Strategic Healthcare owns 40,000 shares, or
approximately 80%, of the
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Class B stock outstanding. Frank J. Hanna, III, Frank J. Hanna, Jr. and David
Hanna share voting and dispositive power with regard to all of the shares of
Class B stock owned by Georgia Strategic Healthcare. Frank J. Hanna, III, is,
therefore, deemed to be the indirect beneficial owner of the 40,000 shares held
by Georgia Strategic Healthcare. The address of Georgia Strategic Healthcare is:
Suite 1750, Two Ravinia Drive, Atlanta, Georgia 30346.
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MANAGEMENT OF CERULEAN
The following table sets forth certain information as of August 3, 2000
regarding each of the executive officers of Cerulean or Blue Cross and Blue
Shield of Georgia who is not also a director of Cerulean.
<TABLE>
<CAPTION>
NAME AGE TITLE
---- --- -----
<S> <C> <C>
John A. Harris............................ 49 Treasurer of Cerulean, Executive Vice President
of Finance and Strategic Planning of Blue Cross
and Blue Shield of Georgia
Hugh J. Stedman........................... 52 Secretary of Cerulean, Senior Vice President and
General Counsel of Blue Cross and Blue Shield
of Georgia
Mark Kishel, M.D.......................... 54 Executive Vice President, Chief Medical Officer
of Blue Cross and Blue Shield of Georgia
Richard F. Rivers......................... 46 Executive Vice President, Chief Operating
Officer of Blue Cross and Blue Shield of Georgia
Richard A. Steinhausen.................... 56 Executive Vice President, Service Operations and
Information Systems of Blue Cross and Blue
Shield of Georgia
R. Neil Vannoy............................ 54 Executive Vice President, Community Operations
of Blue Cross and Blue Shield of Georgia
Robert A. Yungk........................... 43 Executive Vice President, Local Market
Operations of Blue Cross and Blue Shield of
Georgia
</TABLE>
John A. Harris has served as Blue Cross and Blue Shield of Georgia's
Executive Vice President, Finance and Strategic Planning since January 1993. He
has served as Treasurer of Cerulean since its organization in February 1996.
Prior to joining Blue Cross and Blue Shield of Georgia, he worked in the health
care industry for 10 years, primarily in managed care companies, but also with
multi-line carriers. His positions included Chief Financial Officer, Western
Market Group, for the Employee Benefits Division of Lincoln National; Assistant
Corporate Controller for Financial Planning, Reporting and Analysis for Equicor;
President, VIP Health Plan, an IPA model health maintenance organization in
California; and Vice President, Finance for CIGNA Health Plans for southern
California.
Hugh J. Stedman currently serves as Secretary of Cerulean and Senior Vice
President and General Counsel to Blue Cross and Blue Shield of Georgia. Mr.
Stedman has been Counsel to Blue Cross and Blue Shield of Georgia since 1985.
Mr. Stedman obtained his J.D. from Rutgers University and is admitted to
practice law in Georgia and Pennsylvania. Prior to joining Blue Cross and Blue
Shield of Georgia, Mr. Stedman was Associate Counsel for Healthdyne, Inc., a
manufacturer of medical devices and supplier of home-health services. Mr.
Stedman is a member of the American, Georgia and Cobb County Bar Associations,
the Cobb County Chamber of Commerce and the American Health Lawyers'
Association.
Mark Kishel, M.D., has been Executive Vice President and Chief Medical
Officer of Blue Cross and Blue Shield of Georgia since October 1993. Prior to
joining Blue Cross and Blue Shield of Georgia, he developed staff, group and IPA
model health maintenance organizations, as well as preferred provider
organizations, for major carriers and other managed care organizations including
Travelers, Lincoln National and Health America. His management experience
includes capitated Medicaid, managed workers' compensation, point-of-service and
health maintenance organization networks. Dr. Kishel has developed quality
management and utilization management programs for various start-up companies
and consulted in physician health organizations and university-sponsored health
plan development. As a practicing pediatrician and family physician for 11
years, Dr. Kishel assisted in the development of a model primary care system
that addressed the needs of the indigent and uninsured in Arizona. He is a
director of the Atlanta Boys and Girls Clubs, Inc.
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Richard F. Rivers joined Blue Cross and Blue Shield of Georgia as Executive
Vice President and Chief Operating Officer in September 1997. Prior to joining
Blue Cross and Blue Shield of Georgia, Mr. Rivers worked for Prudential
Insurance Company for 22 years. Most recently, he was Senior Vice President of
Health Plan Operations with Prudential Healthcare and was responsible for the
operations of 32 local health plans nationwide. Prior to this, he was President
of South Central Operations and had full responsibility for operations in ten
states.
Richard A. Steinhausen joined Blue Cross and Blue Shield of Georgia in
August 1995 as Executive Vice President, Service Operations and Information
Systems. Mr. Steinhausen has more than 30 years of health care industry
experience. Most recently, he served as Vice President, Employee Benefits
Division of Washington National. Previously, he was a Senior Vice President of
Equicor and President of its National Benefits Sector. He also served as
Regional Vice President, Claims for Equitable Life Assurance Society.
R. Neil Vannoy joined Blue Cross and Blue Shield of Georgia as Senior Vice
President of Public Affairs and Product Development in July 1992. In 1994, he
was appointed Executive Vice President of Community Operations of Blue Cross and
Blue Shield of Georgia and is responsible for community healthcare partnership
developments and government programs. Prior to joining Blue Cross and Blue
Shield of Georgia, Mr. Vannoy served in management positions with Prudential
Insurance Company for 16 years, including Vice President, Group Corporate at
Prudential's New Jersey headquarters, Vice President in charge of the company's
Southern Group Operations, Vice President of Florida Group Operations and Vice
President of Group Marketing and Sales at the New York City group office. Mr.
Vannoy is a member of the boards of directors of the Georgia Business Forum and
the community health partnership networks in Atlanta and Augusta. He serves on
the Professional Advisory Council of Mission New Hope in Atlanta, supported the
development of the Georgia Coalition for Health as a member of the formation
steering committee and serves on the technical advisory committee of the Georgia
Health Policy Center. Mr. Vannoy holds a Chartered Life Underwriter designation.
Robert A. Yungk joined Blue Cross and Blue Shield of Georgia on December
15, 1997 with 18 years experience with national managed care companies. Mr.
Yungk has extensive managed care experience with staff, group, gatekeeper and
open access IPAs, point of service, preferred provider organization and pre-
paid dental health maintenance organizations. Most recently he served in a dual
capacity as President and Chief Executive Officer of United Healthcare of
Alabama and Executive Vice President and Chief Operating Officer of United
Healthcare South, a six-region managed care plan with 650,000 health maintenance
organization members. During his 12 years at Lincoln National Corporation, he
served in various senior roles in health plan management, corporate and regional
sales. He also holds a Chartered Life Underwriter designation.
COMPARISON OF RIGHTS OF
CERULEAN SHAREHOLDERS AND WELLPOINT SHAREHOLDERS
The rights of Cerulean shareholders are presently governed by the Georgia
Business Corporation Code, the Cerulean articles of incorporation, the Cerulean
bylaws and, in the case of holders of Class B stock, the shareholders' agreement
between the Class B shareholders, Cerulean and Blue Cross and Blue Shield of
Georgia. Upon completion of the merger, the rights of Cerulean shareholders who
become shareholders of WellPoint in the merger will be governed by the Delaware
General Corporation Law, the restated certificate of incorporation of WellPoint
and the bylaws of WellPoint. The following is a summary of the principal
differences between the current rights of Cerulean shareholders and those of
WellPoint shareholders following the merger.
We do not intend the following to be a complete discussion of the
differences in the rights of Cerulean and WellPoint shareholders. This
discussion is qualified by reference to Delaware law, Georgia law, the WellPoint
certificate of incorporation, the Cerulean articles of incorporation, the
WellPoint bylaws and the Cerulean bylaws. Copies of the WellPoint certificate of
incorporation and the WellPoint bylaws are attached to this proxy
statement/prospectus as Appendix D and Appendix E. Cerulean will send its
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articles of incorporation and bylaws, which are presently available from
Cerulean as well as from the SEC, to shareholders of Cerulean upon request.
BOARD OF DIRECTORS
Cerulean. The Cerulean articles of incorporation provide that, for all
matters other than election of directors, the holders of Class A stock and Class
B stock vote as separate classes. Shareholders elect directors by a plurality of
the votes cast unless the Cerulean articles of incorporation provide otherwise.
Under the Georgia Business Corporation Code, a corporation may provide in
its articles of incorporation for a board of directors divided into two or three
classes, with the size of the classes as even as possible. The Cerulean articles
of incorporation provide for a board which is divided into three classes, each
of which is elected for a staggered three-year term.
The Cerulean articles of incorporation further provide that as long as both
shares of Class B stock and Class A stock are issued and outstanding, the
holders of Class A stock, voting separately as a single class, are entitled to
elect two members of each class of the board of directors of Cerulean. These
directors are referred to as the Class A designated directors. Under the
Cerulean articles of incorporation, the holders of Class A shares elected the
first two Class A designated directors at the annual meeting of Cerulean held on
December 18, 1996. The Class A shareholders elected two more directors at the
annual meeting of Cerulean held on April 25, 1997 and were going to elect the
final two at the annual meeting scheduled for December 30, 1998. The board of
directors appointed these final two effective March 15, 1999 and the Class A
shareholders ratified that action at the special meeting held June 25, 1999.
The Cerulean articles of incorporation provide for a restriction on voting
of shares of common stock, limiting the vote of any one shareholder to 5% of the
total number of shares voting. The limit is also contained in the shareholders'
agreement between Cerulean and the foundation formed in connection with the
settlement of the conversion litigation. In a shareholders' agreement with
Cerulean, the foundation has agreed to vote only 5% of its Class A stock on
matters presented for a vote to the Class A shareholders. Cerulean has waived
this provision with respect to the merger, so that on the merger proposal, the
foundation will be entitled to vote all 53,150 of its shares of Class A stock.
On the proposal for the election of directors, however, the foundation will vote
only 20,480 shares.
So long as any shares of Class B stock are issued and outstanding, the
holders of Class B stock, voting separately and as a single class, are entitled
to elect all remaining directors of the Cerulean board of directors other than
the Class A designated directors. The holders of Class B stock nominate two
directors, known as preferred designated directors. The nominating committee of
the board nominates the remainder of the directors and the board of directors
approves them.
WellPoint. The Delaware General Corporation Law permits a classified board
of directors, divided into as many as three classes. However, the Delaware
General Corporation Law does not require that the classes be as even in size as
possible. The WellPoint certificate of incorporation provides that the WellPoint
board of directors be divided into three classes. If WellPoint changes the size
of its board, the change in the number of directors must be apportioned among
the classes such that the number of directors in each class is as nearly equal
as possible. The board of directors of WellPoint is elected by a plurality of
the votes cast by shareholders, up to the number of directors to be elected in
such election. WellPoint's certification of incorporation does not provide for
cumulative voting.
COMMITTEES OF THE BOARD
Cerulean. The Cerulean bylaws provide that Cerulean must have a finance
committee of the board of directors which consists of up to seven directors. In
addition to duties the board delegates to it, this committee must prepare and
approve an annual business plan of Cerulean, its subsidiaries and affiliates.
Upon approval of the finance committee and the board of directors, this business
plan serves as the official business plan for Cerulean, its subsidiaries and
affiliates. The Cerulean bylaws and the shareholders' agreement of the Class B
shareholders provide that the two preferred designated directors must serve on
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the finance committee. The Cerulean bylaws further provide that in the
discretion of the holders of Class B stock, one or two preferred designated
directors must serve on the compensation committee, the strategic planning
committee and the audit committee of Cerulean.
WellPoint. The WellPoint bylaws provide that any executive committee
established by the board of directors shall initially have at least one member
who is a "Blue Cross of California Designee," which is defined to mean W.
Toliver Besson, Stephen L. Davenport and Sheila P. Burke, or their direct or
indirect replacements. The bylaws also provide that a majority of any executive
committee be composed of members who are "WellPoint Designees." WellPoint
Designees are defined in the bylaws as Leonard D. Schaeffer, David R. Banks,
Roger E. Birk, Julie A. Hill and Elizabeth E. Sanders, or their direct or
indirect replacements. These committee provisions are applicable until the date
on which the California HealthCare Foundation and its affiliates collectively
cease to beneficially own WellPoint capital stock in excess of the certain
ownership limits. As of June 30, 2000, the California HealthCare Foundation
owned 4,410,000 shares, or approximately 7.1% of the outstanding WellPoint
common stock.
The WellPoint bylaws further provide for a nominating committee of
WellPoint's board of directors. This nominating committee will consist of three
directors, at least one of whom will be a Blue Cross of California Designee and
a majority of whom will be non-Blue Cross of California Designees. The
nominating committee has the power, acting by majority vote, to nominate persons
to serve as directors of WellPoint. These nominating rights are subject to the
following qualifications:
- the powers of the nominating committee are subject to any rights of
WellPoint's shareholders under law to nominate persons to serve as
directors;
- in the case of a person nominated as a replacement for a Blue Cross of
California Designee, the Blue Cross of California Designee members of the
nominating committee will have a veto vote;
- in the case of a person nominated as a replacement for any WellPoint
Designee, the nominating committee will not nominate any person if a
majority of the WellPoint Designee members of the Nominating Committee
oppose such nomination; and
- the powers of the nominating committee are further subject to any of
WellPoint's contractual obligations.
If the nominating committee is unable to nominate a candidate for
WellPoint's board of directors as set forth above, the board of directors will
make nominations, in the case of replacing a Blue Cross of California Designee,
by vote of a majority of the remaining Blue Cross of California Designees or, in
the case of replacing a WellPoint Designee, by vote of a majority of the
remaining WellPoint Designees. The nominating committee will continue to exist
so long as the California HealthCare Foundation's stock ownership is above the
ownership limit outlined on page 116.
ACTIONS BY SHAREHOLDERS WITHOUT A MEETING; SPECIAL MEETINGS
Cerulean. Under the Georgia Business Corporation Code, the shareholders of
a corporation may take any action which they could otherwise take at a meeting
of the shareholders by written consent of all of the shareholders entitled to
vote on that action. The articles of incorporation may also permit the
shareholders to act by written consent signed by the shareholders who would be
entitled to vote at a meeting and who hold shares having voting power to cast
not less than the minimum number of votes that would be necessary to authorize
or take the action at a meeting. The Cerulean bylaws provide that shareholders
may take any action required or permitted to be taken at a shareholders' meeting
by written consent if all the shareholders entitled to vote on the action sign
that consent.
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The Cerulean bylaws further provide that special meetings of the
shareholders, for any purpose or purposes, unless otherwise prescribed by the
Georgia Business Corporation Code:
- may be called by the Chairman of the Cerulean board of directors;
- may be called by the Chairman of the board of directors or the Secretary
of Cerulean when so directed by the board of directors;
- at any time at which Cerulean has more than 100 shareholders of record,
may be called by the Chairman of the board of directors or the Secretary
of Cerulean at the request in writing of shareholders holding not less
than 70% of all of the votes entitled to be cast on any issue proposed to
be considered at the special meeting;
- at any time at which Cerulean has 100 or fewer shareholders of record,
must be called by the Chairman of the board of directors or the Secretary
of Cerulean at the request in writing of shareholders owning not less
than 25% of all of the votes entitled to be cast on any issue to be
considered at the proposed special meeting; and
- may be called at the request in writing of shareholders owning not less
than a majority of the outstanding shares of Class B stock.
WellPoint. Under the Delaware General Corporation Law, unless a
corporation's certificate of incorporation provides otherwise, any action which
may be taken at a meeting of the shareholders of a corporation may be taken by
written consent without a meeting. Any such written consent must be executed by
the holders of outstanding stock having at least the minimum amount of votes
necessary to take such action at a meeting where all shareholders entitled to
vote on such action are present.
The WellPoint certificate of incorporation and the WellPoint bylaws
prohibit shareholder action by written consent without a meeting. The WellPoint
certificate provides that a special meeting of the shareholders of WellPoint may
be called at any time. Special meetings of the shareholders may be called only
by the Chairman of the Board, the President, a majority of the members of the
board of directors or holders of WellPoint shares entitled to cast not less than
10% of the votes at the meeting.
AMENDMENTS TO CERTIFICATE OR ARTICLES OF INCORPORATION
Cerulean. Under the Georgia Business Corporation Code, the Cerulean board
of directors may amend the articles of incorporation to take the following
actions without obtaining shareholder approval:
- delete the names and addresses of the initial directors, initial
registered agent or registered office, the initial principal office, and
each incorporator;
- change each issued or each issued and unissued authorized share of an
outstanding class of stock into a greater number of whole shares if the
corporation has only shares of that class outstanding;
- change the corporate name;
- extend the corporation's duration if it was incorporated at a time the
law required limited duration;
- change or eliminate the par value of each issued and unissued share of an
outstanding class if the corporation has only shares of that class
outstanding; or
- make any other change permitted by the Georgia Business Corporation Code
without shareholder action.
The board of directors must approve other amendments and recommend them to
the shareholders. The shareholders must then approve the amendments by a
majority of the votes entitled to be cast on the amendment by each voting group
entitled to vote on the amendment unless the articles of incorporation, the
bylaws or another provision of the Georgia Business Corporation Code require a
higher vote. In general, the Georgia Business Corporation Code permits class or
series voting on an amendment if the amendment would change the number of
authorized shares of a class, unless the articles of incorporation
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provide otherwise, or adversely affect the rights, powers or preferences of the
shares of a class or series in a manner specified by the statute.
The Cerulean articles of incorporation and Cerulean bylaws further restrict
the ability of the Cerulean shareholders to amend the Cerulean articles of
incorporation. The Cerulean articles of incorporation and bylaws provide that
the shareholders may alter, amend or repeal the Cerulean articles of
incorporation only upon the affirmative vote of:
- a majority of the members of the board of directors; and
- a majority, or in the case of amendment of provisions which require a
greater percentage, such greater percentage, of the shares of each class
of shares then outstanding and entitled to vote.
The Cerulean articles of incorporation and Cerulean bylaws further provide that
the provision governing amendment of the Cerulean articles of incorporation
described above, together with the provisions of the Cerulean articles of
incorporation dealing with classification of the Cerulean board of directors and
restrictions upon the acquisition of securities of Cerulean in the event that
Cerulean common stock is outstanding and no shares of Class B stock remain
outstanding, may be altered, amended or repealed by the shareholders only upon
the affirmative vote of:
- a majority of the members of the board of directors; and
- three-fourths of the shares of each class of shares then outstanding and
entitled to vote thereon.
WellPoint. Pursuant to the Delaware General Corporation Law, WellPoint's
certificate of incorporation may be amended if such amendment is approved by
both the board of directors and the majority of the outstanding shares entitled
to vote. Pursuant to the WellPoint certificate of incorporation, in order for
the WellPoint board of directors to approve any amendment of the WellPoint
certificate of incorporation, either two-thirds of the entire board or seven of
the directors then in office must vote in favor of the amendment, whichever is
greater. Certain provisions of the WellPoint certificate of incorporation may
only be amended by a "super-majority" vote of the holders of at least 75% of
each class of the shares of voting stock, represented and voting by class at a
duly held meeting of shareholders at which a quorum is present. These
"super-majority" protected provisions include those concerning:
- the number of directors of the board;
- certain provisions dealing with WellPoint's classified board of
directors;
- the filling of vacancies on the board of directors;
- the power of directors to amend the WellPoint certificate of
incorporation;
- the prohibition on shareholder action by written consent;
- the ownership and transfer restrictions relating to WellPoint common
stock;
- the prohibition on cumulative voting by shareholders; and
- the requirement for super-majority shareholder approval to amend such
provisions.
In no case will any amendment of the super-majority protected provisions of
the WellPoint certificate of incorporation be effective unless it has been
approved by the affirmative vote of a majority of the outstanding shares of
voting stock entitled to vote. WellPoint's license agreement with the Blue Cross
and Blue Shield Association contains restrictions on ownership and transfer of
WellPoint securities. The requirement for super-majority shareholder approval
will not apply to any amendment to these ownership and transfer restrictions to
conform such provision to a change to the terms of the WellPoint License
Agreement or to any amendment to the ownership and transfer restrictions
required or permitted by the Blue Cross Blue Shield Association. Furthermore,
the provisions of the WellPoint certificate of incorporation described in the
last three sentences of this paragraph will expire if the WellPoint license
agreement terminates and if WellPoint and the Blue Cross Blue Shield Association
do not enter into a replacement license agreement.
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AMENDMENTS TO BYLAWS
Cerulean. The Georgia Business Corporation Code permits a corporation's
board of directors to amend, repeal or adopt bylaws, unless:
- the articles of incorporation reserve this power exclusively to the
shareholders in whole or in part; or
- the shareholders, in amending or repealing a particular bylaw, expressly
reserve the power to amend or repeal that particular bylaw.
The corporation's shareholders may also amend, repeal or adopt bylaws even
though the board may amend or repeal the same bylaws. The shareholders alone may
amend, repeal or adopt bylaws limiting the authority of the board of directors
or establishing staggered terms for directors. The shareholders alone may adopt
bylaws extending a greater quorum or voting requirement for shareholders. In
addition, the board of directors may not amend, repeal or adopt a bylaw fixing a
greater shareholder quorum or voting requirement unless the bylaw relates to the
Georgia Business Corporation Code's business combination or fair practice
provisions. Unless provided otherwise in a corporation's articles of
incorporation or bylaws, adoption, amendment or repeal of a bylaw fixing a
greater quorum or voting requirement for the board of directors requires the
affirmative vote of a majority of the votes entitled to be cast by the
shareholders or of a majority of the directors. If the shareholders adopt or
amend such a bylaw, the bylaw or amendment may provide that only a specified
vote of either the shareholders or the board of directors may amend that bylaw.
The Cerulean articles of incorporation and Cerulean bylaws restrict the
ability of Cerulean shareholders and directors to amend the Cerulean bylaws. The
Cerulean articles and Cerulean bylaws provide that the shareholders may alter,
amend or repeal the bylaws only upon the affirmative vote of:
- a majority of the members of the board of directors; and
- a majority, or in the case of amendment provisions which require a
greater percentage, such greater percentage, of the shares of each class
of shares then outstanding and entitled to vote.
WellPoint. Pursuant to the Delaware General Corporation Law, bylaws may
generally be adopted, amended or repealed either by approval of the majority of
the outstanding shares entitled to vote or, if provided in a corporation's
certificate of incorporation, by approval of the board of directors. The
WellPoint certificate of incorporation further requires that certain amendments
to the WellPoint bylaws must have the approval of either two-thirds of the
board, or seven of the directors then in office, whichever is greater. The
bylaws requiring a super-majority board approval to amend include:
- the number, qualification and election of directors;
- the filling of vacancies on the board of directors;
- the committees of the board of directors, including the nominating
committee; and
- the prohibition on adopting rules and regulations inconsistent with the
WellPoint certificate of incorporation.
GENERAL VOTING REQUIREMENTS
Cerulean. The Georgia Business Corporation Code provides that unless the
articles of incorporation, a bylaw adopted by the shareholders or the Georgia
Business Corporation Code requires a greater number of affirmative votes, action
by a voting group on a matter, other than the election of directors, will be
approved if the votes cast within the voting group favoring the action exceed
the votes cast opposing the action at a meeting where a quorum is present.
WellPoint. The Delaware General Corporation Law provides that unless the
Delaware General Corporation Law, the certificate of incorporation or the bylaws
provide otherwise, the affirmative vote of a majority of the shares present in
person or represented by proxy at a meeting at which a quorum is present will
constitute approval by such voting group, except that directors will be elected
by a plurality of the
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votes of the shares entitled to vote. Because WellPoint presently has only one
class of shares outstanding, votes on all matters other than the election of
directors will be by vote of a majority of a single voting group present in
person or represented by proxy at a meeting, unless a different vote is required
by the Delaware General Corporation Law.
VOTE REQUIRED FOR CERTAIN TRANSACTIONS
Cerulean. In connection with the approval of proposed mergers and share
exchanges, and unless the Georgia Business Corporation Code requires a greater
vote or vote by voting group, the articles of incorporation, bylaws or board
resolutions, the Georgia Business Corporation Code generally requires:
- the affirmative vote of a majority of all votes entitled to be cast on
the plan for such transaction, voting as a single group; and
- the affirmative vote of a majority of the votes entitled to be cast by
holders of shares of each voting group entitled to vote as a group under
the corporation's articles of incorporation.
Unless the articles of incorporation, bylaws or board resolutions require a
greater vote or a vote by voting groups, the Georgia Business Corporation Code
provides that the shareholders must approve the sale of all or substantially all
of the assets of a corporation by the affirmative vote of a majority of all the
votes entitled to be cast on the matter, regardless of voting groups.
Shareholders of the surviving corporation generally do not need to approve a
merger if:
- the articles of incorporation of the surviving corporation will not
differ from the current articles;
- each share of stock of the surviving or acquiring corporation outstanding
immediately before the effective date of the merger or share exchange
will be an identical outstanding or reacquired share immediately after
the merger or share exchange; and
- the number and kind of shares outstanding immediately after the merger or
share exchange, plus the number and kind of shares issuable as a result
of the merger or share exchange, do not exceed the total number and kind
of shares of the surviving corporation authorized by its articles of
incorporation immediately before the merger or share exchange.
Under the Cerulean articles of incorporation, the holders of Class A stock
and the holders of Class B stock are each entitled to vote as a separate voting
group in connection with a merger, share exchange or sale of all or
substantially all of Cerulean's assets.
WellPoint. Under the Delaware General Corporation Law, a merger,
consolidation or sale of all or substantially all of a corporation's assets
generally must be approved by the shareholders of each constituent corporation
by the affirmative vote of the holders of a majority of the outstanding shares
entitled to vote on the transaction. The Delaware General Corporation Law does
not recognize share exchanges. No approval from the shareholders of the
surviving corporation is required if:
- the corporation's certificate of incorporation will not be amended as a
result of the merger;
- each share of the corporation's stock outstanding immediately prior to
the effective date of the merger will be an identical outstanding or
treasury share of the surviving corporation after the effective date of
the merger; and
- any authorized unissued shares or treasury shares of the surviving
corporation's common stock to be issued pursuant to the merger, including
those initially issuable upon conversion of any other securities to be
issued pursuant to the merger do not exceed 20% of the shares of the
surviving corporation's common stock outstanding immediately prior to the
effective date of the merger.
CERTAIN RESTRICTIONS ON OWNERSHIP OF SECURITIES
Cerulean. The Cerulean articles of incorporation provide for certain
restrictions on the ownership of securities of Cerulean in the event that common
stock of Cerulean is ever issued. Cerulean put these
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provisions in place to comply with the licensing requirement imposed on Blue
Cross and Blue Shield of Georgia by the Blue Cross and Blue Shield Association
in connection with the issuance of licenses to Cerulean and Blue Cross and Blue
Shield of Georgia to use the Blue Cross and Blue Shield tradenames and
trademarks in the State of Georgia. The shareholders' agreement dated September
22, 1998 between Cerulean and the foundation created in connection with the
settlement of the conversion litigation with respect to Class A stock and
warrants incorporates these restrictions. There is no common stock presently
outstanding.
WellPoint. The WellPoint certificate of incorporation also has an
ownership limit to accommodate Blue Cross Blue Shield Association licensing
restrictions. WellPoint's license agreement and related addendum with the Blue
Cross and Blue Shield Association incorporate this ownership limit. Generally,
the ownership limitations provide that no person may beneficially own more than
the number of shares of voting stock which is one share lower than the number of
shares of voting stock representing the "ownership limit." For any institutional
investor, the ownership limit is one share less than 10% of WellPoint's
outstanding voting securities. For any noninstitutional investor, other than the
California HealthCare Foundation, the ownership limit is one share less than 5%
of WellPoint's outstanding voting securities.
For these purposes, an institutional investor means any person if such
person is:
- a broker or dealer registered under Section 15 of the Securities Exchange
Act;
- a bank as defined in Section 3(a)(6) of the Securities Exchange Act;
- an insurance company as defined in Section 3(a)(19) of the Securities
Exchange Act;
- an investment company registered under Section 8 of the Investment
Company Act of 1940;
- an investment adviser registered under Section 203 of the Investment
Advisers Act of 1940;
- an employee benefit plan, or pension fund which is subject to the
provisions of the Employee Retirement Income Security Act of 1974 or an
endowment fund;
- a parent holding company, provided the aggregate amount held directly by
the parent and directly and indirectly by its subsidiaries which are not
persons specified above, does not exceed one percent of the securities of
the subject class; or
- a group composed entirely of any of the above persons or entities.
In addition, every filing made by such person with the SEC under
Regulations 13D-G or any successor regulations under the Securities Exchange Act
with respect to such person's beneficial ownership must contain a certification
that the WellPoint common stock acquired by such person was acquired in the
ordinary course of business and was not acquired for the purpose of and does not
have the effect of changing or influencing the control of WellPoint and was not
acquired in connection with or as a participant in any transaction having such
purpose or effect. A noninstitutional investor means any person that is not an
institutional investor.
The WellPoint certificate of incorporation provides that any "transfer"
that, if effective, would result in a person beneficially owning more than the
ownership limit will be void with respect to any shares in excess of the
ownership limit. Any transfer or event resulting in a person purporting to hold
excess shares will result in such excess shares being automatically deemed
transferred to an escrow agent. The escrow agent would have the power to vote
the excess shares at the direction of WellPoint, and would be obligated to sell
the excess shares for the benefit of the purported owner, net of costs and
expenses of the escrow agent and WellPoint, at a time that the escrow agent
deems appropriate, so as not to negatively impact the market price of WellPoint
common stock.
Pursuant to the WellPoint certificate of incorporation, WellPoint has the
power to interpret the provisions of the WellPoint certificate of incorporation
described above and, in the absence of manifest error, any interpretation of the
board of directors of WellPoint will be binding. In making any such
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interpretation, the board of directors of WellPoint is required to consider its
obligations to the Blue Cross Blue Shield Association, wherever relevant. The
ownership limitations are more fully described in the WellPoint certificate of
incorporation, a copy of which is attached to this proxy statement/prospectus in
Appendix D.
To the knowledge of WellPoint, the California HealthCare Foundation is
presently the only shareholder of WellPoint which would beneficially own shares
of WellPoint common stock in excess of the ownership limit. However, the
California HealthCare Foundation is subject to specific restrictions on its
ability to vote its shares pursuant to certain voting and voting trust
agreements entered into in connection with WellPoint's May 1996
recapitalization, as set forth on page 116. Based upon Cerulean's and
WellPoint's existing knowledge of relationships between Cerulean's shareholders
and their existing ownership of WellPoint common stock, no Cerulean shareholder
is expected to beneficially own voting stock of WellPoint representing five
percent or more of WellPoint's outstanding voting securities as a result of the
merger. Consequently, no Cerulean shareholder should be subject to the transfer
and ownership limitations described above in connection with the shares received
by it in the merger.
BUSINESS COMBINATIONS WITH INTERESTED SHAREHOLDERS
Cerulean. The Georgia Business Corporation Code contains provisions
regarding business combinations with interested shareholders. These provisions
are designed to encourage any person, before acquiring 10% of the outstanding
voting stock of a corporation, to seek approval of its board of directors
regarding the terms of any contemplated business combination by prohibiting such
business combination for a period of five years, subject to certain exceptions
in the statute.
The provisions of the Georgia Business Corporation Code regarding business
combinations do not apply to a Georgia corporation unless it has affirmatively
elected in its bylaws to be governed by them. Cerulean has adopted the business
combination provisions of the Georgia Business Corporation Code through election
in the Cerulean bylaws. These provisions, however, are not applicable to the
merger with WellPoint.
WellPoint. Unlike the Georgia provisions, Section 203 of the Delaware
General Corporation Law prohibits a corporation from entering into certain
business combination transactions with any interested shareholder for a period
of three years from the time the shareholder becomes an interested shareholder,
unless a certain super-majority of the shareholders vote in favor of the
transaction. The prohibition will not apply if:
- the board of directors has approved either the proposed business
combination or the transaction resulting in interested shareholder status
prior to the date that the shareholder became an interested shareholder;
- upon completion of the transaction in which the shareholder became an
interested shareholder, the interested shareholder owned at least 85% of
the voting stock of the corporation outstanding at the time the
transaction commenced; or
- after the date that the shareholder became an interested shareholder, the
interested shareholder obtains the approval of the board of directors and
the approval at an annual or special meeting (and not by written consent)
of two-thirds of the shares outstanding that are not held by the
interested shareholder.
A Delaware corporation may "opt out" of the requirements of Section 203 of the
Delaware General Corporation Law if a majority of the outstanding shares
entitled to vote adopt an amendment to the corporation's certificate of
incorporation or bylaws expressly electing not to be governed by Section 203.
WellPoint has not "opted out" of Section 203.
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FAIR PRICE PROVISIONS
Cerulean. The Georgia Business Corporation Code also contains provisions
designed to protect shareholders of Georgia corporations against certain tactics
used by acquiring corporations in hostile takeover attempts. Specifically, the
fair price provisions provide protection from so-called two-tier transactions.
In these transactions, the acquiring party first usually tenders at a
substantial premium for a major stock interest in a target corporation. After
having acquired such interest, the acquiring party acquires total ownership of
the corporation by effecting a freeze-out merger which forces minority
shareholders to receive cash or other consideration for their common stock in
the acquired corporation.
Through a provision in the Cerulean bylaws, Cerulean has elected to be
governed by the fair price provisions of the Georgia Business Corporation Code.
WellPoint. Other than Section 203 of the Delaware General Corporation Law,
neither the Delaware General Corporation Law nor the WellPoint certificate of
incorporation contains a provision similar to the one described above.
CONFLICTING INTEREST TRANSACTIONS
Cerulean. The Georgia Business Corporation Code states that a director has
a conflicting interest with respect to a transaction that the corporation or any
other entity in which the corporation has a controlling interest effects or
proposes if:
- whether or not the transaction is brought before the board for action, to
the knowledge of the director at the "time of commitment" the director or
a related person is a party to the transaction or has a beneficial
financial interest in or is so closely linked to the transaction and the
transaction is of such financial significance to the director or a
related person that it would reasonably be expected to exert an influence
on the director's judgment if he or she were called upon to vote on the
transaction; or
- the transaction is brought, or would normally be brought, before the
board of directors for action, and to the knowledge of the director at
the time of the commitment any of the following persons is either a party
to the transaction or has a beneficial financial interest so closely
linked to the transaction and of such financial significance to such
person that it would reasonably be expected to exert an influence on the
director's judgment if he or she were called upon to vote on the
transaction:
- an entity other than the corporation of which the director is a
director, general partner, agent or employee;
- a person that controls one or more of the entities specified above or an
entity that is controlled by, or is under common control with, one or
more of the entities specified above; or
- an individual who is a general partner, principal or employer of the
director.
Generally, an action by a shareholder or by or in the right of the
corporation may not enjoin, set aside, or give rise to an award of damages or
other sanctions in connection with, a director's conflicting interest
transaction on the ground of an interest in the transaction of such director or
any person with whom such director has a personal, economic or other
association, if:
- the transaction receives the affirmative vote of a majority, but not less
than two, of the disinterested directors or a committee of disinterested
directors who voted on the transaction after required disclosure to them;
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- a majority of the votes entitled to be cast by disinterested shareholders
were cast in favor of the transaction after:
- notice to the shareholders describing the conflicting interest
transactions;
- disclosure by such director, prior to the shareholders' vote to the
Secretary of the company of the number and identity of the persons
holding or controlling the vote, of all shares that to the knowledge of
the director are beneficially owned or the voting of which is controlled
by that director or by a related person of the director, or both; and
- required disclosure to the shareholders who voted on the transaction to
the extent the required information was not known by them; or
- the director can establish that the transaction, judged in the
circumstances at the time of commitment, was fair to the corporation.
The provisions of the Georgia Business Corporation Code that are applicable
to directors also generally apply to officers. These provisions provide that
with respect to an officer who is not also a director of the corporation, a
conflicting interest transaction may not be enjoined, set aside, or give rise to
an award of damages or other sanctions if:
- the transaction was approved by the board of directors after required
disclosure;
- the transaction was approved by the shareholders after required
disclosure; or
- the officer can establish that the transaction, judged in the
circumstances at the time of commitment, was fair to the corporation.
WellPoint. The Delaware General Corporation Law states that contracts and
transactions between a Delaware corporation and one or more of its directors or
officers, or organizations in which they serve in such capacities or have a
financial interest will not be void or voidable solely because of such
relationship. Similarly, a transaction with a director or officer is not void or
voidable solely because such director or officer acts or participates in a board
or committee meeting authorizing the contract or transaction. Such transactions
are permissible if:
- the material facts of the relationship or interest and as to the contract
or transaction are disclosed or known to the board or committee and the
board or committee in good faith authorizes the contract or transaction
by the affirmative vote of a majority of the disinterested directors,
even if the disinterested directors are less than a quorum; or
- the contract or transaction is specifically approved in good faith by the
shareholders entitled to vote thereon after the material facts as to the
relationship or interest and as to the contract or transaction are
disclosed to or are known to those shareholders; or
- the contract or transaction is fair to the corporation as of the time
that it is authorized by the board, a committee of the board or by the
shareholders.
APPRAISAL RIGHTS
Cerulean. The Georgia Business Corporation Code grants shareholders the
right to dissent and receive payment of the fair value of their shares in the
event of:
- certain specified amendments to the articles of incorporation which
materially and adversely affect the rights or interests of shareholders
in their capacity as shareholders;
- sales of all or substantially all of the corporation's assets, unless the
sale is pursuant to a court order and the proceeds are distributed to the
shareholders within one year after the sale; or
- mergers or share exchanges on which the shareholders are entitled to vote
or certain mergers of subsidiaries into parent corporations not requiring
a shareholder vote.
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The right of appraisal is not available when the affected shares are listed
on a national securities exchange or held of record by more than 2,000
shareholders unless:
- the articles of incorporation or a resolution of the board of directors
approving the transaction provides otherwise; or
- in a plan of merger or share exchange, the holders of such shares are
required to accept anything other than shares of the surviving
corporation or another publicly-held corporation listed on a national
securities exchange or held of record by more than 2,000 shareholders,
except for cash paid in lieu of fractional shares.
Under the Georgia Business Corporation Code, the board of directors may
nevertheless grant appraisal rights to shareholders with respect to merger
transactions, and Cerulean's board of directors has done so for Class A and
Class B shareholders in the case of the merger with WellPoint. Shareholders who
are entitled to appraisal rights and who perfect those rights subsequently
receive cash from the corporation equal to the fair value of their shares as
established by agreement of the parties or judicial appraisal. Under the Georgia
Business Corporation Code, however, fair value does not include any appreciation
or depreciation in share price due to the anticipated corporate action, such as
the merger.
WellPoint. Generally, the stockholders of a Delaware corporation who
object to mergers or consolidations of the corporation are entitled to appraisal
rights, requiring the corporation to pay the "fair value" of the dissenting
shares. There are, however, no statutory rights of appraisal with respect to any
holder of shares receiving the following forms of merger consideration:
- shares of the surviving corporation;
- shares of any other corporation listed on a national securities exchange
or held of record by more than 2,000 shareholders; or
- cash, or stock and cash, in lieu of fractional shares or any combination
thereof.
The Delaware General Corporation Law provides that a corporation may
provide in its certificate of incorporation for appraisal rights in connection
with an amendment to the corporation's certificate of incorporation, any merger
or consolidation, regardless of the shareholder's right to vote on such
transaction, or the sale of all or substantially all of the assets of the
corporation. WellPoint has not made provision for such rights in the WellPoint
certificate of incorporation.
PAR VALUE; DIVIDENDS AND REPURCHASES OF SHARES
Cerulean. The Georgia Business Corporation Code dispenses with the concept
of par value of shares, as well as with statutory definitions of capital and
surplus. The Georgia Business Corporation Code states, however, that solely for
the purpose of any statute or regulation imposing any tax or fee based upon
capitalization of the corporation, shares shall be deemed to have a nominal or
par value of $.01 per share. Where any federal or other statute or regulation
requires that shares have par value, a deemed par value shall be determined by
the board of directors solely for the purpose of satisfying the requirements of
the statute or regulation.
The Georgia Business Corporation Code prohibits Cerulean from making a
distribution to its shareholders, if, after giving such distribution effect:
- Cerulean would not be able to pay its debts as they become due in the
usual course of business; or
- Cerulean's total assets would be less than the sum of its total
liabilities plus the amount that would be needed, if Cerulean were to be
dissolved at the time of the distribution, to satisfy the preferential
rights upon dissolution of shareholders whose preferential rights are
superior to those receiving the distribution, unless the Cerulean
articles permit otherwise.
The concept of distribution to shareholders includes any share repurchases
by Cerulean.
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WellPoint. The Delaware General Corporation Law has retained the concepts
of par value, capital and surplus. The Delaware General Corporation Law permits
a corporation to declare and pay dividends out of statutory surplus (defined as
the excess of paid in par value of shares or stated capital). If there is no
surplus, dividends may be paid out of net profits for the fiscal year in which
the dividend is declared and/or for the preceding fiscal year. No dividends may
be paid unless the amount of capital remaining of the corporation following the
payment of the dividend is at least the aggregate amount of the capital
represented by the issued and outstanding stock of all classes having a
preference upon the distribution of assets. In addition, the Delaware General
Corporation Law generally provides that a corporation may redeem or repurchase
its shares only if such redemption or repurchase would not impair the capital of
the corporation.
The WellPoint certificate of incorporation provides that shares of
WellPoint common stock carry a par value per share of $.01.
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PROPOSAL 2
ELECTION OF CLASS A DESIGNATED DIRECTORS
ACTIONS TO BE TAKEN
At this meeting, Cerulean is asking holders of Class A stock to elect two
Class A designated directors to serve until the 2003 annual meeting or until
Cerulean completes the merger.
SELECTION OF CLASS A DESIGNATED DIRECTORS
In voting to elect two Class A designated directors to serve as Class Two
directors until the 2003 annual meeting or until the completion of the merger,
whichever is earlier, holders of Class A stock may vote in favor of all
nominees, withhold their votes as to all nominees or withhold their votes as to
specific nominees. Georgia law governs the vote required to approve the election
of the nominees and requires a plurality of the votes cast by the owners of
shares entitled to vote in the election, provided a quorum is present at the
meeting. As a result, votes that are withheld will not be counted and will have
no effect.
Under the Cerulean articles of incorporation, the holders of outstanding
shares of Class A stock, voting separately as a single class, are entitled to
elect the Class A designated directors, for a total of six of the total members
of the board of directors following the third election of Class A designated
directors. Pursuant to the shareholders' agreement entered into by the
foundation formed as part of the settlement of the conversion litigation, the
foundation will only vote 20,480 shares of the 53,150 shares it owns for the
election of the Class A designated directors.
A special nominating committee composed of the Class A designated directors
has nominated Joseph D. Greene and James R. Lientz, Jr. as Class A designated
directors to serve as Class Two directors until the 2003 annual meeting.
Cerulean presently anticipates that it will complete the merger prior to
holding another annual meeting. If it does not do so, however, at each annual
meeting hereafter until the Class A stock is converted to common stock as
provided in the Cerulean articles of incorporation, a special nominating
committee composed of the six Class A designated directors will nominate, and
the holders of the Class A stock will be entitled to elect, two Class A
designated directors each year to replace the Class A designated directors whose
terms expire at that annual meeting.
Regardless of any nomination by the special nominating committee, the
holders of the Class A stock are entitled to nominate and elect any eligible
individual to fill the Class A designated director positions subject to election
each year.
DIRECTORS
The Cerulean articles of incorporation provide that the board of directors
shall consist of up to 21 members, with the actual number of directors to be
fixed from time to time by the board of directors. The Cerulean articles of
incorporation further provide for the classification of Cerulean's directors
into three classes, with each class containing approximately the same number of
directors, and the term of one class expiring each year. At each annual meeting
of shareholders, the shareholders entitled to vote elect the directors of one
class to hold office for a term expiring at the third annual meeting following
their election, or until their successors are elected and qualified, except as
may be provided with respect to the terms of Class A designated directors
elected prior to the 1999 annual meeting. The board of directors currently
consists of 17 members. Each director of Cerulean also serves as a director of
Blue Cross and Blue Shield of Georgia.
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NOMINEES FOR CLASS A DESIGNATED DIRECTOR
NOMINEES AND APPOINTEES
The special nominating committee of Cerulean, consisting of Elizabeth W.
Camp, Joseph D. Greene, Warren Y. Jobe, James R. Lientz, John W. Robinson, Jr.
and Arnold M. Tenenbaum, who are all Class A designated directors, nominated
Joseph D. Greene and James R. Lientz, Jr. to serve as Class A designated
directors in Class Two to serve until the 2003 annual meeting or until their
successors are duly elected and qualified, or until the earlier completion of
the merger. Both nominees are presently members of the board of directors whose
terms expire at the meeting.
Each of the nominees has consented to serve if elected. If any of the
nominees should become unavailable to serve for any reason, the board of
directors or the special nominating committee, in its discretion, may designate
a substitute nominee or nominees or allow the vacancy or vacancies to remain
open until a suitable candidate or candidates are located. If the board of
directors designates a substitute nominee or nominees, the persons named as
proxies on the enclosed card will vote all valid proxy cards for the election of
such substitute nominee or nominees.
THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS THAT THE SHAREHOLDERS VOTE
"FOR" THE PROPOSAL TO ELECT JOSEPH D. GREENE AND JAMES R. LIENTZ, JR. AS CLASS A
DESIGNATED DIRECTORS TO SERVE AS CLASS TWO DIRECTORS UNTIL THE 2003 ANNUAL
MEETING.
INFORMATION REGARDING NOMINEES AND DIRECTORS
PERSONS NOMINATED TO SERVE AS CLASS A DESIGNATED
DIRECTORS UNTIL THE 2003 ANNUAL MEETING
JOSEPH D. GREENE(1)
Mr. Greene has been a professor of Business Administration for the College
of Business at Augusta State University in Augusta, Georgia since 1991. Before
joining Augusta State University, Mr. Greene was employed by Pilgrim Health and
Life Insurance Company, where he retired as Executive Vice President in 1991
after 32 years of employment with the company. Mr. Greene is past Chairman of
the Georgia Board of Regents. He currently serves on the board of directors of
McDuffie Bank & Trust of Thomson, the Greater Augusta Community Foundation,
Morris Museum of Arts, Southeastern Technology Center, the National Science
Center Discovery and the University of Georgia Terry College of Business. Mr.
Greene has been a director of Blue Cross and Blue Shield of Georgia since 1993
and a director of Cerulean since its organization in February 1996. He is also
Vice Chairman of the board of directors of HMO Georgia. Mr. Greene is 59.
JAMES R. LIENTZ, JR.(2)
Mr. Lientz has been President of NationsBank, Mid-South Banking Group since
1996 and was President of NationsBank of Georgia from 1993 to 1996. From 1990 to
1993, he was President and CEO of C&S National Bank of South Carolina, a
predecessor of NationsBank. Mr. Lientz is a member of the board of directors of
Georgia Power Company. He is a trustee of Rhodes College, The Lovett School, the
Georgia Research Alliance, and Georgia State University Foundation. He serves as
Chairman of the Georgia Chamber of Commerce and the Georgia Council on Economic
Education. He is also a member of the executive committee of the Metropolitan
Atlanta Chamber of Commerce. Mr. Lientz has been a director of Cerulean and of
Blue Cross and Blue Shield of Georgia since 1997. Mr. Lientz is 56.
---------------
1 Mr. Greene is a Class A designated director in Class Two.
2 Mr. Lientz is a Class A designated director in Class Two.
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CLASS ONE -- TERM EXPIRES AT THE 2002 ANNUAL MEETINGS OF SHAREHOLDERS
CLASS A DESIGNATED DIRECTORS
ELIZABETH W. CAMP
Ms. Camp is President of Camp Oil Company in Rome, Georgia. Prior to
joining Camp Oil in 1984, Ms. Camp held positions as an attorney at Silver,
Freedman & Taff, attorneys in Washington, D.C., and as an accountant at Arthur
Andersen, LLP in Atlanta, Georgia. Ms. Camp is a member of the boards of
directors of Citizens First Bank in Rome, Camp Oil Company, Inc. and Sav-A-Ton
Oil. She is a member and past Chairman of the Board of Alumni Advisors for the
Terry School of Business at the University of Georgia. She is also a member of
the Board of Trustees of Darlington School in Rome. She has been a director of
Blue Cross and Blue Shield of Georgia since 1993 and a director of Cerulean
since its organization in February 1996. Ms. Camp is 48.
JOHN W. ROBINSON, JR.
Mr. Robinson has been President of Southern Waistbands Incorporated, a
manufacturer of textile interlinings, since 1968. Until June 1996, he was also a
manufacturer's representative for Threads USA. He has served as a member of the
boards of directors of the Bank of Barrow and Bank South Corporation, and is
currently an Advisory Director to NationsBank Northeast Georgia. He is a Trustee
of The Georgia Baptist Foundation, serves on the executive committee and is a
past Chairman. Mr. Robinson has served on the Georgia Board of Natural Resources
and the Board of Regents of the University System of Georgia, and has been a
Trustee of Athens Academy and a director of the Barrow County Chamber of
Commerce. Mr. Robinson became a director of Cerulean and Blue Cross and Blue
Shield of Georgia in March 1999. Mr. Robinson is 60.
OTHER CLASS ONE DIRECTORS(3)
MEL H. GREGORY, JR.
Mr. Gregory is retired, following a 35-year career in executive insurance
positions with The Equitable Companies. Before retiring in 1994, he held
positions as Executive Vice President, Agency Operations; President and Chief
Operating Officer, Equitable Variable Life Insurance Company; Chief Executive
Officer, Equico Securities; and as a member of The Equitable's Executive
Committee. He is a member of the board of directors of Stetson University School
of Business. Mr. Gregory has been a director of Cerulean since its organization
in February 1996 and a Director of Blue Cross and Blue Shield of Georgia since
1996. Mr. Gregory is also a director of Greater Georgia Life Insurance Company.
Mr. Gregory is 63.
JAMES L. LABOON, JR.
Mr. LaBoon has been the Chairman and President of Athens First Bank and
Trust Company, an affiliate of Synovus Financial Corporation, in Athens,
Georgia, since 1983. Prior to joining Athens Bank and Trust, Mr. LaBoon was Vice
President of Finance and Chief Financial Officer of Wilkins Industries, Inc. He
presently serves as a director of Athens First Bank & Trust Company, Synovus
Mortgage Corp., Athens Y.M.C.A. and Athens Symphony, Inc. Mr. LaBoon has been
Chairman of the board of directors of Blue Cross and Blue Shield of Georgia
since 1994 and a director since 1984. He has also served as a director of
Cerulean since its organization in February 1996 and as its Chairman since March
22, 1996. He is also a member of the board of directors of Group Benefits of
Georgia. Mr. LaBoon is 63.
---------------
3 There was no annual meeting of holders of Class B stock for the election of
directors in 1999. Therefore, in accordance with Cerulean's bylaws, the
directors whose terms would have expired in 1999 continue to serve until
successors are elected and qualified. Cerulean anticipates that these
directors will be nominated for re-election at the 2000 annual meeting of
holders of Class B stock.
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JAMES H. LEIGH, JR., M.D.
Dr. Leigh is a surgeon in Gainesville, Georgia, where he has practiced with
the Longstreet Clinic since 1995. From 1996 to 1997, he was Chairman and Chief
Executive Officer of the Longstreet Clinic. He has been a member of the
Northeast Georgia Medical Center staff since 1973 and the Lanier Park Hospital
consultant staff since 1982. Dr Leigh is also past Chief of Surgery and Chief of
Staff at Northeast Georgia Medical Center. Dr. Leigh served as an Assistant
Professor of Surgery at the University of Tennessee College of Medicine. Dr.
Leigh was a member of the board of directors of the Northeast Georgia Health
Association and was previously an alternate director of the Medical Association
of Georgia. He has been a director of Blue Cross and Blue Shield of Georgia
since 1975 and a director of Cerulean since its organization in February 1996.
He is also a director of HMO Georgia. Dr. Leigh is 57.
JULIA L. MITCHELL-IVEY
Ms. Mitchell-Ivey has been a consultant since retiring from First Union
National Bank of Georgia, where she was Vice President and Assistant Corporate
Secretary from 1993 to 1995. Prior to 1995, she held various positions at
Decatur Federal Savings and Loan Association including Corporate Treasurer,
Corporate Secretary and Division Vice President. Ms. Mitchell-Ivey is a past
Chairperson of the board of directors of Metropolitan Atlanta Rapid Transit
Authority (MARTA) and Chairperson of the board of directors of Private Colleges
and Universities Authority, and a member of the board of directors of the
Y.W.C.A. and the DeKalb Chamber of Commerce. She has been a director of Blue
Cross and Blue Shield of Georgia since 1980 and a director of Cerulean since its
organization in February 1996. She is Chairperson of the board of directors of
HMO Georgia. Ms. Mitchell-Ivey is 66.
CLASS TWO -- TERM EXPIRES AT THE 2000 ANNUAL MEETINGS OF SHAREHOLDERS(4)
EDWARD M. GILLESPIE
Mr. Gillespie is retired from University Hospital in Augusta, Georgia,
where he served as President and Executive Director until 1991. Prior to joining
University Hospital in 1978, Mr. Gillespie held various hospital administrative
positions including Hospital Administrator of Rochester Methodist Hospital in
Rochester, Minnesota. Mr. Gillespie serves on the advisory board of South Trust
and Brandon Wilde retirement community. He is also President of Health Advance,
a health care consulting organization. Mr. Gillespie has been a director of Blue
Cross and Blue Shield of Georgia since 1980 and a director of Cerulean since its
organization in February 1996. Mr. Gillespie is 64.
W. JERRY VEREEN
Mr. Vereen has been President since 1974 and Chief Executive Officer since
1978 of Riverside Manufacturing Company in Moultrie, Georgia and is the acting
Chairman of the board of directors of Riverside Manufacturing Company and all of
its subsidiary corporations. Mr. Vereen serves on the boards of directors of
Georgia Power Company, Georgia Chamber of Commerce, Gerber Scientific, Inc.,
American Apparel Manufacturers Association, the Textile Clothing Technology
Corporation, the International Apparel Federation and the Georgia Research
Alliance. He has been a director of Blue Cross and Blue Shield of Georgia since
1993 and a director of Cerulean since its organization in February 1996. Mr.
Vereen is 59.
---------------
4 The directors who are not Class A designated directors are elected by the
holders of Class B stock. The 2000 annual meeting of holders of Class B stock
has not yet been scheduled.
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JOE M. YOUNG(5)
Mr. Young is the General Manager of LOR, Inc. and Rollins Investment Fund,
two entities which manage the holdings of the family of the late O. Wayne
Rollins. His service with LOR, Inc. began in 1979 and with Rollins Investment
Fund at its inception in 1988. He also serves as an officer and director of
several other related entities and as a trustee of several Rollins Family
foundations and trusts. Since 1992 he has been a director of Valley Systems,
Inc., a public company traded on The Nasdaq Stock Market. Mr. Young became a
director of Cerulean and Blue Cross and Blue Shield of Georgia in February 1996.
Mr. Young is 71.
CLASS THREE -- TERM EXPIRES AT THE 2001 ANNUAL MEETINGS OF SHAREHOLDERS
WILLIAM A. ALIAS, JR.
Mr. Alias is an entrepreneur holding various private investments, including
Security Check, where he has worked since 1997. He was President of Welcome Home
Services from 1995 to 1997 and Vice President of Marketing of Paralympics from
1993 to 1995. Mr. Alias was President of Alias Brothers, Inc. from 1982 to 1990.
From 1973 to 1982, Mr. Alias was President of Rollins Protective Services, a
residential security company. Prior to joining Rollins, he was Executive Vice
President and Chief Operating Officer of Across the Street Restaurants of
America, Inc. He also held positions at Royal Crown Cola Company and the
National Icee Corporation. Mr. Alias is a former member of the Board of Trustees
of the Lovett School and is a board member of Security Check. He has been a
member of the boards of directors of Cerulean and Blue Cross and Blue Shield of
Georgia since December 1996. He is also a member of the board of directors of
HMO Georgia. Mr. Alias is 58.
FRANK J. HANNA III(6)
Mr. Hanna is, and has been since 1993, the Chief Executive Officer of HBR
Capital, Ltd., an investment firm based in Atlanta, Georgia. Mr. Hanna began his
career in Atlanta as a corporate attorney with the Atlanta law firm of Troutman
Sanders LLP. Mr. Hanna is also extensively involved in education, including
serving as a founding member of the board of directors of the Archbishop
Donnellan School in Atlanta and as a director of Pinecrest Academy. Mr. Hanna is
a director of CompuCredit Corporation. Mr. Hanna is a graduate of the University
of Georgia and the University of Georgia School of Law. Mr. Hanna became a
director of Cerulean and of Blue Cross and Blue Shield of Georgia in February
1996. Mr. Hanna is 38.
WARREN Y. JOBE
Mr. Jobe has been Senior Vice President of Southern Company responsible for
corporate development including customer relations and civic affairs since 1998.
Since 1998, Mr. Jobe also has been Executive Vice President of Georgia Power
Company, where he was Executive Vice President, Treasurer and Chief Financial
Officer from 1982 to 1998. He is president of the Georgia Power Foundation. Mr.
Jobe is Chairman of the Board of Trustees of Oglethorpe University. He is also
currently a member of the board of directors of the Atlanta Symphony Orchestra
and the National Science Center, Inc. In the past, Mr. Jobe has served on the
Board of Regents of the University System of Georgia and the boards of directors
of the Georgia Chamber of Commerce, the Visiting Nurse Health System of Atlanta,
the DeKalb Regional Healthcare system and various other civic and community
organizations. He became a director of Blue Cross and Blue Shield of Georgia and
Cerulean in March 1999. Mr. Jobe is 59.
---------------
5 Mr. Young is one of two preferred designated directors.
6 Mr. Hanna is one of two preferred designated directors.
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RICHARD D. SHIRK
Mr. Shirk joined Blue Cross and Blue Shield of Georgia as President and
Chief Executive Officer on April 1, 1992 and has been a director of Blue Cross
and Blue Shield of Georgia since that date. He has been President, Chief
Executive Officer and a director of Cerulean since its organization in February
1996, and has been Chairman of Greater Georgia Life Insurance since 1992. Mr.
Shirk has more than 25 years experience in employee benefits and managed care.
He was a key senior officer of Equicor in its formation in 1986 serving as
President of the Southern Region. When Equicor combined business operations with
CIGNA in 1990, Mr. Shirk became Senior Vice President of the Central Region and
coordinated the integration of managed care operations of the companies. Mr.
Shirk is a board member of the Georgia Coalition for Health and the National
Institute of Health Care Management. He is a board member of Central Atlanta
Progress, and serves as Chairman of the Georgia U.S.O.C. Steering Committee, as
well as on the board of directors of the Georgia Chamber of Commerce and the
Board of Trustees of the SSGA Mutual Funds. He is director of the Buckhead
Coalition and Metropolitan Atlanta Chapter of the American Red Cross. Mr. Shirk
is also a member of the board of directors of HMO Georgia and Group Benefits of
Georgia. Mr. Shirk is 54.
ARNOLD M. TENENBAUM
Mr. Tenenbaum has been President of Chatham Steel Corporation since 1983.
He is a member of the boards of directors of the Georgia Lottery Commission,
First Union National Bank of Savannah, First Union Bank of Georgia and Savannah
Electric & Power Company. Mr. Tenenbaum is a past President of the Telfair
Academy of Arts & Sciences and the Chair of Steel Service Center Institute. He
is a past Chairman of the Georgia Chamber of Commerce. He is also a director of
HMO Georgia. He has been a director of Cerulean and Blue Cross and Blue Shield
of Georgia since 1997. Mr. Tenenbaum is 63.
FRED L. TOLBERT, JR.
Mr. Tolbert retired as President of Albany First Federal Savings and Loan
in Albany, Georgia in 1990. He currently operates his own real estate investment
company in Albany, Georgia. Mr. Tolbert is a trustee of the Darton College
Foundation. He has been a director of Blue Cross and Blue Shield of Georgia
since 1983 and Vice Chairman of the board of directors since 1994. He has been a
member of the board of directors of Cerulean since its organization in February
1996, and its Vice Chairman since March 22, 1996. He also serves as Chairman of
the board of directors of Group Benefits of Georgia. Mr. Tolbert is 70.
MEETINGS AND COMMITTEES OF THE BOARD OF DIRECTORS
The board of directors conducts its business through meetings of the full
board of directors and through committees consisting of a governance committee,
a compensation committee, a finance committee and an audit committee. During the
fiscal year ended December 31, 1999, the board of directors held eight meetings.
Each director attended 75% or more of the aggregate of all meetings of the board
of directors and all committees of the board of directors of which he or she was
a member held during the period in Cerulean's 1999 fiscal year during which he
or she served, except Joe M. Young, who attended 71.4% of those meetings.
The governance committee, composed of Messrs. LaBoon (Chairman), Gillespie,
Greene, Tenenbaum and Vereen, recommends policies to be followed by the board of
directors, including criteria for board of director membership, nominations for
election to the board of directors, board of directors' officers and committees
and ongoing credentialing of the directors. In addition, it monitors compliance
with and recommends changes to the Cerulean bylaws and the Cerulean articles of
incorporation and monitors compliance with the laws and regulations to which
Cerulean is subject. During the fiscal year ended December 31, 1999, the
governance committee held one meeting.
The compensation committee, composed of Messrs. Vereen (Chairman),
Gillespie, Gregory, Hanna, Lientz and Tolbert, ensures the integrity of
Cerulean's compensation and benefit programs, including
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directors' compensation and benefit levels, executive compensation, retirement
plans and group health care benefits. It periodically reviews Cerulean's
compensation programs to ensure that compensation is tied to performance and
that an appropriate structure is in place to attract and retain key management
talent. During the fiscal year ended December 31, 1999, the compensation
committee held six meetings.
The finance committee, composed of directors Tolbert (Chairman), Camp,
Hanna, Lientz, Mitchell-Ivey and Young, oversees the handling of monies and
investments of Cerulean and monitors the financial performance of Cerulean and
its subsidiaries. This includes a review and recommendation to the board of
directors regarding payment of annual dividends and periodic reviews and
monitoring of progress against the business plans of Cerulean and its
subsidiaries. During the fiscal year ended December 31, 1999, the finance
committee held ten meetings.
The audit committee, composed of Ms. Camp (Chair) and Messrs. Alias,
Gregory, Leigh and Young, recommends Cerulean's independent auditors to the
board of directors, reviews and approves the scope and approach of the
independent auditors and reviews the opinion and recommendations from Cerulean's
independent auditors and reports the results to the board of directors. It also
makes periodic reports to the board of directors pertaining to the internal
controls of Cerulean. During the fiscal year ended December 31, 1999, the audit
committee held three meetings.
EXECUTIVE COMPENSATION
Table 1 summarizes by various categories, for the fiscal years ended
December 31, 1999, 1998, and 1997, the total compensation earned by the Chief
Executive Officer of Cerulean and each of the four most highly compensated
executive officers of Cerulean or Blue Cross and Blue Shield of Georgia who were
serving as executive officers at December 31, 1999 and whose salary and bonus
for the fiscal year ended December 31, 1999 exceeded $100,000. These five
officers are collectively referred to as the "named executive officers." As a
result of the merger, some members of management will receive additional
payments under Cerulean's benefit plans.
TABLE 1: SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
ANNUAL COMPENSATION COMPENSATION
----------------------------------------- ------------
OTHER ANNUAL LTIP ALL OTHER
SALARY BONUS COMPENSATION PAYOUTS COMPENSATION
NAME AND PRINCIPAL POSITION YEAR ($)(1) ($)(2) ($)(3) ($)(4) ($)(5)
--------------------------- ---- -------- --------- ------------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Richard D. Shirk........................ 1999 $537,500 $ 379,923 -- $ -- $4,265
Chief Executive Officer, President and 1998 500,000 423,940 -- -- 4,505
Director of Cerulean and Blue Cross
and 1997 481,250 -- -- 281,437 4,030
Blue Shield of Georgia
Richard F. Rivers....................... 1999 318,750 175,256 3,604
Executive Vice President and Chief 1998 307,500 183,600 2,376
Operating Officer of Blue Cross and 1997 77,299 -- -- -- 279
Blue Shield of Georgia(6)
John A. Harris.......................... 1999 273,500 139,553 -- 3,430
Treasurer of Cerulean, Executive Vice 1998 254,000 162,432 -- -- 3,460
President, Finance and strategic 1997 225,750 -- -- 89,967 3,202
Planning of Blue Cross and Blue Shield
of Georgia
Mark Kishel, M.D........................ 1999 245,000 91,434 -- -- 3,325
Executive Vice President and Chief 1998 225,000 121,525 -- -- 3,276
Medical Officer of Blue Cross and Blue 1997 208,750 -- -- 89,967 3,238
Shield of Georgia
Stuart G. Wright........................ 1999 300,000 265,771 -- -- 3,569
Senior Vice President and 1998 300,000 91,800 -- -- 3,238
Chief Information Officer of Blue
Cross 1997 199,000 -- -- 34,167 3,213
and Blue Shield of Georgia(7)
</TABLE>
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---------------
(1) Includes amounts deferred at the election of the officers pursuant to the
Tax-Favored Savings Program and other deferred compensation plans.
(2) Cerulean did not achieve threshold financial performance criteria pursuant
to the Annual Incentive Program 1997; therefore, the named executive
officers did not earn any bonuses for that period.
(3) Perquisites for named executive officers were less than 10% of their total
salary for all periods presented.
(4) Cerulean did not make any payments in 1998 as it did not achieve threshold
financial performance criteria for the 1995-1997 performance period.
Includes payments in 1997 to the named executive officers for long-term
incentive payments for the 1994-1996 performance period. The Performance
Unit Plan replaced the long-term incentive plan during 1997.
(5) Reflects contributions to the Tax-Favored Savings Program in 1999, 1998 and
1997, respectively, of $2,525, $2,525 and $2,500 for Mr. Shirk, Mr. Harris
and Mr. Wright, $2,525, $2,444 and $2,500 for Dr. Kishel and $2,525, $1,188
and $-0- for Mr. Rivers, as well as the following premium payments on group
term life insurance in 1999, 1998 and 1997, respectively: Mr. Shirk, $1,740,
$1,980 and $1,530; Mr. Rivers, $1,079, $1,188 and $279; Mr. Harris, $905,
$935 and $702; Dr. Kishel, $800, $832 and $738; Mr. Wright, $1,044, $713 and
$713.
(6) Mr. Rivers joined Cerulean in September 1997.
(7) The 1999 bonus for Mr. Wright includes a non-recurring bonus of $200,000
related to the successful execution of Cerulean's Year 2000 readiness plan.
LONG-TERM INCENTIVE COMPENSATION
Prior to fiscal year 1997, Blue Cross and Blue Shield of Georgia maintained
a Long-Term Incentive Plan. Cerulean designed the Long-Term Incentive Plan to
reward participants for their contributions to the successful achievement of
specific financial, market share and customer service goals based on Cerulean's
long-term business strategy. Cerulean established goals for three-year
performance periods. The Long-Term Incentive Plan had minimum threshold, target
and maximum performance levels. The plan required participants to be employed by
one of Cerulean's subsidiaries on the last day of the performance period. Prior
to 1997, Cerulean established long-term incentive award opportunities for four
performance cycles, the 1992-1994 performance period, the 1993-1995 performance
period, the 1994-1996 performance period and the 1995-1997 performance period.
The compensation committee made the final award determination related to the
achievement of the defined goals for each performance period. Named executive
officers received payout for the 1994-1996 performance cycle, which is reflected
in the Summary Compensation Table.
Cerulean did not exceed minimum threshold levels for financial performance
for the 1995-1997 cycle. No payouts to named executive officers were due for
this performance period. Cerulean terminated the Long-Term Incentive Plan as of
December 31, 1997, and there are no remaining payments due under the Long-Term
Incentive Plan with respect to any period for which it was in effect.
In July 1997, Cerulean adopted the Performance Unit Plan that is designed
to reward key employees for creating and increasing the value of Cerulean. The
compensation committee of the board of directors of Cerulean is responsible for
the administration of the Performance Unit Plan including designation of
participants and granting of units. The Performance Unit Plan is described above
on page 47.
NON-CONTRIBUTORY RETIREMENT PROGRAM FOR CERTAIN EMPLOYEES OF BLUE CROSS AND BLUE
SHIELD OF GEORGIA
The Non-Contributory Retirement Program for Certain Employees of Blue Cross
and Blue Shield of Georgia is a tax-qualified defined benefit pension plan that
covers all employees of Blue Cross and Blue Shield of Georgia and its
participating affiliated companies who have attained age 21 and have completed
1,000 hours of service in a 12-month period after their date of hire or who
complete 1,000 hours of service in any calendar year thereafter. Participants
receive benefits under the Retirement Program based upon length of service with
any Blue Cross/Blue Shield plan, with varying provisions for employees
terminated by Blue Cross and Blue Shield of Georgia or who take early, normal or
deferred retirement. The plan calculates the annual retirement benefit according
to a specific formula. The benefit is 60% of the participant's final average
earnings reduced by 50% of the participant's anticipated Social Security
benefit. Final average earnings are the average of the highest five consecutive
years of annual sales and annual incentive payments of the last ten years of
credited service. If the participant has less than 30 years of service, the
result is multiplied by a service fraction. The fraction is the number of the
participant's years
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of credited service up to 30 divided by 30. For purposes of the Retirement
Program, provisions of Section 401(a)(17) of the Internal Revenue Code may limit
a participant's eligible earnings, and Internal Revenue Code Section 415 may
limit the annual additions to his benefit. A participant becomes fully vested
after five years of service. Generally, upon retirement, participants may elect
to receive their benefits in the form of a lump sum payment, lifetime annuity,
lifetime annuity with a guaranteed payout period over ten to 20 years, or a
joint and survivor annuity with 50%, 66 2/3% or 100% survivor benefits. The
Retirement Program also provides, subject to certain conditions, for the payment
of vested benefits of a deceased employee to his or her spouse during such
spouse's lifetime.
Each year, actuaries determine the amount of contributions required by Blue
Cross and Blue Shield of Georgia to fund benefits for its employees. The plan
does not permit participant contributions. The Pension Benefit Guaranty
Corporation insures benefits under the Retirement Program. The Blue Cross and
Blue Shield Association administers the Retirement Program. A tax-qualified
trust holds all benefits, and Bankers Trust Company serves as trustee to the
Retirement Program. Blue Cross and Blue Shield of Georgia made a contribution of
$1.3 million to the Retirement Program for the plan year ended December 31,
1999. The Summary Compensation Table above shows amounts which do not include
Blue Cross and Blue Shield of Georgia's contributions in connection with the
Retirement Program for the named executive officers. Blue Cross and Blue Shield
of Georgia cannot readily separate or individually calculate these amounts.
In order to provide benefits to certain of its highly compensated or
management employees whose benefits under the Retirement Program will be limited
due to requirements of the Internal Revenue Code, Blue Cross and Blue Shield of
Georgia maintains the Blue Cross and Blue Shield of Georgia, Inc. Executive
Benefit Restoration Plan, in which all of the named executive officers
participate. Generally, the Chief Executive Officer recommends participants and
the compensation committee approves them. The Restoration Plan provides benefits
to participants whose benefits under the Retirement Program are restricted by
the compensation and annual addition limitations described in Internal Revenue
Code Sections 401(a)(17) and 415. A participant becomes vested in his benefit
under the Restoration Plan upon retirement or disability after attainment of age
55 and completion of five years of service. If Blue Cross and Blue Shield of
Georgia terminates the employment of a participant within one year following a
change in control for reasons other than death or disability, the participant
will have a fully vested right to receive all benefits accrued under the
Restoration Plan as of the date of termination if his employment is terminated
without just cause or if the participant terminates with good reason. The
benefit payable under the Restoration Plan is equal to the difference between:
- the benefit the participant would be entitled to under the Retirement
Program, calculated without regard to the compensation and annual
addition limits in effect under the Internal Revenue Code; and
- the sum of the benefit payable under the Retirement Program and any
nonqualified benefit plan sponsored by another Blue Cross/Blue Shield
employer, that relates to a period of service for which credit is given
under the Restoration Plan.
In addition to the Retirement Program and the Restoration Plan, Blue Cross
and Blue Shield of Georgia maintains the Supplemental Executive Retirement Plan,
which is more fully described on page 48, to provide supplemental retirement
benefits to its highly compensated and management employees. Mr. Shirk is not a
participant in the Supplemental Executive Retirement Plan. Therefore, through a
separate individual plan, Blue Cross and Blue Shield of Georgia has agreed to
provide Mr. Shirk a personal Supplemental Executive Retirement Plan. Mr. Shirk's
Supplemental Executive Retirement Plan is more fully described on page 49.
The following Pension Plan Table indicates an estimated annual benefit
payable after reductions for a portion of Social Security benefits to
participants in the Retirement Program and the Restoration Plan, assuming
continued employment until retirement at age 65. The table indicates the
estimated annual benefit calculated on a straight-line annuity basis in persons
in specified final average earnings and
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completed years of service categories. As of December 31, 1999, years of
credited service under the Retirement Program for the named executive officers
were:
- Mr. Shirk -- 7 3/4 years
- Mr. Harris -- 7 years
- Dr. Kishel -- 6 1/4 years
- Mr. Wright -- 3 11/12 years
- Mr. Rivers -- 2 1/3 years
The compensation covered by the Retirement Program generally includes the
base rate of annual earnings and amount of incentive payments that Blue Cross
and Blue Shield of Georgia actually paid to a participant up to $160,000, the
maximum amount of compensation that may be recognized under qualified pension
plans. For each named executive officer, the compensation in the Summary
Compensation Table exceeds this maximum amount.
TABLE 2: PENSION PLAN TABLE
<TABLE>
<CAPTION>
YEARS OF SERVICE
----------------------------------------------------
FINAL AVERAGE EARNINGS 10 15 20 25 30
---------------------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
$ 100,000................................... $ 17,132 $ 25,698 $ 34,264 $ 42,830 $ 51,396
150,000.................................. 27,132 40,698 54,264 67,830 81,396
200,000.................................. 37,132 55,698 74,264 92,830 111,396
250,000.................................. 47,132 70,698 94,264 117,850 141,396
300,000.................................. 57,132 85,798 114,264 142,830 171,396
350,000.................................. 67,132 100,698 134,264 167,830 201,396
400,000.................................. 77,132 115,698 154,264 192,830 231,396
500,000.................................. 97,132 145,698 194,264 242,830 291,396
600,000.................................. 117,132 175,698 234,264 292,830 351,396
700,000.................................. 137,132 205,698 274,264 343,830 411,396
800,000.................................. 157,132 235,698 314,264 392,830 471,396
900,000.................................. 177,132 265,698 354,264 442,830 531,396
1,000,000.................................. 197,132 295,698 394,264 492,830 591,396
1,250,000.................................. 247,132 370,698 494,264 617,830 741,396
1,500,000.................................. 297,132 445,698 594,264 742,830 891,396
</TABLE>
TAX-FAVORED SAVINGS PROGRAM
The Blue Cross and Blue Shield of Georgia, Inc. Tax-Favored Savings Program
is a tax-qualified profit sharing plan with a cash or deferred arrangement under
Section 401(k) of the Internal Revenue Code. The Savings Program helps
participants build long-term savings for the future. Generally, all employees
are eligible to participate after they complete 30 days of service and have
attained age 21. A participant may contribute to the Savings Program on a
before-tax basis from 1% to 15% of pay up to the maximum dollar contribution
amount, which was $10,000 in 1999. The employer will match $0.50 for every
dollar the participant contributes up to $500. For the remaining contribution,
the employer will add $0.25 for each dollar the participant contributes up to
$2,275, for a total employer match of $2,525. Participants become 25% vested in
all employer matching contributions after two years, 50% vested after three
years, 75% vested after four years, and 100% vested once they complete five
years of service. Eligible participants may receive lump sum distributions from
the Savings Program upon termination of employment or attainment of age 59 1/2.
Participants also may obtain a hardship withdrawal or borrow money from their
account. Blue Cross and Blue Shield of Georgia holds all contributions to the
Savings Program and investment earnings in trust for the exclusive benefit of
participants and their beneficiaries. The name of the trust is Blue Cross and
Blue Shield Association National 401(k) Master Trust for the
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Tax-Favored Savings Program. The trustee is INVESCO Trust Company. The category
"All Other Compensation" in the Summary Compensation Table includes Cerulean's
contributions to the Savings Program for the named executive officers for 1999,
1998 and 1997.
DEFERRED COMPENSATION PLANS
Cerulean offers certain directors and employees the opportunity to defer
income pursuant to Cerulean's "Deferred Compensation Plan for Select
Management." Qualified directors and employees may elect to defer payment of all
or any portion of such person's compensation during any year for a period of
three years or more. At the election of the qualified director or employee,
Cerulean will pay the deferred compensation in a lump sum or in monthly
installments over a period from five to 20 years. Approximately 43 directors and
employees participate in these arrangements and become general creditors of
Cerulean under these arrangements. Cerulean's total obligation to these
participants, which is unsecured, was approximately $5.1 million as of December
31, 1999.
DIRECTORS COMPENSATION
Non-employee directors each receive aggregate annual retainers of $20,000
for service on the board of directors of Cerulean and Blue Cross and Blue Shield
of Georgia, plus meeting fees for attendance at board of directors and committee
meetings of Cerulean and of Blue Cross and Blue Shield of Georgia. The Chairman,
the Vice Chairman and each committee chairman receive additional aggregate
retainers of $10,000, $5,000 and $3,000, respectively. Each non-employee
director receives $1,000 for attendance at board of directors meetings, $1,000
for attendance at committee meetings and $500 for participation in telephone
meetings for each of the two companies. Each non-employee director may defer his
or her director fees under Cerulean's non-qualified, deferred compensation
plans. Cerulean also reimburses directors for reasonable expenses incurred in
connection with the performance of their duties.
COMPENSATION COMMITTEE; INTERLOCKS AND INSIDER PARTICIPATION
The compensation committee for 1999 was comprised of directors Vereen
(Chair), Gillespie, Gregory, Hanna and Tolbert. Mr. LaBoon sits with the
compensation committee ex officio. The compensation committee meets quarterly.
The compensation committee sets the compensation for the Chief Executive Officer
and the other named executive officers at a meeting early in each fiscal year
after reviewing, in each case, the performance targets established for the prior
year in comparison to the prior year's actual performance. At this meeting the
compensation committee also sets performance targets for the new fiscal year as
well as any targets for additional compensation plans under which the Chief
Executive Officer and the other named executive officers may earn compensation
for that fiscal year and sets annual salaries in accordance with the same
considerations. None of the members of the compensation committee is or has ever
been an officer or employee of Cerulean. There were no interlocking
relationships between any executive officers of Cerulean and any entity whose
directors or executive officers served on Cerulean's compensation committee.
None of the members of the compensation committee engaged in transactions or had
relationships requiring disclosure under Item 404 of Regulation S-K in the
fiscal year ended December 31, 1999.
EXECUTIVE OR OTHER SEVERANCE AGREEMENTS
Chief Executive Officer
Pursuant to Mr. Shirk's employment agreement, each of Cerulean and Blue
Cross and Blue Shield of Georgia employs Mr. Shirk as President and Chief
Executive Officer. The employment agreement has a term of two years commencing
on January 1, 1997, which automatically extends for an additional month on the
first day of each month. As a result, the employment agreement always has an
unexpired term of two years unless the board of directors of either Cerulean or
Blue Cross and Blue Shield of Georgia affirmatively notifies Mr. Shirk to the
contrary in writing. At this point, the monthly term extension ceases and the
two year term becomes fixed. The employment agreement provides Mr. Shirk with an
annual base
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salary of $425,000, which the boards of directors or the compensation committees
of Cerulean and Blue Cross and Blue Shield of Georgia may adjust upward. The
employment agreement entitles Mr. Shirk to participate in all incentive
compensation plans of Cerulean and Blue Cross and Blue Shield of Georgia on a
basis consistent with his position, but in no event less than on an equal basis
with any other executives of Cerulean and Blue Cross and Blue Shield of Georgia.
The employment agreement provides that if Cerulean and Blue Cross and Blue
Shield of Georgia terminate Mr. Shirk for any reason other than for cause or Mr.
Shirk terminates for good reason, then all payments to him shall continue at the
same rate for a period of two years. If Cerulean and Blue Cross and Blue Shield
of Georgia terminate Mr. Shirk's employment for cause, or Mr. Shirk voluntarily
terminates his employment without good reason, Mr. Shirk will not be entitled to
any compensation whatsoever after the effective date of termination other than
benefits that are vested at that time. The employment agreement defines "for
cause" as:
- the willful engagement by Mr. Shirk in conduct, or the taking by him of
any action, which is materially harmful to Cerulean or Blue Cross and
Blue Shield of Georgia;
- the willful and repeated failure by Mr. Shirk to substantially perform
his duties; or
- gross misconduct or conduct involving moral turpitude.
The employment agreement provides that the governance committees of the
boards of directors of Cerulean and Blue Cross and Blue Shield of Georgia first
determine if Mr. Shirk should be terminated "for cause" and then after three
months an absolute majority of the members of the boards of directors of
Cerulean and Blue Cross and Blue Shield of Georgia must approve the termination.
The employment agreement provides that differences in management philosophy or
the structure of operations of Cerulean or Blue Cross and Blue Shield of Georgia
do not constitute cause for termination.
The employment agreement provides that in the event Mr. Shirk dies while
employed, he is entitled to three months of salary and all other compensation
benefits. After three months, all benefits terminate except benefits which are
vested on or before the date of death. If Mr. Shirk becomes physically or
mentally disabled, he would become entitled to a continuation of his salary for
two years and his benefit under his Supplemental Executive Retirement Plan would
immediately vest. The employment agreement entitles Mr. Shirk to six weeks of
vacation each year, an automobile allowance and the right to reimbursement for
the cost of membership in luncheon and civic clubs. He is also entitled to
reimbursement for any costs and expenses incurred in connection with the
negotiation or renegotiation of the employment agreement or the enforcement of
any provision in the agreement.
The employment agreement provides Mr. Shirk with his Supplemental Executive
Retirement Plan. The employment agreement also provides that if any portion of
payments under the employment agreement or any other agreement or plan of
Cerulean or Blue Cross and Blue Shield of Georgia qualifies as an "excess
parachute payment" under Section 280G of the Internal Revenue Code and is
thereby subject to excise tax as described in Section 4999 of the Internal
Revenue Code, Cerulean and Blue Cross and Blue Shield of Georgia will provide
Mr. Shirk with a cash gross-up payment equal to Mr. Shirk's excise tax liability
plus an additional amount to cover Mr. Shirk's state and federal income taxes on
the gross-up payment.
Change in Control Severance Agreements
In January 1998, Cerulean entered into individual change in control
severance agreements with Richard F. Rivers, John A. Harris, Mark Kishel, and
Stuart G. Wright. These agreements are more fully described on page 51.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
There were no transactions or relationships requiring disclosure under Item
404 of Regulation S-K for the fiscal year ended December 31, 1999.
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COMPENSATION COMMITTEE REPORT ON EXECUTIVE COMPENSATION
This report by the compensation committee of the board of directors
discusses the compensation committee's objectives and policies applicable to the
compensation of Cerulean's executive officers. The report specifically reviews
the compensation committee's guidelines in establishing the compensation of
Cerulean's Chief Executive Officer, as reported in the Summary Compensation
Table, and generally with respect to all executive officers. The compensation
committee is composed entirely of independent, nonemployee directors, whose main
focus is the enhancement of shareholder value. In designing its compensation
guidelines, the compensation committee desires to attract, retain and
appropriately reward executives of exceptional talent and seeks to align the
interests of those executives with Cerulean's shareholders and policyholders.
The committee considers both individual and corporate performance. Generally, an
executive's compensation package contains three components:
- base salary;
- short-term incentive compensation; and
- long-term incentive compensation.
Base Salaries
Base salary provides a fixed level of compensation reflecting the scope and
nature of basic job responsibilities. In setting base salaries for executive
officers, the compensation committee considers the level of compensation paid by
other companies in the insurance managed care industry that are similar in size
to Cerulean. Generally, the Chief Executive Officer evaluates how well each
executive officer has fulfilled his or her responsibilities, taking into account
actual performance as compared to the financial goals established for Cerulean
and other goals established for his or her area of responsibility. He then
provides his recommendations to the committee. The compensation committee
annually reviews the salary survey methodology and, after considering the
recommendations of the Chief Executive Officer, approves the base salaries for
the executive officers.
Short-Term Incentive Compensation
Under Cerulean's Annual Incentive Plan, Cerulean's executive officers and
other key employees have the opportunity to earn annual performance bonuses. At
the beginning of each year under the Annual Incentive Plan, the management
committee reviews performance goals and assigns each participant a target award
opportunity based on his or her anticipated contribution to Cerulean's business
performance. The award opportunity is expressed as a percentage of base salary.
At the end of the calendar year, Cerulean measures team and individual
performance by comparing actual results achieved to the goals previously
established to determine how much of the target award each participant will
receive. Each of the performance measurements is weighted, based on the
anticipated contribution to Cerulean's performance. Cerulean pays the awards in
cash. The Annual Incentive Plan allocates ten percent of the overall incentive
pool for discretionary awards that the Chief Executive Officer determines. The
objectives of the Annual Incentive Plan are:
- to reward significant contributions to annual business performance; and
- to closely align compensation to individual and company performance.
The target award percentages for 1999 ranged from 15% to 45% of base salary
of the participant. For 1999, corporate financial performance was at 79% of the
target level, resulting in a plan payout of approximately $3.0 million to 76
participants.
Long-Term Incentive Compensation
Prior to 1997, Blue Cross and Blue Shield of Georgia maintained a Long Term
Incentive Plan. The Long Term Incentive Plan rewarded participants for their
contributions to the successful achievement of specific financial, market share
and customer service goals based on Cerulean's long-term business
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<PAGE> 145
strategy. The plan set goals for three-year performance periods. The Long Term
Incentive Plan had minimum threshold, target and maximum performance levels. The
plan required participants to be employed by one of Cerulean's subsidiaries on
the last day of performance. Prior to 1997, Cerulean had established long-term
incentive award opportunities for four performance cycles, the 1992-1994
performance period, the 1993-1995 performance period, the 1994-1996 performance
period and the 1995-1997 performance period. The compensation committee made the
final award determination related to the achievement of the defined goals for
each performance period. Eligible executive officers received payout for the
1994-1996 performance cycle which are reflected in the Summary Compensation
Table. Cerulean did not exceed minimum threshold levels for financial
performance for the 1995-1997 cycle. Cerulean did not owe any payouts to
executive officers for this performance cycle. The Long Term Incentive Program
was terminated as of December 31, 1997, and there are no remaining payments due
under the Long Term Incentive Program with respect to any period for which it
was in effect.
In July 1997, Cerulean adopted the Performance Unit Plan to reward the key
executives for creating and increasing the value of Cerulean. The award payable
to a participant under the Performance Unit Plan will be equal to the increase
in unit value calculated as of the end of the measurement period multiplied by
the number of units granted. However, executives must surpass performance
hurdles before any award is payable under the Performance Unit Plan. If the
growth in Cerulean's value over the measurement period is less than the
performance hurdle, the award will be zero. The Performance Unit Plan calculates
payouts on the occurrence of a market liquidity event defined in the plan. Prior
to the time Cerulean's common stock is listed or traded on a recognized U.S.
stock exchange, the board of directors will determine when a market-liquidity
event occurs and creates a definite value of Cerulean and results in liquidity.
The initial measurement period began on February 2, 1996. At the end of 1999,
there was no market/liquidity event as defined in the plan. As a result, units
granted under the Performance Unit Plan did not have any assigned value. The
compensation committee believes that the awards granted under the Performance
Unit Plan to executive officers provide a long-term incentive to such persons to
contribute to the growth of Cerulean and establish a direct link between
compensation and shareholder return.
The compensation committee established the Long Term Incentive Plan and the
Performance Unit Plan to:
- focus management on long-term results;
- retain key executives;
- provide the executives with long-term incentive compensation in line with
that of executives at comparable companies; and
- enhance the link with shareholder interests.
Chief Executive Officer Compensation
Approximately 78.87% of the total compensation opportunity target for Mr.
Shirk is salary and approximately 21.13% is variable compensation that is at
risk and tied to competitive corporate business results. Of Mr. Shirk's total
compensation opportunity, 21.13% is based on annual business performance. In
determining the size of the base salary component of Mr. Shirk's compensation,
the compensation committee generally considers the competitive industry pay
practices, Cerulean's performance, and whether Mr. Shirk's total compensation
opportunity is consistent with the compensation for chief executive officers in
comparable companies. For 1999, corporate financial performance was at 79% of
the target level. Mr. Shirk received an annual incentive bonus award in the
amount of $379,923. Cerulean has granted Mr. Shirk 138,000 units under the
Performance Unit Plan.
Omnibus Budget Reconciliation Act of 1993 Implications for Executive
Compensation
It is the responsibility of the compensation committee to address the
issues raised by the recent change in the tax laws which made certain
non-performance-based compensation in excess of $1,000,000 to executives of
public companies nondeductible to these companies beginning in 1995. Depending
on the
135
<PAGE> 146
incentives awarded during any particular year, Cerulean might not be able to
deduct certain payments. If Cerulean and WellPoint complete the proposed merger,
certain payments triggered as a result of the merger may be nondeductible to the
extent they exceed the $1,000,000 limit. The compensation committee will
continue to monitor this situation and will take appropriate action if it is
warranted in the future. In order to attract, retain and reward executives of
exceptional talent the policy of the compensation committee related to this
issue is to establish and maintain a compensation program that is competitive
with that of comparable companies in the insurance industry while maximizing the
creation of long-term shareholder value.
SECTION 16(A) OF THE SECURITIES EXCHANGE ACT
BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Securities Exchange Act and associated regulations
require Cerulean's executive officers and directors and persons who own more
than ten percent of the Class A stock, as well as certain affiliates of such
persons, to file initial reports of ownership and changes in ownership with the
SEC. SEC regulations require executive officers, directors and persons owning
more than ten percent of the Class A stock to furnish Cerulean with copies of
all Section 16(a) forms they file. Based solely on its review of the copies of
these reports sent to Cerulean and the written representations from the
reporting persons that no other reports were required for those persons, to
Cerulean's knowledge, its executive officers and directors complied with all
filing requirements in a timely manner during and with respect to the fiscal
year ended December 31, 1999. To Cerulean's knowledge, there is no person other
than the foundation who beneficially owns more than 10% of the Class A stock.
SHAREHOLDER PROPOSALS FOR 2001 ANNUAL MEETING
Should there be an annual meeting in 2001, shareholders must submit
shareholder proposals and director nominations intended to be presented at the
2001 annual meeting of shareholders to Cerulean in accordance with the
procedures set forth in Article 1, Section 1.12 of the Cerulean bylaws. The
effect of these provisions is that shareholders must submit the proposals and
nominations in writing to Cerulean on or before in order for
Cerulean to include these matters in its proxy materials for the 2001 annual
meeting and for the shareholders to vote on them at that meeting. Shareholders
must submit all proposals and nominations on or before that date by certified
mail, return receipt requested, to Hugh J. Stedman, Secretary.
INDEPENDENT AUDITORS
The firm of Ernst & Young LLP served as Cerulean's independent auditors for
the fiscal year ended December 31, 1999 and the board of directors has
reappointed this firm to continue as independent auditors of Cerulean for the
fiscal year ending December 31, 2000.
A representative of Ernst & Young LLP is expected to attend the meeting.
This representative will have an opportunity to make a statement if he or she
desires and will be available to respond to questions from shareholders.
EXPERTS
The financial statements of WellPoint Health Networks Inc. incorporated by
reference to the Annual Report on Form 10-K for the year ended December 31,
1999, have been so incorporated in reliance on the report of
PricewaterhouseCoopers LLP, independent accountants, given on the authority of
said firm as experts in auditing and accounting.
Ernst & Young LLP, independent auditors, has audited the consolidated
financial statements of Cerulean Companies, Inc. at December 31, 1999 and 1998,
and for each of the three years in the period ended December 31, 1999 included
in this proxy statement/prospectus, which are referred to and made a
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<PAGE> 147
part of this registration statement, as set forth in their report on those
financial statements appearing elsewhere in this proxy statement/prospectus.
These financial statements are included in reliance upon that report given upon
the authority of Ernst & Young LLP as experts in accounting and auditing.
LEGAL MATTERS
Gibson, Dunn & Crutcher LLP will pass upon the legality of the shares of
WellPoint common stock to be issued by WellPoint in the merger. Gibson, Dunn &
Crutcher LLP and Long Aldridge & Norman LLP will deliver their opinions to
WellPoint and Cerulean, respectively, as to the federal income tax consequences
of the merger.
OTHER MATTERS
As of the date of this proxy statement/prospectus, the board of directors
of Cerulean knows of no matters that will be presented for consideration at the
meeting other than as described in this proxy statement/prospectus. However, if
any other matter comes before the meeting or any adjournments or postponements
of the meeting and is voted upon, the proxy given by each shareholder of
Cerulean will be deemed to confer authority to the individuals named as
authorized in that proxy to vote the shares represented by the proxy as to any
matters that fall within the purposes set forth in the notice of meeting.
WHERE YOU CAN FIND MORE INFORMATION
Federal securities laws require WellPoint and Cerulean to file information
with the Securities and Exchange Commission concerning their business and
operations. Accordingly, WellPoint and Cerulean file annual, quarterly, and
special reports, proxy statements and other information with the SEC. You can
read and copy this information at the public reference rooms in Washington,
D.C., New York, New York and Chicago, Illinois.
You can get additional information about the operation of the SEC's public
reference facilities by calling the SEC at 1-800-SEC-0330. The SEC also
maintains a web site (http://www.sec.gov) that contains our filings and the
reports, proxy and information statements and other information regarding other
companies. You can also inspect information about WellPoint at the offices of
the New York Stock Exchange located at 20 Broad Street, New York, New York
10005.
This proxy statement/prospectus is a part of a registration statement that
WellPoint has filed with the SEC and omits certain information contained in the
registration statement as permitted by the SEC. Additional information about
WellPoint and its common stock is contained in the registration statement on
Form S-4 of which this proxy statement/prospectus forms a part, including
certain exhibits and schedules. You can obtain a copy of the registration
statement from the SEC at the addresses or Internet site listed above.
This proxy statement/prospectus does not constitute an offer to sell, or a
solicitation of an offer to purchase, the securities offered by this proxy
statement/prospectus, or the solicitation of a proxy, in any jurisdiction to or
from any person to whom or from whom it is unlawful to make such offer,
solicitation of an offer or proxy solicitation in that jurisdiction. Neither the
delivery of this proxy statement/prospectus nor any distribution of securities
pursuant to this proxy statement/prospectus will, under any circumstances,
create any implication that there has been no change in the information set
forth or incorporated into this proxy statement/prospectus by reference or in
our affairs since the date of this proxy statement/prospectus.
YOU SHOULD RELY ONLY ON THE INFORMATION CONTAINED OR INCORPORATED BY
REFERENCE IN THIS PROXY STATEMENT/PROSPECTUS TO VOTE ON THE MERGER. WE HAVE NOT
AUTHORIZED ANYONE TO PROVIDE YOU WITH INFORMATION THAT IS DIFFERENT FROM WHAT IS
CONTAINED IN THIS PROXY STATEMENT/PROSPECTUS. THIS PROXY STATEMENT/PROSPECTUS IS
DATED , 2000. YOU SHOULD NOT ASSUME THAT THE INFORMATION CONTAINED
IN THIS PROXY STATEMENT/PROSPECTUS IS ACCURATE AS OF ANY DATE OTHER THAN THAT
DATE, AND NEITHER THE MAILING OF THE PROXY STATEMENT/PROSPECTUS TO STOCKHOLDERS
NOR THE ISSUANCE OF WELLPOINT COMMON STOCK IN THE MERGER WILL CREATE ANY
IMPLICATION TO THE CONTRARY.
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CERULEAN COMPANIES, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Unaudited Consolidated Financial Statements
Consolidated Balance Sheets as of June 30, 2000 and
December 31, 1999...................................... F-2
Consolidated Statements of Income for the Three and Six
Months Ended June 30, 2000 and 1999.................... F-3
Consolidated Statements of Comprehensive Income for the
Three and Six Months Ended June 30, 2000 and 1999...... F-3
Consolidated Statements of Cash Flows for the Six Months
Ended June 30, 2000 and 1999........................... F-4
Notes to Consolidated Financial Statements................ F-5
Audited Consolidated Financial Statements
Report of Independent Auditors............................ F-9
Consolidated Balance Sheets as of December 31, 1999 and
1998................................................... F-10
Consolidated Statements of Income for the Years Ended
December 31, 1999, 1998 and 1997....................... F-11
Consolidated Statements of Comprehensive Income for the
Years Ended December 31, 1999, 1998 and 1997........... F-11
Consolidated Statements of Shareholders' Equity for the
Years Ended December 31, 1999, 1998 and 1997........... F-12
Consolidated Statements of Cash Flows for the Years Ended
December 31, 1999, 1998 and 1997....................... F-13
Notes to Consolidated Financial Statements................ F-14
</TABLE>
F-1
<PAGE> 149
CERULEAN COMPANIES, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
JUNE 30 DECEMBER 31,
2000 1999
------------ ------------
(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, respectively....................... 4,096 4,096
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.
F-2
<PAGE> 150
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.
F-3
<PAGE> 151
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
------------- ------------
Net cash (used in) provided by investing activities......... (39,005,535) 508,541
FINANCING ACTIVITIES:
Sale of stock warrants by a subsidiary...................... -- 250,000
------------- ------------
Net cash provided by financing activities................... -- 250,000
------------- ------------
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.
F-4
<PAGE> 152
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 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 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.
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
F-5
<PAGE> 153
CERULEAN COMPANIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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. Young, and John B. Zellars
(collectively, the "Defendant Directors") in the Superior Court of Richmond
County, State of Georgia,
F-6
<PAGE> 154
CERULEAN COMPANIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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,
F-7
<PAGE> 155
CERULEAN COMPANIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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
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.
F-8
<PAGE> 156
REPORT OF INDEPENDENT AUDITORS
Board of Directors
Cerulean Companies, Inc.
We have audited the accompanying consolidated balance sheets of Cerulean
Companies, Inc. and subsidiaries as of December 31, 1999 and 1998, and the
related consolidated statements of income, comprehensive income, shareholders'
equity, and cash flows for each of the three years in the period ended December
31, 1999. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Cerulean
Companies, Inc. and subsidiaries at December 31, 1999 and 1998, and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended December 31, 1999, in conformity with accounting
principles generally accepted in the United States.
/s/ ERNST & YOUNG LLP
February 11, 2000
Atlanta, Georgia
F-9
<PAGE> 157
CERULEAN COMPANIES, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------
1999 1998
------------ ------------
<S> <C> <C>
ASSETS
Investments (Note 3):
Fixed maturities:
Available-for-sale, at fair value (amortized cost:
$265,875,467; $235,441,231)............................ $256,844,521 $239,548,185
Equity securities, at fair value (cost: $55,204,793;
$55,866,571)............................................ 73,036,645 76,906,525
Short-term investments, at fair value (cost: $325,000;
$9,215,878)............................................. 325,000 9,215,878
------------ ------------
Total investments.................................. 330,206,166 325,670,588
Cash and cash equivalents................................... 58,522,617 52,159,196
Accounts receivable (Note 4)................................ 76,429,351 61,777,995
Reimbursable portion of estimated benefit liabilities....... 47,002,000 47,816,000
FEP assets held by agent.................................... 26,749,038 38,786,536
Property and equipment (Note 5)............................. 40,063,725 36,898,538
Other assets................................................ 33,110,191 24,232,739
------------ ------------
Total assets....................................... $612,083,088 $587,341,592
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Estimated benefit liabilities (Note 7).................... $201,587,264 $184,075,293
Unearned premiums......................................... 17,873,115 16,077,960
FEP stabilization reserve................................. 26,749,038 38,786,536
Accounts payable and accrued expenses..................... 50,723,056 43,893,056
Other liabilities......................................... 37,477,669 42,184,663
------------ ------------
Total liabilities.................................. 334,410,142 325,017,508
------------ ------------
Mandatorily redeemable preferred stock:
Class B Convertible Preferred Stock, no par value.
Authorized, issued and outstanding, 49,900 shares at
December 31, 1999 and 1998; aggregate liquidation
preference $49,900,000; aggregate mandatory redemption,
$44,910,000 (Note 10).................................. 46,645,042 46,645,042
------------ ------------
Shareholders' equity:
Blank Preferred Stock, no par value.
Authorized and unissued 100,000,000 shares (Note 10).... -- --
Series A Preferred Stock, no par value, $0.01 stated
value.
Authorized and unissued 64,000 shares (Note 10)......... -- --
Class A Convertible Common Stock, no par value, $0.01
stated value.
Authorized 50,000,000 shares; issued and outstanding
409,597 and 409,392 shares at December 31, 1999 and
1998, respectively (Note 10)........................... 4,096 4,094
Additional paid-in capital................................ 45,188,422 45,188,422
Common Stock, no par value.
Authorized and unissued 100,000,000 shares (Note 10).... -- --
Stock warrants exercisable (Note 10)...................... 29,968,000 29,968,000
Accumulated other comprehensive income (unrealized
appreciation on securities, net of taxes)............... 7,258,906 19,596,908
Retained earnings......................................... 148,608,480 120,921,618
------------ ------------
Total shareholders' equity......................... 231,027,904 215,679,042
Commitments and contingencies (Note 15)................... -- --
------------ ------------
Total liabilities and shareholders' equity......... $612,083,088 $587,341,592
============ ============
</TABLE>
See accompanying notes.
F-10
<PAGE> 158
CERULEAN COMPANIES, INC.
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------------------
1999 1998 1997
-------------- -------------- --------------
<S> <C> <C> <C>
Revenues (Note 2):
Premium revenue............................... $1,486,293,824 $1,189,665,302 $ 989,789,161
Management services revenue................... 142,186,145 117,962,641 96,470,348
Investment and other income................... 19,686,765 17,183,747 17,258,952
Realized gains................................ 7,214,467 9,253,506 11,299,757
-------------- -------------- --------------
Total revenues........................ 1,655,381,201 1,334,065,196 1,114,818,218
Benefits expense (Note 7)....................... 1,300,922,715 1,032,519,546 881,554,366
Operating expenses.............................. 313,602,633 279,218,246 233,650,574
-------------- -------------- --------------
Operating income (loss)......................... 40,855,853 22,327,404 (386,722)
Endowment of a non-profit foundation (Note 8)... -- (76,157,000) --
Non-operating income (Note 14).................. 255,000 255,000 1,275,000
-------------- -------------- --------------
Income (loss) before income taxes and minority
interests..................................... 41,110,853 (53,574,596) 888,278
Income tax expense (benefit) (Note 9)........... 9,061,000 2,073,000 (2,050,000)
Minority interests in losses (earnings) of joint
venture investments........................... 793,324 (1,520,163) 1,459,405
-------------- -------------- --------------
Net income (loss)..................... $ 32,843,177 $ (57,167,759) $ 4,397,683
============== ============== ==============
</TABLE>
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------------
1999 1998 1997
------------ ------------ -----------
<S> <C> <C> <C>
Net income (loss)..................................... $ 32,843,177 $(57,167,759) $ 4,397,683
Other comprehensive (loss) income, net of tax:
Unrealized holding (losses) gains arising during the
period, net of reclassification adjustment for
gains included in net income of $5,771,574,
$7,402,805 and $9,039,806, respectively.......... (12,338,002) 5,647,013 6,063,577
------------ ------------ -----------
Comprehensive income (loss)........................... $ 20,505,175 $(51,520,746) $10,461,260
============ ============ ===========
</TABLE>
See accompanying notes.
F-11
<PAGE> 159
CERULEAN COMPANIES, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
CLASS A ACCUMULATED
CONVERTIBLE ADDITIONAL STOCK OTHER
COMMON PAID-IN WARRANTS COMPREHENSIVE RETAINED
STOCK CAPITAL EXERCISABLE INCOME EARNINGS TOTAL
----------- ----------- ----------- ------------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1996..... $3,506 $ -- $ -- $ 7,886,318 $179,679,704 $187,569,528
Issuance of Class A Common
Stock to eligible
subscribers.................. 9 -- -- -- (9) --
Net income..................... -- -- -- -- 4,397,683 4,397,683
Dividends paid and accrued..... -- -- -- -- (2,994,000) (2,994,000)
Accumulated other comprehensive
income (unrealized
appreciation on securities,
net of taxes of
$1,543,000).................. -- -- -- 6,063,577 -- 6,063,577
------ ----------- ----------- ------------ ------------ ------------
Balance at December 31, 1997..... 3,515 -- -- 13,949,895 181,083,378 195,036,788
Issuance of Class A
Common Stock to eligible
subscribers.................. 1 -- -- -- (1) --
Endowment of a non-profit
foundation (Note 8).......... 578 45,188,422 29,968,000 -- -- 75,157,000
Net income (loss).............. -- -- -- -- (57,167,759) (57,167,759)
Dividends paid and accrued..... -- -- -- -- (2,994,000) (2,994,000)
Accumulated other comprehensive
income (unrealized
appreciation on securities,
net of taxes of
$2,121,000).................. -- -- -- 5,647,013 -- 5,647,013
------ ----------- ----------- ------------ ------------ ------------
Balance at December 31, 1998..... 4,094 45,188,422 29,968,000 19,596,908 120,921,618 215,679,042
Issuance of Class A
Common Stock to eligible
subscribers.................. 2 -- -- -- (2) --
Net income..................... -- -- -- -- 32,843,177 32,843,177
Dividends paid and accrued..... -- -- -- -- (5,156,313) (5,156,313)
Accumulated other comprehensive
income (unrealized
appreciation on securities,
net of taxes of
$4,008,000).................. -- -- -- (12,338,002) -- (12,338,002)
------ ----------- ----------- ------------ ------------ ------------
Balance at December 31, 1999..... $4,096 $45,188,422 $29,968,000 $ 7,258,906 $148,608,480 $231,027,904
====== =========== =========== ============ ============ ============
</TABLE>
See accompanying notes.
F-12
<PAGE> 160
CERULEAN COMPANIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------------------
1999 1998 1997
------------- ------------- -------------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income (loss)................................. $ 32,843,177 $ (57,167,759) $ 4,397,683
Adjustments to reconcile net income (loss) to net
cash provided by operating activities:
Non-cash and non-operating items:
Depreciation................................. 10,439,488 10,743,267 9,765,395
Amortization................................. 783,847 444,737 277,183
Uncollectible receivables.................... (2,269) 1,296,515 1,356,180
Gain on sale of investments.................. (7,214,467) (9,253,506) (11,299,757)
Loss (gain) on sale of property and
equipment.................................. 496,028 184,030 (13,419)
Endowment of a non-profit foundation......... -- 75,157,000 --
Non-operating income......................... (255,000) (255,000) (1,275,000)
(Increase) decrease in certain assets:
Accounts receivable.......................... (14,649,087) (3,449,611) (14,301,581)
Reimbursable portion of estimated benefit
liabilities................................ 814,000 (4,538,000) (3,840,000)
Other assets................................. (4,869,452) (7,336,540) (8,751,532)
Increase (decrease) in certain liabilities:
Estimated benefit liabilities................ 17,511,971 34,494,289 30,070,211
Unearned premiums............................ 1,795,155 7,776,763 (682,759)
Accounts payable and accrued expenses........ 6,830,000 12,682,968 (309,640)
Other liabilities............................ (4,706,994) 5,480,048 (1,947,055)
Minority interest in sale of stock and stock
warrants by a subsidiary................... (245,000) (245,000) (1,225,000)
------------- ------------- -------------
Net cash provided by operating
activities............................ 39,571,397 66,014,201 2,220,909
INVESTING ACTIVITIES
Investments available-for-sale:
Investments purchased........................... (166,642,785) (275,784,389) (211,187,305)
Investments sold or matured..................... 152,191,825 247,011,823 167,660,837
Property and equipment purchased.................. (14,738,523) (14,123,924) (12,434,970)
Property and equipment sold....................... 637,820 33,630 211,974
------------- ------------- -------------
Net cash used in investing activities... (28,551,663) (42,862,860) (55,749,464)
FINANCING ACTIVITIES
Repayment of note payable......................... -- (3,500,000) --
Dividends paid and accrued........................ (5,156,313) (2,994,000) (2,994,000)
Sale of stock and stock warrants by a
subsidiary...................................... 500,000 500,000 2,500,000
------------- ------------- -------------
Net cash used in financing activities... (4,656,313) (5,994,000) (494,000)
------------- ------------- -------------
Increase (decrease) in cash and cash
equivalents..................................... 6,363,421 17,157,341 (54,022,555)
Cash and cash equivalents at beginning of year.... 52,159,196 35,001,855 89,024,410
------------- ------------- -------------
Cash and cash equivalents at end of year.......... $ 58,522,617 $ 52,159,196 $ 35,001,855
============= ============= =============
</TABLE>
See accompanying notes.
F-13
<PAGE> 161
CERULEAN COMPANIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999
1. ORGANIZATION AND PROPOSED MERGER
Organization
Cerulean Companies, Inc. (the "Company") was incorporated under the laws of
the State of Georgia on February 2, 1996 to act as the holding company for Blue
Cross and Blue Shield of Georgia, Inc. ("BCBSGA") and its subsidiaries, and for
other lawful purposes. On February 2, 1996, the Company acquired all of the
outstanding capital stock of BCBSGA, following BCBSGA's conversion from a
not-for-profit corporation to a for-profit corporation pursuant to a Plan of
Conversion approved by the Georgia Commissioner of Insurance on December 27,
1995 (the "Conversion"). As part of the Conversion, the Company agreed to offer
to each of BCBSGA's approximately 141,000 eligible subscribers five shares of
Class A Convertible Common Stock, no par value (the "Class A Stock") at no cost.
Upon completion of the offering eligible subscribers accepted 351,545 shares of
no par value Class A Stock. The registration of the Class A Stock became
effective under the Securities Act of 1933 and under section 12(g) of the
Securities Exchange Act of 1934 on May 14, 1996 and June 30, 1997, respectively.
Currently, the Class A Stock is not publicly traded.
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. 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 Note 15 Legal Proceedings below,
the Company expects that the Commissioner will schedule a public hearing. Upon
closing the transaction, shareholders of the Company will exchange their shares
for WellPoint shares or cash in a transaction valued at $500 million.
2. SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The Company's accompanying consolidated financial statements have been
prepared in conformity with generally accepted accounting principles ("GAAP")
and require the use of management's estimates. As to the Company's managed care,
health and life insurance operations, GAAP varies in some respects from
statutory accounting practices permitted or prescribed by insurance regulatory
authorities. The Company's health care plan subsidiary, its health maintenance
organization and its life insurance subsidiary are subject to regulation by the
Georgia Insurance Department including minimum capital and surplus requirements
and restrictions on payment of dividends. In the opinion of management, all
material adjustments necessary for a fair presentation of the financial position
and results of operations for the periods presented have been made. All such
adjustments are of a normal recurring nature.
Principles of Consolidation
The Company's accompanying consolidated financial statements include the
accounts of the Company, BCBSGA and its wholly-owned life insurance subsidiary,
a health maintenance subsidiary, a
F-14
<PAGE> 162
CERULEAN COMPANIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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.
Accounting for a Sale of Stock and Stock Warrants by a Subsidiary
Gains arising from a subsidiary issuing its own stock and stock warrants to
third parties are recorded as non-operating income and are presented as a
separate line item in the accompanying consolidated statements of income.
Earnings Per Share
Earnings per share are omitted because such data is not meaningful at the
present time due to the likely dilutive events that will occur prior to the
conversion of the Class A Stock or the Class B Convertible Preferred Stock.
Presently there is no market for Class A Stock or any equity securities of the
Company.
Investments
The Company accounts for its investments in accordance with Financial
Accounting Standards Board ("FASB") Statement No. 115, Accounting for Certain
Investments in Debt and Equity Securities ("Statement No. 115"). Statement No.
115 requires that fixed maturity securities are to be classified as either
"held-to-maturity", "available-for-sale", or "trading".
Management determines the appropriate classification of its fixed maturity
securities at the time of purchase and reevaluates such designation as of each
balance sheet date. Fixed maturity securities are classified as held-to-maturity
when the Company has the positive intent and ability to hold them to maturity.
Held-to-maturity securities are stated at amortized cost, adjusted for
amortization of premiums and accretion of discounts to maturity. Such
amortization as well as interest earned is included in investment and other
income.
Fixed maturity and equity securities not classified as held-to-maturity are
classified as available-for-sale. Available-for-sale securities are carried at
fair value, with the unrealized gains and losses, net of tax, reported in a
separate component of shareholders' equity. The amortized cost of debt
securities in this category is adjusted for amortization of premiums and
accretion of discounts to maturity. Such amortization and interest earned is
included in investment and other income. The cost of securities sold is based on
the specific identification method. At December 31, 1999 and 1998, the Company
classified all of its fixed maturity and equity securities as
available-for-sale. The Company's investment portfolio is not significantly
concentrated in any particular industry or geographic region.
F-15
<PAGE> 163
CERULEAN COMPANIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Cash and Cash Equivalents
Cash equivalents are liquid, short-term investments with maturities of
three months or less at the time of purchase and are combined with cash account
balances. These investments are stated at cost, which approximates fair value.
Property and Equipment
Property and equipment are stated at cost less accumulated depreciation.
The costs of developing software for internal use are capitalized when
technological feasibility has been established. Depreciation is computed using
the straight-line method over the estimated useful lives of the respective
assets, which are 15 years for buildings and 3-7 years for software, furniture
and equipment. Amortization of software developed for internal use begins when
the asset is placed in service.
Estimated Benefit Liabilities
The Company provides for claims reported but unpaid and for claims incurred
but unreported and the cost of adjudicating claims based primarily on past
experience, membership demographics, claims run-off patterns and other current
medical trend information, using accepted actuarial methods. Estimates are
adjusted as changes in these factors occur and such adjustments are reported in
the year of determination. Portions of the Company's estimated benefit
liabilities are reimbursable due to the nature of certain rate stabilization
reserve programs. Offsetting receivables have been recorded in the accompanying
consolidated balance sheets.
Premium Revenue and Management Services Revenue
The Company's premium revenues consist primarily of premiums for
traditional indemnity health insurance, managed care products and group life
insurance products. All of the Company's individual and employer group contracts
provide for the individual or the group to be fully insured. Premiums for these
contracts are billed in advance of the respective coverage periods and are
initially recorded as premium receivables and as unearned premiums. Unearned
premiums are recognized as earned in the period of coverage.
Management services revenue is earned as services are performed and
consists of administrative fees for services provided to commercial employer
groups under self-funded arrangements, including claims processing, management
of medical services, access to provider networks and other services rendered to
third parties. Related claims processed for commercial self-funded employer
groups were $515,909,000 in 1999, $499,618,000 in 1998 and $489,407,000 in 1997.
Management services revenue also includes reimbursements for administrative
expenses incurred in performing services as agent for federal and state
government programs and for the national Blue Cross Blue Shield interplan
system. Related claims processed for these programs were $4.2 billion in 1999,
$4.3 billion in 1998 and $3.9 billion in 1997.
Rate Stabilization Reserves
The Company has fully insured arrangements with certain employer groups
whose premium revenues are based on experience rating. On each group's
anniversary date, the gain or loss resulting from its experience is determined.
Premium rates for these groups are based on the group's historical claims
experience plus a retention factor for an appropriate contribution to surplus.
Premium revenues include adjustments to employer groups under rate stabilization
contracts to the extent premiums billed exceed claims incurred plus retention.
Any accumulated excess of premium revenues over claims incurred and
retention is recorded as a rate stabilization reserve liability. Under the terms
of these agreements, groups may utilize these funds to
F-16
<PAGE> 164
CERULEAN COMPANIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
reduce prospective rates, leave the excess funds on deposit with the Company or
receive a refund. An accumulated excess of claims incurred over premiums billed
is expensed by the Company in the period incurred.
Federal Employee Program
The Company and other Blue Cross and Blue Shield plans participate in the
Federal Employee Program ("FEP") which underwrites a voluntary health insurance
contract for employees (and their dependents) of the federal government. The
Blue Cross and Blue Shield Association has been designated as the contract
agent. A premium stabilization reserve liability (FEP stabilization reserve) and
an offsetting asset (FEP assets held by agent) have been recorded in the
accompanying consolidated balance sheets, and premium revenues, investment
income and operating expenses, including FEP operations center expenses, have
been recorded in the accompanying consolidated statements of income to recognize
the Company's portion of the FEP's underwriting results.
Advertising and Promotion
All costs associated with advertising and promoting products are expensed
in the year incurred. Advertising and promotion expense was $3,608,037 in 1999,
$3,780,629 in 1998 and $5,012,557 in 1997.
3. INVESTMENTS
Investments at December 31, 1999 and 1998 are as follows:
<TABLE>
<CAPTION>
DECEMBER 31, 1999
AVAILABLE-FOR-SALE SECURITIES
-----------------------------------------------------------------------
COST OR GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR CARRYING
COST GAINS LOSSES VALUE VALUE
------------ ----------- ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Fixed Maturities:
U.S. Treasury securities and
obligations of U.S.
government agencies....... $168,468,947 $ 127,105 $ (6,491,695) $162,104,357 $162,104,357
Corporate securities........ 74,559,523 31,145 (2,244,622) 72,346,046 72,346,046
Mortgage-backed
securities................ 22,846,997 34,564 (487,443) 22,394,118 22,394,118
------------ ----------- ------------ ------------ ------------
Total fixed
maturities......... 265,875,467 192,814 (9,223,760) 256,844,521 256,844,521
Equity Securities:
Preferred stocks............ 448,000 -- -- 448,000 448,000
Common stocks............... 54,756,793 21,287,880 (3,456,028) 72,588,645 72,588,645
------------ ----------- ------------ ------------ ------------
Total equity
securities......... 55,204,793 21,287,880 (3,456,028) 73,036,645 73,036,645
Short-term investments........ 325,000 -- -- 325,000 325,000
------------ ----------- ------------ ------------ ------------
Total
available-for-sale
securities......... $321,405,260 $21,480,694 $(12,679,788) $330,206,166 $330,206,166
============ =========== ============ ============ ============
</TABLE>
F-17
<PAGE> 165
CERULEAN COMPANIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
<TABLE>
<CAPTION>
DECEMBER 31, 1998
AVAILABLE-FOR-SALE SECURITIES
----------------------------------------------------------------------
COST OR GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR CARRYING
COST GAINS LOSSES VALUE VALUE
------------ ----------- ----------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Fixed Maturities:
U.S. Treasury securities and
obligations of U.S. government
agencies........................... $160,529,318 $ 2,911,851 $ (414,659) $163,026,510 $163,026,510
Corporate securities................. 53,501,824 1,248,926 (41,695) 54,709,055 54,709,055
Mortgage-backed securities........... 21,410,089 441,500 (38,969) 21,812,620 21,812,620
------------ ----------- ----------- ------------ ------------
Total fixed maturities........ 235,441,231 4,602,277 (495,323) 239,548,185 239,548,185
Equity Securities:
Preferred stocks..................... 596,000 -- -- 596,000 596,000
Common stocks........................ 55,270,571 23,701,632 (2,661,678) 76,310,525 76,310,525
------------ ----------- ----------- ------------ ------------
Total equity securities....... 55,866,571 23,701,632 (2,661,678) 76,906,525 76,906,525
Short-term investments................. 9,215,878 -- -- 9,215,878 9,215,878
------------ ----------- ----------- ------------ ------------
Total available-for-sale
securities.................. $300,523,680 $28,303,909 $(3,157,001) $325,670,588 $325,670,588
============ =========== =========== ============ ============
</TABLE>
Fair values for fixed maturities and short-term investments are based on
quoted market prices, where available. For fixed maturities not actively traded,
fair values are estimated using values obtained from independent pricing
services. The fair values for common stocks are based on quoted market prices.
Substantially all of the Company's investments in equity securities at
December 31, 1999 and 1998 are comprised of stocks in industrial companies.
The amortized cost and fair values of fixed maturities at December 31,
1999, by contractual maturity, are shown below. Expected maturities will differ
from contractual maturities because borrowers may have the right to call or
prepay obligations with or without call or prepayment penalties.
<TABLE>
<CAPTION>
DECEMBER 31, 1999
AVAILABLE-FOR-SALE SECURITIES
-----------------------------
AMORTIZED FAIR
COST VALUE
------------- -------------
<S> <C> <C>
Due in one year or less..................................... $ 28,747,116 $ 28,451,929
Due after one year through five years....................... 112,519,094 109,800,004
Due after five years through ten years...................... 99,762,336 94,321,900
Due after ten years......................................... 1,999,924 1,876,570
Mortgage-backed securities.................................. 22,846,997 22,394,118
------------ ------------
Total fixed maturity securities................... $265,875,467 $256,844,521
============ ============
</TABLE>
Bonds, certificates of deposit and money market funds carried at a value of
$1,004,422 were on deposit with insurance regulatory authorities at December 31,
1999 in accordance with statutory requirements.
F-18
<PAGE> 166
CERULEAN COMPANIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Investment and other income for the years ended December 31, 1999, 1998 and
1997 is summarized as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------------
1999 1998 1997
----------- ----------- -----------
<S> <C> <C> <C>
Fixed maturities................................ $14,114,469 $13,354,658 $11,464,768
Equity securities............................... 976,415 881,667 1,302,477
Short-term investments and cash equivalents..... 4,873,071 4,061,482 5,165,927
----------- ----------- -----------
Interest and dividend income.................... 19,963,955 18,297,807 17,933,172
Less: investment expenses....................... (1,008,599) (771,950) (947,913)
----------- ----------- -----------
Net investment income........................... 18,955,356 17,525,857 16,985,259
Other income (loss)............................. 731,409 (342,110) 273,693
----------- ----------- -----------
Investment and other income........... $19,686,765 $17,183,747 $17,258,952
=========== =========== ===========
</TABLE>
Other income (loss) amounts are generally gains or losses on the disposal
of assets or other transactions that do not relate to the Company's primary
business operations.
Realized and unrealized investment gains and losses for the years ended
December 31, 1999, 1998 and 1997 were as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------------
1999 1998 1997
------------ ----------- -----------
<S> <C> <C> <C>
Realized gains:
Fixed maturities............................. $ 709,622 $ 2,685,201 $ 248,942
Equity securities............................ 9,130,824 8,191,839 11,910,540
------------ ----------- -----------
Total gains.......................... 9,840,446 10,877,040 12,159,482
Realized losses:
Fixed maturities............................. (577,256) (7,778) (127,366)
Equity securities............................ (2,048,723) (1,615,756) (732,359)
------------ ----------- -----------
Total losses......................... (2,625,979) (1,623,534) (859,725)
------------ ----------- -----------
Net realized investment gains.................. 7,214,467 9,253,506 11,299,757
Changes in unrealized gains (losses):
Fixed maturities............................. (13,137,900) 1,553,093 1,936,513
Equity securities............................ (3,208,102) 6,214,920 5,618,852
Short-term investments....................... -- -- 51,212
------------ ----------- -----------
Net unrealized gains (losses).................. (16,346,002) 7,768,013 7,606,577
------------ ----------- -----------
Total realized and unrealized gains
(losses)........................... $ (9,131,535) $17,021,519 $18,906,334
============ =========== ===========
</TABLE>
4. ACCOUNTS RECEIVABLE
Accounts receivable consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------
1999 1998
----------- -----------
<S> <C> <C>
Groups and subscribers...................................... $47,617,634 $37,132,624
Other....................................................... 35,115,414 30,951,367
Less: Allowance for doubtful accounts....................... (6,303,697) (6,305,996)
----------- -----------
$76,429,351 $61,777,995
=========== ===========
</TABLE>
F-19
<PAGE> 167
CERULEAN COMPANIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
5. PROPERTY AND EQUIPMENT
Property and equipment consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------
1999 1998
------------ ------------
<S> <C> <C>
Land.................................................... $ 1,046,773 $ 1,046,773
Building and improvements............................... 16,019,474 15,161,667
Furniture and equipment................................. 95,997,531 86,286,171
------------ ------------
113,063,778 102,494,611
Less: accumulated depreciation.......................... (73,000,053) (65,596,073)
------------ ------------
$ 40,063,725 $ 36,898,538
============ ============
</TABLE>
At December 31, 1999 and 1998, furniture and equipment includes $6,740,544
and $3,021,638, respectively, of capitalized costs related to the development of
internal use software. During 1999 and 1998, the Company recognized
approximately $564,073 and $90,000 of amortization expense related to costs
capitalized for the development of internal use software.
Depreciation expense was $10,439,488, $10,743,267 and, $9,765,395 for 1999,
1998 and 1997, respectively, including $697,594 in 1999, $1,187,550 in 1998 and
$1,063,318 in 1997 for building and improvements.
6. LINES OF CREDIT
The Company has available a $5,500,000 line of credit with a bank to
finance its working capital needs. Interest accrues on amounts advanced at the
prime rate. There were no borrowings on this line of credit during the three
years ended December 31, 1999.
The Company has a $55,000,000 insolvency line of credit with a group of
banks. The insolvency line of credit may be drawn on solely in the event of an
insolvency of BCBSGA to pay authorized insurance policy claims. The insolvency
line of credit is designed to satisfy certain membership standards of the Blue
Cross and Blue Shield Association, from which the Company and certain of its
subsidiaries have the exclusive right to do business in Georgia under the name
"Blue Cross and Blue Shield" and to use the Blue Cross and Blue Shield names,
trademarks and service marks with respect to the Company's indemnity, PPO, HMO
and POS products.
Under the terms of a revolving credit loan agreement with a group of banks
to finance the Company's community health partnership networks and other related
costs, the Company could borrow up to $9,000,000. During January 1998, the
Company terminated its $9,000,000 revolving credit agreement and paid in full
the $3,500,000 note payable outstanding at December 31, 1997. Interest accrued
on amounts advanced at 0.5% over the LIBOR rate in 1998 and 1997.
F-20
<PAGE> 168
CERULEAN COMPANIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
7. ESTIMATED BENEFIT LIABILITIES
The following table provides a reconciliation of the beginning and ending
estimated benefit liabilities including claims adjudication expenses, net of
rate stabilization reimbursable reserves and life reserves, for 1999, 1998 and
1997:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------------
1999 1998 1997
------------ ------------ ------------
<S> <C> <C> <C>
Balance at January 1......................... $184,075,293 $149,581,004 $119,510,793
Less: Reimbursable reserves and life
reserves................................... 54,563,626 49,699,319 44,663,227
------------ ------------ ------------
Net balance at January 1..................... 129,511,667 99,881,685 74,847,566
Plus incurred related to:
Current year............................... 943,930,921 729,799,455 576,250,933
Prior year................................. (4,628,524) (13,801,953) 901,109
------------ ------------ ------------
Total incurred..................... 939,302,397 715,997,502 577,152,042
Less paid related to:
Current year............................... 801,587,915 603,369,042 478,159,277
Prior year................................. 119,857,216 82,998,478 73,958,646
------------ ------------ ------------
Total paid......................... 921,445,131 686,367,520 552,117,923
------------ ------------ ------------
Net balance at December 31................... 147,368,933 129,511,667 99,881,685
Plus: Reimbursable reserves and life
reserves................................... 54,218,331 54,563,626 49,699,319
------------ ------------ ------------
Balance at December 31....................... $201,587,264 $184,075,293 $149,581,004
============ ============ ============
</TABLE>
The Company uses paid claims and completion factors based on historical
payment patterns to estimate incurred claims. Changes in payment patterns and
claims trends can result in changes to prior year's claims estimates.
A reconciliation of the Company's incurred expense to total benefits
expense as shown in the accompanying consolidated statements of income is as
follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------------------
1999 1998 1997
-------------- -------------- ------------
<S> <C> <C> <C>
Incurred related to current and prior
year.................................... $ 939,302,397 $ 715,997,502 $577,152,042
Benefits expense related to life insurance
claims and claims reimbursed by certain
rate stabilization accounts............. 361,620,318 316,522,044 304,402,324
-------------- -------------- ------------
Total benefits expense.......... $1,300,922,715 $1,032,519,546 $881,554,366
============== ============== ============
</TABLE>
F-21
<PAGE> 169
CERULEAN COMPANIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
8. ENDOWMENT OF NON-PROFIT FOUNDATION
On September 3, 1997, a lawsuit (the "Lawsuit") was filed in the Superior
Court of Fulton County by Plaintiffs Let's Get Together, Inc.; Statewide
Independent Living Council of Georgia, Inc.; Living Independence for Everybody,
Inc.; Aids Survival Project, Inc.; Women's Policy Education Fund, Inc.;
Disability Connections -- The Middle Georgia Center for Independent Living,
Inc.; Physicians for a National Health Program, Inc.; Campaign for a Prosperous
Georgia, Inc.; and Friends and Survivors Standing Together, Inc. (collectively,
the "Plaintiffs") on behalf of themselves and a class putatively composed of all
other 501(c)(3) organizations in Georgia seeking, among other things, to
invalidate a Georgia statute upon which certain aspects of the conversion of
Blue Cross and Blue Shield of Georgia, Inc. from a not-for-profit corporation to
a business corporation was based. The complaint named BCBSGA, the Company and
the Commissioner of Insurance of the State of Georgia as defendants. An
additional, similar request for declaratory ruling was filed with the Georgia
Insurance Department on September 3, 1997.
The Plaintiffs' claims related to the conversion of BCBSGA from a
non-profit entity to a for-profit entity which occurred as part of a Plan of
Conversion submitted to a public hearing November 21, 1995, and approved by the
Georgia Commissioner of Insurance in an order dated December 27, 1995. The
complaint sought to have the fair market value of the assets of BCBSGA as of
December 27, 1995, plus interest from December 27, 1995, placed in a public
trust for the use and benefit of a class of nonprofit charitable organizations.
On October 3, 1997, the Georgia Insurance Department denied the Plaintiffs'
request for declaratory ruling, which decision the Plaintiffs appealed. On
October 31, 1997, the Company and BCBSGA filed a motion to dismiss the Lawsuit.
Oral argument was held on January 12, 1998.
On July 8, 1998, the Company entered into a stipulation and agreement of
settlement of the Lawsuit (the "Settlement") subject to the approval of the
Superior Court of Fulton County, Georgia (the "Court"). On August 17, 1998, six
individuals, including two shareholders, filed a motion to intervene in the
lawsuit and an objection to the Settlement. A settlement hearing was held on
August 20, 1998 to determine, among other things, if the terms and conditions of
the Settlement were fair and reasonable and should be approved by the Court.
On August 21, 1998, the judge denied the motion to intervene and entered a
final order approving the Settlement. The effective date of the Settlement was
September 21, 1998, the date on which the appeal period expired after the entry
of the final order. Under the terms of the Settlement, the Company established a
new non-profit foundation for the advancement of health care for all Georgians
and paid to the foundation, as endowment, and to the Plaintiff's lawyers
(together, the "Foundation"), an aggregate of $1.0 million in cash, and
securities of Cerulean aggregating 20% of Cerulean's total equity upon their
issuance consisting of: (1) shares of Class A Stock approximating 9.5% of the
total equity of Cerulean and (2) warrants (the "Warrants") exercisable for
shares on non-voting Series A Preferred Stock (the "Series A Stock") in the
Company (which will approximate 10.5% of the total equity of the Company) upon
payment by the Foundation of an exercise price of $21 million. Additionally, the
Foundation entered into a shareholder's agreement to which it agreed not to vote
any larger number of its Class A Stock than would constitute 5% of the shares of
its Class A Stock.
In September 1998, the Company issued 57,772 shares of Class A Stock and
63,853 warrants exercisable for non-voting Series A Stock. Pursuant to the terms
of the Warrants, prior to consummation of a transaction such as the proposed
merger with WellPoint, the Warrants must be exercised in a defined "cash-less
exercise" which results in a reduction in the percentage participation by the
Foundation from a 20% portion of the total merger consideration of the Company
to approximately 16.7% of the total.
During 1998, the Company recorded a nonrecurring charge of $76.2 million
for the endowment of the Foundation, which, in management's judgment,
represented fair value as of the date of the Settlement.
F-22
<PAGE> 170
CERULEAN COMPANIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
9. INCOME TAXES
Income tax expense (benefit) attributable to income before income taxes and
minority interests, substantially all of which is federal, consists of:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------------
1999 1998 1997
----------- ----------- -----------
<S> <C> <C> <C>
Current tax expense.......................... $12,155,000 $ 8,293,000 $ 3,330,000
Deferred tax benefit......................... (3,094,000) (6,220,000) (5,380,000)
----------- ----------- -----------
Total tax expense (benefit)........ $ 9,061,000 $ 2,073,000 $(2,050,000)
=========== =========== ===========
</TABLE>
The provision for income taxes is different than the amount computed using
the statutory federal income tax rate of 35% as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------------
1999 1998 1997
----------- ------------ -----------
<S> <C> <C> <C>
Tax expense (benefit) at statutory rate........ $14,388,000 $(18,751,000) $ 311,000
Changes in valuation allowance related to:
Alternative minimum tax...................... (7,735,000) (3,282,000) --
Increase in loss carryforwards............... -- 22,085,000 --
Utilization of carryforwards................. -- -- (2,356,000)
CHPN losses with no benefit.................. 3,140,000 2,676,000 4,231,000
Long-lived tax assets........................ -- -- (2,119,000)
Other temporary differences.................. -- (542,000) (375,000)
CHPN investments............................... (1,872,000) (925,000) (2,132,000)
Other.......................................... 1,140,000 812,000 390,000
----------- ------------ -----------
$ 9,061,000 $ 2,073,000 $(2,050,000)
=========== ============ ===========
</TABLE>
The Company and its wholly-owned subsidiaries file a consolidated federal
income tax return. Income tax expense consisted primarily of federal alternative
minimum tax in 1999 and 1998. The Company's consolidated tax expense in 1997
calculated under the regular tax system was reduced by available net operating
loss carryforwards, which subjected the Company to alternative minimum tax.
CHPN subsidiaries do not join in the filing of the consolidated tax return
with the Company. Certain CHPNs generated tax losses that are not expected to
generate benefit currently or in the foreseeable future. The Company recorded a
benefit in 1999 for the difference in book and tax basis for its CHPN
investments reduced to its expected realizable value of $1,872,000. In 1998, the
Company recorded a benefit of $26,655,000 related to the Settlement, reduced to
its expected realizable value of $4,570,000. Other includes state taxes, net of
federal tax benefit, and permanent book to tax differences, including non-
deductible expenses.
Federal income taxes paid during 1999, 1998 and 1997 were $15,524,000,
$6,403,000 and $2,800,000, respectively.
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax
F-23
<PAGE> 171
CERULEAN COMPANIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
purposes. The significant components of the deferred tax asset, which is
included in other assets in the accompanying consolidated balance sheets, are as
follows:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------
1999 1998
------------ ------------
<S> <C> <C>
Deferred tax asset:
Regular tax operating loss carryforwards for the
consolidated tax group............................... $ 36,629,000 $ 40,400,000
Regular tax operating loss carryforwards for CHPNs...... 7,317,000 8,160,000
Alternative minimum tax credit.......................... 27,003,000 16,470,000
Long-lived tax assets................................... 23,621,000 23,900,000
Basis difference in CHPN investments.................... 3,670,000 5,350,000
Other temporary differences............................. 16,803,000 12,880,000
------------ ------------
Total deferred tax asset........................ 115,043,000 107,160,000
Valuation allowance for deferred tax asset.............. (94,539,000) (89,750,000)
------------ ------------
Deferred tax asset, net of valuation allowance.......... 20,504,000 17,410,000
------------ ------------
Deferred tax liability:
Unrealized investment gains............................. 1,542,000 5,550,000
------------ ------------
Total deferred tax liability.................... 1,542,000 5,550,000
------------ ------------
Net deferred tax asset.......................... $ 18,962,000 $ 11,860,000
============ ============
</TABLE>
Other temporary differences consist principally of differences between tax
and generally accepted accounting principles related to estimated benefit
liabilities and accounting accruals.
At December 31, 1999, the Company's consolidated tax group has net
operating loss carryforwards of $104,655,000 for regular income tax purposes
that expire in the years 2003 through 2018. Certain of the CHPN subsidiaries
which file separate tax returns have net operating loss carryforwards of
$19,276,000 that expire in 2011 through 2019.
The Company qualifies for a special deduction under the regular tax system
available to certain Blue Cross and Blue Shield plans under Section 833(b) of
the Internal Revenue Code. The effect of this deduction is to significantly
reduce regular taxable income and subjects the Company to alternative minimum
tax. The Company expects to be taxed under the alternative minimum tax system
into the foreseeable future and therefore principally all of the regular tax net
operating loss carryforwards of the consolidated tax group, the alternative
minimum tax credit and the long-lived tax assets which will not be deductible
until well into the future, will most likely not be utilized. For financial
reporting purposes, a valuation allowance has been recorded to reduce the
related deferred tax assets to the amount expected to be realized. The Company
reviewed the adequacy of the deferred tax valuation allowance and believes it is
appropriate.
During January 1999, the Internal Revenue Service completed its examination
of the Company's consolidated federal income tax returns for 1995 and 1994. The
Company does not believe that the ultimate resolution of the issues will have an
adverse effect on its operations or financial position.
10. CAPITAL STOCK
Mandatorily Redeemable Preferred Stock
The Class B Convertible Preferred Stock (the "Class B Stock") has a
liquidation preference of $1,000 per share and a mandatory redemption value of
$900 per share. Dividends on the Class B Stock are currently paid at the rate of
$100.00 per annum per share ($60.00 per annum per share prior to 1999), are
F-24
<PAGE> 172
CERULEAN COMPANIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
fully cumulative and accrue without interest. The preferred shares are
mandatorily redeemable on December 1, 2001 or may be redeemed prior to this date
upon the occurrence of certain events. Upon completion of a Stock Conversion,
each share of Class B Stock shall convert into the number of fully paid and
nonassessable shares of Common Stock equal to .0004446420631%. This rate may be
adjusted periodically upon the occurrence of certain events. The holders of the
Class B Stock vote separately as a single class with each share being entitled
to one vote.
Blank Preferred Stock
The Board of Directors (the "Board") of the Company may from time to time
issue shares of Blank Preferred Stock in such series or classes with such terms,
preferences and other provisions as the Board shall determine, provided that
such issuance is approved by the majority of the holders of the Preferred Stock
then issued, outstanding and entitled to vote. Presently, there is no Blank
Preferred Stock issued or outstanding.
Series A Preferred Stock
The Series A Stock is a series of preferred stock created specifically for
the Settlement. The Series A Stock has all of the economic attributes of Class A
Stock, and each share of Series A Stock is the economic equivalent of one share
of Class A Stock. The Series A Stock, however, has no voting rights. In those
events in which there is a statutory voting right accorded to any class or
series of capital stock, each share of Series A Stock automatically converts
into one unit of the Company's Class A Common Stock Participation Rights (the
"Company's Rights"). Each of the Company's Rights is the economic equivalent of
one share of Class A Stock but has no voting rights.
The Series A Stock has been authorized by the Company's Board of Directors
and holders of a majority of the outstanding shares of Class B Stock, and an
amendment to the Company's Articles of Incorporation (the "Articles") creating
the Series A Stock was filed with the Georgia Secretary of State.
Class A Convertible Common Stock
Prior to December 1, 1998, shares of Class A Stock could not be sold,
transferred, encumbered, pledged or otherwise disposed of except upon the
occurrence of certain events. While there is no established market for the
Company's Class A Stock, following December 1, 1998, these shares became
transferable under certain defined criteria, with a right of first refusal by
the Company. As of December 31, 1999, no shares had been presented to the
Company for transfer that met the defined criteria. In the event of a Stock
Conversion, each share of Class A Stock will be converted into one share of
Common Stock. So long as any shares of the Company's Class B Stock are issued,
outstanding and entitled to vote, no dividends may be paid on the Class A Stock
without the approval of the Board and the holders of a majority of the shares of
Class B Stock. As long as no Common Stock is outstanding, the holders of the
Class A Stock vote separately as a single class with each share being entitled
to one vote. The Company's Articles do not contain any provisions protecting
holders of Class A Stock against dilution. In the event the Company issues
additional shares of Class A Stock, or issues shares of Common Stock or Blank
Preferred Stock convertible into Common Stock or effects a stock split, stock
dividend or other recapitalization of or on its Common Stock, the then existing
Class A Shareholders will be diluted.
During 1998, 57,772 shares of Class A Stock were issued as part of the
Settlement. These shares have all of the same terms and provisions as the other
shares of Class A Stock as provided in the Company's Articles, except that the
Foundation, which received shares of Class A Stock as part of the Settlement,
entered into a shareholders' agreement pursuant to which 37,305 shares of the
total 57,772 shares issued are not entitled to vote. Additionally, the
Foundation has the right to tender for redemption shares of Class A Stock for an
aggregate redemption price of $1.0 million. Under the Company's Articles, this
F-25
<PAGE> 173
CERULEAN COMPANIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
redemption right was required to be separately authorized by holders of a
majority of the shares of Class B Stock which authorization was granted at a
meeting of holders of Class B Stock held on September 15, 1998.
Common Stock
Unless approved by two-thirds of the Directors, no person may directly or
indirectly acquire or hold more than the permissible ownership amount which is
currently 20% of the total shares of Common Stock outstanding. So long as any
shares of the Company's Class B Stock are issued, outstanding and entitled to
vote, no dividends may be paid on the Common Stock without the approval of the
Board and the holders of a majority of the shares of Class B Stock. In the event
no Class A Stock or Class B Stock is issued or outstanding at the time of a
liquidation, dissolution or winding up of the affairs of the Company, the entire
assets of the Company available for distribution to stockholders will be
distributed pro rata among the holders of the Common Stock. Each outstanding
share of Common Stock is entitled to one vote. Presently, there is no Common
Stock issued or outstanding.
Stock Warrants Exercisable
During 1998, Warrants were also issued as part of the Settlement. The
63,853 warrants are exercisable for shares of non-voting Series A Stock. There
are no circumstances under which the equity interest represented by the Warrants
has any voting rights. The Warrants also provide that upon the occasion of
certain defined "Major Events," the Warrants must be exercised in a cashless
exercise. The effect of this provision is that the Warrants will be
automatically converted into shares of Series A Stock according to a formula
provided in the Warrant Agreement.
11. OPERATING LEASES
The Company has an operating lease arrangement for its home office
facility. The term of the lease is ten years, with two five-year renewal
options. Annual rental includes base rental plus pro-rated real estate taxes and
operating expenses.
In addition, the Company leases other office space and data processing
equipment. Future minimum lease obligations (including estimated real estate
taxes and operating expenses) under all non-cancelable operating leases are as
follows:
<TABLE>
<S> <C>
2000........................................................ $17,735,926
2001........................................................ 5,130,170
2002........................................................ 2,336,903
2003........................................................ 1,192,762
2004........................................................ 1,135,079
Thereafter.................................................. --
-----------
$27,530,840
===========
</TABLE>
Rent expense amounted to approximately $21,911,000 in 1999, $18,413,000 in
1998 and $14,235,000 in 1997.
12. EMPLOYEE BENEFITS
Pension Plan
The Company and its subsidiaries participate in a multi-employer
non-contributory defined benefit pension plan covering substantially all of its
employees. The benefits are based on years of service and the employee's
compensation during those years. The Company's funding policy is to contribute
amounts
F-26
<PAGE> 174
CERULEAN COMPANIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
sufficient to meet the minimum funding requirements set forth in the Employee
Retirement Income Security Act of 1974. Contributions are intended to provide
not only for benefits attributed to service to date but also for those expected
to be earned in the future. The Projected Unit Credit Method is used to
determine funding requirements and pension expense.
Supplemental Executive Retirement Plan
During 1996, the Company and its subsidiaries established three defined
benefit pension plans (the "Plans") covering certain executives. The benefits
are based on years of service and the employee's compensation during those
years. The Plans are non-qualified and unfunded. The Projected Unit Credit
Method is used to determine pension expense. The Company will pay benefits to
eligible participants when due under terms of the individual plans.
Postretirement Plan
The Company sponsors a Defined Dollar Benefit Plan that provides
postretirement health, dental, vision and life insurance benefits to full-time
associates with at least ten years of service or part-time associates with the
equivalent of ten years full-time employment. These benefits are also available
to spouses. Credits based on length of service are provided to retirees annually
to be used towards the cost of postretirement benefits. Spouses of retirees
receive one half of the credits received by retirees. For those who retired
prior to January 1, 1995, insurance is provided by the Company at no cost to the
retiree. Additionally, a group of associates who meet the "rule of 80" (those
who were at least age 55 with ten years of service, and whose combined years of
service plus age equaled 80 or greater) by December 31, 1994 are grandfathered
and will receive postretirement benefits at no cost whenever they retire.
The following chart summarizes the change in the plans' benefit obligation,
assets and funded status:
<TABLE>
<CAPTION>
POSTRETIREMENT
PENSION PLANS BENEFIT PLANS
--------------------------- -----------------------------
1999 1998 1999 1998
------------ ------------ ------------- -------------
<S> <C> <C> <C> <C>
Change in benefit obligation:
Benefit obligation at
beginning of year......... $ 84,889,734 $ 66,669,719 $ 17,551,400 $ 17,802,200
Service cost................. 6,300,720 5,153,127 649,000 581,500
Interest cost................ 5,646,635 5,029,628 1,126,100 1,140,700
Actuarial loss (gain)........ (13,002,983) 10,225,989 (2,899,600) (1,245,700)
Amendments................... 856,263 713,929 -- --
Benefits paid................ (3,801,774) (2,902,658) (792,500) (727,300)
------------ ------------ ------------- -------------
Benefit obligation at end of
year...................... 80,888,595 84,889,734 15,634,400 17,551,400
------------ ------------ ------------- -------------
Change in plan assets:
Fair value of plan assets at
beginning of year......... 65,604,328 56,731,183 -- --
Actual return on plan
assets.................... 10,394,044 8,870,572 -- --
Employer contributions....... 1,282,570 2,905,231 -- --
Benefits paid................ (3,801,774) (2,902,658) -- --
------------ ------------ ------------- -------------
Fair value of plan assets at
end of year............... 73,479,168 65,604,328 -- --
------------ ------------ ------------- -------------
</TABLE>
F-27
<PAGE> 175
CERULEAN COMPANIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
<TABLE>
<CAPTION>
POSTRETIREMENT
PENSION PLANS BENEFIT PLANS
--------------------------- -----------------------------
1999 1998 1999 1998
------------ ------------ ------------- -------------
<S> <C> <C> <C> <C>
Reconciliation of funded
status:
Funded status................ $ (7,409,427) $(19,285,406) $ (15,634,400) $ (17,551,400)
Unrecognized actuarial loss
(gain).................... (10,783,205) 7,783,506 (5,644,400) (2,854,300)
Unrecognized prior service
cost...................... 4,983,476 4,676,823 -- --
Unrecognized transition
(asset) obligation........ (530,780) (665,153) 12,075,400 12,880,500
------------ ------------ ------------- -------------
Net amount recognized........ $(13,739,936) $ (7,490,230) $ (9,203,400) $ (7,525,200)
============ ============ ============= =============
Amounts recognized in the
accompanying consolidated
balance sheets consist of:
Accrued benefit liability.... $(13,753,953) $ (7,949,252) $ (9,203,400) $ (7,525,200)
Intangible asset............. 14,017 459,022 -- --
------------ ------------ ------------- -------------
Net amount recognized........ $(13,739,936) $ (7,490,230) $ (9,203,400) $ (7,525,200)
============ ============ ============= =============
Weighted-average assumptions as
of December 31,
Discount rate................ 7.75% 6.75% 7.75% 6.75%
Expected long-term rate of
return on plan assets..... 9.00% 9.00% N/A N/A
Rate of increase in future
compensation.............. 3.0-6.5% 3.0-6.5% Varies by age Varies by age
</TABLE>
<TABLE>
<CAPTION>
POSTRETIREMENT
PENSION PLANS BENEFIT PLANS
--------------------------------------- ------------------------------------
1999 1998 1997 1999 1998 1997
----------- ----------- ----------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Components of net periodic
benefit cost:
Service cost................... $ 6,300,720 $ 5,153,127 $ 3,731,909 $ 649,000 $ 581,500 $ 475,900
Interest cost.................. 5,646,635 5,029,628 4,225,087 1,126,100 1,140,700 1,264,200
Expected return on plan
assets....................... (5,220,276) (4,580,790) (3,817,799) -- -- --
Amortization of actuarial loss
(gain)....................... 389,961 236,924 67,886 (109,500) (114,900) (23,400)
Amortization of prior service
cost......................... 549,609 549,609 462,788 -- -- --
Amortization of transition
obligation (asset)........... (134,373) (134,373) (134,373) 805,100 805,100 805,100
----------- ----------- ----------- ---------- ---------- ----------
Net periodic benefit
cost.................. $ 7,532,276 $ 6,254,125 $ 4,535,498 $2,470,700 $2,412,400 $2,521,800
=========== =========== =========== ========== ========== ==========
</TABLE>
The projected benefit obligation, accumulated benefit obligation and fair
value of plan assets for the supplemental executive retirement plan, which has
an accumulated benefit obligation in excess of plan assets, were $5,524,172,
$4,013,284 and $-0-, respectively as of December 31, 1999, and $5,185,428,
$3,055,356 and $-0-, respectively, as of December 31, 1998.
The postretirement benefit plan valuation is based on census information as
of January 1, 1999 and claims development based on the benefits provided. The
discount rate assumed is 7.75% and the salary increase rate assumed varies by
age. The health care cost trend rate is assumed to be 7.5% in 1999,
F-28
<PAGE> 176
CERULEAN COMPANIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
decreasing gradually to 5.25% in 2003 and after. The health care cost trend rate
was assumed to be 8.0% in 1998, decreasing 0.5% each year to an ultimate rate of
5.25%. The health care cost trend rate assumption has a significant effect on
the amounts reported. For example, increasing the assumed health care cost trend
rates by one percentage point each year would increase the accumulated
postretirement benefit obligation by $690,900 as of December 31, 1999, and the
aggregate of the estimated service and interest cost components of net periodic
postretirement benefit cost by $53,500 for 1999. Similarly, decreasing the
assumed health care cost trend rates by one percentage point each year would
decrease the accumulated postretirement benefit obligation by $598,000 as of
December 31, 1999, and the aggregate of the estimated service and interest cost
components of net periodic postretirement benefit cost by $46,300 for 1999.
Defined Contribution Plan
The Company offers a defined contribution plan ("401(k) plan") covering
substantially all employees. Under this plan, employees can contribute up to 15%
of their base compensation, subject to certain maximum limitations. The Company
matches 50% of the employee's first $500 contributed and 25% thereafter, up to a
maximum of 6% of the employee's annual compensation. The Company's matching
contributions vest 25% per year commencing at the end of the second year of
participation. Employee contributions vest immediately. The Company contributed
$1,201,000 to this 401(k) plan during 1999, $1,125,000 during 1998 and
$1,031,000 during 1997.
13. 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. As a percentage of
total revenues (premium revenues and management services revenues), the
Company's largest customer represented 22% of total revenues in 1999, 23% of
total revenues in 1998 and 27% in 1997. The Company's next two largest customers
accounted for less than 9% of total revenues in 1999, 1998 and 1997.
The Company's total revenues (premium revenues and management services
revenues), by primary product groups are as follows:
<TABLE>
<CAPTION>
1999 1998 1997
-------------- -------------- --------------
<S> <C> <C> <C>
Indemnity and PPO insurance products and
services.............................. $ 933,807,941 $ 771,080,787 $ 727,786,073
HMO and POS insurance products and
services.............................. 677,047,014 520,317,074 343,613,408
Life insurance and other products and
services.............................. 17,625,014 16,230,082 14,860,028
-------------- -------------- --------------
Total......................... $1,628,479,969 $1,307,627,943 $1,086,259,509
============== ============== ==============
</TABLE>
14. NON-OPERATING INCOME
Community health partnership networks ("CHPNs") are locally based equity
joint ventures between the Company, which owns a 51% interest, and local
physician and/or hospital groups, which own the remaining equity interests in
the CHPNs. Clinical services are provided by the physician or hospital partners
as well as other providers with which the CHPNs maintain contracts, and BCBSGA
provides sales, management and administrative services, including information
systems and data management services through service contracts with the CHPNs.
F-29
<PAGE> 177
CERULEAN COMPANIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
In January 1998, a hospital purchased stock warrants exercisable for common
stock in one of the Company's CHPN subsidiaries in exchange for $1.0 million,
paid ratably over two years. The stock warrants expired on December 16, 1999. In
accordance with the CHPN formation agreement, the Company's 51% equity interest
was not diluted as a result of this transaction. The Company recorded non-
operating income of $255,000 in 1999 and in 1998 for its portion of this
transaction.
In 1997, a hospital purchased a 5% interest in one of the Company's CHPN
subsidiaries. In accordance with the CHPN formation agreement, the Company's 51%
equity interest was not diluted as a result of this transaction. The Company
recorded non-operating income of $1,275,000 in 1997 for its portion of this
transaction.
15. COMMITMENTS AND CONTINGENCIES
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 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 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 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
F-30
<PAGE> 178
CERULEAN COMPANIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 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.
Legal Proceedings
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 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 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 Commissioner filed an application
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 are completing their briefing of
the cases. Oral argument before the Court of Appeals is scheduled for March 23,
2000. 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.
16. STATUTORY FINANCIAL INFORMATION AND ACCOUNTING PRACTICES
BCBSGA, Greater Georgia Life Insurance Company, a life insurance
subsidiary, and HMO Georgia, Inc., a health maintenance organization are
domiciled in the State of Georgia and prepare their statutory financial
statements in accordance with accounting principles and practices prescribed or
permitted by the
F-31
<PAGE> 179
CERULEAN COMPANIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Georgia Insurance Department. Currently, prescribed statutory accounting
practices are interspersed throughout state insurance laws and regulations, the
National Association of Insurance Commissioners' ("NAIC") "Accounting Practices
and Procedures Manual" and a variety of other NAIC publications. Permitted
statutory accounting practices encompass all accounting practices that are not
prescribed; such practices may differ from state to state, may differ from
company to company within a state and may change in the future.
In 1998, the NAIC adopted codified statutory accounting principles
("Codification") effective January 1, 2001. Codification will likely change, to
some extent, prescribed statutory accounting practices and may result in changes
to the accounting practices that the Company's subsidiaries use to prepare their
statutory financial statements. Codification will require adoption by the
various states before it becomes the prescribed statutory basis of accounting
for insurance companies domesticated within those states. Accordingly, before
Codification becomes effective for the Company's subsidiaries, the State of
Georgia must adopt Codification as the prescribed statutory basis of accounting
on which domestic insurers must report their statutory-basis results to the
Insurance Department. At this time it is anticipated that Georgia will adopt
codification. However, based on current guidance, management believes that the
impact of Codification will not be material to the statutory-basis financial
statements of the Company's subsidiaries. The Company's insurance subsidiaries
do not have permitted practices which would require authorization by the Georgia
Insurance Department.
The minimum amount of statutory capital and surplus necessary to satisfy
regulatory requirements of the Georgia Insurance Department is $1,000,000 for
BCBSGA and $3,000,000 each for HMO Georgia, Inc. and Greater Georgia Life
Insurance Company. The Company's insurance subsidiaries may distribute dividends
only out of realized profits (undistributed, accumulated, net earnings since
organization). The amount of dividends distributable each year is limited to the
greater of the prior year's net income determined on a statutory basis or 10% of
prior year statutory surplus. In addition, dividends distributable by BCBSGA are
further limited by the Conversion order (approved by the Georgia Commissioner of
Insurance on December 27, 1995 related to BCBSGA's conversion to a for-profit
corporation). Dividend distributions by BCBSGA, HMO Georgia, Inc. and Greater
Georgia Life Insurance Company above these defined limits require special
approval by the State of Georgia Insurance Commissioner.
The following table presents the amount of statutory capital and surplus
for the Company's insurance subsidiaries:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------
1999 1998
------------ ------------
<S> <C> <C>
Blue Cross and Blue Shield of Georgia, Inc.............. $161,510,819 $155,721,970
HMO Georgia, Inc........................................ 45,481,883 26,017,636
Greater Georgia Life Insurance Company.................. 24,481,354 24,971,304
</TABLE>
The following table presents the amount of statutory net income for the
Company's insurance subsidiaries:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------------
1999 1998 1997
----------- ----------- ----------
<S> <C> <C> <C>
Blue Cross and Blue Shield of Georgia, Inc....... $33,158,697 $15,131,962 $1,936,150
HMO Georgia, Inc................................. 14,419,178 11,399,608 8,250,726
Greater Georgia Life Insurance Company........... 2,117,567 2,569,111 3,173,718
</TABLE>
F-32
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APPENDIX
A
AGREEMENT AND PLAN OF MERGER
AMONG
CERULEAN COMPANIES, INC.,
WELLPOINT HEALTH NETWORKS INC.
AND
WATER POLO ACQUISITION CORP.
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AGREEMENT AND PLAN OF MERGER
THIS AGREEMENT AND PLAN OF MERGER (this "Agreement"), dated as of July 9,
1998, by and among Cerulean Companies, Inc., a Georgia corporation ("Cerulean"),
WellPoint Health Networks Inc., a Delaware corporation ("WellPoint"), and Water
Polo Acquisition Corp., a Delaware corporation ("WPAC").
W I T N E S S E T H:
WHEREAS, WellPoint directly owns all of the issued and outstanding stock of
WPAC;
WHEREAS, the Boards of Directors of each of Cerulean, WellPoint, and WPAC
(i) have approved the merger of Cerulean with and into WPAC upon the terms and
conditions set forth herein and (ii) deem such merger to be in the best
interests of their respective shareholders;
WHEREAS, Cerulean, WellPoint, and WPAC desire to make certain
representations, warranties and agreements in connection with such merger; and
WHEREAS, it is the express intention of Cerulean, WellPoint, and WPAC that
the merger constitute a reorganization for federal income tax purposes under
Section 368 of the Internal Revenue Code of 1986, as amended, and the
regulations thereunder (the "Code").
NOW, THEREFORE, in consideration of the mutual representations, warranties,
covenants and agreements contained herein, and upon and subject to the terms and
the conditions hereinafter set forth, the parties do hereby agree as follows:
18.
ARTICLE I.
THE MERGER
1.01 The Merger. Subject to the terms and conditions of this Agreement, at
the Effective Time (as defined in Section 1.02), Cerulean shall be merged with
and into WPAC in accordance with this Agreement and the separate corporate
existence of Cerulean shall thereupon cease (the "Merger"). WPAC shall be the
surviving corporation in the Merger (sometimes hereinafter referred to as the
"Surviving Corporation"). The Merger shall have the effects specified in Section
259 of the Delaware General Corporation Law (the "DGCL") and Section 14-2-1106
of the Georgia Business Corporation Code (the "GBCC").
1.02 Effective Time. If all the conditions to the Merger set forth in
Article VI shall have been fulfilled or waived in accordance herewith and this
Agreement shall not have been terminated as provided in Article VII, the
consummation of the Merger (the "Closing") shall take place at the offices of
Long Aldridge & Norman LLP, One Peachtree Center, 303 Peachtree Street, Suite
5300, Atlanta, Georgia 30308 on the date which is 30 days after the last to
occur of the conditions to Closing which are to occur prior to, but not on, the
Closing Date, or on such other date as the parties shall agree (the "Closing
Date"). The parties hereto shall cause Certificates of Merger substantially in
the forms of Exhibits 1.02(a) and (b) hereto (the "Certificates of Merger") to
be properly executed and filed with the Secretaries of State of Delaware and
Georgia, on the Closing Date. The Merger shall become effective at the time of
filing of the Certificate of Merger or at such later time which the parties
hereto shall have agreed upon and designated in such filing as the effective
time of the Merger (the "Effective Time").
1.03 Certificate of Incorporation. The Certificate of Incorporation of
WPAC in effect immediately prior to the Effective Time shall be the Certificate
of Incorporation of the Surviving Corporation, until duly amended in accordance
with applicable law.
1.04 Bylaws. The Bylaws of WPAC in effect immediately prior to the
Effective Time shall be the Bylaws of the Surviving Corporation, until duly
amended in accordance with applicable law.
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1.05 Directors, Officers and Name of WPAC. The directors and officers of
WPAC immediately prior to the Effective Time shall be the directors and officers
of the surviving corporation in the Merger, and the name of WPAC at the
Effective Time shall be Cerulean Companies, Inc.
1.06 Proxy Statement; Form S-4; Listing on NYSE. As soon as practicable,
Cerulean shall file with the Securities and Exchange Commission ("SEC") under
the Securities Exchange Act of 1934, as amended (the "Exchange Act"), and shall
use its best efforts to have cleared by the SEC, a proxy statement with respect
to the meeting of Cerulean's shareholders referred to in Section 5.05 (the
"Proxy Statement"). In connection therewith, as soon as practicable after the
date hereof, WellPoint shall file with the SEC, and shall use its best efforts
to have cleared by the SEC, a Registration Statement on Form S-4 (the "Form
S-4") to register under the Securities Act of 1933, as amended (the "Securities
Act"), the shares of $.01 par value WellPoint common stock ("WellPoint Common
Stock") to be issued in the Merger, which Form S-4 shall incorporate the Proxy
Statement. Each of the parties hereto shall use its best efforts promptly to
provide in writing all information related to such party which is required for
inclusion in the Proxy Statement and Form S-4 in order to have the Form S-4
declared effective by the SEC as promptly as practicable. WellPoint shall use
its best efforts to comply, prior to the Effective Time, with all applicable
requirements of "Blue Sky" and federal and state securities laws in connection
with the Merger and the issuance of WellPoint Common Stock in connection
therewith. In addition, WellPoint shall promptly file all appropriate
applications with the New York Stock Exchange to have the WellPoint Common Stock
to be issued in the Merger approved for listing on the New York Stock Exchange
upon notice of issuance.
ARTICLE II.
THE CONVERSION
2.01 Conversion of Shares. (a) At the Effective Time, each issued and
outstanding share of Cerulean Class A Convertible Common Stock ("Cerulean Class
A Stock"), Class B Convertible Preferred Stock ("Cerulean Class B Stock") and
Series A Preferred Stock ("Cerulean Series A Stock"), and each outstanding Class
A Common Stock Participation Right into which the shares of Cerulean Series A
Stock have been converted ("Cerulean Rights"), other than shares of Cerulean
Class A Stock, Cerulean Class B Stock, or Cerulean Series A Stock or units of
Cerulean Rights as to which a demand for fair value has been validly made and
perfected under the GBCC ("Cerulean Dissenting Shares"), (collectively, the
"Outstanding Cerulean Shares") shall, by virtue of the Merger and without any
action on the part of the holder thereof (but subject to the provisions for
fractional shares set forth below and other applicable provisions of this
Agreement), be converted into the right to receive (i) in the case of Cerulean
Class A Stock, Cerulean Series A Stock and Cerulean Rights (collectively, "Cash
Eligible Shares"), either a number of shares of WellPoint Common Stock equal to
the Class A Exchange Ratio (as hereinafter defined), or cash in an amount equal
to the Cash Election Price (as hereinafter defined), and (ii) in the case of
Cerulean Class B Stock, a number of shares of WellPoint Common Stock equal to
the Class B Exchange Ratio (as hereinafter defined); provided, however, that no
more than X shares of Cerulean Class A Stock issued and outstanding as of the
date of this Agreement (the "Historical Stock") shall be converted into the
right to receive the Cash Election Price, with X being calculated by solving the
following equation:
X = (AGGREGATE MERGER PRICE LESS THE SUM OF THE AGGREGATE VALUE OF ALL
CONSIDERATION TO BE PAID BY WELLPOINT IN EXCHANGE FOR SHARES OF CERULEAN
CLASS A STOCK ISSUED AFTER THE DATE OF THIS AGREEMENT, SHARES OF CERULEAN
SERIES A STOCK, OR UNITS OF CERULEAN RIGHTS (THE "NEW STOCK") IN CONNECTION
WITH THE MERGER) X 45% ) / THE CASH ELECTION PRICE (ALL AS HEREINAFTER
DEFINED)
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and provided further, that no more than Y shares or units of New Stock shall be
converted into the right to receive the Cash Election Price, with Y being
calculated by solving the following equation:
Y = ((THE SUM OF THE AGGREGATE VALUE OF ALL CONSIDERATION TO BE PAID BY
WELLPOINT FOR THE NEW STOCK IN CONNECTION WITH THE MERGER) X 45% ) / THE
CASH ELECTION PRICE (ALL AS HEREINAFTER DEFINED).
and provided further, however, that if holders elect to convert less than X
shares of Historical Stock into the Cash Election Price, then instead of
calculating Y as provided above, Y shall be calculated as follows:
Y = ((AGGREGATE MERGER PRICE X 45%) -- CASH TO BE PAID BY WELLPOINT IN
EXCHANGE FOR HISTORICAL STOCK IN CONNECTION WITH THE MERGER) / CASH
ELECTION PRICE
Holders shall only be entitled to receive cash for their Historical Stock
in accordance with the provisions above if the holder has elected to receive
cash for all of such holder's Historical Stock. Holders of New Stock shall be
entitled to elect to receive cash for all or a portion of such New Stock
expressed in whole shares of Cerulean Class A Stock or Cerulean Series A Stock,
or units of Cerulean Rights. Holders of Cash Eligible Shares who desire to
effect elections for cash consideration shall effect such election
(individually, an "Electing Holder" and collectively, the "Electing Holders")
through an election mechanism to be provided to holders of Cerulean Class A
Stock in connection with the solicitation of proxies to approve the transaction,
or in the case of holders of Cerulean Series A Stock or Cerulean Rights, through
an election mechanism to be provided to such holder in the form of a notice from
Cerulean. In the event that a holder of Cash Eligible Shares does not elect to
receive cash as provided above, the Cash Eligible Shares of such holder shall be
converted into WellPoint Common Stock pursuant to the applicable exchange ratio
as provided under this Agreement.
In the event that holders of Historical Stock, in the aggregate, elect to
convert more than X shares of Historical Stock, in the aggregate, into the Cash
Election Price, each such holder shall be deemed to have elected to convert only
that number of shares of Historical Stock equal to the number of shares of
Historical Stock actually elected by such holder to be converted into the Cash
Election Price multiplied by a fraction, the numerator of which shall be X and
the denominator of which shall be the total number of shares of Historical
Stock, in the aggregate, which all holders elected to be converted into the Cash
Election Price. Each remaining share of such electing holder's Historical Stock
(i.e. the shares of Historical Stock not subject to the deemed election above)
shall be converted into that number of shares of WellPoint Common Stock equal to
the Class A Exchange Ratio. In the event that holders of New Stock elect to
convert more than Y shares or units of New Stock, in the aggregate, into the
Cash Election Price, each such holder shall be deemed to have elected to convert
only that number of shares or units of New Stock equal to the number of shares
or units of New Stock actually elected by such holder to be converted into the
Cash Election Price multiplied by a fraction, the numerator of which shall be Y
and the denominator of which shall be the total number of shares or units of New
Stock, in the aggregate, which all holders have elected to be converted into the
Cash Election Price. Each remaining share or unit of such electing holder's New
Stock (i.e. the shares or units of New Stock not subject to the deemed election
above) shall be converted into that number of shares of WellPoint Common Stock
equal to the Class A Exchange Ratio.
At the Effective Time, the stock transfer books of Cerulean shall be
closed, and no transfers of shares of Cerulean Class A Stock, Cerulean Class B
Stock, or Cerulean Series A Stock or units of Cerulean Rights shall thereafter
be made.
(b) Determination of Exchange Ratios. (i) Class A Exchange Ratio. The
Class A Exchange Ratio shall equal the solution (carried to two decimal places)
to the following equation: Aggregate Merger Price (as hereinafter defined)
divided by the Closing Price (as hereinafter defined), multiplied by the Class A
Percentage (as hereinafter defined), and further multiplied by a fraction, the
numerator of which is the number 1 and the denominator of which is the total
number of shares of Cerulean Class A Stock and shares of Cerulean Series A
Stock, and units of Cerulean Rights outstanding as of the Effective Time.
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As used herein, the term "Aggregate Merger Price" shall mean Five Hundred
Million and No/100 Dollars ($500,000,000), subject to certain adjustments as
expressly provided or referred to herein.
As used herein, the term "Closing Price" shall mean the average closing
price per share for WellPoint Common Stock for the 20 business days immediately
prior to the day that is two business days prior to the Closing on which
WellPoint Common Stock is traded on the New York Stock Exchange, as reported by
the Wall Street Journal (Southeastern Edition), or if not reported therein, by
another authoritative source.
As used herein, the term "Class A Percentage" shall mean the number 1 minus
the "Class B Percentage."
(ii) Class B Exchange Ratio. The Class B Exchange Ratio shall equal the
solution (carried to two decimal places) to the following equation: Aggregate
Merger Price divided by the Closing Price, multiplied by the Class B Percentage
(as hereinafter defined), and further multiplied by a fraction, the numerator of
which is the number 1 and the denominator of which is the total number of shares
of Cerulean Class B Stock outstanding as of the Effective Time.
As used herein, the term "Class B Percentage" shall mean .221876389486.
(iii) Cash Election Price. The Cash Election Price shall equal the
solution (carried to two decimal places) to the following equation: Aggregate
Merger Price multiplied by the Class A Percentage, and further multiplied by a
fraction, the numerator of which is the number 1 and the denominator of which is
the total number of shares of Cerulean Class A Stock, shares of Cerulean Series
A Stock, and units of Cerulean Rights outstanding as of the Effective Time.
(c) Notwithstanding any other provision of this Agreement, in the event
that Cerulean and its legal counsel, in consultation with counsel to WellPoint,
determine that the cash which would otherwise be paid to holders of Outstanding
Cerulean Shares hereunder, when combined with other cash payable or potentially
payable in connection with a proceeding described in Section 2.04 or otherwise
in connection with the Merger or the transactions contemplated hereunder, would
jeopardize the Merger qualifying as reorganization under Section 368(a) of the
Code, WellPoint, at the direction of Cerulean, shall reserve payment of a
portion of the cash consideration otherwise payable to such holders on a
pro-rata basis (the "Cash Holdback") until such time as Cerulean reasonably
determines that the payment of the Cash Holdback would not jeopardize the Merger
qualifying as a reorganization under Section 368(a) of the Code. In the event
Cerulean determines that payment of all or a portion of the Cash Holdback cannot
be made without unduly jeopardizing the qualification of the Merger as a
reorganization under Section 368(a) of the Code, then in lieu of payment of all
or a portion of the Cash Holdback, such holders shall be paid in shares of
WellPoint Common Stock pursuant to the exchange ratios provided under this
Agreement.
2.02 Surrender of Certificates. After the Effective Time, each holder of a
certificate or certificates previously representing Outstanding Cerulean Shares
("Cerulean Certificates"), or in the case of Outstanding Cerulean Shares which
are not represented by Cerulean Certificates, each holder of Outstanding
Cerulean Shares as shown on the books and records of Cerulean, shall (except as
otherwise provided in this Agreement) receive a certificate or certificates
representing the number of whole shares of WellPoint Common Stock into which the
shares represented by the holder's Cerulean Certificate(s) (or as shown on the
books and records of Cerulean) shall have been converted and, if appropriate, a
cash payment as provided for in Section 2.01 and Section 2.03. Notwithstanding
the foregoing, no holder of any Cerulean Certificate(s) shall receive any
certificates representing WellPoint Common Stock or a cash payment until
surrender of the holder's Cerulean Certificate(s) (if any) to the exchange agent
appointed by WellPoint (the "Exchange Agent"). After the Effective Time, each
Cerulean Certificate representing shares converted into the right to receive
WellPoint Common Stock pursuant to Section 2.01 shall represent ownership of the
number of shares of WellPoint Common Stock which the holder of the Cerulean
Certificate shall be entitled to receive. Whenever a dividend or distribution is
declared by WellPoint on WellPoint Common Stock after the Effective Time, the
declaration shall include dividends or distributions on all shares issued and
outstanding, including those with respect to which no certificates have been
delivered hereunder; provided, however, no dividends or distributions shall be
required to be
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made to any holder of Cerulean Certificates until the Cerulean Certificate(s)
representing such shares shall have been delivered to the Exchange Agent by the
person, firm, trust, estate, corporation, or business organization ("Person")
entitled to such dividend or distribution. Upon delivery of such Cerulean
Certificate(s), or as soon as practicable thereafter, such Person shall receive
from WellPoint an amount equal to all dividends and distributions (without
interest thereon and less the amount of taxes, if any, required to be withheld
or paid thereon by WellPoint) on the shares of WellPoint Common Stock formerly
represented by the surrendered Cerulean Certificate(s), which shall have been
declared and paid between the Effective Time and the date of delivery of such
Cerulean Certificate(s).
2.03 No Fractional Shares. All fractional shares of WellPoint Common Stock
to which a holder of Outstanding Cerulean Shares would otherwise be entitled at
the Effective Time shall be aggregated. If a fractional share shall result from
such aggregation, no certificate or scrip of any kind shall be issued by
WellPoint in respect of such fractional interest, but such holder of Outstanding
Cerulean Shares shall be entitled to receive a cash payment equal to such
fraction multiplied by the Closing Price. No implication is intended that the
Closing Price would be the value of shares of WellPoint Common Stock for any
other purpose, or would indicate the value of shares of Cerulean Class A Stock,
Cerulean Series A Stock, or Cerulean Class B Stock, or units of Cerulean Rights
for any purpose, including determination of the amount which any holder of
Cerulean shares or Rights dissenting from the Merger would receive.
Notwithstanding any provision in this Section 2.03 to the contrary, in the event
that Cerulean and its legal counsel, after consultation with counsel for
WellPoint, determine that the payment of cash for such fractional share
interests would jeopardize the treatment of the Merger as a reorganization under
Section 368 of the Code, then Cerulean shall be entitled to require that
WellPoint issue to Electing Holders a whole share of WellPoint Common Stock in
lieu of a cash payment under this Section 2.03, in which case an amount equal to
the difference between the Closing Price and the cash value of the fractional
share interest shall be subtracted from the cash consideration to be paid to
such Electing Holder.
2.04 Dissenting Shares. Cerulean Dissenting Shares held by any holder
entitled to and seeking relief as a dissenting shareholder under Section
14-2-1302 of the GBCC shall not be converted into the right to receive WellPoint
Common Stock or cash as provided in Section 2.01, but shall be converted into
such consideration as may be due with respect to such Cerulean Dissenting Shares
pursuant to the applicable provisions of the GBCC unless and until the right of
such holder to receive payment of fair value for such Cerulean Dissenting Shares
terminates in accordance with Section 14-2-1323 of the GBCC. If such right is
terminated other than by the purchase of such shares by WellPoint, then such
shares shall cease to be Cerulean Dissenting Shares and shall be converted into
and represent the right to receive WellPoint Common Stock as provided in Section
2.01.
2.05 Title to Assets and Responsibility for Liabilities. At the Effective
Time, the title to all real estate and other property owned by Cerulean shall be
vested in WPAC, as the corporation surviving the Merger, without any further act
or deed, and WPAC shall be responsible and liable for all the liabilities of
Cerulean.
ARTICLE III.
REPRESENTATIONS AND WARRANTIES OF CERULEAN
Cerulean hereby represents and warrants as of the date hereof to WPAC as
follows:
3.01 Organization and Authorization. (a) Cerulean and each of the Cerulean
Subsidiaries (as hereinafter defined) is a corporation duly organized, validly
existing and in good standing under the laws of the state of Georgia, and has
all requisite power and authority, corporate or otherwise, to carry on and
conduct its business as it is now being conducted and to own or lease its
properties and assets. Cerulean and each Cerulean Subsidiary is duly qualified
and in good standing in every state of the United States in which the conduct of
its business or the ownership of its properties and assets requires it to be so
qualified, except where the failure to be so qualified and in good standing
would not have a "Cerulean Material
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Adverse Effect," as defined below. As used in this Agreement, "Cerulean Material
Adverse Effect" shall mean a material adverse effect on the business, assets, or
financial condition of Cerulean and the Cerulean Subsidiaries, taken as a whole.
Cerulean has heretofore delivered or made available to WPAC accurate and
complete copies of the Articles of Incorporation and Bylaws, or equivalent
governing instruments, as currently in effect, of Cerulean and each of the
Cerulean Subsidiaries.
(b) Schedule 3.01(b) sets forth every entity in which Cerulean owns, or
will own prior to the Closing, fifty percent (50%) or more of the outstanding
equity, directly or indirectly, (the "Cerulean Subsidiaries"), and the equity
interest that is owned by Cerulean. Except as noted on Schedule 3.01(b),
Cerulean's ownership interest in the Cerulean Subsidiaries (the "Cerulean
Subsidiary Shares") are owned by Cerulean, directly or indirectly, free and
clear of all liens, restrictions, claims, equities, charges, options, rights of
first refusal, encumbrances or other restrictions of any kind, with no defects
of title whatsoever. Cerulean has full power, right and authority to vote all of
the Cerulean Subsidiary Shares. Cerulean is not a party to or bound by any
voting trust, proxy, or other agreement affecting or relating to its right to
transfer or vote the Cerulean Subsidiary Shares.
(c) Cerulean has the corporate right, power and capacity to execute,
deliver and perform this Agreement and to consummate the transactions
contemplated hereby, subject to the approval and adoption of this Agreement by
the shareholders of Cerulean in accordance with the GBCC and the Articles of
Incorporation and Bylaws of Cerulean. The execution, delivery and performance of
this Agreement, and the consummation of the transactions contemplated hereby,
have been duly and validly authorized by Cerulean's Board of Directors. This
Agreement has been duly and validly executed and delivered by Cerulean and
constitutes Cerulean's legal, valid and binding obligation, enforceable in
accordance with its terms, except that such enforcement may be subject to (i)
bankruptcy, insolvency, reorganization, moratorium, or similar laws affecting or
relating to the enforcement of creditors' rights generally and (ii) general
equitable principles.
3.02 Capitalization. The authorized capital stock of Cerulean consists of
50,000,000 shares of Cerulean Class A Stock, 49,901 shares of Cerulean Class B
Stock, 100,000,000 shares of Cerulean Common Stock, and 100,000,000 shares of
Blank Preferred Stock ("Cerulean Blank Preferred Stock"). As of the date hereof,
351,570 shares of Cerulean Class A Stock and 49,900 shares of Cerulean Class B
Stock were issued and outstanding, and no shares of Cerulean Common Stock, and
Cerulean Blank Preferred Stock are issued and outstanding. No other capital
stock of Cerulean is authorized or issued. All of such issued and outstanding
shares of capital stock of Cerulean are validly issued, fully paid and
nonassessable. There are no shares of capital stock held in the treasury of
Cerulean. Except as set forth on Schedule 3.02, there are no outstanding or
authorized stock appreciation rights, phantom stock, profit participation or
similar rights with respect to Cerulean or any Cerulean Subsidiary.
3.03 Absence of Other Claims. Except as set forth on Schedule 3.03, there
is not outstanding, nor is Cerulean or any Cerulean Subsidiary bound by, any
subscriptions, options, preemptive rights, warrants, calls, commitments or
agreements or rights of any character requiring Cerulean or any Cerulean
Subsidiary to issue or entitling any person or entity to acquire any additional
shares of capital stock or any other equity security of Cerulean or any Cerulean
Subsidiary, including any right of conversion or exchange under any outstanding
security or other instrument, and Cerulean or any Cerulean Subsidiary is not
obligated to issue or transfer any shares of its capital stock for any purpose.
Except as set forth on Schedule 3.03, there are no outstanding obligations of
Cerulean or any Cerulean Subsidiary to repurchase, redeem or otherwise acquire
any outstanding shares of capital stock of Cerulean or any Cerulean Subsidiary.
3.04 Financial Statements. The audited consolidated balance sheets of
Cerulean as of December 31, 1997 and 1996 and the related audited consolidated
statements of income, retained earnings and cash flows for the years then ended,
including the footnotes thereto, certified by Ernst & Young LLP, Cerulean's
independent certified public accountants, as set forth in Cerulean's Annual
Reports on Form 10-K, as amended, for the years ended December 31, 1997 and
1996, have been prepared in accordance with generally accepted accounting
principles ("GAAP") applied on a consistent basis during the periods
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involved and present fairly the financial position in all material respects of
Cerulean and its consolidated Cerulean Subsidiaries as of the dates thereof and
the results of their operations for the periods then ended. The unaudited
consolidated balance sheet of Cerulean as of March 31, 1998 and the related
unaudited consolidated statements of income, retained earnings and cash flows
for the three-month period then ended (the "Interim Financial Statements") have
been prepared in accordance with GAAP for interim financial statements applied
on a basis consistent with prior periods and present fairly the financial
position in all material respects of Cerulean and its consolidated Cerulean
Subsidiaries as of the dates thereof and the results of their operations for the
period then ended.
3.05 No Undisclosed Liabilities. Except (i) as set forth in the Cerulean
SEC Filings (as hereinafter defined), (ii) as shown in the Interim Financial
Statements, or (iii) as shown on Schedule 3.05, as of March 31, 1998, neither
Cerulean nor any Cerulean Subsidiary had any liability or obligation whatsoever,
whether accrued, absolute, contingent or otherwise, except for any such
liability or obligation that would not have a Cerulean Material Adverse Effect,
either individually or in the aggregate. Since March 31, 1998, neither Cerulean
nor any Cerulean Subsidiary has incurred any liability or obligation, except for
liabilities and obligations (x) incurred by Cerulean in the ordinary course of
its business consistent with past practice, (y) as reflected on Schedule 3.05,
or (z) that would not, individually or in the aggregate, have a Cerulean
Material Adverse Effect.
3.06 No Violation of Law. Except as set forth on Schedule 3.06 or for any
of the following which would not have a Cerulean Material Adverse Effect,
neither Cerulean nor any Cerulean Subsidiary is nor has been nor will be (by
virtue of any past or present action, omission to act, contract to which it is a
party or any occurrence or state of facts whatsoever) in violation of any
applicable local, state or federal law (including any Health Benefit Law (as
defined hereafter)), ordinance, regulation, order, injunction or decree, or any
other requirement of any governmental body, agency or authority or court binding
on it, or relating to its property or business. For purposes of this Agreement,
the term "Health Benefit Law" shall mean any local, state or federal law,
ordinance, regulation or order relating to the license, certification,
qualification or authority to transact business relating to the provision of or
payment for health benefits and insurance and any such laws relating to the
regulation of health maintenance organizations, workers' compensation, managed
care organizations, insurance, preferred provider organizations,
point-of-service plans, third party administrators, utilization review, hospital
reimbursement, Medicare and Medicaid participation, fraud and abuse and patient
referrals.
3.07 Real and Personal Property. (a) Schedule 3.07(a) sets forth a true,
correct and complete schedule of all real property owned by Cerulean or any of
the Cerulean Subsidiaries (the "Cerulean Real Property"). Cerulean or one of the
Cerulean Subsidiaries is the owner of the title to the real property described
on Schedule 3.07(a) and to all of the buildings, structures, and other
improvements located thereon free and clear of any mortgage, deed of trust,
lien, pledge, security interest, claim, lease, charge, option, right of first
refusal, easement, restrictive covenant, encroachment or other survey defect,
encumbrance or other restriction or limitation except for matters on Schedule
3.07(a) and any exceptions or restrictions which, individually or in the
aggregate, would not have a Cerulean Material Adverse Effect (the "Cerulean
Permitted Liens").
(b) Schedule 3.07(b) sets forth a true, correct and complete schedule of
all material leases, subleases, licenses or other agreements under which
Cerulean or any of the Cerulean Subsidiaries uses or occupies, or has the right
to use or occupy, now or in the future, any real property or improvements
thereon (the "Cerulean Real Property Leases"). Except for matters listed on
Schedule 3.07(b), Cerulean or one of the Cerulean Subsidiaries holds the
leasehold estate under an interest in each Cerulean Real Property Lease free and
clear of all material liens, encumbrances and other rights of occupancy, except
(i) liens for current taxes not yet due and payable, (ii) such imperfections of
title, liens or easements as do not and will not materially detract from or
interfere with the use of the properties subject thereto or affected thereby, or
otherwise materially impair the business operations involving such properties,
or (iii) those material liens, encumbrances and other rights of occupancy which
would not have a Cerulean Material Adverse Affect. Except as set forth on
Schedule 3.07(b), all Cerulean Real Property Leases have been delivered to
WellPoint and are valid and binding on Cerulean or the Cerulean Subsidiary party
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thereto and are valid and binding on the lessors thereunder in accordance with
their respective terms and to Cerulean's knowledge, there is not under any such
Cerulean Real Property Lease any existing default, or any condition, event, or
act which with notice or lapse of time, or both, would constitute such a
default, which in either case, considered individually or in the aggregate with
all such other Cerulean's Real Property Leases under which there is such a
default, condition, event or act, would have a Cerulean Material Adverse Effect.
(c) Cerulean and each Cerulean Subsidiary has good and marketable title to,
or a valid leasehold interest in, all personal property which is material to the
business of Cerulean or such Cerulean Subsidiary, respectively. All such
personal property is suitable for the purpose for which it is presently used,
and is adequate and sufficient for the current operations of Cerulean and the
Cerulean Subsidiaries.
3.08 Indebtedness. Schedule 3.08 sets forth a complete and accurate list
and description of all instruments or other documents relating to any direct or
indirect indebtedness for borrowed money of Cerulean or a Cerulean Subsidiary
(and the amounts owed thereunder as of the date of this Agreement), as well as
other material indebtedness by way of lease-purchase arrangements, guarantees,
undertakings on which others rely in extending credit, and all conditional sales
contracts, chattel mortgages and other security arrangements with respect to
personal property used or owned by Cerulean or a Cerulean Subsidiary. Cerulean
has made available to WPAC a true, correct and complete copy of each of the
items listed on Schedule 3.08.
3.09 Proxy Statement; Form S-4. None of the information relating to
Cerulean and the Cerulean Subsidiaries included in the Proxy Statement or
furnished by Cerulean in writing for inclusion in the Form S-4 contains or will
contain (in the case of the Proxy Statement or any amendments thereof or
supplements thereto, at the time of the mailing of the Proxy Statement and any
amendments or supplements thereto, and at the time of the meeting of
shareholders of Cerulean to be held in connection with the transactions
contemplated by this Agreement or, in the case of the Form S-4, as amended or
supplemented, at the time it becomes effective) any untrue statement of material
fact or omits or will omit to state any material fact required to be stated
therein or necessary in order to make the statements therein, in light of the
circumstances under which they were made, not misleading. Except for information
supplied or to be supplied by WellPoint or WellPoint Subsidiaries in writing for
inclusion therein, as to which no representation is made, the Proxy Statement,
and any supplements or amendments thereto, will comply in all material respects
with the Exchange Act and the rules and regulations thereunder.
3.10 SEC Filings. Cerulean has made available to WPAC true and complete
copies of (i) its Annual Reports on Form 10-K, as amended, for the years ended
December 31, 1996 and December 31, 1997, as filed with the SEC, (ii) its proxy
statements relating to all of Cerulean's meetings of shareholders (whether
annual or special) since January 1, 1997, as filed with the SEC, and (iii) all
other reports, statements and registration statements (including Quarterly
Reports on Form 10-Q and Current Reports on Form 8-K, as amended) filed by
Cerulean with the SEC since January 1, 1997 (the reports and statements set
forth in clauses (i), (ii) and (iii) are referred to collectively as the
"Cerulean SEC Filings"). As of their filing date, none of the Cerulean SEC
Filings contained any untrue statement of a material fact or omitted to state a
material fact required to be stated therein or necessary to make the statements
therein, in light of the circumstances under which they were made, not
misleading. The Cerulean SEC Filings at the time of filing complied in all
material respects with the Exchange Act or the Securities Act, as the case may
be, and the rules and regulations thereunder.
3.11 Intellectual Property. Schedule 3.11 sets forth a complete and
accurate list of all of Cerulean's and Cerulean's Subsidiaries registered
trademarks, service marks, and patents, and trademark service mark copyrights
and patent registration applications, and all permits, grants and licenses or
other rights running to or from Cerulean and any Cerulean Subsidiaries relating
to any of the foregoing that are material to the business of Cerulean and
Cerulean Subsidiaries taken as a whole. Except where the following would not
have a Cerulean Material Adverse Effect, (i) Cerulean or one of the Cerulean
Subsidiaries owns, is licensed to use, or otherwise has the right to use all
registered patents, trademarks, service marks, tradenames, copyrights and
franchises set forth on Schedule 3.11; (ii) Cerulean's rights in the property
set
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forth on such list are free and clear of any liens or other encumbrances and
Cerulean and the Cerulean Subsidiaries have not received written notice of any
adversely-held patent, invention, trademark, service mark or tradename of any
other person, or notice of any charge or claim of any person, relating to such
intellectual property, and to Cerulean's knowledge there is no basis for any
such charge or claim; and (iii) Cerulean, the Cerulean Subsidiaries, and their
respective predecessors, if any, have not conducted business at any time during
the period beginning five years prior to the date hereof under any corporate,
trade or fictitious names other than their current corporate names.
3.12 Employee Benefits. Except as described on Schedule 3.12, no employee
of Cerulean or any Cerulean Subsidiary (collectively, the "Cerulean Employees")
participates in or is entitled to benefits under any employee benefit plan, as
defined in Section 3(3) of Employee Retirement Income Security Act of 1974, as
amended ("ERISA") nor any other type of retirement, deferred compensation,
insurance, bonus, medical, stock option or other plan or arrangement (the
"Cerulean Employee Benefit Plans"). Cerulean has provided a true and accurate
copy of each Cerulean Employee Benefit Plan to WellPoint. None of the Cerulean
Employees participate in, and neither Cerulean nor any Cerulean Subsidiary has
any obligation to contribute to, a multiemployer plan (as defined in Section
3(37) of ERISA) which is subject to Title IV of ERISA. To the knowledge of
Cerulean, except as otherwise described on Schedule 3.12, the Cerulean Employee
Benefit Plans, both in form and operation, are in material compliance with any
applicable local, state or federal law, ordinance, regulation, order, injunction
or decree or any other requirement of any governmental body, agency or authority
or court binding on them (including ERISA and the Internal Revenue Code of 1986,
as amended). To the knowledge of Cerulean, no officer, director or employee of
Cerulean or any Cerulean Subsidiary has committed a material breach of any
responsibility or obligation imposed upon fiduciaries by Title I of ERISA with
respect to any Cerulean Employee Benefit Plan. Except as described on Schedule
3.12, neither Cerulean nor any Cerulean Subsidiary has received written notice
that any of their respective assets are currently subject to a lien or other
process under Title IV of ERISA, and neither has received written notice of any
threatened or pending action related to the Cerulean Employee Benefit Plans by
an employee or former employee, a plan participant, the Department of Labor,
Internal Revenue Service or Pension Benefit Guaranty Corporation or any other
party. Cerulean has made full and timely payment of all amounts required to be
contributed under the terms of each Cerulean Employee Benefit Plan and
applicable law or required to be paid as expenses or benefits under each
Cerulean Employee Benefit Plan which is intended to be qualified under Code
Section 401(a). Any group health plan maintained by Cerulean or any Cerulean
Subsidiary covering any employee or former employee has, to Cerulean's
knowledge, been administered in all material respects in compliance with the
health care continuation coverage provisions of the Consolidated Omnibus Budget
Reconciliation Act of 1985 and the Health Insurance Portability and
Accountability Act of 1996. To the best of Cerulean's knowledge, neither
Cerulean nor any Cerulean Subsidiary is obligated to provide health care or
welfare benefits of any kind to its current or former employees or dependents or
to any other person actively employed by Cerulean or any Cerulean Subsidiary,
pursuant to any agreement or understanding, except as set forth in Schedule
3.12. Except for the triggering of payments, liabilities, funding events, or
other obligations under the plans denoted with an asterisk on Schedule 3.12, the
execution and delivery of this Agreement by Cerulean, the consummation of the
transactions contemplated herein, and the performance of the covenants and
agreements of Cerulean hereto will not result in a breach or violation of, a
default under, or the triggering of any payment, liability, funding event or
other obligation pursuant to any Cerulean Employee Benefit Plan or any grant,
award or other agreement thereunder.
3.13 Litigation. Schedule 3.13(a) (i) sets forth all litigation, claims,
suits, actions, known investigations, indictments, informations, proceedings,
arbitrations, grievances or other procedures (including known grand jury
investigations, actions or proceedings, and product liability and workers'
compensation suits, actions or proceedings) (collectively, "Cerulean Claims")
pending, or to the knowledge of Cerulean, threatened, before any court,
commission, arbitration tribunal, or judicial, governmental or administrative
department, body, agency, administrator or official, grand jury, or any other
forum for the resolution of grievances, against Cerulean or any Cerulean
Subsidiary or involving any of its property or business, the outcome of which,
individually or in the aggregate, could reasonably be expected
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to have a Cerulean Material Adverse Effect, and (ii) indicates which of such
matters are being defended by an insurance carrier, and which of the matters
being so defended are being defended under a reservation of rights. Further,
except as set forth on Schedule 3.13(b), there are no material judgments,
orders, writs, injunctions, decrees, plea agreements, stipulations or awards
(whether rendered by a court, commission, arbitration tribunal, or judicial,
governmental or administrative department, body, agency, administrator or
official, grand jury or any other forum for the resolution of grievances)
against or relating to Cerulean or involving any of its property or business.
Neither Cerulean nor any Cerulean Subsidiary is in default with respect to any
judgment, order, writ, injunction, decree, plea agreement, stipulation or award
listed in Schedule 3.13(b). Cerulean has made available to WellPoint true,
correct and complete copies of pleadings, briefs and other documents filed in
each Cerulean Claim listed on Schedule 3.13(a), and the material judgments,
orders, writs, injunctions, decrees, plea agreements, stipulations and awards
listed in said Schedule.
3.14 Collective Bargaining. Except as set forth on Schedule 3.14, there
are no labor contracts, collective bargaining agreements, letters of
understanding or other arrangements, formal or informal, with any union or labor
organization covering any of Cerulean's or Cerulean's Subsidiaries' employees
and none of said employees are represented by any union or labor organization.
Cerulean has made available to WPAC a true, correct and complete copy of each
agreement listed on Schedule 3.14.
3.15 Labor Disputes. Except for any of the following which would not have
a Cerulean Material Adverse Effect, neither Cerulean nor any Cerulean Subsidiary
is nor has been nor will be (by virtue of any past or present action, omission
to act, contract to which it is a party or any occurrence or state of facts
whatsoever) in violation of any federal and state laws respecting employment and
employment practices, terms and conditions of employment, wages and hours.
Neither Cerulean nor any Cerulean Subsidiary is nor has been engaged in any
unfair labor practice, and no unfair labor practice complaint against Cerulean
or a Cerulean Subsidiary is pending before the National Labor Relations Board,
the result of which would have a Cerulean Material Adverse Effect. There is no
labor strike or other labor action actually pending against Cerulean or a
Cerulean Subsidiary, or to the knowledge of Cerulean being threatened against or
affecting Cerulean or a Cerulean Subsidiary. To Cerulean's knowledge, there have
not been, nor are there presently, any attempts to organize non-union employees,
nor are there plans for any such attempts.
3.16 Environmental Requirements. (a) Definitions. For purposes of this
Agreement, the following definitions apply:
(i) The term "Environmental Claims" means any and all administrative,
regulatory or judicial actions or proceedings relating to the Release (as
defined in (iv) below) or alleged Release into the environment of any
Hazardous Material (as defined in (iii) below) on or at the Cerulean Real
Property ("Claims"), including, without limitation, Claims by any
governmental or regulatory authority or by any third party or other person
for enforcement, mitigation, cleanup, removal, response, remediation or
other actions for damages, fines, penalties, contribution, indemnification,
cost recovery, compensation or injunctive or declaratory relief pursuant to
any Environmental Law (as defined in (ii) below).
(ii) The term "Environmental Laws" means all federal and state laws,
rules and regulations relating to the regulation or protection of human
health, safety, natural resources or the environment and applicable to the
business of Cerulean, including but not limited to the Resource
Conservation and Recovery Act, 42 U.S.C. sec.6901, et seq., as amended; the
Comprehensive Environmental Response, Compensation & Liability Act of 1980,
42 U.S.C. sec.9601, et seq., as amended; the Clean Water Act, 33 U.S.C.
sec.1251, et seq., as amended; the Clean Air Act, 42 U.S.C. sec.7401, et
seq., as amended; the Toxic Substances Control Act, 15 U.S.C. sec.2601, et
seq., as amended; and the Federal Insecticide, Fungicide and Rodenticide
Act, 7 U.S.C. sec.136, et seq., as amended.
(iii) The term "Hazardous Materials" means any substance or material
that is included within the definition of a "hazardous substance,"
"hazardous waste," "hazardous constituent," "hazardous material,"
"hazardous chemical" or "extremely hazardous substance" contained in the
Environmental Laws.
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(iv) The term "Release" means spilling, leaking, pumping, pouring,
emitting, emptying, discharging, injecting, escaping, leaching, dumping or
disposing into the environment (including the abandonment or discarding of
barrels, containers, and other closed receptacles containing any Hazardous
Materials).
(b) Cerulean's Premises. Except as disclosed in Schedule 3.16, during
Cerulean's ownership and operation of its business, there have been no Releases
of Hazardous Materials on the Cerulean Real Property that would have a Cerulean
Material Adverse Effect, nor are there any pending Environmental Claims against
or relating to the business of Cerulean or any Cerulean Subsidiary that would
have a Cerulean Material Adverse Effect.
(c) Permits. Except as disclosed in Schedule 3.16, each of Cerulean and
the Cerulean Subsidiaries has obtained and is in material compliance with all
approvals, certificates, consents, licenses, orders and other similar
authorizations of all governmental authorities that relate to the conduct of
their respective businesses and are required under any Environmental Law.
(d) Compliance. Except as disclosed in Schedule 3.16, to Cerulean's
knowledge, each of Cerulean and any Cerulean Subsidiary is in material
compliance with all other material limitations, restrictions, conditions,
standards, requirements, schedules and timetables required or imposed under all
Environmental Laws.
(e) Known Conditions. Except as set forth on Schedule 3.16, to the
knowledge of Cerulean, there are no past or present events, conditions,
circumstances, activities, practices, incidents, actions, omissions or plans
relating to the Cerulean Real Property or the operations of the business of
Cerulean or any Cerulean Subsidiary that will interfere with or prevent
continued material compliance with any material Environmental Law by Cerulean or
any Cerulean Subsidiary, or that will likely give rise to any Environmental
Claims.
3.17 Required Licenses and Permits. Cerulean and each Cerulean Subsidiary
has all licenses, permits or other authorizations of governmental authorities
necessary for the conduct of its business, including those applicable to health
maintenance organizations, preferred provider organizations or insurance
business, except where the failure to have such would not result in a Cerulean
Material Adverse Effect. A correct and complete list of all such licenses,
permits and other authorizations is set forth on Schedule 3.17. Cerulean has
made available to WPAC true, correct and complete copies of all written licenses
and permits listed on Schedule 3.17.
3.18 Insurance Policies. Except to the extent that there would be no
Cerulean Material Adverse Effect, all of Cerulean's and its Subsidiaries'
insurance, surety bonds and umbrella policies insuring Cerulean and its
subsidiaries and their directors, officers, agents, properties and business, are
valid and in full force and effect and without any premium past due, and there
are no claims, singly or in the aggregate, under such policies which are in
excess of the limitations of coverage set forth in such policies. Except as set
forth on Schedule 3.18 or where any of the following would not have a Cerulean
Material Adverse Effect, neither Cerulean nor any Cerulean Subsidiary has
received notice of default under, or intended cancellation or non-renewal of,
any material policies of insurance which insure the properties, business or
liability of Cerulean or any Cerulean Subsidiary.
3.19 Contracts and Commitments. (a) For the purposes of this Agreement,
the term "Contract" shall mean: (i) any contract or other agreement filed as an
exhibit to any Cerulean SEC filing, (ii) any contract or other agreement listed
on Schedule 3.19(a) hereof, (iii) any contract or other agreement limiting in
any material respect the ability of Cerulean or any Cerulean Subsidiary to sell
any products or services, engage in any line of business or compete with any
person or entity, or (iv) any customer contract that involves annual premiums or
premium equivalents in excess of $10,000,000 and contains a fee, rate or
performance guarantee applicable to any period longer than 12 months. All such
Contracts (other than Contracts within the meaning of (iii) above) are valid and
binding and are in full force and effect and enforceable in accordance with
their respective terms. Except as set forth in Schedule 3.19(a), 3.20 or 3.21,
(x) no approval or consent of, or notice to any person is needed in order to
ensure that such
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Contracts shall continue in full force and effect in accordance with their
respective terms without penalty, acceleration or rights of early termination
following the consummation of the transactions contemplated by this Agreement,
and (y) neither Cerulean nor any Cerulean Subsidiary is in violation or breach
of or default under any such Contract, nor to Cerulean's knowledge is any other
party to any such Contract in violation or breach or default under any such
Contract, except in the case of clauses (x) and (y) above, where any of the
foregoing would not result in a Cerulean Material Adverse Effect.
(b) Schedule 3.19(b) sets forth a list of all material contracts between
Cerulean and any of the Cerulean Subsidiaries and any of the following: (i) any
officers, directors or employees of Cerulean or any Cerulean Subsidiary, and
(ii) any person or entity which would be considered an "Affiliate" of Cerulean
or any Cerulean Subsidiary. For the purpose of the foregoing sentence,
"Affiliate" shall mean, with respect to such person or entity, a person or
entity that, directly, or indirectly through one or more intermediaries,
controls, is controlled by, or is under common control with such person or
entity.
3.20 No Conflict. Subject to obtaining the consents and approvals and
making the filings described in Section 3.21 or as otherwise expressly set forth
in this Agreement, the execution and delivery of this Agreement by Cerulean, the
consummation of the transactions contemplated herein by Cerulean, and the
performance of the covenants and agreements of Cerulean will not (i) violate or
conflict with any of the provisions of the Articles of Incorporation or Bylaws
of Cerulean or any Cerulean Subsidiary; (ii) except as set forth on Schedule
3.19(a) or Schedule 3.20 and except as would not have a Cerulean Material
Adverse Effect, violate, conflict with or result in a breach or default under or
cause termination of any term or condition of any mortgage, indenture, contract,
license, permit, instrument or any Cerulean Subsidiary, trust document, will, or
other agreement, document or instrument to which Cerulean is a party or by which
Cerulean or any Cerulean Subsidiary or any of its properties may be bound; (iii)
violate any provision of law, statute, rule, regulation, court order, judgment
or decree, or ruling of any governmental authority, to which Cerulean or any
Cerulean Subsidiary is a party or by which it or any of its properties may be
bound; or (iv) result in the creation or imposition of any lien or encumbrance
of any kind whatsoever upon any asset of Cerulean or any of the Cerulean
Subsidiaries, other than any such lien or encumbrance which would not have a
Cerulean Material Adverse Effect.
3.21 Required Filings, Consents and Approvals. Except as set forth on
Schedule 3.21, no declaration, filing or registration with, or notice to, or
authorization, consent or approval of, any governmental or regulatory body or
authority is required or necessary by virtue of the execution hereof by Cerulean
or the consummation of any of the transactions contemplated herein by Cerulean
to avoid the violation or breach of, or the default under, or the creation of a
lien on assets of Cerulean or a Cerulean Subsidiary pursuant to the terms of,
any law, regulation, order, decree or award of any court or governmental agency
or any lease, agreement, contract, mortgage, note, license, or any other
instrument to which Cerulean or a Cerulean Subsidiary is a party or to which it
or any of its property is subject, except for any such declaration, filing,
registration, notice, authorization, consent or approval, the failure of which
to obtain would not have a Cerulean Material Adverse Effect or could prevent or
materially delay the Merger.
3.22 Absence of Certain Changes and Events. Except as set forth on
Schedule 3.22, since March 31, 1998 through the date hereof, Cerulean and each
Cerulean Subsidiary has conducted its businesses only in the ordinary course in
all material respects, and specifically has not:
(a) experienced any event or occurrence which would result in a Cerulean
Material Adverse Effect or suffered any damage or destruction which would have a
Cerulean Material Adverse Effect;
(b) made any declaration, setting aside or payment of any dividend or other
distribution of assets (whether in cash, stock or property) with respect to the
capital stock of Cerulean, or any direct or indirect redemption, purchase or
other acquisition of such stock;
(c) incurred, assumed or guaranteed any material liability or obligation
(absolute, accrued, contingent or otherwise) other than in the ordinary course
of business consistent with past practice;
(d) permitted any of its assets to be subjected to any mortgage, lien,
security interest, restriction, charge or other encumbrance of any kind except
for Cerulean Permitted Liens;
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(e) waived any claims or rights except any waiver which did not have a
Cerulean Material Adverse Effect;
(f) sold, transferred or otherwise disposed of any of its material assets,
except in the ordinary course of business consistent with past practice;
(g) made any material change in any method, practice or principle of
financial or tax accounting, except such changes required by changes in GAAP or
statutory accounting principles;
(h) made or suffered to exist any material changes in the customary methods
of underwriting, investment or actuarial practices and policies;
(i) suffered any material adverse development in the claims or other loss
experience of Cerulean or any Cerulean Subsidiaries;
(j) granted or announced any increase in the wages, salaries,
compensations, bonuses, incentives, pension or other benefits payable by
Cerulean or any Cerulean Subsidiary to any of their respective employees,
including without limitation, any increase or change pursuant to any Cerulean
Employee Benefit Plan, except for regular salary or bonus or benefit increases
in the ordinary course of business consistent with past practices, or
established or increased or promised to increase any benefits under, any
Cerulean Employee Benefit Plan;
(k) made any material change in the methodology used in the determination
of the liability for reserves of Cerulean or any Cerulean Subsidiary;
(l) made any material changes in the investment policies of Cerulean or any
Cerulean Subsidiary except as required by law; or
(m) agreed in writing, or otherwise, to take any action described in this
Section.
3.23 Tax Matters. (a) Definitions. For purposes of this Agreement, the
following definitions shall apply:
(i) The term "Taxes" shall mean all (A) taxes, fees, assessments or
charges, however denominated, including any interest, penalties or other
additions to tax that may become payable in respect thereof, imposed by any
federal, territorial, state, local or foreign government or any agency or
political subdivision of any such government, which taxes shall include,
without limiting the generality of the foregoing, all income or profits
taxes (including federal income taxes and state income taxes), payroll and
employee withholding taxes, unemployment insurance, social security taxes,
sales and use taxes, ad valorem taxes, excise taxes, franchise taxes, gross
receipts taxes, business license taxes, occupation taxes, real and personal
property taxes, stamp taxes, environmental taxes, transfer taxes, workers'
compensation, Pension Benefit Guaranty Corporation premiums and other
governmental charges, and other obligations of the same or of a similar
nature to any of the foregoing, which are required to be paid, withheld or
collected by the relevant party or (B) any liability for payment of amounts
described in clause (A) whether as a result of transferee liability, of
being a member of an affiliated, consolidated, combined, unitary or other
similar group for any period, or otherwise through operation of law and
(C) any liability for the payment of amounts described in clauses (A) or
(B) as a result of any tax sharing, tax indemnity or tax allocation
agreement or any other express or implied agreement to indemnify or pay any
other person or entity; and the term "Tax" means any one of the foregoing
Taxes.
(ii) The term "Returns" shall mean all reports, estimates,
declarations of estimated tax, information statements and returns relating
to, or required to be filed in connection with, any Taxes, including
information returns or reports with respect to backup withholding and other
payments to third parties.
(b) Returns Filed and Taxes Paid. Except as otherwise disclosed in
Schedule 3.23(b): (i) all Returns required to be filed by or on behalf of
Cerulean and each Cerulean Subsidiary have been duly filed on a timely basis and
such Returns are true, complete and correct in all material respects; (ii) all
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Taxes shown to be payable on the Returns or on subsequent assessments with
respect thereto have been paid in full on a timely basis, and no other Taxes are
payable by Cerulean or any Cerulean Subsidiary with respect to items or periods
covered by such Returns (whether or not shown on or reportable on such Returns)
or with respect to any period prior to the date of this Agreement; (iii)
Cerulean and each Cerulean Subsidiary has withheld and paid over all Taxes
required to have been withheld and paid over, and complied in all material
respects with all information reporting and backup withholding requirements,
including maintenance of required records with respect thereto, in connection
with amounts paid or owing to any employee, creditor, independent contractor, or
other third party; (iv) neither Cerulean nor any Cerulean Subsidiary has
incurred any liability for Taxes since the latest date covered by such Returns
other than in the ordinary course of business; (v) neither Cerulean nor any
Cerulean Subsidiary has any liability, contingent or otherwise, for Taxes of any
other person or entity; (vi) no person having responsibility for Taxes of or
with respect to Cerulean or any Cerulean Subsidiary has knowledge of any basis
upon which a Tax authority could impose a material liability for Taxes against
Cerulean or any Cerulean Subsidiary in excess of those shown on the Returns
previously filed and Taxes incurred in the ordinary course of business since the
latest date covered by such Returns; (vii) none of the transactions contemplated
by this Agreement will give rise to any material liability for Taxes or to any
payments within the meaning of Section 280G of the Code; (viii) there are no
deferred intercompany gains, losses or other intercompany items, or excess loss
accounts, within the meaning of the Treasury Regulation Sections 1.1502-13 or
1.1502-19 (or any predecessor regulations or any comparable items for state,
local or foreign Tax purposes) with respect to Cerulean or any Cerulean
Subsidiary, (ix) neither Cerulean, any Cerulean Subsidiary nor any shareholder
of Cerulean or any Cerulean Subsidiary has taken any action that could
reasonably be expected to cause the Merger to fail to qualify as a
reorganization within the meaning of Section 368 of the Code; (x) the
representations set forth in the Officer's Certificate Regarding Certain Tax
Matters, attached as Exhibit 3.23(b) hereto, are true, correct and complete; and
(xi) there are no liens on any of the assets of Cerulean or any Cerulean
Subsidiary with respect to Taxes, other than liens for Taxes not yet due and
payable or for Taxes that Cerulean or any Cerulean Subsidiary is contesting in
good faith through appropriate proceedings and for which appropriate reserves
have been established, which contested Taxes are disclosed on Schedule 3.23(b).
(c) Tax Deficiencies; Audits; Statutes of Limitations. Except as otherwise
disclosed on Schedule 3.23(c): (i) the Returns of Cerulean and each Cerulean
Subsidiary have never been audited by a government or taxing authority, nor is
any such audit in process, pending or, to Cerulean's knowledge, threatened
(either in writing or verbally, formally or informally); (ii) no deficiencies
exist or have been asserted (either in writing or verbally, formally or
informally) or are expected to be asserted with respect to Taxes of Cerulean or
any Cerulean Subsidiary, and Cerulean or any Cerulean Subsidiary has not
received notice (either in writing or verbally, formally or informally) or
expects to receive notice that it has not filed a Return or paid Taxes required
to be filed or paid by it; (iii) neither Cerulean nor any Cerulean Subsidiary is
a party to any action or proceeding for assessment or collection of Taxes, nor
has such event been asserted or to Cerulean's knowledge, threatened (either in
writing or verbally, formally or informally) against Cerulean or any Cerulean
Subsidiary or any of their respective assets; (iv) no waiver or extension of any
statute of limitations is in effect with respect to Taxes or Returns of Cerulean
or any Cerulean Subsidiary; and (v) each of Cerulean and each Cerulean
Subsidiary has disclosed on its federal income tax returns all positions taken
therein that could give rise to a substantial understatement penalty within the
meaning of Section 6662 of the Code.
(d) Tax Sharing Agreements. Except as otherwise disclosed on Schedule
3.23(d), neither Cerulean nor any Cerulean Subsidiary is (nor has it ever been)
a party to any tax sharing agreement. All such agreements disclosed on Schedule
3.23(d) shall be terminated prior to the Merger with no amount due with respect
thereto on or after the date hereof.
(e) No Transfer Tax. There shall not be any Georgia sales or transfer
taxes, including stock transfer taxes, arising out of the consummation of
Merger.
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3.24 Brokerage. Except as disclosed on Schedule 3.24, neither Cerulean nor
any of its officers or directors has employed any broker or finder or incurred
any liability for any brokerage fees, commissions or finders' fees in connection
with the transactions contemplated under this Agreement.
3.25 Year 2000 Compliance. To the knowledge of Cerulean, the ongoing
management information system upgrading program undertaken by Cerulean and the
Cerulean Subsidiaries will result in each system comprised of software,
hardware, databases or embedded control systems that constitutes any material
part of, or is used in connection with the use, operation or enjoyment of any
material tangible or intangible asset or real property of Cerulean or any
Cerulean Subsidiary (each, a "System"), except any System or Systems as to which
Cerulean does not intend to continue usage and the absence of which would not
constitute a Cerulean Material Adverse Effect, not being materially adversely
affected by the transition from the twentieth century through the year 2000 and
into the twenty-first century and, except as set forth in Schedule 3.25 hereto,
neither Cerulean nor any Cerulean Subsidiary will incur any material expense
arising from or relating to the failure of any of its Systems as a result of the
transition from the twentieth century through the year 2000 and into the
twenty-first century. To the knowledge of Cerulean, year 2000 issues affecting
Cerulean's or any Cerulean Subsidiary's suppliers, customers, contracting
providers and others with which it conducts business will not have a Cerulean
Material Adverse Effect.
3.26 Reserves. The reserves established by Cerulean and its subsidiaries
in the Cerulean SEC Filings or in any financial statement or balance sheet
contained in any document filed with the SEC after the date hereof, for
statutorily required reserves and for incurred but not yet paid claims for, or
relating to health care, life insurance or other claims (i) have been computed
in accordance with presently accepted actuarial standards consistently applied
and are fairly stated in all material respects in accordance with sound
actuarial principles, (ii) meet the requirements of any law, rule or regulation
applicable to such reserves, (iii) have been computed on the basis of
methodologies consistent with those used in computing the corresponding reserves
in the prior fiscal year, and (iv) include provisions for all actuarial reserves
and related items which ought to be established in accordance with applicable
laws and regulations and prudent insurance practices. Cerulean is not aware of
any facts or circumstances which would necessitate, in the good faith
application of prudent reserving practices and policies, any material adverse
change in the statutorily required reserves or reserves for such incurred but
not yet paid claims above those reflected in the most recent balance sheet
included in the Cerulean SEC Filings (other than increases consistent with past
experience resulting from increases in enrollment with respect to services
provided by Cerulean or any Cerulean Subsidiary).
3.27 Statutory Financial Statements. Except as otherwise set forth
therein, the annual statements and the quarterly statements filed by any
Cerulean Subsidiary with the Georgia Department of Insurance for the years ended
December 31, 1996 and 1997 and for the quarterly period ended March 31, 1998
(the "DOI Filings") and the statutory balance sheets and income statements
included in such DOI Filings fairly present the statutory financial condition
and results of operations of such Cerulean Subsidiary as of the dates and for
the periods indicated therein and have been prepared in accordance with
applicable statutory accounting principles consistently applied throughout the
periods indicated.
3.28 Disclosure. No representations, warranties, assurances or statements
by Cerulean in this Agreement and no statement contained in any certificates or
other writings to be delivered by Cerulean (or caused to be delivered by
Cerulean) to WPAC or any of their respective representatives pursuant to the
provisions hereof contains or will contain any untrue statement of material
fact, or omits or will omit to state any material fact necessary, in light of
the circumstances under which it was made, to make the statements herein or
therein not misleading.
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ARTICLE IV.
REPRESENTATIONS AND WARRANTIES OF WELLPOINT & WPAC
WellPoint and WPAC hereby jointly and severally represent and warrant as of
the date hereof to Cerulean as follows:
4.01 Organization and Authorization. (a) WellPoint and each of the
WellPoint Subsidiaries (as hereinafter defined) is a corporation duly organized,
validly existing and in good standing under the laws of the state of its
incorporation or organization, and has all requisite power and authority,
corporate or otherwise, to carry on and conduct its business as it is now being
conducted and to own or lease its properties and assets. WellPoint and each
WellPoint Subsidiary is duly qualified and in good standing in every state of
the United States in which the conduct of its business or the ownership of its
properties and assets requires it to be so qualified, except where the failure
to be so qualified and in good standing would not have a "WellPoint Material
Adverse Effect," as defined below. As used in this Agreement, "WellPoint
Material Adverse Effect" shall mean a material adverse effect on the business,
assets, or financial condition of WellPoint and the WellPoint Subsidiaries,
taken as a whole. WellPoint has heretofore delivered or made available to
Cerulean accurate and complete copies of the Certificate of Incorporation and
Bylaws, or equivalent governing instruments, as currently in effect, of
WellPoint and each of the WellPoint Subsidiaries as of the date hereof.
(b) The term "WellPoint Subsidiary" shall mean every entity in which
WellPoint owns 50% or more of the outstanding equity, directly and indirectly,
and which is material to the operations or financial condition of WellPoint.
Schedule 4.01(b) sets forth every entity as of the date hereof which is a
WellPoint Subsidiary, and the equity interest in such entities that is owned by
WellPoint. WellPoint owns all of the issued and outstanding shares of WPAC. For
the purpose of all the representations and warranties made in this Article IV,
WPAC shall be considered a "WellPoint Subsidiary." Except as noted on Schedule
4.01(b), WellPoint's ownership interest in the WellPoint Subsidiaries (the
"WellPoint Subsidiary Shares") are owned by WellPoint, directly or indirectly,
free and clear of all liens, restrictions, claims, equities, charges, options,
rights of first refusal, encumbrances or other restrictions of any kind, with no
defects of title whatsoever. WellPoint has full power, right and authority to
vote all of the WellPoint Subsidiary Shares. WellPoint is not a party to or
bound by any agreement affecting or relating to its right to transfer or vote
the WellPoint Subsidiary Shares.
(c) WellPoint and WPAC, respectively, have the corporate right, power and
capacity to execute, deliver and perform this Agreement and to consummate the
transactions contemplated hereby. The execution, delivery and performance of
this Agreement, and the consummation of the transactions contemplated hereby,
have been duly and validly authorized by WellPoint's and WPAC's respective
Boards of Directors. This Agreement has been duly and validly executed and
delivered by WellPoint and WPAC, and constitutes WellPoint's and WPAC's legal,
valid and binding obligation, enforceable in accordance with its terms except
that such enforcement may be subject to (i) bankruptcy, insolvency,
reorganization, moratorium, or similar laws affecting or relating to the
enforcement of creditors' rights generally and (ii) general equitable
principles.
4.02 Capitalization. (a) The authorized capital stock of WellPoint
consists of 300,000,000 shares of Common Stock and 50,000,000 shares of
Preferred Stock. As of March 31, 1998, 70,041,458 shares of Common Stock and no
shares of Preferred Stock were issued and outstanding. All of such issued and
outstanding shares of capital stock of WellPoint are validly issued, fully paid
and nonassessable. As of March 31, 1998, there were 5,927 shares of capital
stock held in the treasury of WellPoint. As of the date hereof, there are no
shares of Preferred Stock outstanding.
(b) The authorized capital stock of WPAC consists of 1,000 shares of $.01
par value common stock. One thousand shares of $.01 par value common stock are
issued and outstanding, and all of such shares are owned by WellPoint. All of
such issued and outstanding shares of capital stock of WPAC are validly issued,
fully paid and nonassessable. All issuances, transfers or purchases of the
capital stock of WPAC have been in compliance with all applicable agreements and
all applicable laws, including federal and state
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securities laws, and all taxes thereon have been paid. There are no shares of
capital stock held in the treasury of WPAC.
4.03 Absence of Other Claims. Except as set forth on Schedule 4.03, there
is not outstanding nor is WellPoint or WPAC bound by, any subscriptions,
options, preemptive rights, warrants, calls, commitments or agreements or rights
of any character requiring WellPoint or WPAC to issue or entitling any person or
entity to acquire any additional shares of capital stock or any other equity
security of WellPoint or WPAC, including any right of conversion or exchange
under any outstanding security or other instrument, and neither WellPoint nor
WPAC is obligated to issue or transfer any shares of its capital stock for any
purpose. There are no outstanding obligations of WellPoint or WPAC to
repurchase, redeem or otherwise acquire any outstanding shares of capital stock
of WellPoint or WPAC.
4.04 Financial Statements. The consolidated balance sheets of WellPoint as
of December 31, 1997, 1996, and 1995 and the related consolidated statements of
income, retained earnings and cash flows for the years then ended, including the
footnotes thereto, certified by Coopers & Lybrand, LLC, WellPoint's independent
certified public accountants, as set forth in WellPoint's Annual Reports on Form
10-K, as amended, for the years ended December 31, 1997, 1996 and 1995, have
been prepared in accordance with GAAP applied on a consistent basis during the
periods involved and present fairly the financial position in all material
respects of WellPoint and its consolidated subsidiaries as of the dates thereof
and the results of their operations for the periods then ended.
4.05 No Undisclosed Liabilities. Except (i) as set forth in the WellPoint
SEC Filings (as hereinafter defined) or (ii) as shown on Schedule 4.05, as of
March 31, 1998, WellPoint had no liability or obligation whatsoever, whether
accrued, absolute, contingent or otherwise, except for any such liabilities or
obligation that would not have a WellPoint Material Adverse Effect. Since March
31, 1998, WellPoint has not incurred any liability or obligation, except for
liabilities and obligations (x) incurred by WellPoint in the ordinary course of
its business consistent with past practice or as reflected on Schedule 4.05 or
(y) that, individually or in the aggregate, would not have a WellPoint Material
Adverse Effect.
4.06 Proxy Statement; Form S-4. None of the information relating to
WellPoint and the WellPoint Subsidiaries furnished by WellPoint in writing for
inclusion in the Proxy Statement or included in the Form S-4 contains or will
contain (in the case of the Proxy Statement or any amendments thereof or
supplements thereto, at the time of the mailing of the Proxy Statement and any
amendments or supplements thereto, and at the time of the meeting of
shareholders of Cerulean to be held in connection with the transactions
contemplated by this Agreement or, in the case of the Form S-4, as amended or
supplemented, at the time it becomes effective) any untrue statement of material
fact or omits or will omit to state any material fact required to be stated
therein or necessary in order to make the statements therein, in light of the
circumstances under which they were made, not misleading. Except for information
supplied or to be supplied by Cerulean in writing for inclusion therein, as to
which no representation is made, the Form S-4, and any supplements or amendments
thereto, will comply in all material respects with the Securities Act and the
rules and regulations thereunder.
4.07 SEC Filings. WellPoint has made available to Cerulean true and
complete copies of (i) its Annual Reports on Form 10-K, as amended, for the
years ended December 31, 1997, 1996, as filed with the SEC, (ii) its proxy
statements relating to all of WellPoint's meetings of shareholders (whether
annual or special) since January 1, 1997, as filed with the SEC, and (iii) all
other reports, statements and registration statements (including Quarterly
Reports on Form 10-Q and Current Reports on Form 8-K, as amended) filed by
WellPoint with the SEC since January 1, 1997 (the reports and statements set
forth in clauses (i), (ii) and (iii) are referred to collectively as the
"WellPoint SEC Filings"). As of their filing date, none of the WellPoint SEC
Filings contained any untrue statement of a material fact or omitted to state a
material fact required to be stated therein or necessary to make the statements
therein, in light of the circumstances under which they were made, not
misleading. The WellPoint SEC Filings at the time of filing complied in all
material respects with the Exchange Act or the Securities Act, as the case may
be, and the rules and regulations thereunder.
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4.08 No Conflict. Subject to obtaining the consents and approvals and
making the filings described in Section 4.09 or as otherwise expressly set forth
in this Agreement, the execution and delivery of this Agreement by WellPoint and
WPAC, the consummation of the transactions contemplated herein by WellPoint and
WPAC, and the performance of the covenants and agreements of WellPoint and WPAC
will not (i) violate or conflict with any of the provisions of the Certificate
of Incorporation or Bylaws of each of WellPoint and WPAC; (ii) except as set
forth on Schedule 4.08 and except for any of the following which does not and
will not have a WellPoint Material Adverse Effect, violate, conflict
respectively, with or result in a breach or default under or cause termination
of any term or condition of any mortgage, indenture, contract, license, permit,
instrument, trust document, will, or other agreement, document or instrument to
which WellPoint or WPAC is a party or by which WellPoint or WPAC or any of its
properties may be bound; (iii) violate any provision of any material law,
statute, rule, regulation, court order, judgment or decree, or ruling of any
governmental authority, to which WellPoint or WPAC is a party or by which it or
any of its properties may be bound; or (iv) result in the creation or imposition
of any lien, claim, charge, restriction, security interest or encumbrance of any
kind whatsoever upon any asset of WellPoint or WPAC or any of the WellPoint
Subsidiaries other than any such lien or encumbrance which would not have a
WellPoint Material Adverse Effect.
4.09 Required Filings, Consents and Approvals. Except as set forth on
Schedule 4.09, no declaration, filing or registration with, or notice to, or
authorization, consent or approval of, any governmental or regulatory body or
authority is required or necessary by virtue of the execution hereof by
WellPoint and WPAC or the consummation of any of the transactions contemplated
herein by WellPoint or WPAC to avoid the violation or breach of, or the default
under, or the creation of a lien on assets of WellPoint or a WellPoint
Subsidiary pursuant to the terms of, any law, regulation, order, decree or award
of any court or governmental agency or any lease, agreement, contract, mortgage,
note, license, or any other instrument to which WellPoint or a WellPoint
Subsidiary is a party or to which it or any of its property is subject, except
for any such declaration, filing, registration, notice, authorization, consent
or approval, the failure of which to obtain would not have a WellPoint Material
Adverse Effect.
4.10 Absence of Certain Changes and Events. Except as set forth on
Schedule 4.10, from March 31, 1998 through the date hereof , neither WellPoint
nor any WellPoint Subsidiary has experienced any event or occurrence or suffered
any damage or destruction which, individually or in the aggregate, would have a
WellPoint Material Adverse Effect.
4.11 Disclosure. No representations, warranties, assurances or statements
by WellPoint or WPAC in this Agreement and no statement contained in any
certificates or other writings to be delivered by WellPoint or WPAC (or caused
to be delivered by WellPoint or WPAC) to Cerulean or any of its representatives
pursuant to the provisions hereof contains or will contain any untrue statement
of material fact, or omits or will omit to state any material fact necessary, in
light of the circumstances under which it was made, in order to make the
statements herein or therein not misleading.
ARTICLE V.
COVENANTS OF THE PARTIES
The parties covenant as provided in this Article V and as expressly set
forth in the Schedules and ancillary documents delivered in connection herewith
(with the term "WellPoint" being deemed to include "WPAC" for the purposes of
this Article V):
5.01 Pre-Closing Operations. (a) Cerulean. Cerulean hereby covenants and
agrees that, except as consented to in writing by WellPoint, pending the
Closing, Cerulean will operate and conduct its business, and that of the
Cerulean Subsidiaries, only in the ordinary course in accordance with prior
practices. Pursuant to this section and not in limitation of the foregoing (for
purposes of the following, "Cerulean" shall be deemed to include the Cerulean
Subsidiaries):
(i) Cerulean shall maintain its assets in their present state of repair
(ordinary wear and tear excepted), shall use its reasonable best efforts to keep
available the services of its employees, and preserve
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the good will of its business and relationships with the customers, licensors,
suppliers, distributors and brokers with whom it has business relations.
(ii) Cerulean shall not:
(a) sell, transfer or otherwise dispose of any assets other than in
the ordinary course of business consistent with past practice, except for
sales, transfers or disposals which would not have a Cerulean Material
Adverse Effect;
(b) enter into any new material contract or commitment relating to its
business, with "material contract or commitment" being defined for the
purpose of this subsection as a contract or commitment which involves
Cerulean incurring a liability in excess of $5 million individually or $10
million in the aggregate, or which is not terminable by Cerulean without
penalty upon less than 180 days notice;
(c) mortgage, pledge or subject to liens or other encumbrances or
charges any material assets, except by incurring Cerulean Permitted Liens;
(d) purchase or commit to purchase any capital asset outside of the
relevant Cerulean business plan for a price exceeding $2 million
individually, or $10 million in the aggregate;
(e) amend or terminate in any material respect any material agreement,
including any Cerulean employee benefit plan (except for certain programs
intended to retain members of information systems and financial management
on terms conforming to standard industry practices and as to which
Cerulean's Chief Executive Officer has consulted with WellPoint's Chief
Executive Officer), or any insurance policy, in force on the date hereof,
without the approval of the Transition Team (as defined in Section
5.02(b));
(f) amend its charter or bylaws in any manner which would adversely
affect the ability of Cerulean to consummate the transactions contemplated
by this Agreement (provided, however, the foregoing will in no way limit
the actions which may be taken by Cerulean pursuant to Section 5.18);
(g) acquire (whether by merger, consolidation, share exchange,
acquisition of stock, or acquisition of assets) any corporation,
partnership, joint venture, or other business (or any part thereof), except
where the consideration paid by Cerulean in connection with such
acquisition (including any debt assumed as a result thereof) is less than
$5 million individually, or $10 million in the aggregate;
(h) take, refrain from taking, agree to take or refrain from taking,
or enter into any formal or informal arrangement or understanding to take
or refrain from taking any action that could have the effect of causing the
Merger to fail to qualify as a reorganization within the meaning of Section
368 of the Code;
(i) split, combine or reclassify its outstanding capital stock or,
except for dividends regularly due and payable upon shares of Cerulean
Class B Stock, declare, set aside or pay any dividend or distribution
payable in cash, stock, property or otherwise, except for the payments or
distributions by a wholly owned subsidiary of Cerulean; provided, however,
that with respect to certain dividends from Cerulean Subsidiaries currently
under consideration, WellPoint upon being duly informed of the terms and
rationale therefor, will not unreasonably withhold its consent to the
payment of such dividends;
(j) except for the issuance of the Settlement Consideration (as
defined in Section 5.18), issue, sell, pledge or dispose of, or agree to
issue, sell, pledge or dispose of or otherwise cause to become outstanding
any additional shares of or any options, warrants or rights of any kind to
acquire any shares of its capital stock of any class or any debt or equity
securities convertible into or exchangeable for such capital stock;
(k) (A) incur or become contingently liable with respect to any
indebtedness for borrowed money other than (1) borrowings in the ordinary
course of business or (2) commercially reasonable borrowings to refinance
existing indebtedness or (B) redeem, purchase, acquire or offer to purchase
or
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acquire any shares of its capital stock or any options, warrants or rights
to acquire any of its capital stock or any security convertible into or
exchangeable for its capital stock (provided, however, that Cerulean may
enter into guaranty, with appropriate security, on commercially reasonable
terms with respect to a physician office building which has been identified
to WellPoint by Cerulean);
(l) adopt, enter into or materially amend any employment, severance,
special pay arrangement, bonus plan or other benefit plan or arrangement
for the benefit or welfare of any employee or retiree, including those
relating to the termination of employment or other similar arrangements or
agreements with any directors, officers or key employees, except (i) in
accordance with standard industry practice and following consultation with
the Transition Team described in Section 5.02(b) or (ii) to enter into
retention agreements with Cerulean personnel, which arrangements may only
be entered into with persons and on terms approved by the Transition Team
described in Section 5.02(b); or
(m) modify or change its current written investment policies except to
accommodate changes in applicable law.
Notwithstanding any provision above to the contrary, no action which is (x)
reasonably taken by Cerulean in furtherance of obtaining the private letter
ruling referenced in Section 5.20 and (y) does not result in Cerulean or any
Cerulean Subsidiary incurring any additional liabilities other than out of
pocket expenses in connection therewith, shall be deemed to violate any of the
foregoing provisions of Section 5.01.
(b) WellPoint. WellPoint hereby covenants and agrees that, except as
consented to in writing by Cerulean, pending the Closing, WellPoint will (for
purposes of the following, "WellPoint" shall be deemed to include the WellPoint
Subsidiaries):
(i) maintain its assets in their present state of repair (ordinary
wear and tear excepted), shall use its reasonable best efforts to keep
available the services of its employees, and preserve the good will of its
business and relationships with the customers, licensors, suppliers,
distributors and brokers with whom it has business relations; or
(ii) not amend its charter or bylaws in any manner which would
adversely affect the ability of WellPoint to consummate the transactions
contemplated by this Agreement.
5.02 Access; New Information. (a) Each of Cerulean and WellPoint shall be
obligated to promptly disclose in writing to the other any new information which
would result in a breach of their respective representations and warranties in
Articles III and IV of this Agreement if such representation or warranty were
made at the time of the discovery of the new information.
(b) Promptly following execution of this Agreement, the parties shall
establish a transition planning team (the "Transition Team") comprised of an
equal number of representatives of Cerulean and WellPoint. The Transition Team
shall be responsible for facilitating a transition and integration planning
process to ensure the successful combination of the operations of Cerulean with
those of WellPoint. The Transition Team shall be responsible for developing, and
monitoring the development of, and deliverables due under, an action plan for
the combination of the businesses which, among other things, shall include an
information systems action plan intended to facilitate the most effective
combination of the information systems resources of Cerulean and WellPoint. The
Transition Team, or designated representatives thereof, shall meet monthly to
review the financial performance of Cerulean and its affiliates and at such
meetings Cerulean shall advise the Transition Team of the status of achieving
Cerulean's then current Operating Plan (as has been presented to WellPoint),
including all of the material components thereof, such as sales, enrollment,
revenues, investment income, quarterly claim trends, medical loss ratio,
administrative expenses, net income, reserves and statutory capital (as
indicated on the quarterly balance sheet). The Transition Team shall be informed
at each quarterly meeting of the applicable trends and retention experience
arising from Cerulean's business planning and underwriting process.
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(c) From and after the date hereof and subject to the terms of that certain
Confidentiality Agreement by and between the parties hereto, dated November 14,
1997, and to facilitate the activities of the Transition Team, WellPoint,
through its General Counsel, Chief Financial Officer or Alice Rosenblatt, or
duly authorized designees identified by such persons, shall have access during
regular business hours to Cerulean's and any Cerulean Subsidiary's books,
records, offices, personnel, counsel, accountants and actuaries as WellPoint or
its designees may from time to time reasonably request; provided, however, that
(i) no on-site investigation by WellPoint shall be made unless WellPoint shall
have provided at least two business days prior notice to Cerulean, (ii) no
investigation made pursuant to this section shall unreasonably interfere with
the operation or conduct of the business of Cerulean or any Cerulean Subsidiary,
(iii) any requests by WellPoint for investigation or access pursuant to this
Section shall be made to Cerulean's Executive Vice President, Finance and
Strategic Planning, General Counsel or any designee of such persons, and (iv)
Cerulean shall not be compelled to provide any customer-specific information
pursuant to this Section.
5.03 Transfer Taxes. All sales or transfer taxes, including stock transfer
taxes, document recording fees, real property transfer taxes, and excise taxes,
arising out of or in connection with the consummation of the transactions
contemplated hereby shall be paid by WellPoint.
5.04 Preparation of Supporting Documents. In addition to such actions as
the parties may otherwise be required to take under this Agreement or applicable
law in order to consummate this Agreement and the transactions contemplated
hereby, the parties shall take such action, shall furnish such information, and
shall prepare, or cooperate in preparing, and execute and deliver such
certificates, agreements and other instruments as the other party may reasonably
request from time to time, before, at or after the Closing, with respect to
compliance with the obligations of Cerulean, WPAC, or WellPoint in connection
with the Merger. Any information so furnished by the parties shall be true,
correct and complete in all material respects and shall not contain any untrue
statement of a material fact or omit to state a material fact required to be
stated therein or necessary to make the statements therein not misleading.
5.05 Shareholders Meeting. As soon as practicable, Cerulean will take all
steps necessary to duly call, give notice of, convene and hold a meeting of its
shareholders (including filing with the SEC and mailing to its shareholders the
Proxy Statement) for the purpose of adopting and approving this Agreement and
the Merger and for such other purposes as may be necessary or desirable in
connection with effectuating the transactions contemplated hereby and thereby.
Subject to applicable law, the fiduciary duties of the directors (including the
duties of loyalty and care), and compliance by WellPoint and WPAC with the
material terms and conditions of this Agreement, the Board of Directors of
Cerulean shall recommend that its shareholders vote in favor of the Merger, the
adoption of this Agreement, and the approval of the transactions contemplated
hereby, and shall use its best efforts to obtain any necessary approval by the
shareholders of Cerulean of the foregoing.
5.06 Dissenting Shareholders. Cerulean shall give WellPoint prompt notice
of any demands received by Cerulean for appraisal of shares pursuant to Article
13 of the GBCC, and WellPoint shall have the right to direct all negotiations
and proceedings with respect to such demands. WellPoint shall not make any
payment with respect to, or settle or offer to settle, any such demands, without
the written consent of Cerulean, which consent shall not be unreasonably
withheld or delayed.
5.07 SEC and Shareholder Filings. Each of Cerulean and WellPoint shall
send to the other party copies of all public reports and materials as and when
they send the same to their shareholders or the SEC.
5.08 Labor Matters. Cerulean shall provide any notice to affected
employees before the Effective Time as may be required by the Workers Adjustment
and Retraining Notification Act of 1988, as amended ("WARN Act"). WellPoint
agrees to indemnify Cerulean and its directors, officers, employees, consultants
and agents for, and to hold Cerulean and its directors, officers, employees,
consultants and agents harmless from and against, any and all losses arising or
resulting, or alleged to arise or result from the notification or other
requirements of the WARN Act as a result of the Merger, including without
limitation any failure to meet the full notice period required by the WARN Act.
The indemnifications
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contained in this Section will survive the Closing and remain effective
concurrent with the statute of limitations period applicable to WARN Act
liability.
5.09 Consents, Waivers, Authorizations, etc. Each of Cerulean and
WellPoint will use its best efforts to obtain all consents, waivers,
authorizations, orders and approvals of and make all filings and registrations
with, any governmental commission, board or other regulatory body or any
nongovernmental third party, required for, or in connection with, the
performance by them of this Agreement and the consummation by them of the
transactions contemplated hereby, or as may be required in order not to
accelerate, violate, breach or terminate any agreement to which either party or
any of their respective Subsidiaries may be subject. Each party will cooperate
fully with each other party in assisting it to obtain such consents,
authorizations, orders and approvals. The parties will not take any action which
could reasonably be anticipated to have the effect of delaying, impairing or
impeding the receipt of any required approvals, regulatory or otherwise. Without
limiting the generality of the foregoing, the parties agree that Cerulean shall
on behalf of WellPoint prepare and, with the consent of WellPoint (which consent
shall not be unreasonably withheld), file the "Form A" regulatory filing to be
made pursuant to O.C.G.A. sec.33-13-3 in connection with this Agreement and the
transactions contemplated hereby, and shall coordinate the conduct of the
hearing before the Department of Insurance in connection with such filing.
Cerulean and WellPoint will reasonably cooperate with regard to the content of
such filing. Cerulean shall submit all such filings and hearing testimony,
witness lists and other similar materials relating to the hearing to WellPoint
for its review and approval, which approval shall not be unreasonably withheld.
At the request and direction of Cerulean, WellPoint agrees to appeal any adverse
finding in connection with any order issued as a result of such hearing and to
use its best efforts in pursuing such appeal. Cerulean and WellPoint will
reasonably cooperate with regard to such appeal.
5.10 Indemnification. From and after the Effective Time, the parties shall
not take any action nor permit any action to be taken which would have the
effect of eliminating or impairing the rights prior to the Effective Time of
current or former officers and the directors of Cerulean to be indemnified for
any actions taken by such officers or directors in such capacities so long as
such indemnification would have been available to such parties at such time in
accordance with the respective Bylaws and Articles of Incorporation of Cerulean,
as the case may be, and applicable law.
5.11 Hart-Scott-Rodino Notification. Each of Cerulean and WellPoint shall
promptly prepare and file as soon as practicable after the date hereof a
notification with the United States Justice Department (the "Justice
Department") and the Federal Trade Commission (the "FTC") as required by the
Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended ("HSR Act").
Each party shall cooperate with each other party in connection with the
preparation of such notification, including sharing information concerning sales
and ownership and such other information as may be needed to complete such
notification, and providing a copy of such notification to the other prior to
filing. Each party shall keep all information about the other party obtained in
connection with the preparation of such notification confidential.
5.12 Further Assurances. Subject to the terms and conditions herein
provided, each of Cerulean and WellPoint agrees to use its best efforts to take,
or cause to be taken, all actions, and to do, or cause to be done, all things
reasonably necessary, proper or advisable to consummate and make effective as
promptly as practicable the transactions contemplated by this Agreement,
including (i) the defending of any lawsuits or other legal proceedings, whether
judicial or administrative, challenging the Agreement or the consummation of the
transactions contemplated hereby, (ii) obtaining all governmental consents
required for the consummation of the Merger and the transactions contemplated
thereby, and (iii) making and causing their shareholders, as applicable, to
timely make all necessary filings under the HSR Act. Upon the terms and subject
to the conditions hereof, each of the parties agree to use its best efforts to
take, or cause to be taken, all actions and to do, or cause to be done, all
things reasonably necessary to satisfy the other conditions of the Closing set
forth herein. Each party will consult with counsel for the other party as to,
and will permit such counsel to participate in, at such other party's expense,
any lawsuits or proceedings referred to in clause (i) above brought against any
party. In case at any time after the Effective Time any further action is
necessary or desirable to carry out the purposes of this Agreement, the
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officers and directors of WPAC shall take all such necessary action to the
extent not inconsistent with their other duties and obligations or applicable
law.
5.13 Public Announcements. So long as this Agreement is in effect, each of
Cerulean and WellPoint shall not and shall cause their affiliates not to issue
or cause the publication of any press release or any other announcement with
respect to the Merger or the transactions contemplated by this Agreement without
the prior written consent of the other party, except where such release or
announcement is required by applicable law or pursuant to any listing agreement
with, or the rules or regulations of the SEC or the New York Stock Exchange, in
which case each of Cerulean and WellPoint will permit review by the other of any
such press release or announcement prior to its release or filing and shall
deliver simultaneously a final copy of such release or announcement to the other
upon its release or filing.
5.14 Dividend on Cerulean Class B Stock. Immediately prior to the Closing,
Cerulean shall pay the accrued dividend on each share of Cerulean Class B Stock
then owing as provided in Section 4.3 of the Articles of Incorporation of
Cerulean.
5.15 Obligations with Respect to WPAC and Blue Cross Blue Shield of
Georgia, Inc. It is the intent of the parties that WellPoint and WPAC (i)
maintain Blue Cross Blue Shield of Georgia, Inc. ("Insurance Sub") as a Georgia
corporation or other Georgia legal entity separate and apart from WellPoint or
WPAC and (ii) fill a majority of the seats of the Board of Directors of
Insurance Sub with residents of the State of Georgia.
5.16 Appointment of Director of WellPoint. As of the Closing, the
nominating committee of the Board of Directors of WellPoint shall nominate for
election to the Board of Directors of WellPoint a person who is a member of the
Board of Directors of Cerulean on the date hereof.
5.17 Non-Solicitation. So long as this Agreement is in effect, neither
Cerulean nor any Cerulean Subsidiary shall, and each shall use its best efforts
to cause its representatives not to, directly or indirectly, solicit any
proposal from a third party regarding a purchase, affiliation, or lease of all
or a material part of the assets of Cerulean, whether by sale of capital stock,
merger, consolidation, sale or lease of material assets, affiliation, joint
venture, or other material transaction (a "Merger Proposal"). Neither the
foregoing prohibition, nor any other provision of this Agreement shall be
interpreted to prohibit Cerulean from (i) making any disclosure of information
required by law, (ii) communicating any information to the shareholders of
Cerulean to the extent necessary to comply with the fiduciary duties of the
Board of Directors of Cerulean, or (iii) providing non-public information
regarding Cerulean to, or negotiating with, any third party (provided such party
is subject to an executed confidentiality agreement) that makes an unsolicited
Merger Proposal; provided, however, that prior to any such action referred to in
clause (iii), the Board of Directors of Cerulean shall have determined in good
faith after consultation with its outside legal counsel and financial advisors
that such Merger Proposal, if accepted by Cerulean on substantially the terms
presented, is likely to be consummated and would, if consummated, result in a
transaction superior to the one contemplated by this Agreement after taking into
account all relevant factors, including, without limitation, the consideration
to be received pursuant to such Merger Proposal (any such superior Merger
Proposal being referred to herein as a "Superior Proposal").
5.18 Settlement of Lawsuit. WellPoint and Cerulean agree that Cerulean is
authorized to (i) pay the amount of cash, (ii) create and issue the number of
shares of Cerulean Class A Stock and a warrant for shares of Cerulean Series A
Preferred Stock, and (iii) do all other acts and pay all other expenses and fees
that, in the opinion of counsel to Cerulean, are reasonably necessary in order
to effectuate the settlement of the Let's Get Together, Inc., et al. v.
Insurance Commissioner of the State of Georgia, Blue Cross and Blue Shield of
Georgia, Inc. and Cerulean Companies, Inc. litigation (the "Settlement"), all in
compliance with the terms of the Stipulation and Agreement of Settlement
executed in connection with the Settlement and attached hereto as Exhibit 5.18
(all of such actions, collectively, the "Settlement Actions"). Notwithstanding
any other provision in this Agreement to the contrary, the performance of any or
all of the Settlement Actions shall not violate any of the conditions to closing
set forth in this Agreement and shall not be included in any amount used in
connection with the calculation of an amount constituting a Cerulean Material
Adverse Effect.
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5.19 Agreements of Affiliates. Cerulean shall deliver to WellPoint a
letter identifying all persons who, at the Effective Time, may, in the
reasonable opinion of counsel to Cerulean, be deemed to be "affiliates" of
Cerulean for purposes of Rule 145 under the Securities Act. Cerulean shall use
its best efforts to cause each person who is so identified as an "affiliate" to
deliver to WellPoint on or prior to the Effective Time a customary written
agreement reasonably satisfactory to WellPoint with respect to the shares of
WellPoint Common Stock to be received by such affiliate in connection with the
Merger.
5.20 Adjustments. (a) Prior to the Closing, Cerulean shall be entitled to
request a private letter ruling from the Internal Revenue Service regarding (i)
the application of the provisions contained in Proposed Treasury Regulation
sec. 280G-1, Q&A 24(b) or (c) to reduce certain obligations payable in
connection with the Cerulean Companies, Inc. Performance Unit Plan (the "PUP"),
(ii) the inapplicability of Code Section 280G to the funding of a rabbi trust
upon a change of control for amounts accrued under Blue Cross and Blue Shield of
Georgia, Inc.'s Supplemental Executive Retirement Plan, Benefit Restoration Plan
and certain other nonqualified plans (the "Rabbi Trust Plans"), and (iii) the
inapplicability of Code Section 280G to certain bonus payments. Prior to the
submission of such ruling request, Cerulean will consult with WellPoint
regarding the pertinent factual representations to be made in connection with
such ruling request and subsequent supplemental submissions. If Cerulean has
obtained a private letter ruling prior to the Closing providing that any portion
of the payments under the PUP are not subject to excise tax by reason of
Proposed Treasury Regulation sec. 280G-1, Q&A 24(b) or (c), that sec. 280G is
inapplicable to the funding of the rabbi trust upon the change of control for
amounts accrued under any of the Rabbi Trust Plans, or sec. 280G is inapplicable
to the Short-Term Incentive Plan (each, an "Excluded Payment"), the parties
agree that the "Aggregate Merger Price" referenced in Section 2.01(b)(i) shall
be increased by the amount of excise tax and gross-up that would have been
payable absent the treatment of such amounts as Excluded Payments. The parties
agree that the amount of such increase to the Aggregate Merger Price will be no
greater than $10,000,000. If Cerulean and its advisors and WellPoint and its
advisors are unable to agree upon the amount of increase in the "Aggregate
Merger Price" required under this Section 5.20 within 10 days of the receipt of
written notice by WellPoint from Cerulean including Cerulean's computation of
the amount of the increase in the Aggregate Merger Price, either party may refer
the matter to an Independent Arbitrator (as defined in Section 8.16), who may
engage an independent third party actuarial firm, which firm shall be provided
all relevant information and assumptions by the Independent Arbitrator, for a
determination of the amount of savings to be added to the "Aggregate Merger
Price" in Section 2.01(b)(i). The Independent Arbitrator shall hold a hearing
and render his decision, which shall be final and binding upon the parties,
within thirty (30) days following either party's request for arbitration, but in
no event later than the Closing Date. Each party shall be entitled to submit a
written brief to the Independent Arbitrator (with a copy being simultaneously
provided to the other party) prior to the hearing. The costs and expenses of the
Independent Arbitrator shall be borne by WellPoint.
(b) Cerulean agrees that in the event the aggregate costs or liabilities
described in the due diligence memorandum exchanged between the parties
contemporaneous herewith (the "Diligence Memorandum") exceed the aggregate
estimated cost of such obligations as specified in the Diligence Memorandum by
more than $1,000,000, then the Aggregate Merger Price shall be reduced on a
dollar for dollar basis by the amount of such excess and directly related costs.
(c) The Aggregate Merger Price shall be reduced to the extent of amounts
paid by Cerulean to repurchase the stock of Cerulean pursuant to Section 2.2(d)
of the Stipulation and Agreement of Settlement executed in connection with the
Settlement.
5.21 Benefits. WellPoint and WPAC covenant to provide to the retained
employees of Cerulean and the Cerulean Subsidiaries employee benefits comparable
to the employee benefits offered by WellPoint to its employees and the employees
of its affiliates.
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ARTICLE VI.
CONDITIONS
6.01 Conditions to Each Party's Obligations. The respective obligation of
each party to effect the Merger and the other transactions to be effected
contemporaneous with or as a result of the Merger shall be subject to the
fulfillment at or prior to the Effective Time of the following conditions:
(a) Shareholder Approval; Consummation of Merger. This Agreement and the
Merger shall have been adopted at or prior to the Effective Time by the
requisite vote of the shareholders of Cerulean in accordance with generally
applicable law and the Articles of Incorporation and Bylaws of Cerulean, and the
Merger shall have been consummated concurrently with the Closing.
(b) No Injunction. No order, statute, rule, regulation, executive order,
stay, decree, judgment or injunction shall have been enacted, entered,
promulgated or enforced by any court or governmental authority which prohibits
or prevents the consummation of the transactions contemplated hereby and which
has not been stayed or vacated by the Effective Time. Each of Cerulean, WPAC,
and WellPoint shall use its best efforts and shall cooperate with each other to
have any such order, statute, rule, regulation, executive order, stay, decree,
judgment or injunction vacated, lifted or stayed.
(c) HSR Act. Any waiting period applicable to the Merger under the HSR Act
shall have expired or earlier termination thereof shall have been granted.
(d) Effective Form S-4. The Form S-4 shall have been declared effective by
the SEC and no stop order suspending the effectiveness of the Form S-4 shall
have been issued and no proceeding for that purpose shall have been initiated or
threatened by the SEC.
(e) NYSE Listing. The WellPoint Common Stock issuable in the Merger shall
have been approved for listing on the New York Stock Exchange upon notice of
issuance.
(f) Consent of Georgia Department of Insurance and Other State
Regulators. The consent of the Georgia Department of Insurance, together with
any other state regulatory consents, shall have been obtained pursuant to an
order which by its terms does not impose any Materially Burdensome Condition (as
defined below), and be in full force and effect, except for those the failure of
which to obtain or be in full force and effect would not have a WellPoint
Material Adverse Effect. "Materially Burdensome Condition" shall mean a
condition imposed upon WPAC, WellPoint, Cerulean or a Cerulean Subsidiary which
differs materially in character, degree or scope from conditions commonly
imposed by such consents and which would (i) materially limit the ability of
WPAC to operate the businesses of Cerulean and the Cerulean Subsidiaries after
the Merger or (ii) materially change the material terms of the transaction.
(g) Approval of The Blue Cross Blue Shield Association. The approval of
the Blue Cross Blue Shield Association of the consummation of the transactions
contemplated by this Agreement pursuant to that certain license agreement with
Cerulean dated February 22, 1996 shall have been obtained.
(h) Closing Price. The Closing Price (as defined in Section 2.01(c)(i))
shall be greater than or equal to $30 per share of WellPoint Common Stock,
subject to appropriate adjustment in the event of a stock split, stock dividend,
recapitalization or other similar event applicable to shares of WellPoint Common
Stock after the date of this Agreement.
(i) Superior Proposal. In the event that Cerulean has provided WellPoint
with written notice pursuant to Section 7.01(f)(ii), the expiration of the seven
(7) day period referenced in subsection (iii) of 7.02(f) shall have expired.
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6.02 Conditions to Obligations of Cerulean. The obligation of Cerulean to
effect the Merger shall be subject to the fulfillment at or prior to the
Effective Time of the following additional conditions, any one or more of which
may be waived in writing by Cerulean:
(a) Obligations Performed. WellPoint and WPAC shall have performed and
complied with in all material respects its obligations, agreements and covenants
under this Agreement which are required to be performed or complied with by it
at or prior to the Effective Time.
(b) Representations and Warranties True at Closing Date. As of the
Effective Time, the representations and warranties contained in Article IV shall
be true and correct in all material respects as if made on and as of the Closing
Date (except in each case for (i) such changes that are caused by WellPoint's
compliance with the terms of this Agreement, and (ii) representations and
warranties that address matters only as of a date or with respect to the period
of time specified therein and not as of the Closing Date or for any period
through the Closing Date); provided, however, that with respect to the
representations and warranties other than those already qualified by WellPoint
Material Adverse Effect, such representations and warranties shall be deemed
true and correct in all material respects unless the failure of such
representations and warranties to be true and correct, whether individually or
in the aggregate, would result in a WellPoint Material Adverse Effect.
(c) Certificate Delivered. WellPoint and WPAC shall have delivered to
Cerulean a certificate executed on their behalf by their respective Presidents
or another authorized executive officer in its corporate capacity to the effect
that the conditions set forth in subsections 6.02(a) and 6.02(b) have been
satisfied.
(d) Opinion of Counsel to Cerulean. Cerulean shall have received from
counsel to Cerulean an opinion, dated the Closing Date, that the Merger will be
treated for federal income tax purposes as a reorganization within the meaning
of Section 368(a) of the Code.
(e) Fairness Opinion. The opinion of Morgan Stanley, dated as of the date
of the Proxy Statement, that the value of the consideration to be paid to the
shareholders of Cerulean in the Merger is fair from a financial point of view to
the shareholders of Cerulean, shall not have been withdrawn or amended or
modified in any material respect.
(f) Certificate of Merger. WPAC shall have executed and delivered the
Certificate of Merger in accordance with Section 1.02 hereof.
(g) Appointment of Cerulean Director. WellPoint shall have taken all
action necessary to appoint to the Board of Directors of WellPoint the person
nominated pursuant to Section 5.16.
(h) Rule 145 Shares. WellPoint shall have entered into a Registration
Rights Agreement in the form set forth in Exhibit 6.02(h) with each person or
entity which is a shareholder of Cerulean as of the date of this Agreement that
will be subject to the resale limitations of Sections (c) and (d) of Rule 145
promulgated under the Securities Act.
(i) Required Consents. Any required material consents or approvals to be
obtained by WellPoint and WPAC, as contemplated hereby, shall have been obtained
and be in full force and effect.
(j) No Material Adverse Change. There shall have not occurred any
WellPoint Material Adverse Effect which has as its proximate cause an action or
inaction by WellPoint since the date of this Agreement.
(k) Private Letter Ruling. In the event that a letter ruling from the
Internal Revenue Service has been obtained pursuant to Section 5.20, Cerulean
and WellPoint shall have agreed upon an amount of savings resulting from such
ruling or, in the event an arbitration has been instituted by either party
pursuant to Section 5.20, the Independent Arbitrator shall have rendered a final
and binding decision regarding the amount of savings. Notwithstanding the
foregoing, obtaining a ruling pursuant to Section 5.20 shall not be a condition
to Closing.
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6.03 Conditions to Obligations of WellPoint and WPAC. The obligation of
WellPoint and WPAC to effect the Merger shall be subject to the fulfillment at
or prior to the Effective Time of the following additional conditions, any one
or more of which may be waived in writing by WellPoint:
(a) Obligations Performed. Cerulean shall have performed and complied with
in all material respects its obligations, agreements and covenants under this
Agreement which are required to be performed or complied with by it at or prior
to the Effective Time.
(b) Representations and Warranties True at Closing Date. As of the
Effective Time, the representations and warranties contained in Article III
shall be true and correct in all material respects as if made on and as of the
Closing Date (except in each case for (i) such changes that are caused by
Cerulean's compliance with the terms of this Agreement, and (ii) representations
and warranties that address matters only as of a date or with respect to the
period of time specified therein, and not as of the Closing Date or for any
period through the Closing Date); provided, however, that with respect to the
representations and warranties other than those already qualified by Cerulean
Material Adverse Effect, such representations and warranties shall be deemed
true and correct in all material respects unless the failure of such
representations and warranties to be true and correct, whether individually or
in the aggregate, would result in a Cerulean Material Adverse Effect; and
provided further, that no representation or warranty contained in Section 3.19
shall be violated by reason of the expiration of any Contract in accordance with
its terms.
(c) Certificate Delivered. Cerulean shall have delivered to WellPoint a
certificate executed on its behalf by its President or another authorized
executive officer in its corporate capacity to the effect that the conditions
set forth in subsections 6.03(a) and 6.03(b) have been satisfied.
(d) Opinion of Counsel to WellPoint. WellPoint shall have received from
counsel to WellPoint an opinion, dated the Closing Date, which shall include an
opinion to the effect that the Merger will be treated for federal income tax
purposes as a reorganization within the meaning of Section 368(a) of the Code.
(e) Certificate of Merger. Cerulean shall have executed and delivered the
Certificate of Merger in accordance with Section 1.02 hereof.
(f) Required Consents. Any required material consents or approvals to be
obtained by Cerulean as contemplated hereby, shall have been obtained and be in
full force and effect.
(g) Settlement of Certain Litigation. Cerulean shall have effected the
Settlement of Let's Get Together, Inc., et al. v. Insurance Commissioner of the
State of Georgia, Blue Cross and Blue Shield of Georgia, Inc. and Cerulean which
settlement shall have been approved by the Superior Court of Fulton County in a
Final Order (as defined in Section 1.5 of the Stipulation and Agreement of
Settlement executed in connection with the Settlement) that effectuates a
settlement of such litigation and a dismissal of all claims brought by the
plaintiffs thereto, with prejudice against the plaintiffs and the class
represented thereby.
(h) No Other Litigation. There shall not be pending any suit, litigation
or other similar proceeding relating to the conversion of Cerulean's affiliate
Blue Cross and Blue Shield of Georgia, Inc. or to the distribution of
consideration contemplated by this Agreement and as to which there is a
significant likelihood of material liability to either WellPoint, Cerulean or
any of their affiliates (a "Material Case"); provided, however, that in the
event WellPoint notifies Cerulean that it considers a matter to be a Material
Case, Cerulean and WellPoint agree that Cerulean may refer the matter to an
Independent Arbitrator (as defined in Section 8.16) for a determination of
whether the matter is a Material Case within the meaning of this Section
6.03(h). The Independent Arbitrator shall hold a hearing and render his
decision, which shall be final and binding upon the parties, within ten (10)
days following Cerulean's request. Each party shall be entitled to submit a
written brief to the Independent Arbitrator (with a copy being simultaneously
provided to the other party) prior to the hearing. The costs and expenses of the
arbitrator shall be borne by WellPoint.
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(i) No Material Adverse Change. There shall have not occurred any Cerulean
Material Adverse Effect which has as its proximate cause an action or inaction
by Cerulean since the date of this Agreement.
(j) Receipt of Agreements of Affiliates. WellPoint shall have received
from each person who is identified as an "affiliate" of Cerulean for purposes of
Rule 145 under the Securities Act a written agreement substantially in the form
of Exhibit 5.19 hereto with respect to the shares of WellPoint Common Stock to
be received by such affiliate in the Merger.
(k) Conversion of Warrants. Prior to the Effective Time, all outstanding
warrants to purchase Cerulean Series A Stock shall have been exercised in the
manner specified in the warrant agreement without payment of cash.
(l) Termination of Shareholders' Agreement. At least 10 days prior to the
Effective Time, that certain Shareholders' Agreement between Cerulean, Blue
Cross and Blue Shield of Georgia, Inc., and the holders of Cerulean Class B
Stock dated February 2, 1996 shall have been amended to eliminate from the
definition of "Registrable Stock" any shares of common stock issued in a merger
pursuant to a registration statement on Form S-4.
ARTICLE VII.
TERMINATION PRIOR TO CLOSING
7.01 Termination of Agreement. This Agreement may be terminated and the
Merger contemplated hereby may be abandoned at any time prior to the Effective
Time, whether before or after approval by the shareholders of Cerulean:
(a) By the written agreement of Cerulean and WellPoint;
(b) By either of Cerulean or WellPoint if the Merger shall not have been
consummated on or before the one year anniversary of this Agreement (or such
later date as may be agreed to by Cerulean and WellPoint); provided, however,
neither Cerulean nor WellPoint may terminate this Agreement under this Section
if the failure has been caused by such party's material breach or default of its
obligations under this Agreement;
(c) By Cerulean in writing, without liability, if WellPoint or WPAC shall
have (i) materially breached any of their respective covenants contained herein
or (ii) breached any of their respective representations or warranties contained
herein which, individually or in the aggregate, has resulted in a WellPoint
Material Adverse Effect, which breach is not cured within thirty (30) days after
Cerulean has notified WellPoint of its intent to terminate this Agreement
pursuant to this subparagraph (c);
(d) By WellPoint and WPAC in writing, without liability, if Cerulean shall
have (i) materially breached any of its covenants contained herein or (ii)
breached any of its representations or warranties contained herein which,
individually or in the aggregate, has resulted in a Cerulean Material Adverse
Effect, which breach is not cured within thirty (30) days after WellPoint has
notified Cerulean of its intent to terminate this Agreement pursuant to this
subparagraph (d);
(e) By either Cerulean or WellPoint in writing, without liability, if any
order, statute, rule, regulation, executive order, stay, decree, judgment or
injunction shall have been enacted, entered, promulgated or enforced by any
court or governmental authority which prohibits or prevents the consummation of
the transactions contemplated hereby, provided that WellPoint, WPAC and Cerulean
shall have used their respective best efforts to have any such order, statute,
rule, regulation, executive order, stay, decree, judgment or injunction vacated,
lifted or stayed and the same shall not have been vacated, lifted or stayed
within 30 days after entry, by any such court or governmental or regulatory
agency;
(f) by Cerulean in writing, without liability other than as provided in
Section 7.02, if the Board of Directors of Cerulean authorizes Cerulean to
execute a binding written agreement with respect to a
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transaction that constitutes a Superior Proposal; provided, however, that prior
to any termination pursuant to this Section 7.01(f), (i) the Board of Directors
of Cerulean, after consultation with legal counsel, determines in good faith
that contemplation of such Superior Proposal and terminating this Agreement is
necessary for such Board of Directors to comply with its fiduciary duties under
applicable law; (ii) Cerulean must notify WellPoint in writing that it intends
to enter into such an agreement and provide WellPoint with the then-current
version of the proposed definitive documentation for such transaction and, (iii)
WellPoint does not, within seven (7) days after the receipt of such written
notice, provide a written offer that the Board of Directors of Cerulean
determines in good faith, after application of the analysis set forth in Section
5.17, to be at least as favorable as the Superior Proposal; or
(g) by either of Cerulean or WellPoint in writing, without liability other
than as provided in Section 7.02, if (i) Cerulean's shareholders decline to
approve the Merger, (ii) the Georgia Department of Insurance declines to approve
the Merger, (iii) the FTC or the Justice Department declines to approve the
Merger under the HSR Act; or (iv) the Blue Cross Blue Shield Association
declines to approve the Merger.
7.02 Liquidated Damages. In the event of termination pursuant to Section
7.01(f) or Section 7.01(g) (if but only if such termination pursuant to Section
7.01(g) results from the failure of the holders of Cerulean Class B Stock to
approve the Merger), Cerulean shall be obligated to pay to WellPoint within 15
days after such termination a termination fee of $10 million, which the parties
hereto agree shall be the appropriate measure of liquidated damages and shall
represent complete reimbursement of expenses incurred by WellPoint up to the
date of termination, and which amount shall be the total damages and sole remedy
of WellPoint upon the termination of this Agreement pursuant to Section 7.01(f)
or Section 7.01(g).
7.03 Termination of Obligations. Termination of this Agreement pursuant to
this Article VII shall terminate all obligations of the parties hereunder,
except for the obligations under Sections 7.02 (if applicable in connection with
a termination), 7.03 and 8.07 hereof; provided, however, that termination
pursuant to subparagraphs (b), (c) or (d) of Section 7.01 hereof shall not
relieve a defaulting or breaching party from any liability to the other party
hereto.
ARTICLE VIII.
MISCELLANEOUS
8.01 Entire Agreement. This Agreement (including the Schedules and
Exhibits) constitutes the sole understanding of the parties with respect to the
subject matter hereof; provided, however, that this provision is not intended to
abrogate any other written agreement between the parties executed with or after
this Agreement, or abrogate the effect of that certain Confidentiality Agreement
dated November 14, 1997 between Cerulean and WellPoint.
8.02 Amendment. No amendment, modification or alteration of the terms or
provisions of this Agreement shall be binding unless the same shall be in
writing and duly executed by the parties hereto.
8.03 Parties Bound by Agreement; Successors and Assigns. The terms,
conditions and obligations of this Agreement shall inure to the benefit of and
be binding upon the parties hereto and the respective successors and assigns
thereof. Neither this Agreement nor any of the rights, interests or obligations
hereunder shall be assigned by any of the parties hereto prior to the Effective
Time without the prior written consent of the other parties hereto. Except for
the parties hereto and any person or entity covered by an indemnification
provision hereunder, this Agreement is not intended to confer upon any other
person any rights or remedies hereunder.
8.04 Counterparts. This Agreement may be executed in two or more
counterparts, each of which shall for all purposes be deemed to be an original
and all of which shall constitute the same instrument.
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8.05 Headings. The headings of the Sections and paragraphs of this
Agreement are inserted for convenience only and shall not be deemed to
constitute part of this Agreement or to affect the construction thereof.
8.06 Modification and Waiver. Any of the terms or conditions of this
Agreement may be waived in writing at any time by the party which is entitled to
the benefits thereof. No waiver of any of the provisions of this Agreement shall
be deemed to be or shall constitute a waiver of any other provision hereof
(whether or not similar).
8.07 Expenses. Except as otherwise expressly provided herein, if the
Merger is not consummated, all costs and expenses incurred in connection with
this Agreement and the transactions contemplated hereby shall be paid by the
party incurring such costs or expenses, subject to the rights of such party
contemplated under Article VII with respect to a willful breach, violation or
default by the other party hereto.
8.08 Survival of Representations and Warranties. The respective
representations and warranties of Cerulean, WellPoint and WPAC contained herein
or in any certificates or other documents delivered prior to or at the Closing
by such parties pursuant to the terms of this Agreement shall terminate upon the
consummation of the Merger and be of no further force and effect.
8.09 Notices. Any notice, request, instruction or other document to be
given hereunder by any party hereto to any other party hereto shall be in
writing and delivered personally or sent by registered or certified mail
(including by overnight courier or express mail service), postage or fees
prepaid, or sent by facsimile with original sent by overnight courier,
if to Cerulean to:
Cerulean Companies, Inc.
3350 Peachtree Road, N.E.
Capital City Plaza Building, 4th Floor
Atlanta, Georgia 30326
Attention: Mr. Hugh J. Stedman
Telecopy No.: (404) 842-8451
with a copy to:
Long Aldridge & Norman LLP
One Peachtree Center, Suite 5300
303 Peachtree Street
Atlanta, Georgia 30308
Attention: Edgar H. Sims, Jr., Esq.
Johnathan H. Short, Esq.
Telecopy No.: (404) 527-4198
if to WellPoint or WPAC to:
21555 Oxnard Street
Woodland Hills, CA 91367
Attn: General Counsel
Telecopy No.: (818) 703-4406
with a copy to:
Gibson, Dunn & Crutcher LLP
One Montgomery Street
Telesis Tower
San Francisco, CA 94104
Attn: William L. Hudson, Esq.
Telecopy No.: (415) 986-5309
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or at such other address for a party as shall be specified by like notice. Any
notice which is delivered personally in the manner provided herein shall be
deemed to have been duly given to the party to whom it is directed upon actual
receipt by such party or the office of such party. Any notice which is addressed
and mailed in the manner herein provided shall be conclusively presumed to have
been duly given to the party to which it is addressed at the close of business,
local time of the recipient, on the fourth business day after the day it is so
placed in the mail or, if earlier, the time of actual receipt.
8.10 Governing Law. This Agreement is executed by the parties hereto in
and shall be construed in accordance with and governed by the laws of Georgia
without giving effect to the principles of conflicts of law thereof.
8.11 Cerulean's Knowledge. As used herein, the terms "Cerulean's
knowledge" and "to the knowledge of Cerulean" with respect to Cerulean shall
mean the actual knowledge of any officer of Cerulean listed on Schedule 8.11.
8.12 "Including." Words of inclusion shall not be construed as terms of
limitation herein, so that references to "included" matters shall be regarded as
non-exclusive, non-characterizing illustrations.
8.13 "Gender and Number." Where the context requires, the use of a pronoun
of one gender or the neuter is to be deemed to include a pronoun of the
appropriate gender, singular words are to be deemed to include the plural, and
vice versa.
8.14 References. Whenever reference is made in this Agreement to any
Article, Section, Schedule or Exhibit, such reference shall be deemed to apply
to the specified Article or Section of this Agreement or the specified Schedule
or Exhibit to this Agreement.
8.15 Waiver of Jury Trial. Each party hereto waives its rights to a trial
by jury in connection with any matter related to the Merger or this Agreement.
8.16 Independent Arbitrator. As used herein, the term "Independent
Arbitrator" shall mean an arbitrator which is mutually acceptable to the
parties.
IN WITNESS WHEREOF, each of the parties hereto has caused this Agreement to
be duly executed on its behalf as of the date indicated on the first page
hereof.
CERULEAN COMPANIES, INC.
By: /s/ RICHARD D. SHIRK
------------------------------------
Richard D. Shirk
President and Chief Executive
Officer
WELLPOINT HEALTH NETWORKS INC.
By: /s/ LEONARD D. SCHAEFFER
------------------------------------
Leonard D. Schaeffer
Chairman and Chief Executive Officer
WATER POLO ACQUISITION CORP.
By: /s/ LEONARD D. SCHAEFFER
------------------------------------
Leonard D. Schaeffer
President
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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 Agreement 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 to 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 the 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.
IN WITNESS WHEREOF, each of the parties hereof have caused 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
------------------------------------
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SECOND AMENDMENT TO
AGREEMENT AND PLAN OF MERGER
This Second 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 December 31, 1999. Capitalized terms used
herein and not otherwise defined shall have the meaning set forth in the
Agreement.
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; and
WHEREAS, Cerulean, WellPoint and WPAC entered into a First Amendment to the
Agreement dated July 9, 1999 ("First Amendment") amending Section 7.01(b) of the
Agreement to provide that the Agreement may be terminated and the Merger
contemplated thereby may be abandoned by either Cerulean or WellPoint if the
Merger shall not have been consummated on or before December 31, 1999 (which
date was elected by WellPoint and Cerulean pursuant to the First Amendment); and
WHEREAS, Cerulean, WellPoint and WPAC desire further to amend the Agreement
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, as it read prior to the First
Amendment, shall be amended by deleting the words "the one year anniversary
of this Agreement" and inserting in their place the words "December 31,
2000." This Section 1 shall supersede Section 1 of the First Amendment.
2. Except as set forth in this Amendment, the Agreement shall remain
unmodified and shall continue in full force and effect.
IN WITNESS WHEREOF, each of the parties hereof have caused 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
------------------------------------
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APPENDIX B
OPINION OF MORGAN STANLEY & CO. INCORPORATED
AS TO THE FAIRNESS OF THE MERGER
TO THE CERULEAN SHAREHOLDERS
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MORGAN STANLEY
MORGAN STANLEY & CO.
INCORPORATED
1585 BROADWAY
NEW YORK, NEW YORK 10036
(212) 761-4000
July 8, 1998
Board of Directors
Cerulean Companies, Inc.
3350 Peachtree Road, NE
Atlanta, Georgia 30326
Members of the Board of Directors:
We understand that Cerulean Companies, Inc. (the "Company"), WellPoint
Health Networks Inc. (the "Buyer") and WellPoint Acquisition Corp., a wholly
owned subsidiary of the Buyer, ("Acquisition Sub") propose to enter into an
Agreement and Plan of Merger, substantially in the form of the draft dated July
8, 1998 (the "Merger Agreement") which provides, among other things, for the
merger (the "Merger") of the Company with and into Acquisition Sub. Pursuant to
the Merger, each outstanding share of Class A Convertible Common Stock, no par
value, of the Company (the "Class A Common Stock"), and each outstanding share
of Series A Preferred Stock, no par value, of the Company (the "Series A
Preferred Stock"), other than shares held in treasury or held by the Buyer or an
affiliate of the Buyer or as to which dissenters' rights have been perfected,
will be converted into the right to receive, at the election of the holder in
certain circumstances, either (i) a certain number of shares of common stock,
par value $0.01 per share, of the Buyer (the "Buyer Common Stock"), (ii) a
certain amount per share in cash, or (iii) a combination thereof, each
determined pursuant to a certain formula set forth in the Merger Agreement. In
addition, each outstanding share of Class B Convertible Preferred Stock, no par
value, of the Company (the "Class B Preferred Stock"), other than shares held in
treasury or held by the Buyer or any affiliate of the Buyer or as to which
dissenters' rights have been perfected, will be converted into the right to
receive a certain number of shares of the Buyer Common Stock, determined
pursuant to a certain formula set forth in the Merger Agreement. For the
purposes of this opinion, we have assumed that the Series A Preferred Stock and
the Class B Preferred Stock have been converted into Class A Common Stock
immediately prior to the consummation of the Merger. The terms and conditions of
the Merger are more fully set forth in the Merger Agreement.
You have asked for our opinion as to whether the consideration to be
received by the holders of shares of Class A Common Stock, Series A Preferred
Stock and Class B Preferred Stock pursuant to the Merger Agreement is fair from
a financial point of view to such holders.
For purposes of the opinion set forth herein, we have:
(i) reviewed certain publicly available financial statements and other
information of the Company and the Buyer;
(ii) reviewed certain internal financial statements and other
financial and operating data concerning the Company and the Buyer prepared
by the managements of the Company and the Buyer, respectively;
(iii) analyzed certain financial projections prepared by the
management of the Company;
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(iv) discussed the past and current operations and financial condition
and the prospects of the Company with senior executives of the Company;
(v) discussed the past and current operations and financial condition
and the prospects of the Buyer with senior executives of the Buyer;
(vi) reviewed the reported prices and trading activity for the Buyer
Common Stock;
(vii) compared the financial performance of the Company and the Buyer
and the trading activity of the Buyer Common Stock with that of certain
comparable publicly-traded companies and their securities;
(viii) reviewed the financial terms, to the extent publicly available,
of certain comparable acquisition transactions;
(ix) participated in discussions and negotiations among
representatives of the Company and Buyer and their financial and legal
advisors;
(x) reviewed the draft Merger Agreement and certain related documents;
and
(xi) performed such other analyses as we have deemed appropriate.
We have assumed and relied upon without independent verification the
accuracy and completeness of the information reviewed by us for the purposes of
this opinion. With respect to the financial projections, we have assumed that
they have been reasonably prepared on bases reflecting the best currently
available estimates and judgments of the future financial performance of the
Company. In addition, we have assumed that the Merger will be consummated in
accordance with the terms set forth in the Merger Agreement, including, among
other things, that the Merger will be treated as a tax-free reorganization
and/or exchange, each pursuant to the Internal Revenue Code of 1986. Morgan
Stanley has assumed that in connection with the receipt of all necessary
regulatory approvals for the proposed Merger, no restrictions will be imposed
that would have a material adverse effect upon the contemplated benefits
expected to be derived from in the proposed Merger. We have not made any
independent valuation or appraisal of the assets or liabilities of the Company,
nor have we been furnished with any such appraisals. We note that the holders of
Class B Preferred Stock will not have an election to receive cash in the Merger
and, in receiving shares of Buyer Common Stock in the transaction, may assume
the market risk of holding such stock. We also note that the capital structure
of the Company is comprised of three classes of stock, the Class A Common Stock,
the Series A Preferred Stock and the Class B Preferred Stock, and we express no
opinion as to the relative fairness of the consideration to be received among
the various classes or series of stock. Our opinion is necessarily based on
economic, market and other conditions as in effect on, and the information made
available to us of, the date hereof.
We have acted as financial advisor to the Special Committee of the Board of
Directors of the Company in connection with this transaction and will receive a
fee for our services. In the past, Morgan Stanley & Co. Incorporated and its
affiliates have provided financial advisory and financing services for the
Company and the Buyer and their affiliates and have received fees for the
rendering of these services.
It is understood that this letter is for the information of the Board of
Directors of the Company and may not be used for any other purpose without our
prior written consent, except that this opinion may be included in its entirety
in any filing made by the Company in respect of the transaction with the
Securities and Exchange Commission. In addition, this opinion does not in any
manner address the prices at which the Buyer's Common Stock will trade following
the consummation of the Merger, and Morgan Stanley expresses no opinion or
recommendation as to how the shareholders of the Company should vote at the
shareholders' meeting held in connection with the Merger. As you know, in
connection with the Merger we solicited a group of potential purchasers based
upon certain criteria developed in consultation with the Special Committee of
the Board of Directors and management of the Company.
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Based upon and subject to the foregoing, we are of the opinion on the date
hereof that the consideration to be received by the holders of shares of Class A
Common Stock, Series A Preferred Stock and Class B Preferred Stock pursuant to
the Merger Agreement is fair from a financial point of view to such holders.
Very truly yours,
MORGAN STANLEY & CO. INCORPORATED
By:
------------------------------------
Mary Anne Citrino
Managing Director
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APPENDIX C
ARTICLE 13 OF THE
GEORGIA BUSINESS CORPORATION CODE
RELATING TO RIGHTS OF
DISSENTING SHAREHOLDERS
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Official Code of Georgia Annotated Copyright 1982-1996 State of Georgia.
CODE OF GEORGIA
TITLE 14. CORPORATIONS, PARTNERSHIPS, AND ASSOCIATIONS
CHAPTER 2. BUSINESS CORPORATIONS
ARTICLE 13. DISSENTERS' RIGHTS
PART 1. RIGHT TO DISSENT AND OBTAIN PAYMENT FOR SHARES
CURRENT THROUGH THE END OF 1995 EXTRAORDINARY SESSION OF THE GENERAL ASSEMBLY
14-2-1301 Definitions.
As used in this article, the term:
(1) "Beneficial shareholder" means the person who is a beneficial
owner of shares held in a voting trust or by a nominee as the record
shareholder.
(2) "Corporate action" means the transaction or other action by the
corporation that creates dissenters' rights under Code Section 14-2-1302.
(3) "Corporation" means the issuer of shares held by a dissenter
before the corporate action, or the surviving or acquiring corporation by
merger or share exchange of that issuer.
(4) "Dissenter" means a shareholder who is entitled to dissent from
corporate action under Code Section 14-2-1302 and who exercises that right
when and in the manner required by Code Sections 14-2-1320 through
14-2-1327.
(5) "Fair value," with respect to a dissenter's shares, means the
value of the shares immediately before the effectuation of the corporate
action to which the dissenter objects, excluding any appreciation or
depreciation in anticipation of the corporate action.
(6) "Interest" means interest from the effective date of the corporate
action until the date of payment, at a rate that is fair and equitable
under all the circumstances.
(7) "Record shareholder" means the person in whose name shares are
registered in the records of a corporation or the beneficial owner of
shares to the extent of the rights granted by a nominee certificate on file
with a corporation.
(8) "Shareholder" means the record shareholder or the beneficial
shareholder.
(Code 1981, Sec. 14-2-1301, enacted by Ga. L. 1988, p. 1070, Sec. 1; Ga. L.
1993, p. 1231, Sec. 16.)
14-2-1302. Right to dissent.
(a) A record shareholder of the corporation is entitled to dissent from,
and obtain payment of the fair value of his shares in the event of, any of the
following corporate actions:
(1) Consummation of a plan of merger to which the corporation is a
party:
(A) If approval of the shareholders of the corporation is required
for the merger by Code Section 14-2-1103 or 14-2-1104 or the articles of
incorporation and the shareholder is entitled to vote on the merger; or
(B) If the corporation is a subsidiary that is merged with its
parent under Code Section 14-2-1104;
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(2) Consummation of a plan of share exchange to which the corporation
is a party as the corporation whose shares will be acquired, if the
shareholder is entitled to vote on the plan;
(3) Consummation of a sale or exchange of all or substantially all of
the property of the corporation if a shareholder vote is required on the
sale or exchange pursuant to Code Section 14-2-1202, but not including a
sale pursuant to court order or a sale for cash pursuant to a plan by which
all or substantially all of the net proceeds of the sale will be
distributed to the shareholders within one year after the date of sale;
(4) An amendment of the articles of incorporation that materially and
adversely affects rights in respect of a dissenter's shares because it:
(A) Alters or abolishes a preferential right of the shares;
(B) Creates, alters, or abolishes a right in respect of redemption,
including a provision respecting a sinking fund for the redemption or
repurchase, of the shares;
(C) Alters or abolishes a preemptive right of the holder of the
shares to acquire shares or other securities;
(D) Excludes or limits the right of the shares to vote on any
matter, or to cumulate votes, other than a limitation by dilution
through issuance of shares or other securities with similar voting
rights;
(E) Reduces the number of shares owned by the shareholder to a
fraction of a share if the fractional share so created is to be acquired
for cash under Code Section 14-2-604; or
(F) Cancels, redeems, or repurchases all or part of the shares of
the class; or
(5) Any corporate action taken pursuant to a shareholder vote to the
extent that Article 9 of this chapter, the articles of incorporation,
bylaws, or a resolution of the board of directors provides that voting or
nonvoting shareholders are entitled to dissent and obtain payment for their
shares.
(b) A shareholder entitled to dissent and obtain payment for his shares
under this article may not challenge the corporate action creating his
entitlement unless the corporate action fails to comply with procedural
requirements of this chapter or the articles of incorporation or bylaws of the
corporation or the vote required to obtain approval of the corporate action was
obtained by fraudulent and deceptive means, regardless of whether the
shareholder has exercised dissenter's rights.
(c) Notwithstanding any other provision of this article, there shall be no
right of dissent in favor of the holder of shares of any class or series which,
at the record date fixed to determine the shareholders entitled to receive
notice of and to vote at a meeting at which a plan of merger or share exchange
or a sale or exchange of property or an amendment of the articles of
incorporation is to be acted on, were either listed on a national securities
exchange or held of record by more than 2,000 shareholders, unless:
(1) In the case of a plan of merger or share exchange, the holders of
shares of the class or series are required under the plan of merger or
share exchange to accept for their shares anything except shares of the
surviving corporation or another publicly held corporation which at the
effective date of the merger or share exchange are either listed on a
national securities exchange or held of record by more than 2,000
shareholders, except for scrip or cash payments in lieu of fractional
shares; or
(2) The articles of incorporation or a resolution of the board of
directors approving the transaction provides otherwise.
(Code 1981, Sec. 14-2-1302, enacted by Ga. L. 1988, p. 1070, Sec. 1; Ga. L.
1989, p. 946, Sec. 58.)
14-2-1303. Dissent by nominees and beneficial owners.
A record shareholder may assert dissenters' rights as to fewer than all the
shares registered in his name only if he dissents with respect to all shares
beneficially owned by any one beneficial shareholder and notifies the
corporation in writing of the name and address of each person on whose behalf he
asserts
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dissenters' rights. The rights of a partial dissenter under this Code section
are determined as if the shares as to which he dissents and his other shares
were registered in the names of different shareholders.
(Code 1981, Sec. 14-2-1303, enacted by Ga. L. 1988, p. 1070, Sec. 1.)
14-2-1320. Notice of dissenters' rights.
(a) If proposed corporate action creating dissenters' rights under Code
Section 14-2-1302 is submitted to a vote at a shareholders' meeting, the meeting
notice must state that shareholders are or may be entitled to assert dissenters'
rights under this article and be accompanied by a copy of this article.
(b) If corporate action creating dissenters' rights under Code Section
14-2-1302 is taken without a vote of shareholders, the corporation shall notify
in writing all shareholders entitled to assert dissenters' rights that the
action was taken and send them the dissenters' notice described in Code Section
14-2-1322 no later than ten days after the corporate action was taken.
(Code 1981, Sec. 14-2-1320, enacted by Ga. L. 1988, p. 1070, Sec. 1; Ga. L.
1993, p. 1231, Sec. 17.)
14-2-1321. Notice of intent to demand payment.
(a) If proposed corporate action creating dissenters' rights under Code
Section 14-2-1302 is submitted to a vote at a shareholders' meeting, a record
shareholder who wishes to assert dissenters' rights:
(1) Must deliver to the corporation before the vote is taken written
notice of his intent to demand payment for his shares if the proposed
action is effectuated; and
(2) Must not vote his shares in favor of the proposed action.
(b) A record shareholder who does not satisfy the requirements of
subsection (a) of this Code section is not entitled to payment for his shares
under this article.
(Code 1981, Sec. 14-2-1321, enacted by Ga. L. 1988, p. 1070, Sec. 1.)
Official Code of Georgia Annotated Copyright 1982-1996 State of Georgia.
14-2-1322. Dissenters' notice.
(a) If proposed corporate action creating dissenters' rights under Code
Section 14-2-1302 is authorized at a shareholders' meeting, the corporation
shall deliver a written dissenters' notice to all shareholders who satisfied the
requirements of Code Section 14-2-1321.
(b) The dissenters' notice must be sent no later than ten days after the
corporate action was taken and must:
(1) State where the payment demand must be sent and where and when
certificates for certificated shares must be deposited;
(2) Inform holders of uncertificated shares to what extent transfer of
the shares will be restricted after the payment demand is received;
(3) Set a date by which the corporation must receive the payment
demand, which date may not be fewer than 30 nor more than 60 days after the
date the notice required in subsection (a) of this Code section is
delivered; and
(4) Be accompanied by a copy of this article.
(Code 1981, Sec. 14-2-1322, enacted by Ga. L. 1988, p. 1070, Sec. 1.)
14-2-1323. Duty to demand payment.
(a) A record shareholder sent a dissenters' notice described in Code
Section 14-2-1322 must demand payment and deposit his certificates in accordance
with the terms of the notice.
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(b) A record shareholder who demands payment and deposits his shares under
subsection (a) of this Code section retains all other rights of a shareholder
until these rights are canceled or modified by the taking of the proposed
corporate action.
(c) A record shareholder who does not demand payment or deposit his share
certificates where required, each by the date set in the dissenters' notice, is
not entitled to payment for his shares under this article.
(Code 1981, Sec. 14-2-1323, enacted by Ga. L. 1988, p. 1070, Sec. 1.)
14-2-1324. Share restrictions.
(a) The corporation may restrict the transfer of uncertificated shares from
the date the demand for their payment is received until the proposed corporate
action is taken or the restrictions released under Code Section 14-2-1326.
(b) The person for whom dissenters' rights are asserted as to
uncertificated shares retains all other rights of a shareholder until these
rights are canceled or modified by the taking of the proposed corporate action.
(Code 1981, Sec. 14-2-1324, enacted by Ga. L. 1988, p. 1070, Sec. 1.)
14-2-1325. Offer of payment.
(a) Except as provided in Code Section 14-2-1327, within ten days of the
later of the date the proposed corporate action is taken or receipt of a payment
demand, the corporation shall by notice to each dissenter who complied with Code
Section 14-2-1323 offer to pay to such dissenter the amount the corporation
estimates to be the fair value of his or her shares, plus accrued interest.
(b) The offer of payment must be accompanied by:
(1) The corporation's balance sheet as of the end of a fiscal year
ending not more than 16 months before the date of payment, an income
statement for that year, a statement of changes in shareholders' equity for
that year, and the latest available interim financial statements, if any;
(2) A statement of the corporation's estimate of the fair value of the
shares;
(3) An explanation of how the interest was calculated;
(4) A statement of the dissenter's right to demand payment under Code
Section 14-2-1327; and
(5) A copy of this article.
(c) If the shareholder accepts the corporation's offer by written notice to
the corporation within 30 days after the corporation's offer or is deemed to
have accepted such offer by failure to respond within said 30 days, payment for
his or her shares shall be made within 60 days after the making of the offer or
the taking of the proposed corporate action, whichever is later.
(Code 1981, Sec. 14-2-1325, enacted by Ga. L. 1988, p. 1070, Sec. 1; Ga. L.
1989, p. 946, Sec. 59; Ga. L. 1993, p. 1231, Sec. 18.)
14-2-1326. Failure to take action.
(a) If the corporation does not take the proposed action within 60 days
after the date set for demanding payment and depositing share certificates, the
corporation shall return the deposited certificates and release the transfer
restrictions imposed on uncertificated shares.
(b) If, after returning deposited certificates and releasing transfer
restrictions, the corporation takes the proposed action, it must send a new
dissenters' notice under Code Section 14-2-1322 and repeat the payment demand
procedure.
(Code 1981, Sec. 14-2-1326, enacted by Ga. L. 1988, p. 1070, Sec. 1; Ga. L.
1990, p. 257, Sec. 20.)
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14-2-1327. Procedure if shareholder dissatisfied with payment or offer.
(a) A dissenter may notify the corporation in writing of his own estimate
of the fair value of his shares and amount of interest due, and demand payment
of his estimate of the fair value of his shares and interest due, if:
(1) The dissenter believes that the amount offered under Code Section
14-2-1325 is less than the fair value of his shares or that the interest
due is incorrectly calculated; or
(2) The corporation, having failed to take the proposed action, does
not return the deposited certificates or release the transfer restrictions
imposed on uncertificated shares within 60 days after the date set for
demanding payment.
(b) A dissenter waives his or her right to demand payment under this Code
section and is deemed to have accepted the corporation's offer unless he or she
notifies the corporation of his or her demand in writing under subsection (a) of
this Code section within 30 days after the corporation offered payment for his
or her shares, as provided in Code Section 14-2-1325.
(c) If the corporation does not offer payment within the time set forth in
subsection (a) of Code Section 14-2-1325:
(1) The shareholder may demand the information required under
subsection (b) of Code Section 14-2-1325, and the corporation shall provide
the information to the shareholder within ten days after receipt of a
written demand for the information; and
(2) The shareholder may at any time, subject to the limitations period
of Code Section 14-2-1332, notify the corporation of his own estimate of
the fair value of his shares and the amount of interest due and demand
payment of his estimate of the fair value of his shares and interest due.
(Code 1981, Sec. 14-2-1327, enacted by Ga. L. 1988, p. 1070, Sec. 1; Ga. L.
1989, p. 946, Sec. 60; Ga. L. 1990, p. 257, Sec. 21; Ga. L. 1993, p. 1231, Sec.
19.)
14-2-1330 Court action.
(a) If a demand for payment under Code Section 14-2-1327 remains unsettled,
the corporation shall commence a proceeding within 60 days after receiving the
payment demand and petition the court to determine the fair value of the shares
and accrued interest. If the corporation does not commence the proceeding within
the 60 day period, it shall pay each dissenter whose demand remains unsettled
the amount demanded.
(b) The corporation shall commence the proceeding, which shall be a nonjury
equitable valuation proceeding, in the superior court of the county where a
corporation's registered office is located. If the surviving corporation is a
foreign corporation without a registered office in this state, it shall commence
the proceeding in the county in this state where the registered office of the
domestic corporation merged with or whose shares were acquired by the foreign
corporation was located.
(c) The corporation shall make all dissenters, whether or not residents of
this state, whose demands remain unsettled parties to the proceeding, which
shall have the effect of an action quasi in rem against their shares. The
corporation shall serve a copy of the petition in the proceeding upon each
dissenting shareholder who is a resident of this state in the manner provided by
law for the service of a summons and complaint, and upon each nonresident
dissenting shareholder either by registered or certified mail or statutory
overnight delivery or by publication, or in any other manner permitted by law.
(d) The jurisdiction of the court in which the proceeding is commenced
under subsection (b) of this Code section is plenary and exclusive. The court
may appoint one or more persons as appraisers to receive evidence and recommend
decision on the question of fair value. The appraisers have the powers described
in the order appointing them or in any amendment to it. Except as otherwise
provided in this chapter,
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Chapter 11 of Title 9, known as the "Georgia Civil Practice Act," applies to any
proceeding with respect to dissenters' rights under this chapter.
(e) Each dissenter made a party to the proceeding is entitled to judgment
for the amount which the court finds to be the fair value of his shares, plus
interest to the date of judgment.
(Code 1981, Sec. 14-2-1330, enacted by Ga. L. 1988, p. 1070, Sec. 1; Ga. L.
1989, p. 946, Sec. 61; Ga. L. 1993, p. 1231, Sec. 20.)
14-2-1331 Court costs and counsel fees.
(a) The court in an appraisal proceeding commenced under Code Section
14-2-1330 shall determine all costs of the proceeding, including the reasonable
compensation and expenses of appraisers appointed by the court, but not
including fees and expenses of attorneys and experts for the respective parties.
The court shall assess the costs against the corporation, except that the court
may assess the costs against all or some of the dissenters, in amounts the court
finds equitable, to the extent the court finds the dissenters acted arbitrarily,
vexatiously, or not in good faith in demanding payment under Code Section
14-2-1327.
(b) The court may also assess the fees and expenses of attorneys and
experts for the respective parties, in amounts the court finds equitable:
(1) Against the corporation and in favor of any or all dissenters if
the court finds the corporation did not substantially comply with the
requirements of Code Sections 14-2-1320 through 14-2-1327; or
(2) Against either the corporation or a dissenter, in favor of any
other party, if the court finds that the party against whom the fees and
expenses are assessed acted arbitrarily, vexatiously, or not in good faith
with respect to the rights provided by this article.
(c) If the court finds that the services of attorneys for any dissenter
were of substantial benefit to other dissenters similarly situated, and that the
fees for those services should not be assessed against the corporation, the
court may award to these attorneys reasonable fees to be paid out of the amounts
awarded the dissenters who were benefited.
(Code 1981, Sec. 14-2-1331, enacted by Ga. L. 1988, p. 1070, Sec. 1.)
14-2-1332 Limitation of actions.
No action by any dissenter to enforce dissenters' rights shall be brought
more than three years after the corporate action was taken, regardless of
whether notice of the corporate action and of the right to dissent was given by
the corporation in compliance with the provisions of Code Section 14-2-1320 and
Code Section 14-2-1322.
(Code 1981, Sec. 14-2-1332, enacted by Ga. L. 1988, p. 1070, Sec. 1.)
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APPENDIX D
CERTIFICATE OF INCORPORATION OF WELLPOINT
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RESTATED
CERTIFICATE OF INCORPORATION
OF
WELLPOINT HEALTH NETWORKS INC.
(PURSUANT TO SECTION 245)
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The undersigned, LEONARD D. SCHAEFFER and THOMAS C. GEISER, hereby certify
that:
One: They are the Chief Executive Officer and Secretary,
respectively, of WellPoint Health Networks Inc. (the "Corporation").
WellPoint Health Networks Inc. was originally incorporated under the same
name, and the original Certificate of Incorporation of the Corporation was
filed with the Secretary of State of the State of Delaware on August 29,
1996.
Two: Pursuant to Sections 242 and 245 of the General Corporation Law
of the State of Delaware, this Restated Certificate of Incorporation
restates and integrates and further amends the provisions of the
Certificate of Incorporation of this Corporation.
Three: The Certificate of Incorporation of the Corporation is hereby
restated and amended to read in its entirety as follows:
ARTICLE I
NAME
The name of the corporation (hereinafter called the "Corporation") is
WellPoint Health Networks Inc.
ARTICLE II
PURPOSE
Section 1. The nature of the business or purposes to be conducted or
promoted is to engage in any lawful act or activity for which corporations may
be organized under the General Corporation Law of Delaware ("DGCL").
ARTICLE III
AUTHORIZED CAPITAL STOCK
Section 1. The total number of shares of all classes of stock which the
Corporation shall have authority to issue is three hundred and fifty million
(350,000,000) shares as follows: (a) three hundred million (300,000,000) shares
of Common Stock, $.01 par value per share ("Common Stock"), and (b) fifty
million (50,000,000) shares of Preferred Stock, $.01 par value per share
("Preferred Stock").
Section 2. The rights, preferences, privileges and restrictions of the
classes of stock of the Corporation and the express grant of authority to the
Board of Directors to fix by resolution the rights, preferences, privileges and
restrictions relating to the classes of stock of the Corporation which are not
fixed by this Restated Certificate of Incorporation, are as follows:
COMMON STOCK
A. Dividends. Subject to any other provisions of this Restated Certificate
of Incorporation, as amended from time to time, holders of Common Stock shall be
entitled to receive such dividends and other distributions in cash, stock or
property of the Corporation as may be declared thereon from time to time by the
Board of Directors of the Corporation (the "Board of Directors") out of assets
or funds of the Corporation legally available therefor.
B. Voting. (i) At every meeting of the stockholders, every holder of
Common Stock shall be entitled to one (1) vote in person or by proxy for each
share of Common Stock standing in his or her name on the transfer books of the
Corporation.
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(ii) The provisions of this Article III of this Restated Certificate of
Incorporation shall not be modified, revised, altered or amended, repealed or
rescinded, in whole or in part, without the affirmative vote of the holders of a
majority of the shares of Common Stock.
PREFERRED STOCK
The Board of Directors is authorized to provide, by resolution, for the
issuance of one or more series of Preferred Stock out of the unissued shares of
Preferred Stock and the Board of Directors is authorized to determine the
designation and to fix the number of shares of each series. Except as maybe
required by law, the shares in any series of Preferred stock need not be
identical to any other series of Preferred Stock or any other class. The Board
of Directors of the Corporation is further authorized to determine or alter the
rights, preferences, privileges, and restrictions granted to or imposed upon any
wholly unissued series of Preferred Stock, and to increase or decrease (but not
below the number of shares of such series then outstanding) the number of shares
of any series of Preferred Stock subsequent to the issue of shares of that
series.
ARTICLE IV
BOARD OF DIRECTORS AND STOCKHOLDER MEETINGS
The following provisions are inserted for the management of the business
and for the conduct of the affairs of the Corporation, and for further
definition, limitation and regulation of the powers of the Corporation and of
its directors and stockholders:
Section 1. The business and affairs of the Corporation shall be managed by
or under the direction of a Board of Directors consisting of not less than nine
nor more than seventeen directors, the exact number of directors to be
determined in accordance with the Bylaws of the Corporation. The directors shall
be divided into three classes, designated Class I, Class II and Class III. Each
class shall consist, as nearly as may be possible, of one-third of the total
number of directors constituting the entire Board of Directors. At each annual
meeting of stockholders beginning in 1998, successors to the class of directors
whose term expires at that annual meeting shall be elected for a three-year
term. If the number of directors is changed, any increase or decrease shall be
apportioned among the classes so as to maintain the number of directors in each
class as nearly equal as possible, but in no case shall a decrease in the number
of directors shorten the term of any incumbent director. A director shall hold
office until the annual meeting for the year in which his term expires and until
his successor shall be elected and shall qualify, subject, however, to prior
death, resignation, retirement, disqualification or removal from office.
Section 2. In the case of any vacancy on the Board of Directors, including
any vacancy created by the removal of a director, or in the case of any newly
created directorship, a director elected to fill the vacancy or the newly
created directorship for the unexpired portion of the term being filled shall be
elected pursuant to the procedures set forth in the Bylaws of the Corporation.
The director elected to fill a vacancy shall hold office for the unexpired term
in respect of which the vacancy occurred and until his successor shall be
elected and shall qualify or until his or her earlier death, resignation or
removal.
Section 3. Any director or the entire Board of Directors may be removed,
with or without cause, by the affirmative vote of the holders of a majority of
the voting power of the shares of the Corporation's stock entitled to vote at an
election of directors. However, a director may not be removed without cause if
the votes cast against removal of the director would be sufficient to elect the
director if voted cumulatively (without regard to whether shares may otherwise
be voted cumulatively) at an election at which the same total number of votes
were cast and either the number of directors elected at the most recent annual
meeting of the stockholders, or if greater, the number of directors for whom
removal is being sought, were then being elected.
Section 4. Whenever the holders of any series of Preferred Stock issued by
the Corporation or of any other securities of the Corporation shall have the
right, voting separately by series, to elect directors at
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an annual or special meeting of stockholders, the election, term of office,
filling of vacancies and other features of such directorships shall be governed
by the terms of this Restated Certificate of Incorporation applicable thereto.
Section 5. Election of Directors need not be by ballot unless a
stockholder demands election by ballot at the meeting and before the voting
begins or unless the Bylaws so require.
Section 6. The Board of Directors shall have the concurrent power with the
stockholders to make, alter, amend, change, add to or repeal (collectively,
"Change") the Bylaws of the Corporation.
Section 7. Meetings of the stockholders of the Corporation for any purpose
or purposes may be held within or without the State of Delaware, as the Bylaws
may provide.
Section 8. No action required or permitted to be taken at any annual or
special meeting of stockholders of the Corporation may be taken by written
consent without a meeting of such stockholders.
Section 9. Special meetings of the stockholders of the Corporation for any
purpose or purposes may be called at any time by the Chairman of the Board, the
President, a majority of the members of the Board of Directors or the holders of
shares entitled to cast not less than 10% of the votes at the meeting. Such
special meeting may not be called by any other person or persons or in any other
manner.
Section 10. The approval of the greater of at least two-thirds or seven of
the directors of the Corporation then in office shall be required for the Board
of Directors to approve and authorize any of the following:
(a) any amendment to this Restated Certificate of Incorporation of the
Corporation; and
(b) the amendment of Sections 8 and 10 of Article II, Sections 2, 3
and 14 of Article III, Sections 1 and 2 of Article IV, and Sections 6 and 7
of Article V of the Bylaws of the Corporation.
ARTICLE V
INDEMNIFICATION
Section 1. Other than in the case of an action by, or in the right of, the
Corporation, the Corporation shall indemnify any person who was or is a party or
is threatened to be made a party to any threatened, pending or completed action,
suit or proceeding, whether civil, criminal, administrative or investigative, by
reason of the fact that he or she is or was a director or an officer of the
Corporation or of a Predecessor Corporation, against expenses (including, but
not limited to, attorneys' fees), judgments, fines and amounts paid in
settlement actually and reasonably incurred by him or her in connection with
such action, suit or proceeding to the fullest extent and in the manner set
forth in and permitted by the DGCL and any other applicable law, as from time to
time in effect. To the maximum extent permitted by the DGCL, the Corporation
shall advance expenses (including attorneys' fees) incurred by any person
indemnified hereunder in defending any civil, criminal, administrative or
investigative action, suit or proceeding upon an undertaking by or on behalf of
such person to repay such amount if it shall ultimately be determined that he or
she is not entitled to be indemnified by the Corporation. Such rights of
indemnification and advancement of expenses shall not be deemed to be exclusive
of any other rights to which such director or officer may be entitled apart from
the foregoing provisions. The foregoing provisions of this Section 1 shall be
deemed to be a contract between the Corporation (or any Predecessor Corporation)
and each director and officer who serves in such capacity at any time while this
Section 1 and the relevant provisions of the DGCL and other applicable law, if
any, are in effect, and any repeal or modification thereof shall not affect any
rights or obligations then existing, with respect to any state of facts then or
theretofore existing, or any action, suit or proceeding theretofore or
thereafter brought or threatened based in whole or in part upon any such state
of facts. For purposes hereof "Predecessor Corporation" shall mean WellPoint
Health Networks Inc., a California corporation ("WellPoint California").
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Section 2. The Corporation may indemnify any person who was or is a party
or is threatened to be made a party to any threatened, pending or completed
action, suit or proceedings whether civil, criminal, administrative or
investigative, by reason of the fact that he or she is or was an employee or
agent of the Corporation (or a Predecessor Corporation), or is or was serving at
the request of the Corporation (or a Predecessor Corporation), as a director,
officer, employee or agent of another corporation, partnership, joint venture,
trust or other enterprise, against expenses (including, but not limited to,
attorneys' fees), judgments, fines and amounts paid in settlement actually and
reasonably incurred by him in connection with such action, suit or proceeding to
the extent and in the manner set forth in and permitted by the DGCL and any
other applicable law as from time to time in effect. Such right of
indemnification shall not be deemed to be exclusive of any other rights to which
any such person may be entitled apart from the foregoing provisions.
ARTICLE VI
LIABILITY FOR BREACH OF FIDUCIARY DUTY
A Director of the Corporation shall not be personally liable to the
Corporation or its stockholders for monetary damages for breach of fiduciary
duty as a Director, except for liability (i) for any breach of the Director's
duty of loyalty to the Corporation or its stockholders, (ii) for acts or
omissions not in good faith or which involve intentional misconduct or a knowing
violation of law, (iii) under Section 174 of the Delaware General Corporation
Law, or (iv) for any transaction from which the Director derived any improper
personal benefit. If the Delaware General Corporation Law is hereafter amended
to authorize, with the approval of a corporation's stockholders, further
reductions in the liability of the corporation's directors for breach of
fiduciary duty, then a Director of the Corporation shall not be liable for any
such breach to the fullest extent permitted by the Delaware General Corporation
Law as so amended. Any repeal or modification of the foregoing provisions of
this Article VI by the stockholders of the Corporation shall not adversely
affect any right or protection of a Director of the Corporation existing at the
time of such repeal or modification.
ARTICLE VII
RESTRICTION ON TRANSFER
Section 1. No Person (as defined in Section 14 below) shall Beneficially
Own (as defined in Section 14 below) shares of Capital Stock (as defined in
Section 14 below) in excess of the Ownership Limit (as defined in Section 14
below). Any Transfer (as defined in Section 14 below) that, if effective, would
result in any Person Beneficially Owning Capital Stock in excess of the
Ownership Limit shall result in such intended transferee acquiring no rights in
such shares of Capital Stock (other than those rights expressly granted in this
Article VII) and such number of shares of Capital Stock shall be deemed
transferred to the Share Escrow Agent (as defined in Section 14 below) as set
forth in this Article VII.
Section 2. If, notwithstanding any other provisions of this Article VII,
there is a purported Transfer or other change in the capital structure of the
Corporation such that any Person would Beneficially Own shares of Capital Stock
in excess of the Ownership Limit (a "Purported Owner"), then, upon such Transfer
or change in capital structure, such shares of Capital Stock in excess of the
Ownership Limit shall be Excess Shares for purposes of this Article VII;
provided, however, that in the event that any Person becomes a Purported Owner
as a result of Beneficial Ownership of Capital Stock of one Person being
aggregated with another Person, then the number of Excess Shares subject to this
Article VII shall be allocated pro rata among each Purported Owner in proportion
to each Person's total Beneficial Ownership (without regard to any aggregation
with another Person pursuant to Section 14(b)(4) or (5) of this Article VII).
Upon the occurrence of any event that would cause any Person to exceed the
Ownership Limit (including without limitation the expiration of a voting trust,
without being renewed on substantially similar terms, that entitled such Person
to an exemption from the Ownership Limit), all shares of Capital Stock
Beneficially Owned by such Person in excess of the Ownership Limit shall also be
Excess Shares for
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purposes of this Article VII, such Person shall be deemed the Purported Owner of
such Excess Shares and such Person's rights in such Excess Shares shall be as
prescribed in this Article VII.
Excess Shares shall not constitute a separate class of Capital Stock.
Section 3. If the Corporation at any time determines that a Transfer has
taken place in violation of Section 1 of this Article VII or that a Purported
Owner intends to acquire or has attempted to acquire Beneficial Ownership of any
shares of Capital Stock in violation of Section 1 of this Article VII, the
Corporation shall take such action as it deems advisable to refuse to give
effect to or to prevent such Transfer, including, without limitation, refusing
to give effect to such Transfer on the books of the Corporation or instituting
proceedings to enjoin or rescind such Transfer; provided, however, that any
purported Transfers in violation of Section 1 of this Article VII shall
automatically result in all shares of Capital Stock in excess of the Ownership
Limit being deemed Excess Shares. Notwithstanding the foregoing, nothing
contained in this Article VII shall limit the authority of the Corporation to
take such other action as it deems necessary or advisable to protect the
Corporation and the interests of its stockholders.
Section 4. Any Purported Owner who acquires or attempts to acquire shares
of Capital Stock in violation of Section l of this Article VII, or any Purported
Owner who is a transferee such that any shares of Capital Stock are deemed
Excess Shares under Section 2 of this Article VII, shall immediately give
written notice to the Corporation of such event and shall provide to the
Corporation such other information as the Corporation may request.
Section 5. Each certificate for Capital Stock issued by the Corporation
shall bear the following legend:
The shares of stock represented by this certificate are subject to
restrictions on ownership and transfer. No Person shall Beneficially Own
shares of Capital Stock in excess of the Ownership Limit (as defined in
Article VII, Section 14 of the Restated Certificate of Incorporation of the
Corporation). Subject to certain limited specific exemptions, Beneficial
Ownership of 5% or more of the outstanding shares of any class of Capital
Stock will exceed the Ownership Limit. These provisions have been designed
to ensure that the Corporation will not violate the terms of the License
Agreement between the Corporation and the Blue Cross and Blue Shield
Association (the "BCBSA"). The Corporation maintains at its principal
executive office a copy of the applicable requirements of the BCBSA
relating to such restrictions on ownership and transfer, as such
requirements may be amended from time to time, which are open to inspection
by the stockholders, at all reasonable times during office hours. Any
Person who attempts to beneficially own shares in violation of this
limitation must immediately notify the Corporation. All capitalized terms
in this legend have the meanings ascribed to them in the Corporation's
Restated Certificate of Incorporation, as the same may be amended from time
to time, a copy of which, including the restrictions on ownership and
transfer, will be sent without charge to each stockholder who so requests.
Upon the occurrence of any event that would cause any Person to exceed the
Ownership Limit (including without limitation the expiration of a voting
trust that entitled such Person to an exemption from the Ownership Limit),
all shares of Capital Stock Beneficially Owned by such Person in excess of
the Ownership Limit will automatically be deemed Excess Shares and be
transferred immediately to the Share Escrow Agent and be subject to the
provisions of the Corporation's Restated Certificate of Incorporation and
the Share Escrow Agent Agreement, a copy of which the Corporation maintains
at its principal executive office. The foregoing summary of the
restrictions on ownership and transfer is qualified in its entirety by
reference to the Corporation's Restated Certificate of Incorporation.
Section 6. Upon the occurrence of a Transfer or an event that results in
Excess Shares pursuant to Section 2 of this Article VII, such Excess Shares
shall automatically be transferred immediately to the Share Escrow Agent, which
Excess Shares, subject to the provisions of this Article VII, shall be held by
the Share Escrow Agent until such time as the Excess Shares are transferred to a
Person whose acquisition thereof will not violate the Ownership Limit (a
"Permitted Transferee") and the Share Escrow Agent shall be authorized to
execute any and all documents sufficient to transfer title to any Permitted
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Transferee, even in the absence of receipt of certificate(s) representing Excess
Shares. The Corporation shall take such actions as it deems necessary to give
effect to such transfer to the Share Escrow Agent, including by issuing a stop
transfer order to the Corporation's transfer agent with respect to any attempted
transfer by the Purported Owner or its nominee of any Excess Shares and by
giving effect, or by instructing the Corporation's transfer agent to give
effect, to such transfer to a Permitted Transferee on the books of the
Corporation. Excess Shares so held shall be issued and outstanding shares of
Capital Stock. The Purported Owner shall have no rights in such Excess Shares
except as provided in Sections 7, 8, and 11 of this Article VII and the
administration of the Excess Shares escrow shall be governed by the terms of a
Share Escrow Agent Agreement.
Section 7. The Share Escrow Agent, as record holder of Excess Shares,
shall be entitled to receive all dividends and distributions as may be declared
by the Board of Directors with respect to Excess Shares (the "Excess Share
Dividends") and shall hold the Excess Share Dividends until disbursed in
accordance with the provisions of Section 11 following. The Purported Owner,
with respect to Excess Shares purported to be Beneficially Owned by such
Purported Owner prior to such time that the Corporation determines that such
shares are Excess Shares, shall repay to the Share Escrow Agent the amount of
any Excess Share Dividends received by it that (i) are attributable to any
Excess Shares and (ii) the record date of which is on or after the date that
such shares become Excess Shares. The Corporation shall take all measures that
it determines reasonably necessary to recover the amount of any Excess Share
Dividends paid to a Purported Owner, including, if necessary, withholding any
portion of future dividends or distributions payable on shares of Capital Stock
Beneficially Owned by any Purported Owner (including on shares which fall below
the Ownership Limit as well as on Excess Shares), and, as soon as practicable
following the Corporation's receipt or withholding thereof, shall pay over to
the Share Escrow Agent the dividends so received or withheld, as the case may
be.
Section 8. In the event of any voluntary or involuntary liquidation,
dissolution, or winding up of, or any distribution of the assets of, the
Corporation, the Share Escrow Agent shall be entitled to receive, ratably with
each other holder of Capital Stock of the same class or series, that portion of
the assets of the Corporation that is available for distribution to the holders
of such class or series of Capital Stock. The Share Escrow Agent shall
distribute to the Purported Owner the amounts received upon such liquidations,
dissolution or winding up or distribution in accordance with the provisions of
Section 11 of this Article VII.
Section 9. The Share Escrow Agent shall be entitled to vote all Excess
Shares. The Share Escrow Agent shall be instructed by the Corporation to vote,
consent or assent the Excess Shares as follows: (i) if the matter concerned is
the election of directors, the Share Escrow Agent shall vote, consent or assent
the whole number of Excess Shares held by the Share Escrow Agent for each
director by multiplying the number of votes held in escrow by a fraction, the
numerator of which is the number of Nonaffiliated Votes cast for the director
and the denominator of which is the number of Nonaffiliated Votes that could
have been cast in the election of the director and are present in person or by
proxy at the meeting; (ii) where the matter under the DGCL or this Restated
Certificate of Incorporation or the Bylaws of the Corporation requires at least
an absolute majority of all outstanding shares of Common Stock in order to be
effected, then the Share Escrow Agent shall vote, assent or consent all of such
Excess Shares in favor of or in opposition to such matter as the majority of all
Nonaffiliated Votes are cast; and (iii) on all other matters, the Share Escrow
Agent shall at all times vote, assent or consent all of such shares in the
identical proportion in favor of or in opposition to such matter as
Nonaffiliated Votes are cast. If any calculation of votes under the preceding
sentence would require a fractional vote, the Share Escrow Agent shall vote the
next lower number of whole Excess Shares. The Share Escrow Agent shall use all
reasonable commercial efforts to ensure, with respect to Excess Shares, that
such Excess Shares are counted as being present for the purposes of any quorum
required for stockholder action of the Corporation and to vote as set forth
above. For purposes of this Restated Certificate of Incorporation,
"Nonaffiliated Votes" shall mean the votes cast by stockholders other than any
Share Escrow Agent with respect to Excess Shares.
Section 10. (a) In an orderly fashion so as not to materially adversely
affect the price of Common Stock on the New York Stock Exchange or, if Common
Stock is not listed on the New York Stock
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Exchange, on the exchange or other principal market on which Common Stock is
traded, the Share Escrow Agent shall sell or cause the sale of Excess Shares at
such time or times as the Share Escrow Agent determines to be appropriate. The
Share Escrow Agent shall have the right to take such actions as the Share Escrow
Agent deems appropriate to seek to restrict sale of the shares to Permitted
Transferees.
(b) The Share Escrow Agent shall have the power to convey to the purchaser
of any Excess Shares sold by the Share Escrow Agent ownership of the Excess
Shares free of any interest of the Purported Owner of those Excess Shares and
free of any other adverse interest arising through the Purported Owner.
(c) Upon acquisition by any Permitted Transferee of any Excess Shares sold
by the Share Escrow Agent or the Purported Owner, such shares shall upon such
sale cease to be Excess Shares and shall become regular shares of Capital Stock
in the class to which the Excess Shares belong, and the purchaser of such shares
shall acquire such shares free of any claims of the Share Escrow Agent or the
Purported Owner.
(d) To the extent permitted by law, none of the Corporation, the Share
Escrow Agent or anyone else shall have any liability to the Purported Owner or
anyone else by reason of any action or inaction the Corporation or the Share
Escrow Agent shall take which either shall in good faith believe to be within
the scope of its authority under this Article VII or by reason of any decision
as to when or how to sell any Excess Shares or by reason of any other action or
inaction in connection with activities under this Article VII which docs not
constitute gross negligence or willful misconduct. Without limiting by
implication the scope of the preceding sentence, to the extent permitted by law,
(a) neither the Share Escrow Agent nor the Corporation shall have any liability
on grounds that either failed to take actions which would have produced higher
proceeds for any of the Excess Shares or by reason of the manner or timing for
any disposition of any Excess Shares and (b) the Share Escrow Agent shall not be
deemed to be a fiduciary or Agent of any Purported Owner.
Section 11. The proceeds from the sale of the Excess Shares to a Permitted
Transferee and any Excess Share Dividends shall be distributed as follows: (i)
first, to the Share Escrow Agent for any costs and expenses incurred in respect
of its administration of the Excess Shares that have not theretofore been
reimbursed by the Corporation; (ii) second, to the Corporation for all costs and
expenses incurred by the Corporation in connection with the appointment of the
Share Escrow Agent, the payment of fees to the Share Escrow Agent with respect
to the services provided by the Share Escrow Agent in respect of the escrow and
all funds expended by the Corporation to reimburse the Share Escrow Agent for
costs and expenses incurred by the Share Escrow Agent in respect of its
administration of the Excess Shares and for all fees, disbursements and expenses
incurred by the Share Escrow Agent in connection with the sale of the Excess
Shares; and (iii) third, the remainder thereof (as the case may be) to the
Purported Owner or the Person who was the holder of record before the shares
were transferred to the Share Escrow Agent (depending on who shall at such time
be entitled to any economic interest in the Excess Shares); provided, however,
if the Share Escrow Agent shall have any questions as to whether any security
interest or other interest adverse to the Purported Owner shall have existed
with respect to any Excess Shares, the Share Escrow Agent shall not be obligated
to disburse proceeds for those shares until the Share Escrow Agent is provided
with such evidence as the Share Escrow Agent shall deem necessary to determine
the parties who shall be entitled such proceeds.
Section 12. Subject to Section 13 of this Article VII, nothing contained
in this Article VII or in any other provision of this Restated Certificate of
Incorporation shall limit the authority of the Corporation to take such other
action as it deems necessary or advisable to protect the Corporation and the
interests of its stockholders.
Section 13. Nothing in this Restated Certificate of Incorporation shall
preclude the settlement of any transactions entered into through the facilities
of the New York Stock Exchange or any other exchange or through the means of any
automated quotation system now or hereafter in effect.
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Section 14. The following definitions shall apply with respect to this
Article VII:
(a) "affiliate" and "associate" shall have the respective meanings
ascribed to such terms in Rule 12b-2 of the General Rules and Regulations
under the Securities Exchange Act of 1934, as amended or supplemented (the
"Exchange Act") at the time as of which the term shall be applied and any
other federal law which BCBSA shall reasonably judge to have replaced or
supplemented the coverage of the Exchange Act as in effect at May 20, 1996.
(b) Except as is provided in (c) of this Section 14, a Person shall be
deemed to "Beneficially Own," be the "Beneficial Owner" of or have
"Beneficial Ownership" of any Capital Stock:
(1) in which such Person shall then have a direct or indirect
beneficial ownership interest;
(2) in which such Person shall have the right to acquire any direct
or indirect beneficial ownership interest pursuant to any option or
other agreement (either immediately or after the passage of time or the
occurrence of any contingency);
(3) which such Person shall have the right to vote;
(4) in which such Person shall hold any other interest which would
count in determining whether such Person would be required to file a
Schedule 13D; or
(5) which shall be Beneficially Owned (under the concepts provided
in the preceding clauses) by any affiliate or associate of the
particular Person or by any other Person with whom the particular Person
or any such affiliate or associate has any agreement, arrangement or
understanding (other than customary agreements with and between
underwriters and selling group members with respect to a bona fide
public offering of securities and other than pursuant to that certain
Registration Rights Agreement between the Corporation and Western Health
Partnerships dated as of May 20, 1996 relating to the acquisition,
holding, voting or disposing of any securities of the Corporation).
(c) The following provisions are included to clarify (b) above: (1) A
Person shall not be deemed to Beneficially Own, be the Beneficial Owner of,
or have Beneficial Ownership of Capital Stock by reason of possessing the
right to vote if (i) such right arises solely from a revocable proxy or
consent given to such Person in response to a public proxy or consent
solicitation made pursuant to, and in accordance with, the applicable rules
and regulations promulgated under the Exchange Act, and (ii) such Person is
not the Purported Owner of any Excess Shares, is not named as holding a
beneficial ownership interest in any Capital Stock in any filing on
Schedule 13D and is not an affiliate or associate of any such Purported
Owner or named Person.
(2) A member of a national securities exchange or a registered
depositary shall not be deemed to Beneficially Own, be the Beneficial
Owner of or have Beneficial Ownership of Capital Stock held directly or
indirectly by it on behalf of another Person (and not for its own
account) solely because such member or depositary is the record holder
of such Capital Stock, and (in the case of such member), pursuant to the
rules of such exchange, such member may direct the vote of such Capital
Stock without instruction on matters which are uncontested and do not
affect substantially the rights or privileges of the holders of the
Capital Stock to be voted but is otherwise precluded by the rules of
such exchange from voting such Capital Stock without instruction on
either contested matters or matters that may affect substantially the
rights or the privileges of the holders of such Capital Stock to be
voted.
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(3) A Person who in the ordinary course of business is a pledgee of
Capital Stock under a written pledge agreement shall not be deemed to
Beneficially Own, be the Beneficial Owner of or have Beneficial
Ownership of such pledged Capital Stock solely by reason of such pledge
until the pledgee has taken all formal steps which are necessary to
declare a default or has otherwise acquired the power to vote or to
direct to vote such pledged Capital Stock, provided that;
(i) the pledge agreement is bona fide and was not entered into
with the purpose nor with the effect of changing or influencing the
control of the Corporation, nor in connection with any transaction
having such purpose or effect, including any transaction subject to
Rule 13d-3(b) promulgated under the Exchange Act; and
(ii) the pledge agreement does not grant to the pledgee the
right to vote or to direct the vote of the pledged securities prior
to the time the pledgee has taken all formal steps which are
necessary to declare a default.
(4) A Person engaged in business as an underwriter or a placement
agent for securities who enters into an agreement to acquire or acquires
Capital Stock solely by reason of its participation in good faith and in
the ordinary course of its business in the capacity of underwriter or
placement agent in any underwriting or agent representation registered
under the Securities Act of 1933, as amended and in effect at May 20,
1996 (the "Securities Act"), a bona fide private placement, a resale
under Rule 144A promulgated under the Securities Act or in any foreign
or other offering exempt from the registration requirements under the
Securities Act shall not be deemed to Beneficially Own, be the
Beneficial Owner of or have Beneficial Ownership of such securities
until the expiration of forty (40) days after the date of such
acquisition so long as (i) such Person does not vote such Capital Stock
during such period and (ii) such participation is not with the purpose
or with the effect of changing or influencing control of the
Corporation, nor in connection with or facilitating any transaction
having such purpose or effect, including any transaction subject to Rule
13d-3(b) promulgated under the Exchange Act.
(5) If the Corporation shall sell shares in a transaction not
involving any public offering, then each purchaser in such offering
shall be deemed to obtain Beneficial Ownership in such offering of the
shares purchased by such purchaser, but no particular purchaser shall be
deemed to Beneficially Own or have acquired Beneficial Ownership or be
the Beneficial Owner in such offering of shares purchased by any other
purchaser solely by reason of the fact that all such purchasers are
parties to customary agreements relating to the purchase of equity
securities directly from the Corporation in a transaction not involving
a public offering, provided that: (i) all the purchasers are persons
specified in Rule 13d-1(b)(1)(ii) promulgated under the Exchange Act;
(ii) the purchase is in the ordinary course of each purchaser's
business and not with the purpose nor with the effect of changing or
influencing control of the Corporation, nor in connection with or as
a participant in any transaction having such purpose or effect,
including any transaction subject to Rule 13d-3(b) promulgated under
the Exchange Act;
(iii) there is no agreement among or between any purchasers to
act together with respect to the Corporation or its securities except
for the purpose of facilitating the specific purchase involved; and
(iv) the only actions among or between any purchasers with
respect to the Corporation or its securities subsequent to the
closing date of the nonpublic offering are those which are necessary
to conclude ministerial matters directly related to the completion of
the offer or sale of the securities sold in such offering.
(6) The Share Escrow Agent shall not be deemed to be the Beneficial
Owner of any Excess Shares held by such Share Escrow Agent pursuant to a
Share Escrow Agent Agreement, nor shall any such Excess Shares be
aggregated with any other share of Capital Stock held by affiliates or
associates of such Share Escrow Agent.
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(d) "Capital Stock" shall mean shares (or any other basic unit) of any
class or series of any voting security which the Corporation may at any
time issue or be authorized to issue, that entitles the holder thereof to
vote on any election, but not necessarily all elections, of directors. To
the extent that classes or series of Capital Stock vote together in the
election of directors with equal votes per share, they shall be treated as
a single class of Capital Stock for the purpose of computing the relevant
Ownership Limit or the right to amend this Restated Certificate of
Incorporation.
(e) "License Agreement" shall mean the license agreement between the
Corporation and the BCBSA, including any and all addenda thereto, now in
effect and, as it may be amended, modified, superseded and/or replaced from
time to time, with respect to, among other things, the "Blue Cross" name
and mark.
(f) "Ownership Limit" shall mean the following:
(1) Except as otherwise expressly provided in this Subsection (f)
and subject to Section 15(a), the Ownership Limit shall be that number
of shares of Capital Stock one share lower than the number of shares of
Capital Stock which would represent 5% of the Voting Power.
(2) In the event the Corporation and BCBSA shall agree in writing,
through an amendment of the License Agreement or otherwise, that an
Ownership Limit of a higher percentage than that prescribed in clause
(1) shall apply, then the Ownership Limit shall be as specified in such
written agreement.
(3) In the event any particular Person shall Beneficially Own
shares of Capital Stock in excess of the Ownership Limit which would
apply were it not for this clause (3) (the "Regular Limit"), such
ownership shall not be deemed to exceed the Ownership Limit provided
that (i) such Person shall not at any time Beneficially Own shares of
Capital Stock in excess of the Regular Limit plus 1% and (ii) within
thirty (30) days of the time when the particular Person becomes aware of
the fact that the regular Limit has been exceeded, the particular Person
reduces such Person's Beneficial Ownership below the Regular Limit.
(g) "Person" shall mean any individual, firm, partnership,
corporation, trust, association, joint venture or other entity, and shall
include any successor (by merger or otherwise) of any such entity.
(h) "Schedule 13D" means a report on Schedule 13D under Regulation 13D
of the Exchange Act as in effect at May 20, 1996 and any report which may
be required in the future under any requirements which BCBSA shall
reasonably judge to have any of the purposes served by Schedule 13D as in
effect at May 20, 1996.
(i) "Share Escrow Agent" shall mean the Person appointed by the
Corporation to act as escrow agent with respect to some or all of the
Excess Shares.
(j) "Transfer" shall mean any sale, transfer, gift, hypothecation,
pledge, assignment, devise or other disposition of Capital Stock (including
(i) the granting of any option or entering into any agreement for the sale,
transfer or other disposition of Capital Stock or (ii) the sale, transfer,
assignment or other disposition of any securities or rights convertible
into or exchangeable for Capital Stock), whether voluntary or involuntary,
whether of record, constructively or beneficially and whether by operation
of law or otherwise.
(k) "Voting Power." The percentage of the voting power attributable to
the shares of Capital Stock Beneficially Owned by any particular Person
shall be equal to the percentage of all votes which could be cast in any
election of any director which could be accounted for by the shares of
Capital Stock Beneficially Owned by that particular Person. If in
connection with an election for any particular position on the Board,
shares in different classes or series are entitled to be voted together for
purposes of such election, then in determining the number of "all votes
which could be cast" in the election for that particular position for
purposes of the preceding sentence, the number shall be equal to the number
of votes which could be cast in the election for that particular position
if all
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shares entitled to be voted in such election (regardless of series or
class) were in fact voted in such election. If the Corporation shall issue
any series or class of shares for which positions on the Board are reserved
or shall otherwise issue shares which have voting rights which can arise or
vary based upon terms governing that class or series, then the percentage
of the voting power represented by the shares of Capital Stock Beneficially
Owned by any particular Person shall be the highest percentage of the total
votes which could be accounted for by those shares in any election of any
director.
Section 15. (a) This Article VII shall not be applicable with respect to
any outstanding shares of Capital Stock of the Corporation owned by the
California HealthCare Foundation (the "Foundation") which were (i) issued by the
Corporation in exchange for "Original Shares" (such shares of Capital Stock
being referred to as "Exchange Shares") or (ii) acquired by the Foundation with
respect to Exchange Shares as a result of a stock dividend, stock split,
conversion, recapitalization, exchange of shares or the like, so long as such
Capital Stock of this Corporation shall be Beneficially Owned by the Foundation
or an affiliate of the Foundation or by a trustee for the account of the
Foundation or affiliate of the Foundation. "Original Shares" means shares of
capital stock of WellPoint California owned by the Foundation which were
outstanding on May 20, 1996, and shares of WellPoint California acquired by the
Foundation with respect to such shares after such time as a result of a stock
dividend, stock split, conversion, recapitalization, exchange of shares or the
like. All (1) Exchange Shares and such other shares of Capital Stock received by
the Foundation or affiliate of the Foundation or by a trustee for the account of
the Foundation or affiliate of the Foundation as a result of a stock dividend,
stock split, conversion, recapitalization, exchange of shares or the like
relating to such Exchange Shares shall be aggregated with (2) any other shares
of Capital Stock for which the Foundation or affiliate or trustee of the
Foundation becomes a Beneficial Owner, including shares of Capital Stock issued
in exchange for shares of WellPoint California which were not Original Shares
(all such shares referred to in the immediately preceding clause (2) being
defined as "After Acquired Shares"), in determining if such After Acquired
Shares are Excess Shares. Upon the transfer of any Beneficial Ownership interest
in any Exchange Shares and such other shares of Capital Stock received by the
Foundation or affiliate of the Foundation or by a trustee for the account of the
Foundation or affiliate of the Foundation as a result of a stock dividend, stock
split, conversion, recapitalization, exchange of shares or the like relating to
such Exchange Shares, from the Foundation or affiliate or trustee thereof to any
unaffiliated transferee, that Capital Stock shall become fully subject to this
Article VII from and at all times after such transfer.
Any Exchange Shares and such other shares of Capital Stock received by the
Foundation or affiliate of the Foundation or by a trustee for the account of the
Foundation or affiliate of the Foundation as a result of a stock dividend, stock
split, conversion, recapitalization, exchange of shares or the like relating to
such Exchange Shares shall automatically become subject to this Article VII upon
transfer to any affiliate or trustee of the Foundation, unless such affiliate or
trustee is subject to a binding obligation to vote such shares in the manner
prescribed by the terms of the Voting Agreement dated May 20, 1996 or Voting
Trust Agreement dated May 8, 1996 (as such agreements or replacements thereof
may be in effect from time to time), whichever is applicable, entered into by
the Foundation with respect to Original Shares subject to such agreement. For
purposes of this Section 15(a), neither The California Endowment nor any of its
successors in interest or affiliates shall be deemed to be an affiliate of the
Foundation.
(b) This Article VII shall become ineffective and of no further force and
effect in the event that the Corporation ceases to be subject to any License
Agreement.
(c) Subject to (a) and (b) above, the Board of Directors of the Corporation
has the power to interpret this Article VII and, in the absence of manifest
error, any interpretation by the Board of Directors of the Corporation shall be
binding; provided, however, that in making any such interpretation, the Board of
Directors of the Corporation shall consider the Corporation's obligations to the
BCBSA, wherever relevant.
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ARTICLE VIII
NO PREFERENTIAL RIGHTS
No stockholder of the Corporation shall, by reason of his, her or its
holding shares of any class, have any preemptive or preferential rights to
purchase or subscribe to any shares of the Corporation now or hereafter to be
authorized, or any notes, debentures, bonds or other securities convertible into
or carrying options or warrants to purchase shares of any class now or hereafter
to be authorized (whether or not the issuance of any such shares or such notes,
debentures, bonds or other securities would adversely affect the dividend or
voting rights of such stockholder) other than such rights, if any, as the Board
of Directors in its discretion from time to time may grant and at such price as
the Board of Directors may fix; and the Board of Directors may issue shares of
the Corporation or any notes, debentures, bonds or other securities, convertible
into or carrying options or warrants to purchase shares without offering any
such shares, either in whole or in part, to the existing stockholders.
ARTICLE IX
NO CUMULATIVE VOTING
Stockholders are not entitled to cumulate votes at any election of
directors.
ARTICLE X
BOOKS AND RECORDS
The books and records of the Corporation may be kept (subject to any
provision contained in the statutes) at such place or places as may be
designated from time to time by the Board of Directors or in the Bylaws of the
Corporation.
ARTICLE XI
RIGHT TO AMEND RESTATED CERTIFICATE OF INCORPORATION
The Corporation reserves the right to Change any provision contained in
this Restated Certificate of Incorporation, in the manner now or hereafter
prescribed by statute, and all rights conferred upon stockholders herein are
granted subject to this reservation; provided, however, that subject to the
powers and rights provided for herein with respect to Preferred Stock issued by
the Corporation, if any, but not withstanding anything else contained in this
Restated Certificate of Incorporation to the contrary, (a) the affirmative vote
of the holders of at least seventy-five percent (75%) of each class of the
shares of Capital Stock, represented and voting at a duly held meeting of
stockholders of the Corporation at which a quorum is present, voting by class,
shall be required to Change Sections 1, 2, 6, 8 and 10 of Article IV, Article
VII, Article IX or this Article XI; (b) no amendment of this Restated
Certificate of Incorporation as described in the preceding clause (a) shall be
effective unless approved by the affirmative vote of a majority of the
outstanding shares of Capital Stock entitled to vote, (c) the provisions of
clause (a) above shall not apply to any amendment to Article VII to conform
Article VII to a change to the terms of the License Agreement or to any
amendment to Article VII required or permitted by the BCBSA (whether or not
constituting a change to the terms of the License Agreement) and (d) the
provisions of clauses (a), (b) and (c) above shall become ineffective and of no
further force and effect in the event that the Corporation ceases to be subject
to any License Agreement.
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ARTICLE XII
REGISTERED AGENT
The address of the registered office of the corporation in the state of
Delaware is 1209 Orange Street, in the City of Wilmington, County of New Castle.
The name of its registered agent at such address is CT Corporation.
The foregoing amendment and restatement of the Certificate of Incorporation
was duly adopted in accordance with Sections 242 and 245 of the Delaware General
Corporation Law.
We further declare under penalty of perjury under the laws of the State of
Delaware that the matters set forth in this Certificate are true and correct of
our own knowledge.
IN WITNESS WHEREOF, the undersigned have executed this Certificate on July
29, 1997.
LEONARD D. SCHAEFFER
--------------------------------------
Leonard D. Schaeffer
Chief Executive Officer
THOMAS C. GEISER
--------------------------------------
Thomas C. Geiser
Secretary
The undersigned certify under penalty of perjury that they have read the
foregoing Restated Certificate of Incorporation and know the contents thereof
and that the statements therein are true and correct.
Executed at Los Angeles, California, on July 29, 1997.
LEONARD D. SCHAEFFER
--------------------------------------
Leonard D. Schaeffer
Chief Executive Officer
THOMAS C. GEISER
--------------------------------------
Thomas C. Geiser
Secretary
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APPENDIX E
BYLAWS OF WELLPOINT
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BYLAWS OF WELLPOINT HEALTH NETWORKS INC.
ARTICLE I
OFFICES
Section 1. Principal Office. The Board of Directors shall fix the location
of the principal executive office of the Corporation at any place within or
outside the State of Delaware. If the principal executive office is located
outside this state, and the Corporation has one or more business offices in this
state, the Board of Directors shall fix and designate a principal business
office in the State of Delaware.
Section 2. Other Offices. The Board of Directors may at any time establish
branch or subordinate offices at any place or places within or outside the State
of Delaware as the Board of Directors may from time to time determine or as the
business of the Corporation may require.
ARTICLE II
MEETINGS OF STOCKHOLDERS
Section 1. Place of Meetings. Meetings of stockholders shall be held at
any place within or outside the State of Delaware designated by the Board of
Directors. In the absence of any such designation by the Board of Directors,
stockholders' meetings shall be held at the principal executive office of the
Corporation.
Section 2. Annual Meetings. The annual meeting of the stockholders for the
election of directors and for the transaction of such other business as may
properly come before such meeting shall be held on the second Tuesday of May
each year at 10:00 A.M., if not a legal holiday under the laws of the place
where such meeting is to be held, and if a legal holiday, then on the next
succeeding day not a legal holiday under the laws of that place, or on such
other date and at such hour as may be fixed from time to time by the Board of
Directors.
Section 3. Special Meetings. Subject to the rights of holders of any class
or series of stock having a preference over the Corporation's common stock (the
"Common Stock"), a special meeting of the stockholders may be called at any time
by a majority of the entire Board of Directors, the Chairman of the Board, the
President or the holders of shares entitled to cast not less than 10% of the
votes at the meeting.
If a special meeting is called by any person or persons other than the
Board of Directors, the Chairman of the Board or the President, the request
shall be in writing, specifying the time of such meeting and the general nature
of the business proposed to be transacted, and shall be delivered personally or
sent by registered mail or by telegraphic or other facsimile transmission to the
Chairman of the Board, the President, any Vice President, or the Secretary of
the Corporation.
Section 4. Notice of Stockholders' Meetings. All notices of meetings of
stockholders shall be sent or otherwise given in accordance with Section 5 of
this Article II not less than 10 nor more than 60 days before the date of the
meeting. The notice shall specify the place, date and hour of the meeting and
(i) in the case of a special meeting, the general nature of the business to be
transacted, and no other business may be transacted or (ii) in the case of the
annual meeting, those matters which the Board of Directors, at the time of
giving the notice, intends to present for action by the stockholders. The notice
of any meeting at which directors are to be elected shall include the names of
nominees intended at the time of the notice to be presented by the Board of
Directors for election.
If action is proposed to be taken at any meeting for approval of (i)
amendment of the Certificate of Incorporation, pursuant to Section 242 of the
Delaware General Corporation Law (the "DGCL"), (ii) a merger or consolidation of
the Corporation, pursuant to Subchapter IX of the DGCL, or (iii) a voluntary
dissolution of the Corporation, pursuant to Subchapter X of the DGCL; the notice
shall also state the general nature of that proposal.
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Section 5. Manner of Giving Notice; Affidavit of Notice. Notice of any
meeting of stockholders shall be given either personally or by first-class mail
or telegraphic or other written communication, charges prepaid, addressed to the
stockholder at the address of that stockholder appearing on the books of the
Corporation or given by the stockholder to the Corporation for the purpose of
notice. If no such address appears on the Corporation's books or is given,
notice shall be deemed to have been given if sent to that stockholder by
first-class mail or telegraphic or other written communication to the
Corporation's principal executive office, or if published at least once in a
newspaper of general circulation in the county in which that office is located.
Notice shall be deemed to have been given at the time when delivered personally
or deposited in the mail or sent by telegram or other means of written
communication.
If any notice addressed to a stockholder at the address of that stockholder
appearing on the books of the Corporation is returned to the Corporation by the
United States Postal Service marked to indicate that the United States Postal
Service is unable to deliver the notice to the stockholder at that address, all
future notices or reports shall be deemed to have been duly given without
further mailing if such notices or reports shall be available to the stockholder
on written demand of the stockholder at the principal executive office of the
Corporation for a period of one year from the date of the giving of such notice
or report to other stockholders.
An affidavit of the mailing or other means of giving any notice of any
stockholders' meeting shall be executed by the Secretary, Assistant Secretary,
or any transfer agent of the Corporation giving the notice, and shall be filed
and maintained in the minute book of the Corporation.
Section 6. Quorum. The presence in person or by proxy of the holders of a
majority of the shares entitled to vote at any meeting of stockholders shall
constitute a quorum (unless reduced by an amendment to the Certificate of
Incorporation of the Corporation, but in any case no fewer than one-third of the
shares entitled to vote) for the transaction of business. The stockholders
present at a duly called or held meeting at which a quorum is present may
continue to do business until adjournment, notwithstanding the withdrawal of
enough stockholders to leave less than a quorum, if any action taken (other than
adjournment) is approved by at least a majority of the shares required to
constitute a quorum.
Section 7. Adjourned Meeting; Notice. Any stockholders' meeting, annual or
special, whether or not a quorum is present, may be adjourned from time to time
by the vote of the majority of the shares represented at that meeting, either in
person or by proxy, but in the absence of a quorum, no other business may be
transacted at that meeting, except as provided in Section 6 of this Article II.
When any meeting of stockholders, either annual or special, is adjourned to
another time or place, notice need not be given of the adjourned meeting if the
time and place are announced at a meeting at which the adjournment is taken,
unless a new record date for the adjourned meeting is fixed, or unless the
adjournment is for more than 30 days from the date set for the original meeting,
in which case the Board of Directors shall set a new record date. Notice of any
such adjourned meeting shall be given to each stockholder of record entitled to
vote at the adjourned meeting in accordance with the provisions of Sections 4
and 5 of this Article II. At any adjourned meeting the Corporation may transact
any business which might have been transacted at the original meeting.
Section 8. Voting. The stockholders entitled to vote at any meeting of
stockholders shall be determined in accordance with the provisions of Section 11
of this Article II, subject to the provisions of Section 217 of the DGCL
(relating to voting shares held by a fiduciary, pledges or in joint ownership).
The stockholders' vote may be by voice vote (unless required by law or
determined by a majority of the Board of Directors to be unadvisable) or by
ballot; provided, however, that any election for directors must be by ballot if
demanded by any stockholder before the voting has begun. Any stockholder may
vote part of the shares in favor of the proposal and refrain from voting the
remaining shares or vote them against the proposal, but, if the stockholder
fails to specify the number of shares which such stockholder is voting
affirmatively, it will be conclusively presumed that the stockholder's approving
vote is with respect to all shares that such stockholder is entitled to vote. If
a quorum is present, the affirmative vote of the majority of the shares
represented at the meeting and entitled to vote on any matter (other than the
election of
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directors) shall be the act of the stockholders, unless the vote of a greater
number or voting by classes is required under applicable law or by the
Certificate of Incorporation.
At a stockholders' meeting at which directors are to be elected, no
stockholder shall be entitled to cumulate votes.
At any meeting of stockholders at which shares of Common Stock are voted
that are held of record by the trustee pursuant to the Voting Trust Agreement
(the "Foundation Voting Trust") effective as of May 20, 1996 by and between
California HealthCare Foundation and Wilmington Trust Company, as trustee (the
"Foundation Trust Shares") (or any successor agreement thereto) or held by the
Share Escrow Agent pursuant to Article VII of the Corporation's Certificate of
Incorporation ("Excess Shares"), the polls at such meeting shall be
conditionally closed following such time as stockholders have cast their votes
either by proxy or by ballot. Thereafter, following a preliminary tabulation of
the votes cast at such meeting, the polls shall be reopened solely for the
purpose of permitting the Foundation Trust Shares, and any Excess Shares
pursuant to Article VII of the Corporation's Certificate of Incorporation, if
any, to be voted in accordance with the Foundation Voting Trust, or Article VII
of the Corporation's Certificate of Incorporation, as the case may be.
Section 9. Waiver of Notice or Consent by Absent Stockholders. The
transactions of any meeting of the stockholders, either annual or special,
however called and noticed, and wherever held, shall be as valid as though had
at a meeting duly held after regular call and notice, if a quorum be present
either in person or by proxy, and if, either before or after the meeting, each
person entitled to vote thereat, not present in person or by proxy, signs a
written waiver of notice or a consent to the holding of the meeting or an
approval of the minutes thereof. The waiver of notice or consent need not
specify either the business to be transacted or the purpose of any annual or
special meeting of stockholders. All such waivers, consents or approvals shall
be filed with the corporate records or made a part of the minutes of the
meeting.
Attendance by a person at a meeting shall also constitute a waiver of
notice of that meeting, except when the person objects, at the beginning of the
meeting, to the transaction of any business because the meeting is not lawfully
called or convened, and except that attendance at a meeting is not a waiver of
any right to object to the consideration of matters not included in the notice
of the meeting if that objection is expressly made at the meeting.
Section 10. Stockholder Action by Written Consent Without a
Meeting. Notwithstanding anything contained in these Bylaws to the contrary, no
action required or permitted to be taken at any meeting of stockholders of the
Corporation may be taken by written consent without a meeting of stockholders.
Section 11. Record Date for Stockholder Notice and Voting. For purposes of
determining the stockholders entitled to notice of any meeting or to vote, the
Board of Directors may fix, in advance, a record date, which shall not be more
than 60 days nor less than 10 days before the date of any such meeting, and in
this event only stockholders of record on the date so fixed are entitled to
notice and to vote, notwithstanding any transfer of any shares on the books of
the Corporation after the record date, except as otherwise provided in the DGCL.
If the Board of Directors does not so fix a record date, the record date
for determining stockholders entitled to notice of or to vote at a meeting of
stockholders shall be at the close of business on the business day next
preceding the day on which notice is given or, if notice is waived, at the close
of business on the business day next preceding the day on which the meeting is
held.
Section 12. Proxies. Every person entitled to vote for directors or on any
other matter shall have the right to do so either in person or by one or more
agents authorized by a written proxy signed by the person and filed with the
Secretary of the Corporation. A proxy shall be deemed signed if the
stockholder's name is placed on the proxy (whether by manual signature,
typewriting, telegraphic transmission, or otherwise) by the stockholder or the
stockholder's attorney in fact. A validly executed proxy which does not state
that it is irrevocable shall continue in full force and effect unless (i)
revoked by the person executing it, before the vote pursuant to that proxy, by a
writing delivered to the Corporation stating that the proxy is revoked, or by a
subsequent proxy executed by, or attendance at the meeting and voting in person
by, the person
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executing the proxy; or (ii) written notice of the death or incapacity of the
maker of that proxy is received by the Corporation before the vote pursuant to
that proxy is counted; provided, however, that no proxy shall be valid after the
expiration of three (3) years from the date of the proxy, unless otherwise
provided in the proxy. The revocability of a proxy that states on its face that
it is irrevocable shall be governed by the provisions of Section 212 of the
DGCL.
Section 13. Inspectors of Election. Before any meeting of stockholders,
the Board of Directors shall appoint a person other than nominees for office,
directors or stockholders to act as inspectors of election at the meeting or its
adjournment. If any person appointed as inspector fails to appear or fails or
refuses to act, the chairman of the meeting shall appoint a person to fill that
vacancy.
The inspector shall:
(a) Determine the number of shares outstanding and the voting power of
each, the shares represented at the meeting, the existence of a quorum, and
the authenticity, validity, and effect of proxies;
(b) Receive votes or ballots;
(c) Hear and determine all challenges and questions in any way arising
in connection with the right to vote;
(d) Count and tabulate all votes;
(e) Determine when the polls shall close;
(f) Determine the result; and
(g) Do any other acts that may be proper to conduct the election or
vote with fairness to all stockholders.
ARTICLE III
DIRECTORS
Section 1. Powers. Subject to the provisions of the DGCL and any
limitations in the Corporation's Certificate of Incorporation relating to action
required to be approved by the stockholders or by the outstanding shares, the
business and affairs of the Corporation shall be managed and all corporate
powers shall be exercised by or under the direction of the Board of Directors.
Without prejudice to these general powers, and subject to the same
limitations, the directors shall have the power to:
(a) Select and remove all officers, agents, and employees of the
Corporation; prescribe any powers and duties for them that are consistent
with law, with the Certificate of Incorporation, and with these Bylaws; fix
their compensation; and require from them security for faithful service.
(b) Change the registered office in the State of Delaware from one
location to another; cause the Corporation to be qualified to do business
in any other state, territory, dependency, or country and conduct business
within or outside the State of Delaware; and designate any place within or
outside the State of Delaware for the holding of any stockholders' meeting,
or meetings, including annual meetings.
(c) Adopt, make, and use a corporate seal; prescribe the forms of
certificates of stock; and alter the form of the seal and certificates.
(d) Authorize the issuance of shares of stock of the Corporation on
any lawful terms, in consideration of money paid, labor done, services
actually rendered, debts or securities cancelled, or tangible or intangible
property actually received.
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(e) Borrow money and incur indebtedness on behalf of the Corporation,
and cause to be executed and delivered for the Corporation's purposes, in
the corporate name, promissory notes, bonds, debentures, deeds of trust,
mortgages, pledges, hypothecations, and other evidences of debt and
securities.
Section 2. Number and Qualification of Directors. Until the expiration of
the Initial Period, the Board of Directors shall consist of nine (9) members.
For purposes hereof, "Initial Period" shall mean the period commencing as of May
20, 1996 and ending upon the date on which California HealthCare Foundation and
its affiliates, when taken together, cease to Beneficially Own Capital Stock (as
defined in Section 14(d) of Article VII of the Corporation's Certificate of
Incorporation) in excess of the Ownership Limit (as defined in Section 14(f) of
Article VII of the Corporation's Certificate of Incorporation).
Each of the directors of the Corporation shall hold office for the term for
which he or she is elected and until (i) his or her successor has been elected
and qualified or (ii) his or her earlier death, resignation or removal. The
directors of the Corporation shall be classified, with respect to the time for
which they hold office, into three classes as nearly equal in number as
possible: Class I, consisting of Roger E. Birk, Elizabeth A. Sanders and Sheila
P. Burke, whose term expires at the annual meeting of stockholders held in 2000,
and Class II, consisting of David R. Banks and Stephen L. Davenport, whose term
expires at the annual meeting of stockholders held in 1998 and Class III,
consisting of Julie A. Hill, W. Toliver Besson and Leonard D. Schaeffer, whose
term expires at the annual meeting of stockholders held in 1999, with each class
to hold office until its successors are elected and qualified. If the number of
directors is changed by the Board of Directors, then any newly created
directorships or any decrease in directorships shall be so apportioned among the
classes as to make all classes as nearly equal as possible; provided, that no
decrease in the number of directors shall shorten the term of any incumbent
director. At each annual meeting of the stockholders, subject to the rights of
the holders of any class or series of stock having a preference over the Common
Stock as to dividends or upon liquidation, the successors of the class of
directors whose term expires at that meeting shall be elected to hold office for
a term expiring at the annual meeting of stockholders held in the third year
following the year of their election.
Directors need not be stockholders. In any election of directors, the
persons receiving a plurality of the votes cast, up to the number of directors
to be elected in such election, shall be deemed to be elected.
Section 3. Vacancies. In the case of any vacancy on the Board of Directors
or in the case of any newly created directorship, a director elected to fill the
vacancy or the newly created directorship for the unexpired portion of the term
being filled, shall be elected by a vote of not less than a majority of the
directors of the Corporation then in office, from a list of one or more persons
proposed in accordance with the nominating process specified in Article IV,
Section 2 of these Bylaws, or, in the absence of such list being arrived at in
accordance with the nominating process specified in Article IV, Section 2 of
these Bylaws, then by the vote of a majority of the Board of Directors,
provided, however, during the Initial Period, in the case of replacing or
filling a vacancy of a BCC Designee (as such term is defined in Article IV,
Section 2), the vote shall be of not less than a majority of the remaining BCC
Designees and, in the case of replacing or filling a vacancy of a WellPoint
Designee (as such term is defined in Article IV, Section 2), the vote shall be
of not less than a majority of the remaining WellPoint Designees. Each director
so elected shall hold office until the next annual meeting of the stockholders
at which the class for which such director has been chosen is elected and until
a successor has been elected and qualified. A vacancy or vacancies in the Board
of Directors shall be deemed to exist in the event of the death, resignation, or
removal of any director, or if the Board of Directors by resolution declares
vacant the office of a director who has been declared of unsound mind by an
order of court or convicted of a felony, or if the authorized number of
directors is increased, or if the stockholders fail, at any meeting of
stockholders at which any director or directors are elected, to elect the number
of directors to be voted for at that meeting.
The stockholders may elect a director or directors at any time to fill any
vacancy or vacancies not filled by the directors.
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Any director may resign effective upon giving written notice to the
Chairman of the Board, the President, the Secretary, or the Board of Directors,
unless the notice specifies a later time for that resignation to become
effective. If the resignation of a director is effective at a future time, the
Board of Directors may elect a successor to take office when the resignation
becomes effective.
No reduction of the authorized number of directors shall have the effect of
removing any director before that director's term of office expires.
Section 4. Removal of Directors. Any or all of the directors may be
removed, with or without cause, by the affirmative vote of the holders of a
majority of the voting power of the shares of the Corporation's stock entitled
to vote at an election of directors. However, a director may not be removed
without cause if the votes cast against removal of the director would be
sufficient to elect the director if voted cumulatively (without regard to
whether shares may otherwise be voted cumulatively) at an election at which the
same total number of votes were cast and either the number of directors elected
at the most recent annual meeting of the stockholders, or if greater, the number
of directors for whom removal is being sought, were then being elected.
Section 5. Place of Meetings and Meetings by Telephone. Regular meetings
of the Board of Directors may be held at any place within or outside the State
of Delaware that has been designated from time to time by resolution of the
Board of Directors. In the absence of such a designation, regular meetings shall
be held at the principal executive office of the Corporation. Special meetings
of the Board of Directors shall be held at any place within or outside the State
of Delaware that has been designated in the notice of the meeting or, if not
stated in the notice or if there is no notice, at the principal executive office
of the Corporation. Any meeting, regular or special, may be held by conference
telephone, electronic video screen communication or other communications
equipment, if (1) each member participating in the meeting can communicate with
all of the other members concurrently, (2) each member is provided the means of
participating in all matters before the Board of Directors, including the
capacity to propose, or to interpose an objection, to a specific action to be
taken by the Corporation, and (3) the Corporation adopts and implements some
means of verifying that (a) a member communicating by telephone, electronic
video screen, or other communications equipment is a director entitled to
participate in the meeting and (b) all statements, questions, actions, or votes
were made by that director and not by another person not permitted to
participate as a director. Participation in a meeting as permitted by this
Section 5 constitutes presence in person at such meeting.
Section 6. Regular Meetings. Regular meetings of the Board of Directors
shall be held without call at such time as shall from time to time be fixed by
the Board of Directors. Such regular meetings may be held without notice.
Section 7. Special Meetings. Special meetings of the Board of Directors
for any purpose or purposes may be called at any time by the Chairman of the
Board, the President or by a majority of directors.
Notice of the time and place of special meetings (but the purpose need not
be stated) shall be delivered personally or by telephone, facsimile, or
electronic mail message to each director or sent by first-class mail or
telegram, charges prepaid, addressed to each director at that director's
residence or usual place of business. In case the notice is mailed, it shall be
deposited in the United States mail at least two (2) calendar days before the
time of the holding of the meeting. In case the notice is delivered personally,
or by telephone, facsimile, electronic mail message, or telegram, it shall be
delivered personally or by telephone, facsimile, electronic mail message, or to
the telegraph company at least forty-eight (48) hours before the time of the
holding of the meeting. Any oral notice given personally or by telephone may be
communicated either to the director or to a person at the office of the director
who the person giving the notice has reason to believe will promptly communicate
it to the director. As used herein, notice by telephone shall be deemed to
include a voice messaging system or other system or technology designed to
record and communicate messages, or wireless, to the recipient, including the
recipient's designated voice mailbox or address on such a system.
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Section 8. Quorum. A majority of the authorized number of directors shall
constitute a quorum for the transaction of business, except as so provided in
Section 14 of this Article and as provided in Article IV. Every act done or
decision made by a majority of the directors present at a meeting duly held at
which a quorum is present shall be regarded as the act of the Board of
Directors, subject to the provisions of Section 144 of the DGCL (as to approval
of contracts or transactions in which a director has a direct or indirect
material financial interest), Section 141 of the DGCL (as to appointment of
committees), and Section 145 of the DGCL (as to indemnification of directors). A
meeting at which a quorum is initially present may continue to transact business
notwithstanding the withdrawal of directors, if any action taken is approved by
at least a majority of the required quorum for that meeting.
Section 9. Waiver of Notice. The transactions of any meeting of the Board
of Directors, however called and noticed or wherever held, shall be as valid as
though had at a meeting duly held after regular call and notice if a quorum is
present and if, either before or after the meeting, each of the directors not
present signs a written waiver of notice, a consent to holding the meeting or an
approval of the minutes. The waiver of notice or consent need not specify the
purpose of the meeting. All such waivers, consents, and approvals shall be filed
with the corporate records or made a part of the minutes of the meeting. Notice
of a meeting shall also be deemed given to any director who attends the meeting
without protesting before or at its commencement the lack of notice to that
director.
Section 10. Adjournment. A majority of the directors present, whether or
not constituting a quorum, may adjourn any meeting to another time and place.
Section 11. Notice of Adjournment. Notice of the time and place of holding
an adjourned meeting need not be given, unless the meeting is adjourned for more
than 24 hours, in which case notice of the time and place shall be given prior
to the time of the adjourned meeting, in the manner specified in Section 7 of
this Article III, to the directors who were not present at the time of the
adjournment.
Section 12. Action Without Meeting. Any action required or permitted to be
taken by the Board of Directors may be taken without a meeting, if all members
of the Board shall individually or collectively consent in writing to that
action. Such action by written consent shall have the same force and effect as a
unanimous vote of the Board of Directors. Such written consent or consents shall
be filed with the minutes of the proceedings of the Board.
Section 13. Fees and Compensation of Directors. Directors and members of
committees may receive such compensation, if any, for their services, and such
reimbursement of expenses, as may be fixed or determined by resolution of the
Board of Directors. This Section 13 shall not be construed to preclude any
director from serving the Corporation in any other capacity as an officer,
agent, employee, or otherwise, and receiving compensation for those services.
Section 14. Rules and Regulations. The Board of Directors may adopt such
rules and regulations not inconsistent with the provisions of the Certificate of
Incorporation, these Bylaws or applicable law for the conduct of its meetings
and management of the affairs of the Corporation as the Board of Directors may
deem to be proper.
Section 15. Loans by the Corporation to Officers. The Board of Directors,
acting alone (by a vote sufficient without counting the vote of any interested
director or directors), and without any approval of the stockholders of the
Corporation, shall be authorized to approve the making of any loan of money or
property by the Corporation to, or the guarantee by the Corporation of the
obligation of, any officer (whether or not a director) of the Corporation, or an
employee benefit plan authorizing such a loan or guaranty to an officer (whether
or not a director), if the Board of Directors determines that such a loan or
guaranty or plan may reasonably be expected to benefit the Corporation.
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ARTICLE IV
COMMITTEES
Section 1. Committees. The Board may, by resolution adopted by a majority
of the authorized number of directors, designate one or more committees, each
consisting of two or more directors, to serve at the pleasure of the Board,
provided, however, that any executive committee established pursuant to this
provision shall, during the Initial Period, have at least one member who shall
be a BCC Designee (as hereinafter defined) and a majority of members who shall
be non-BCC Designees. Subject to Section 2 of this Article IV, the Board may
designate one or more directors as alternate members of any committee, who may
replace any absent or disqualified member at any meeting of such committee. Any
committee, to the extent allowed by law and provided in these Bylaws or the
resolution establishing the committee, shall have all the authority of the Board
in the management and of the business and affairs of the Corporation. Each
committee shall keep regular minutes and report to the Board when required.
Section 2. Nominating Committee. There shall be a Nominating Committee of
the Board which shall consist of three directors, at least one of whom shall be
a BCC Designee and a majority of members who shall be non-BCC Designees, and all
of whom shall be independent, but none of whom shall consist of the Chairman of
the Board so long as the Chairman of the Board is also an executive officer of
the Corporation. The Nominating Committee shall continue in existence, with the
power and authority specified in this Section 2, at least until the expiration
of the Initial Period. So long as it shall remain in existence, the Nominating
Committee shall have the power, acting by majority vote, to nominate persons to
serve as directors of the Corporation, subject (i) to any rights of stockholders
under law to nominate persons to serve as directors, (ii) in the case of a
person nominated to be a replacement for any BCC Designee on the Board, the BCC
Designee member(s) of the Nominating Committee shall have a veto vote, (iii) in
the case of a person nominated to be a replacement for any WellPoint Designee on
the Board, the Nominating Committee shall not nominate such a person if a
majority of the WellPoint Designee members of the Nominating Committee oppose
such a nomination, (iv) to any contractual obligations of the Corporation, and
(v) to the next paragraph hereof.
So long as the Nominating Committee shall remain in existence, if the
Nominating Committee is unable to nominate a candidate for the Corporation's
Board of Directors as set forth above on a timely basis, nominations shall be
made by vote of a majority of the Board of Directors, provided, however, in the
case of replacing a BCC Designee, by vote of a majority of the remaining BCC
Designees or, in the case of replacing a WellPoint Designee, by vote of a
majority of the remaining WellPoint Designees and with respect to any other
position on the Board, by a vote of a majority of the Board of Directors.
As used in these Bylaws, "BCC Designee" means each of W. Toliver Besson,
Stephen L. Davenport and Sheila P. Burke, or a direct or indirect replacement
thereof; "WellPoint Designees" shall mean Leonard D. Schaeffer, David R. Banks,
Roger E. Birk, Julie A. Hill and Elizabeth E. Sanders, or a direct or indirect
replacement thereof.
Section 3. Powers of Committees. Any committee, to the extent allowed by
law and provided in these Bylaws or the resolution of the Board of Directors
establishing the committee, shall have all the authority of the Board of
Directors, except with respect to:
(a) the approval of any action which, under the DGCL, also requires
stockholders' approval or approval of the outstanding shares;
(b) the filling of vacancies on the Board of Directors or in any
committee;
(c) the fixing of compensation of the directors for serving on the
Board of Directors or on any committee;
(d) the amendment or repeal of Bylaws or the adoption of new Bylaws;
(e) the amendment or repeal of any resolution of the Board of
Directors;
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(f) a distribution to the stockholders of the Corporation, except at a
rate or in a periodic amount or within a price range set forth in the
Corporation's Certificate of Incorporation or determined by the Board of
Directors; or
(g) the appointment of any other committees of the Board of Directors
or the members of these committees.
Section 4. Meetings and Action of Committees. Meetings and action of
committees shall be governed by, and held and taken in accordance with, the
provisions of Article III of these Bylaws, Section 5 (place of meetings),
Section 6 (regular meetings), Section 7 (special meetings and notice), Section 8
(quorum), Section 9 (waiver of notice), Section 10 (adjournment), Section 11
(notice of adjournment), and Section 12 (action without meeting), with such
changes in the context of those Bylaws as are necessary to substitute the
committee and its members for the Board of Directors and its members, except
that the time of regular meetings of committees may be determined either by
resolution of the Board of Directors or by resolution of the committee; special
meetings of committees may also be called by resolution of the Board of
Directors; and notice of special meetings of committees shall also be given to
all alternate members, who shall have the right to attend all meetings of the
committee. The Board of Directors may adopt rules for the government of any
committee not inconsistent with the provisions of these Bylaws.
ARTICLE V
OFFICERS
Section 1. Officers. The officers of the Corporation shall be a Chairman
of the Board, a President, a Secretary, and a Chief Financial Officer. The
Treasurer is the Chief Financial Officer of the Corporation unless the Board of
Directors has by resolution determined a Vice President or other officer to be
the Chief Financial Officer. The Corporation may also have, at the discretion of
the Board of Directors, one or more vice presidents, one or more assistant
secretaries, one or more assistant treasurers, and such other officers as may be
appointed in accordance with the provisions of Section 3 of this Article V. Any
number of offices may be held by the same person.
Section 2. Election of Officers. The officers of the Corporation, except
such officers as may be appointed in accordance with the provisions of Section 3
or Section 5 of this Article V, shall be chosen by the Board of Directors, and
each shall serve at the pleasure of the Board, subject to the rights, if any, of
any officer under an express written contract of employment.
Section 3. Subordinate Officers. The Board of Directors may appoint, and
may empower the President to appoint, such other officers as the business of the
Corporation may require, each of whom shall hold office for such period, have
such authority and perform such duties as are provided in the Bylaws or as the
Board of Directors or the President may from time to time determine.
Section 4. Removal and Resignation of Officers. Except as otherwise
provided in these Bylaws and subject to the rights, if any, of any officer under
an express written contract of employment, any officer may be removed, either
with or without cause, by the Board of Directors, at any regular or special
meeting of the Board of Directors, or except in the case of an officer chosen by
the Board of Directors, by any officer upon whom such power of removal may be
conferred by the Board of Directors.
Any officer may resign at any time by giving written notice to the
Corporation. Any resignation shall take effect at the date of the receipt of
that notice or at any later time specified in that notice; and, unless otherwise
specified in that notice, the acceptance of the resignation shall not be
necessary to make it effective. Any resignation is without prejudice to the
rights, if any, of the Corporation under any contract to which the officer is a
party.
Section 5. Vacancies in Offices. A vacancy in any office because of death,
resignation, removal, disqualification or any other cause shall be filled in the
manner prescribed in these Bylaws for regular appointments to that office.
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Section 6. Chairman of the Board. The Chairman of the Board shall, when
present, preside at meetings of the Board of Directors and, when present,
preside at the meetings of the stockholders. The Chairman of the Board shall
perform such duties and possess such powers as are usually vested in the office
of the Chairman of the Board or as may be vested in the Chairman of the Board by
the Board of Directors, subject to the terms of his or her employment agreement.
Section 7. President/Chief Executive Officer. The President shall be the
chief operating officer of the Corporation. He shall also be the chief executive
officer of the Corporation, unless such title is assigned to the Chairman of the
Board. The President shall perform such duties and possess such powers as are
usually vested in the office of the President or as may be vested in the
President by the Board of Directors, subject to the terms of his or her
employment agreement.
Section 8. Vice President. In the absence or disability of the President,
the vice presidents, if any, in order of their rank as fixed by the Board of
Directors or, if not ranked, a vice president designated by the Board of
Directors, shall perform all the duties of the President, and when so acting
shall have all the powers of, and be subject to all the restrictions upon, the
President. The vice presidents shall have such other powers and perform such
other duties as from time to time may be prescribed for them respectively by the
Board of Directors or the Bylaws, and the President, or the Chairman of the
Board.
Section 9. Secretary. The Secretary shall keep or cause to be kept, at the
principal executive office or such other place as the Board of Directors may
direct, a book of minutes of all meetings and actions of directors, committees
of directors, and stockholders, with the time and place of holding, whether
regular or special, and, if special, how authorized, the notice given, the names
of those present at directors' meetings or committee meetings, the number of
shares present or represented at stockholders' meetings, and the proceedings.
The Secretary shall keep or cause to be kept, at the principal executive
office or at such other place as designated by the Board of Directors, a share
register, or a duplicate share register, showing the names of all stockholders
and their addresses, the number and classes of shares held by each, the number
and date of certificates issued for the same, and the number and date of
cancellation of every certificate surrendered for cancellation.
The Secretary shall give, or cause to be given, notice of all meetings of
the stockholders and of the Board of Directors required by the Bylaws or by law
to be given, and he shall keep the seal of the Corporation if one be adopted, in
safe custody, and shall have such other powers and perform such other duties as
may be prescribed by the Board of Directors or by the Bylaws.
Section 10. Chief Financial Officer The Chief Financial Officer shall keep
and maintain, or cause to be kept and maintained, adequate and correct books and
records of accounts of the properties and business transactions of the
Corporation, including accounts of its assets, liabilities, receipts,
disbursements, gains, losses, capital, retained earnings, and shares. The books
of account shall at all reasonable times be open to inspection by any director.
The Chief Financial Officer shall deposit all moneys and other valuables in
the name and to the credit of the Corporation with such depositaries as may be
designated by the Board of Directors. He shall disburse the funds of the
Corporation as may be ordered by the Board of Directors, shall render to the
President and directors, whenever they request it, an account of all of his
transactions as Chief Financial Officer and of the financial condition of the
Corporation, and shall have other powers and perform such other duties as may be
prescribed by the Board of Directors or by the Bylaws.
ARTICLE VI
INDEMNIFICATION OF DIRECTORS, OFFICERS, AGENTS AND FIDUCIARIES
Section 1. Indemnification of Directors and Officers The Corporation shall
be required, to the maximum extent permitted by the DGCL, to indemnify each of
its directors and officers against expenses, judgments, fines, settlements, and
other amounts actually and reasonably incurred in connection with any
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proceeding arising by reason of the fact that any such person is or was a
director, officer, employee, or other agent of the Corporation or a Predecessor
Corporation or is or was serving at the request of the Corporation or a
Predecessor Corporation as a director, officer, employee, or agent of another
corporation, partnership, joint venture, trust, or other enterprise. For
purposes hereof, "Predecessor Corporation" shall mean WellPoint Health Networks
Inc., a California corporation ("WellPoint").
Section 2. Indemnification of Other Agents The Corporation may, in its
absolute discretion, up to the maximum extent permitted by the DGCL, indemnify
each of its agents who are not required to be indemnified under Section 1 of
this Article VI against expenses, judgments, fines, settlements, and other
amounts actually and reasonably incurred in connection with any proceeding
arising by reason of the fact that any such person is or was an agent of the
Corporation or a Predecessor Corporation. For purposes of this Section 2, an
"agent" of the Corporation includes any person who is or was an employee or
other agent of the Corporation or a Predecessor Corporation, or is or was
serving at the request of the Corporation or a Predecessor Corporation as a
director, officer, employee, or agent of another corporation, partnership, joint
venture, trust, or other enterprise.
Section 3. Indemnification of Fiduciaries The Corporation shall indemnify
any director, officer, employee, or other agent of the Corporation against
expenses, judgments, fines, settlements, and other amounts actually and
reasonably incurred in connection with any proceeding arising by reason of the
fact that any such person is or was a trustee, investment manager, or other
fiduciary under any employee benefit plan of the Corporation (or a Predecessor
Corporation). The provisions of this Section 3 shall be deemed to constitute a
contract between the Corporation (or any Predecessor Corporation) and any such
indemnified person, or for the benefit of any such indemnified person.
Section 4. Advances of Expenses. To the extent permitted by the DGCL,
expenses incurred in defending any proceeding in the cases described in Sections
1 and 3 of this Article VI shall, and in the case described in Section 2 of this
Article VI may, be advanced by the Corporation prior to the final disposition of
such proceeding upon receipt of any undertaking by or on behalf of the agent to
repay such amount, if it shall be determined ultimately that the agent is not
entitled to be indemnified as authorized in this section.
ARTICLE VII
RECORDS AND REPORTS
Section 1. Maintenance and Inspection of Share Register. The Corporation
shall keep at its principal executive office , or at the office of its transfer
agent or registrar, if either be appointed and as determined by resolution of
the Board of Directors, a record of its stockholders, giving the names and
addresses of all stockholders and the number and class of shares held by each
stockholder.
Any stockholder of the Corporation may upon written demand under oath
stating the proper purpose thereof (i) inspect and copy the records of
stockholders' names and addresses and shareholdings during usual business hours
upon five (5) days' prior written demand on the Corporation, or (ii) obtain from
the transfer agent of the Corporation, upon the tender of such transfer agent's
usual charges for such list, a list of the stockholders' names and addresses
entitled to vote for the election of directors, and their shareholdings, as of
the most recent record date for which that list has been compiled or as of a
date specified by the stockholder subsequent to the date of demand. This list
shall be made available to any such stockholder by the transfer agent on or
before the later of five days after the demand is received or the date specified
in the demand as the date as of which the list is to be compiled. The record of
stockholders shall also be open to inspection on the written demand of any
stockholder or holder of a voting trust certificate, at any time during usual
business hours, for a purpose reasonably related to the holder's interests as a
stockholder or as the holder of a voting trust certificate. Any inspection and
copying under this Section 1 may be made in person or by an agent or attorney of
the stockholder or holder of a voting trust certificate making the demand.
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Section 2. Maintenance and Inspection of Bylaws. The Corporation shall
keep at its principal executive office the original or a copy of the Bylaws as
amended to date, which shall be open to inspection by the stockholders at all
reasonable times during office hours.
Section 3. Maintenance and Inspection of Other Corporate Records. The
accounting books and records and minutes of proceedings of the stockholders and
the Board of Directors and any committee or committees of the Board of Directors
shall be kept at such place or places designated by the Board of Directors, or,
in the absence of such designation, at the principal executive office of the
Corporation. The minutes shall be kept in written form and the accounting books
and records shall be kept either in written form or in any other form capable of
being converted into written form. The minutes and accounting books and records
shall be open to inspection upon the written demand of any stockholder or holder
of a voting trust certificate, at any reasonable time during usual business
hours, for a purpose reasonably related to the stockholder's interests as a
stockholder or as the holder of a voting trust certificate. The inspection may
be made in person or by an agent or attorney, and shall include the right to
copy and to make extracts.
Section 4. Inspection by Directors. Every director shall have the absolute
right at any reasonable time to inspect all books, records, and documents of
every kind and the physical properties of the Corporation and each of its
subsidiary corporations. This inspection by a director may be made in person or
by an agent or attorney and the right of inspection includes the right to copy
and make extracts of documents.
ARTICLE VIII
GENERAL CORPORATE MATTERS
Section 1. Record Date for Purposes Other Than Notice and Voting. For
purposes of determining the stockholders entitled to receive payment of any
dividend or other distribution or allotment of any rights or entitled to
exercise any rights in respect of any other lawful action, the Board of
Directors may fix, in advance, a record date, which shall not be more than 60
nor less than 10 days before any such action, and in that case only stockholders
of record on the date so fixed are entitled to receive the dividend,
distribution, or allotment of rights or to exercise the rights, as the case may
be, notwithstanding any transfer of any shares on the books of the Corporation
after the record date so fixed, except as otherwise provided in the DGCL.
If the Board of Directors does not so fix a record date, the record date
for determining stockholders for any such purpose shall be at the close of
business on the date on which the Board of Directors adopts the applicable
resolution.
Section 2. Checks, Drafts, Evidences of Indebtedness. All checks, drafts,
or other orders for payment of money, notes, or other evidences of indebtedness,
issued in the name of or payable to the Corporation, shall be signed or endorsed
by such person or persons and in such manner as, from time to time, shall be
determined by resolution of the Board of Directors.
Section 3. Executing Corporate Contracts and Instruments. The Board of
Directors, except as otherwise provided in these Bylaws, may authorize any
officer or officers, agent or agents, to enter into any contract or execute any
instrument in the name of and on behalf of the Corporation, and this authority
may be general or confined to specific instances; and, unless so authorized or
ratified by the Board of Directors or within the agency power of an officer, no
officer, agent, or employee shall have any power or authority to bind the
Corporation by any contract or engagement or to pledge its credit or to render
it liable for any purpose or for any amount.
Section 4. Certificates for Shares. A certificate or certificates for
shares of the capital stock of the Corporation shall be issued to each
stockholder when any of these shares are fully paid, and the Board of Directors
may authorize the issuance of certificates or shares as partly paid provided
that these certificates shall state thereon the amount of the consideration to
be paid for them and the amount paid. All certificates shall be signed in the
name of the Corporation by the Chairman of the Board or the President
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or Vice President and by the Chief Financial Officer or an Assistant Treasurer
or the Secretary or any Assistant Secretary, certifying the number of shares and
the class or series of shares owned by the stockholder. Any or all of the
signatures on the certificate may be facsimile. In case any officer, transfer
agent, or registrar who has signed or whose facsimile signature has been placed
on a certificate shall have ceased to be that officer, transfer agent, or
registrar before that certificate is issued, it may be issued by the Corporation
with the same effect as if that person were an officer, transfer agent, or
registrar at the date of issue. Notwithstanding the foregoing, the Board of
Directors may provide by resolution or resolutions that some or all of any or
classes or series of capital stock of the Corporation shall be issued in
uncertificated form.
Section 5. Lost Certificates. Except as provided in this Section 5, no new
certificates for shares shall be issued to replace an old certificate unless the
latter is surrendered to the Corporation and cancelled at the same time. The
Board of Directors may, in case any share certificate or certificate for any
other security is lost, stolen, or destroyed, authorize the issuance of a
replacement certificate on such terms and conditions as the Board of Directors
may require, including provision for indemnification of the Corporation secured
by a bond or other adequate security sufficient to protect the Corporation
against any claim that may be made against it, including any expense or
liability, on account of the alleged loss, theft, or destruction of the
certificate or the issuance of the replacement certificate.
Section 6. Representation of Shares of Other Corporations. The Chairman of
the Board, the President, or any Vice President, or any other person authorized
by resolution of the Board of Directors or by any of the foregoing designated
officers, is authorized to vote on behalf of the Corporation any and all shares
of any other corporation or corporations, foreign or domestic, standing in the
name of the Corporation. The authority granted to these officers to vote or
represent on behalf of the Corporation any and all shares held by the
Corporation in any other corporation or corporations may be exercised by any of
these officers in person or by any person authorized to do so by a proxy duly
executed by these officers.
Section 7. Construction and Definitions. Unless the context requires
otherwise, the general provisions, rules of construction, and definitions in the
DGCL shall govern the construction of these Bylaws. Without limiting the
generality of this provision, the singular number includes the plural, the
plural number includes the singular, and the term "person" includes both a
corporation and a natural person.
ARTICLE IX
AMENDMENTS
Section 1. Amendment by Stockholders. New Bylaws may be adopted or these
Bylaws may be amended or repealed by the vote of holders of a majority of the
outstanding shares entitled to vote, except as otherwise provided by law or in
the Certificate of Incorporation.
Section 2. Amendment by Directors. Subject to the rights of the
stockholders as provided in Section 1 of this Article IX, to adopt, amend, or
repeal Bylaws, and subject to the provisions of the Certificate of
Incorporation, Bylaws may be adopted, amended, or repealed by the Board of
Directors; provided, however, that the Board of Directors may adopt a Bylaw or
amendment of a Bylaw changing the authorized number of directors only for the
purpose of fixing the exact number of directors within the limits specified in
the Certificate of Incorporation.
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PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 20. INDEMNIFICATION OF DIRECTORS AND OFFICERS
WellPoint is a Delaware corporation. Section 145 of the General Corporation
Law of the state of Delaware (the "Delaware Law") empowers a Delaware
corporation to indemnify any persons who are, or are threatened to be made,
parties to any threatened, pending or completed legal action, suit or
proceedings, whether civil, criminal, administrative or investigative (other
than action by or in the right of such corporation), by reason of the fact that
such person was an officer or director of such corporation, or is or was serving
at the request of such corporation as a director, officer, employee or agent of
another corporation or enterprise. The indemnity may include expenses (including
attorneys' fees), judgments, fines and amounts paid in settlement actually and
reasonably incurred by such person in connection with such action, suit or
proceeding, provided that such officer or director acted in good faith and in a
manner he reasonably believed to be in or not opposed to the corporation's best
interests, and, for criminal proceedings, had no reasonable cause to believe his
conduct was illegal. A Delaware corporation may indemnify officers and directors
in an action by or in the right of the corporation under the same conditions,
except that no indemnification is permitted without judicial approval if the
officer or director is adjudged to be liable to the corporation in the
performance of his duty. Where an officer or director is successful on the
merits or otherwise in the defense of any action referred to above, the
corporation must indemnify him against the expenses which such officer or
director actually and reasonably incurred.
WellPoint's certificate of incorporation provides that the liability of
WellPoint's directors to WellPoint or WellPoint's stockholders for monetary
damages for breach of fiduciary duty will be eliminated to the fullest extent
permissible under Delaware law except for (i) breaches of the duty of loyalty;
(ii) acts or omissions not in good faith or involving intentional misconduct or
knowing violations of the law; (iii) the payment of unlawful dividends or
unlawful stock repurchases or redemptions; or (iv) transactions in which a
director received an improper personal benefit.
The effect of these provisions is to eliminate the rights of WellPoint and
its stockholders (through stockholders' derivative suits on behalf of WellPoint)
to recover monetary damages against a director for breach of fiduciary duty of
care as a director (including breaches resulting from negligent or grossly
negligent behavior) except in certain limited situations. These provisions do
not limit or eliminate the rights of WellPoint or any stockholder to seek
non-monetary relief such as an injunction or rescission in the event of a breach
of a director's duty of care. These provisions will not alter the liability of
directors under federal securities law.
WellPoint's bylaws provide that WellPoint will indemnify each present and
former director and officer of WellPoint or a predecessor company and each of
their respective subsidiaries, as such companies exist or have existed, and such
agents of WellPoint as the Board of Directors shall determine, to the fullest
extent provided by Delaware law.
In addition, WellPoint has entered into indemnification agreements with its
directors and certain officers that provide for the maximum indemnification
permitted by law.
ITEM 21. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) See the Exhibit Index included immediately preceding the exhibits to
this Registration Statement.
(b) All of the financial statement schedules for which provision is made in
the applicable accounting regulations of the Commission are not required under
the applicable instructions or are not applicable and therefore have been
omitted.
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ITEM 22. UNDERTAKINGS
The undersigned registrant hereby undertakes that, for purposes of
determining any liability under the Securities Act of 1933, each filing of the
registrant's annual report pursuant to Section 13(a) or 15(d) of the Securities
Exchange Act of 1934 (and, where applicable, each filing of an employee benefit
plan's annual report pursuant to Section 15(d) of the Securities Exchange Act of
1934) that is incorporated by reference in the registration statement shall be
deemed to be a new registration statement relating to the securities offered
therein and the offering of such securities at that time shall be deemed to be
the initial bona fide offering thereof.
The undersigned registrant hereby undertakes as follows: that prior to any
public reoffering of the securities registered hereunder through the use of a
prospectus which is a part of this registration statement, by any person or
party who is deemed to be an underwriter within the meaning of Rule 145(c), the
issuer undertakes that such reoffering prospectus will contain the information
called for by the applicable registration form with respect to reofferings by
persons who may be deemed underwriters, in addition to the information called
for by the other items of the applicable form. The registrant undertakes that
every prospectus: (i) that is filed pursuant to the immediately preceding
sentence, or (ii) that purports to meet the requirements of Section 10(a)(3) of
the Act and is used in connection with an offering of securities subject to Rule
415, will be filed as a part of an amendment to the registration statement and
will not be used until such amendment is effective, and that, for purposes of
determining any liability under the Securities Act of 1933, each such
post-effective amendment shall be deemed to be a new registration statement
relating to the securities offered therein, and the offering of such securities
at that time shall be deemed to be the initial bona fide offering thereof.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers, and controlling persons of the
registrant pursuant to the foregoing provisions, or otherwise, the registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment by the registrant of expenses incurred
or paid by a director, officer or controlling person of the registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Act and will be governed by the final adjudication of
such issue.
The undersigned registrant hereby undertakes to respond to requests for
information that is incorporated by reference into the prospectus pursuant to
Item 4, 10(b), 11 or 13 of this form, within one business day of receipt of such
request, and to send the incorporated documents by first class mail or other
equally prompt means. This includes information contained in documents filed
subsequent to the effective date of the registration statement through the date
of responding to the request.
The undersigned registrant hereby undertakes to supply by means of a
post-effective amendment all information concerning a transaction, and the
company being acquired involved therein, that was not the subject of and
included in the registration statement when it became effective.
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SIGNATURES
Pursuant to the requirements of the Securities Act, the registrant has duly
caused Post-Effective Amendment No. 1 to this Registration Statement to be
signed on its behalf by the undersigned, thereunto duly authorized, in the city
of Los Angeles, State of California, on August 18, 2000.
WELLPOINT HEALTH NETWORKS INC.
By: /s/ LEONARD D. SCHAEFFER*
------------------------------------
Leonard D. Schaeffer
Chairman of the Board of Directors
and Chief Executive Officer
Pursuant to the requirements of the Securities Act of 1933, Post-Effective
Amendment No. 1 to this Registration Statement has been signed by the following
persons in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<C> <S> <C>
/s/ LEONARD D. SCHAEFFER* Chairman of the Board of August 18, 2000
----------------------------------------------------- Directors and Chief Executive
Leonard D. Schaeffer Officer (Principal Executive
Officer)
/s/ DAVID C. COLBY* Executive Vice President and August 18, 2000
----------------------------------------------------- Chief Financial Officer
David C. Colby (Principal Financial Officer)
/s/ KENNETH C. ZUREK Senior Vice President, August 18, 2000
----------------------------------------------------- Controller and Taxation
Kenneth C. Zurek (Principal Accounting
Officer)
/s/ W. TOLIVER BESSON* Director August 18, 2000
-----------------------------------------------------
W. Toliver Besson
/s/ ROGER E. BIRK* Director August 18, 2000
-----------------------------------------------------
Roger E. Birk
/s/ SHEILA A. BURKE* Director August 18, 2000
-----------------------------------------------------
Sheila A. Burke
/s/ STEPHEN L. DAVENPORT* Director August 18, 2000
-----------------------------------------------------
Stephen L. Davenport
/s/ JULIE A. HILL* Director August 18, 2000
-----------------------------------------------------
Julie A. Hill
/s/ ELIZABETH A. SANDERS* Director August 18, 2000
-----------------------------------------------------
Elizabeth A. Sanders
*By: /s/ THOMAS C. GEISER
------------------------------------------------
Thomas C. Geiser, Attorney-in-fact
</TABLE>
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<PAGE> 257
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
------- -----------------------
<C> <C> <S>
2.1 -- Amended and Restated Recapitalization Agreement dated as of
March 31, 1995, by and among the Registrant, Blue Cross of
California, Western Health Partnership and Western
Foundation for Health Improvement, incorporated by reference
to Exhibit 2.1 to Registrant's Form S-4 dated April 8, 1996
2.2 -- Agreement and Plan of Merger dated as of July 9, 1998, by
and among Cerulean, WellPoint and Water Polo Acquisition
Corp. (included in Appendix A to the Proxy
Statement/Prospectus included as a part of this Registration
Statement)
2.3 -- Stock Purchase Agreement dated as of July 29, 1998 by and
between the Registrant and Fremont Indemnity Company,
incorporated by reference to Exhibit 2.1 to Registrant's
Current Report on Form 8-K dated September 1, 1998
2.4 -- First Amendment to the Stock Purchase Agreement dated as of
November 5, 1998, by and between the Registrant and Fremont
Indemnity Company, incorporated by reference to Exhibit 2.05
to the Registrant's Annual Report on Form 10-K for the year
ended December 31, 1998
2.5 -- Second Amendment to the Stock Purchase Agreement dated as of
February 1, 1999, by and between the Registrant and Fremont
Indemnity Company, incorporated by reference to Exhibit 2.06
to the Registrant's Annual Report on Form 10-K for the year
ended December 31, 1998
2.6 -- First Amendment to Agreement and Plan of Merger dated as of
July 9, 1999, by and among Cerulean, WellPoint and Water
Polo Acquisition Corp. (included in Appendix A to the Proxy
Statement/Prospectus included as a part of this Registration
Statement)
2.7 -- Second Amendment to Agreement and Plan of Merger dated as of
December 31, 1999, by and among Cerulean, WellPoint and
Water Polo Acquisition Corp. (included in Appendix A to the
Proxy Statement/Prospectus included as a part of this
Registration Statement)
3.1 -- Restated Certificate of Incorporation of the Registrant
(included in Appendix D to the Proxy Statement/Prospectus
included as a part of this Registration Statement)
3.2 -- Bylaws of the Registrant (included in Appendix E to the
Proxy Statement/Prospectus included as a part of this
Registration Statement)
4.1 -- Specimen of common stock certificate of WellPoint Health
Networks Inc., incorporated by reference to Exhibit 4.4 of
Registrant's Registration Statement on Form 8-B,
Registration No. 001-13083
4.2 -- Restated Certificate of Incorporation of the Registrant
(included in Appendix D to the Proxy Statement/Prospectus
included as a part of this Registration Statement)
4.3 -- Bylaws of the Registrant (included in Appendix E to the
Proxy Statement/Prospectus included as a part of this
Registration Statement)
5.1** -- Form of Opinion of Gibson, Dunn & Crutcher LLP as to
legality of Shares
8.1 -- Opinion of Gibson, Dunn & Crutcher LLP as to certain tax
matters
8.2 -- Opinion of Long Aldridge & Norman LLP as to certain tax
matters
23.1 -- Consent of Gibson, Dunn & Crutcher LLP (to be included as
part of Exhibits 5.1 and 8.1 hereto)
23.2 -- Consent of Long Aldridge & Norman LLP (to be included as
part of Exhibit 8.2 hereto)
23.3 -- Consent of PricewaterhouseCoopers LLP
23.4 -- Consent of Ernst & Young LLP
23.5 -- Consent of Morgan Stanley & Co. Incorporated
24.1** -- Power of Attorney (included on Signature Page)
99.1 -- Form of Proxy Card for Meeting of holders of Class A Stock
</TABLE>
<PAGE> 258
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
------- -----------------------
<C> <C> <S>
99.2* -- Form of Proxy Card for meeting of holders of Class B Stock
99.3** -- Form of Letter of Transmittal to be used by holders of Class
B Stock in connection with the Merger
99.4 -- Fairness Opinion of Morgan Stanley & Co. Incorporated
(included in Appendix B to the Proxy Statement/Prospectus
included as a part of this Registration Statement)
</TABLE>
---------------
* To be filed by amendment
** Previously filed
