item 14 exhibits financial statements financial statement schedules reports form 8k following documents filed part annual report form 10k 1 following financial statements incorporated reference part ii item 8 form 10k report independent auditors consolidated balance sheets december 31 1997 1996 consolidated statements income years ended december 31 1997 1996 1995 consolidated statements shareholders equity years ended december 31 1997 1996 1995 consolidated statements cash flows years ended december 31 1997 1996 1995 notes consolidated financial statements 2 financial statement schedules schedule ii condensed financial information registrant schedule v valuation qualifying accounts schedules omitted applicable required information included elsewhere financial statements notes thereto financial statement schedules follow signature page 3 exhibits b reports form 8k company filed report form 8k dated september 3 1997 filing made connection lawsuit described item 3 legal proceedings incorporated herein reference exhibit filed herewith 1 exhibit form s1 registration 3332796 filed march 27 1996 subsequent amendments incorporated herein reference 2 exhibit form 10q filed may 15 1997 incorporated herein reference 3 exhibit form 10q filed november 14 1997 incorporated herein reference 4 exhibit form 10k filed march 31 1997 incorporated herein reference c exhibits following additional exhibit filed concurrently report signatures pursuant requirements section 13 15d securities exchange act 1934 amended registrant duly caused report signed behalf undersigned thereunto duly authorized city atlanta state georgia march 27 1998 cerulean companies inc registrant richard shirk richard shirk president pursuant requirements securities exchange act 1934 report signed following persons behalf company capacities indicated march 27 1998 schedule ii cerulean companies inc parent condensed balance sheets schedule ii continued cerulean companies inc parent condensed statements income cerulean companies inc parent condensed statements cash flows schedule v cerulean companies inc valuation qualifying accounts years ended december 31 1997 1996 1995 securities exchange commission washington dc 20549 form 10k cerulean companies inc commission file number 3332796 consolidated financial statements years ended december 31 1997 1996 1995 report independent auditors cerulean companies inc consolidated financial statements years ended december 31 1997 1996 1995 contents report independent auditors board directors cerulean companies inc audited accompanying consolidated balance sheets cerulean companies inc subsidiaries december 31 1997 1996 related consolidated statements income shareholders equity cash flows three years period ended december 31 1997 audits also included financial statement schedules listed index item 14a financial statements schedules responsibility companys management responsibility express opinion financial statements schedules based audits conducted audits accordance generally accepted auditing standards require plan perform audit obtain reasonable assurance whether financial statements free material misstatement audit includes examining test basis evidence supporting amounts disclosures financial statements audit also includes assessing accounting principles used significant estimates made management well evaluating overall financial statement presentation believe audits provide reasonable basis opinion financial statements referred present fairly material respects consolidated financial position cerulean companies inc subsidiaries december 31 1997 1996 consolidated results operations cash flows three years period ended december 31 1997 conformity generally accepted accounting principles also opinion related financial statement schedules considered relation basic financial statements taken whole present fairly material respects information set forth therein ernst young llp february 6 1998 atlanta georgia cerulean companies inc consolidated balance sheets see accompanying notes cerulean companies inc consolidated statements income see accompanying notes cerulean companies inc consolidated statements shareholders equity see accompanying notes cerulean companies inc consolidated statements cash flows see accompanying notes cerulean companies inc notes consolidated financial statements december 31 1997 1 organization cerulean companies inc company incorporated laws state georgia february 2 1996 act holding company blue cross blue shield georgia inc bcbsga subsidiaries lawful purposes february 2 1996 company acquired outstanding capital stock bcbsga following bcbsgas conversion notforprofit corporation forprofit corporation pursuant plan conversion approved georgia commissioner insurance december 27 1995 conversion connection conversion company issued 49900 shares class b convertible preferred stock preferred stock raise 49900000 capital deducting offering costs net proceeds company 46645042 although company become holding company bcbsga conversion february 2 1996 consolidated results operations include historical operations bcbsga subsidiaries prior february 2 1996 company including subsidiaries consolidated basis period february 2 1996 december 31 1996 thereafter effective may 14 1996 companys registration securities act 1933 public offering class convertible common stock par value class stock securities exchange commission became effective part conversion company agreed offer bcbsgas approximately 160000 eligible subscribers five shares class stock cost upon completion offering eligible subscribers accepted 351545 shares par value class stock registration class stock section 12g securities exchange act 1934 became effective june 30 1997 currently class stock publicly traded 2 significant accounting policies basis presentation companys accompanying consolidated financial statements prepared conformity generally accepted accounting principles gaap require use managements estimates companys managed care health life insurance operations gaap varies respects statutory accounting practices permitted prescribed insurance regulatory authorities companys health care plan subsidiary health maintenance organization life insurance subsidiary subject regulation georgia insurance department including minimum capital surplus requirements restrictions payment dividends opinion management material adjustments necessary fair presentation financial position results operations periods presented made adjustments normal recurring nature principles consolidation companys accompanying consolidated financial statements include accounts company bcbsga whollyowned life insurance subsidiary health maintenance subsidiary noninsurance subsidiary community health partnership network joint ventures chpns company majority interest significant intercompany transactions balances eliminated consolidation accounting sale stock subsidiary gains arising subsidiary issuing stock third parties recorded nonoperating income presented separate line item consolidated statements income cerulean companies inc notes consolidated financial statements continued earnings per share earnings per share omitted data meaningful present time due likely dilutive events occur prior conversion class stock class b convertible preferred stock presently market class stock equity securities company investments company accounts investments accordance financial accounting standards board fasb statement 115 accounting certain investments debt equity securities statement 115 statement 115 requires fixed maturity securities classified either heldtomaturity availableforsale trading management determines appropriate classification fixed maturity securities time purchase reevaluates designation balance sheet date fixed maturity securities classified heldtomaturity company positive intent ability hold maturity heldtomaturity securities stated amortized cost adjusted amortization premiums accretion discounts maturity amortization well interest earned included investment income fixed maturity equity securities classified heldtomaturity classified availableforsale securities carried fair value unrealized gains losses net tax reported separate component shareholders equity amortized cost debt securities category adjusted amortization premiums accretion discounts maturity amortization interest earned included investment income cost securities sold based specific identification method december 31 1997 1996 company classified fixed maturity equity securities availableforsale companys investment portfolio significantly concentrated particular industry geographic region cash equivalents cash equivalents liquid shortterm investments maturities three months less time purchase combined cash account balances investments stated cost approximates fair value property equipment property equipment stated cost less accumulated depreciation costs developing software internal use capitalized technological feasibility established depreciation computed using straightline method estimated useful lives respective assets 15 years buildings 37 years software furniture equipment amortization software developed internal use begins asset placed service estimated benefit liabilities company provides claims reported unpaid claims incurred unreported cost adjudicating claims based primarily past experience membership demographics claims runoff patterns current medical trend information using accepted actuarial methods estimates adjusted changes factors occur adjustments reported year determination portions companys estimated benefit liabilities reimbursable due nature certain selffunded rate stabilization reserve programs offsetting receivables recorded consolidated balance sheets cerulean companies inc notes consolidated financial statements continued premium revenues companys revenues consist primarily premiums traditional indemnity health insurance services managed care products services group life insurance products companys individual certain employer group contracts provide individual group fully insured premiums contracts billed advance respective coverage periods initially recorded premium receivables unearned premiums unearned premiums recognized earned period coverage certain employer groups contracts provide group risk portion claims experience selffunded groups purchase aggregate andor specific stoploss coverage exchange premium groups aggregate liability capped year groups liability one participant capped year company charges selffunded groups administrative fee based number members group percentage groups claims experience companys selffunded arrangements amounts due recognized based claims experience plus administrative fees stoploss premiums rate stabilization reserves company entered agreements certain groups whose premium revenues based experience rating groups anniversary date gain loss resulting experience determined accumulated net gains represent accumulated excess premium revenues claims incurred retention administrative expenses recorded rate stabilization reserve liability terms agreements groups may utilize excess funds reduce prospective rates leave excess funds deposit company receive refund accumulated excess claims incurred retention administrative expenses premium revenues generally expensed company however shared risk arrangements net losses recorded receivables extent recoverable respective groups national accounts company participates underwriting certain national multipleplan groups claims paid plus certain administrative expenses reimbursed control plan companys share underwriting gains losses national groups recognized settlements rendered control plan typically 6 18 months expiration contract period federal employee program company blue cross blue shield plans participate federal employee program fep underwrites voluntary health insurance contract employees dependents federal government blue cross blue shield association designated contract agent premium stabilization reserve liability fep stabilization reserve offsetting asset fep asset held agent recorded consolidated balance sheets premium revenues investment income operating expenses including fep operations center expenses recorded consolidated statements income recognize companys portion feps reserves agency contracts company acts fiscal intermediary administrative agent medicare certain plans operating expenses allocated lines business determine reimbursement services rendered cerulean companies inc notes consolidated financial statements continued arrangements reimbursement operating expenses recorded reduction companys operating expenses claims processed plans included accompanying consolidated statements income advertising promotion costs associated advertising promoting products expensed year incurred advertising promotion expense 5012557 1997 1651610 1996 3107389 1995 major customers market concentration company primarily conducts business state georgia significant portion customer base concentrated companies located metropolitan atlanta area percentage premium revenues companys largest customer represented 19 premium revenues 1997 20 1996 23 1995 second largest customer represented 10 premium revenues 1997 1996 11 premium revenues 1995 recently issued accounting pronouncements 1997 fasb issued statement 129 disclosure information capital structure statement 130 reporting comprehensive income statement 131 disclosures segments enterprise related information statement 129 establishes standards disclosing information entitys capital structure effective periods ending december 15 1997 disclosures required statement 129 included consolidated financial statements statement 130 establishes standards reporting display comprehensive income components full set generalpurpose financial statements statement effective fiscal years beginning december 15 1997 statement 131 establishes standards way public business enterprises report information operating segments annual financial statements requires enterprises report selected information operating segments interim financial reports issued shareholders also establishes standards related disclosures products services geographic areas major customers statement effective financial statements periods beginning december 15 1997 management company presently assessing effect statement 130 131 companys current consolidated financial statements footnote disclosures however application new rules impact companys financial position results operations reclassifications certain prior year balances reclassified conform current year presentation cerulean companies inc notes consolidated financial statements continued 3 investments december 31 1997 1996 follows fair values fixed maturities shortterm investments based quoted market prices available fixed maturities actively traded fair values estimated using values obtained independent pricing services fair values common stocks based quoted market prices substantially companys investments equity securities december 31 1997 1996 comprised stocks industrial companies cerulean companies inc notes consolidated financial statements continued amortized cost fair values fixed maturities december 31 1997 contractual maturity shown expected maturities differ contractual maturities borrowers may right call prepay obligations without call prepayment penalties bonds certificates deposit money market funds carried value 755423 deposit insurance regulatory authorities december 31 1997 1996 accordance statutory requirements investment income years ended december 31 1997 1996 1995 summarized follows income loss amount years ended december 31 1997 1995 includes receipts 579000 2000000 respectively related settlement lease dispute terms companys primary lease headquarters building modified benefit landlord company paid giving right terms cerulean companies inc notes consolidated financial statements continued realized unrealized investment gains losses years ended december 31 1997 1996 1995 follows 4 accounts receivable accounts receivable consists following 5 property equipment property equipment consists following december 31 1997 furniture equipment includes 1701673 capitalized costs related development internal use software costs related development internal use software cerulean companies inc notes consolidated financial statements continued capitalized 1996 december 31 1997 software developed internal use placed service accordingly amortization recognized year depreciation expense 9765395 9350458 8451468 1997 1996 1995 respectively including 1063318 1997 965196 1996 746113 1995 building improvements 6 lines credit company available 5500000 line credit bank finance working capital needs interest accrues amounts advanced prime rate borrowings line credit 1997 1996 1994 company entered revolving credit loan agreement group banks finance community health partnership networks related costs terms agreement company could borrow 25000000 december 1996 company reduced total amount available revolving credit agreement 9000000 interest accrued amounts advanced 05 libor rate 1997 1996 07 libor rate 1995 borrowings outstanding revolving credit agreement 3500000 december 31 1997 1996 weighted average interest rate amounts outstanding 1997 1996 63 april 1996 company obtained 55000000 insolvency line credit group banks insolvency line credit may drawn solely event insolvency bcbsga pay authorized insurance policy claims insolvency line credit designed satisfy certain membership standards blue cross blue shield association company certain subsidiaries exclusive right business georgia name blue cross blue shield use blue cross blue shield names trademarks service marks respect companys indemnity ppo hmo pos products 7 income taxes income tax expense benefit attributable income taxes minority interests substantially federal consists cerulean companies inc notes consolidated financial statements continued provision income taxes different amount computed using statutory federal income tax rate 35 follows 1997 company increased net value longlived tax assets refined related valuation allowance recognizing benefit 2119000 additionally company recorded 3731000 benefit difference book tax basis chpn investments reduced expected realizable value 2132000 chpn subsidiaries join filing consolidated tax return company generated tax losses 1997 expected generate benefit currently foreseeable future includes state taxes net federal tax benefit permanent book tax differences including non deductible expenses company whollyowned subsidiaries file consolidated federal income tax return companys consolidated tax expense 1997 calculated regular tax system reduced available net operating loss carryforwards subjected company alternative minimum tax income tax expense 1997 1996 1995 consisted primarily federal alternative minimum tax federal income taxes paid 1997 1996 1995 2800000 5400000 3300000 respectively cerulean companies inc notes consolidated financial statements continued deferred income taxes reflect net tax effects temporary differences carrying amounts assets liabilities financial reporting purposes amounts used income tax purposes significant components deferred tax asset included assets balance sheet follows company recorded valuation allowance 20882000 21800000 december 31 1997 1996 certain longlived tax assets deductible future temporary differences consist principally differences tax generally accepted accounting principles related estimated benefit liabilities accounting accruals december 31 1997 companys consolidated tax group net operating loss carryforwards 55969000 regular income tax purposes expire years 2001 2003 certain chpn subsidiaries file separate tax returns net operating loss carryforwards 15937000 expire 2011 2012 company recognized benefit 1997 consolidated tax group carryforwards 2356000 company qualifies special deduction regular tax system available certain blue cross blue shield plans section 833b internal revenue code effect deduction significantly reduce regular taxable income subjects company alternative minimum tax company expects taxed alternative minimum tax system foreseeable future therefore regular tax net operating loss carryforwards consolidated tax group alternative minimum tax credit likely utilized financial reporting purposes valuation allowance recorded reduce deferred tax assets related amount expected realized company continually reviews adequacy deferred tax valuation allowance recognizes benefits reassessment indicates likely benefits realized cerulean companies inc notes consolidated financial statements continued 8 estimated benefit liabilities following table provides reconciliation beginning ending estimated benefit liabilities including claims adjudication expenses net reimbursable reserves life reserves 1997 1996 1995 company uses paid claims completion factors based historical payment patterns estimate incurred claims changes payment patterns claims trends result changes prior years claims estimates reconciliation companys incurred expense total benefits expense shown consolidated statements income follows 9 capital stock mandatorily redeemable preferred stock preferred stock liquidation preference 1000 per share mandatory redemption value 900 per share dividends preferred stock currently paid rate 6000 per annum per share fully cumulative accrue without interest preferred shares mandatorily redeemable december 1 2001 may redeemed prior date upon occurrence certain events upon completion stock conversion share preferred stock shall convert number fully paid nonassessable shares common stock equal 0004446420631 rate may adjusted periodically upon occurrence certain events holders preferred stock vote separately single class share entitled one vote cerulean companies inc notes consolidated financial statements continued blank preferred stock board directors board company may time issue shares blank preferred stock series classes terms preferences provisions board shall determine provided issuance approved majority holders preferred stock issued outstanding entitled vote presently blank preferred stock issued outstanding class convertible common stock shares class convertible stock class stock may sold transferred encumbered pledged otherwise disposed prior december 1 1998 except upon occurrence certain events event stock conversion share class stock converted one share common stock long shares companys preferred stock issued outstanding entitled vote dividends may paid class stock without approval board holders majority shares preferred stock long common stock outstanding holders class stock vote separately single class share entitled one vote companys articles incorporation contain provisions protecting holders class stock dilution event company issues additional shares class stock issues shares common stock blank preferred stock convertible common stock effects stock split stock dividend recapitalization common stock existing class shareholders diluted common stock unless approved twothirds directors person may directly indirectly acquire hold permissible ownership amount currently 20 total shares common stock outstanding long shares companys preferred stock issued outstanding entitled vote dividends may paid common stock without approval board holders majority shares preferred stock event class stock preferred stock issued outstanding time liquidation dissolution winding affairs company entire assets company available distribution stockholders distributed pro rata among holders common stock outstanding share common stock entitled one vote presently common stock issued outstanding 10 agency contracts company processes pays claims fiscal intermediary medicare program administrative agent state georgia national blue cross blue shield interplan system claims processed programs excluded accompanying consolidated statements income follows company receives reimbursement administrative expenses incurred performing services expense reimbursements deducted operating expenses accompanying consolidated statements income cerulean companies inc notes consolidated financial statements continued operating expense reimbursements connection processing medicare claims audited 1994 government representatives management opinion significant adjustments made affecting cost reimbursement december 31 1997 11 operating leases company operating lease arrangement home office facility term lease ten years two fiveyear renewal options annual rental includes base rental plus prorated real estate taxes operating expenses addition company leases office space data processing equipment future minimum lease obligations including estimated real estate taxes operating expenses noncancelable operating leases follows rent expense amounted approximately 14235000 1997 12249000 1996 9933000 1995 12 employee benefits pension plan company subsidiaries participate multiemployer noncontributory defined benefit pension plan covering substantially employees benefits based years service employees compensation years companys funding policy contribute amounts sufficient meet minimum funding requirements set forth employee retirement income security act 1974 contributions intended provide benefits attributed service date also expected earned future projected unit credit method used determine funding requirements pension expense cerulean companies inc notes consolidated financial statements continued following table presents funded status amounts recognized consolidated financial statements respective dates net pension cost includes following components following assumptions used pension calculations supplemental executive retirement plan 1996 company subsidiaries established three defined benefit pension plans covering certain executives benefits based years service employees compensation years plans nonqualified unfunded projected unit credit method used determine pension expense company pay benefits eligible participants due terms individual plans cerulean companies inc notes consolidated financial statements continued following table presents funded status amounts recognized consolidated financial statements respective dates net pension cost includes following components following assumptions used pension calculations defined contribution plan company offers defined contribution plan 401k plan covering substantially employees plan employees contribute 15 base compensation subject certain maximum limitations company matches 50 employees first 500 contributed 25 thereafter maximum 6 employees annual compensation companys matching contributions vest 25 per year commencing end second year participation employee contributions vest immediately company contributed 1031000 401k plan 1997 799000 1996 878000 1995 postretirement plan company sponsors defined dollar benefit plan provides postretirement health dental vision life insurance benefits fulltime associates least ten years service parttime associates equivalent ten years fulltime employment benefits also available spouses credits based length service provided retirees annually used towards cost postretirement benefits spouses retirees receive one half credits received retirees retired prior january 1 1995 insurance provided company cost retiree additionally group associates cerulean companies inc notes consolidated financial statements continued meet rule 80 least age 55 ten years service whose combined years service plus age equaled 80 greater december 31 1994 grandfathered receive postretirement benefits cost whenever retire effective january 1 1995 company changed method accounting benefits payasyougo method full accrual method adopted fasb statement financial accounting standards 106 employers accounting postretirement benefits pensions statement requires projected future cost providing postretirement benefits health care life insurance recognized expense employees render service instead benefits paid implementation required recognition transition obligation defined statement representing unfunded obligation attributable prior employee service company elected amortize transition obligation period 20 years effect change 1995 increase net periodic postretirement benefit cost 1986664 decrease net income 1589331 following table presents plans funded status reconciled amounts recognized companys consolidated balance sheets net periodic postretirement benefit cost includes following components valuation based census information january 1 1997 claims development based benefits provided discount rate assumed 725 salary increase rate assumed varies age health care cost trend rate assumed 85 1997 decreasing 05 year ultimate rate 525 health care cost trend rate assumed 90 1996 decreasing 05 year ultimate rate 60 health care cost trend rate assumption significant effect amounts reported example increasing assumed health care cost trend rates one percentage point year would increase accumulated postretirement benefit obligation 1112000 1307000 december 31 1997 1996 respectively aggregate estimated service interest cost cerulean companies inc notes consolidated financial statements continued components net periodic postretirement benefit cost 84000 110000 1997 1996 respectively 13 nonoperating income community health partnership networks chpns locally based equity ventures company owns 51 interest local physician andor hospital groups remaining equity interests chpns clinical services provided physician hospital partners well providers chpns maintain contracts bcbsga provides sales management administrative services including information systems data management services service contracts chpns 1996 hospital purchased 5 interest one companys chpn subsidiaries 1997 another hospital purchased 5 interest subsidiary accordance chpn formation agreement companys 51 equity interest diluted result transactions company recorded nonoperating income 1275000 1997 1996 gains related portion transactions increased minority interest liability chpn 1225000 year deducting deferred income taxes 255000 net income favorably impacted 1020000 1997 1996 14 commitments contingencies legal actions september 3 1997 lawsuit filed superior court fulton county nine groups behalf class putatively composed 501c3 organizations georgia seeking among things invalidate georgia statute upon certain aspects cerulean companies incs formation based complaint names blue cross blue shield georgia inc cerulean companies inc commissioner insurance state georgia defendants plaintiffs claims relate conversion bcbsga nonprofit entity forprofit entity occurred part plan conversion submitted public hearing november 21 1995 approved georgia commissioner insurance order dated december 27 1995 complaint seeks fair market value assets bcbsga december 27 1995 including limited surplus plus interest december 27 1995 placed public trust use benefit class nonprofit charitable organizations company believes plaintiffs claims without substantive merit intends vigorously defend lawsuit normal course business company involved subject claims contractual disputes uncertainties management reviewing legal counsel actions proceedings believes aggregate losses material effect companys financial position results operations 15 statutory financial information accounting practices bcbsga greater georgia life insurance company life insurance subsidiary hmo georgia inc health maintenance organization domiciled state georgia prepare statutory financial statements accordance accounting principles practices prescribed georgia insurance department prescribed statutory accounting practices interspersed throughout state insurance laws regulations variety publications national association insurance commissioners naic permitted statutory accounting practices encompass accounting practices prescribed practices may differ state may differ company within state cerulean companies inc notes consolidated financial statements continued may change future naic currently process codifying statutory accounting practices codification likely change extent prescribed statutory accounting practices may result changes accounting practices companys subsidiaries use prepare statutory financial statements codification expected approved naic 1998 require adoption various states becomes prescribed basis accounting domestic insurers must report statutorybasis results insurance department time unclear whether georgia adopt codification however based current draft guidance management believes impact codification material subsidiaries statutorybasis financial statements companys insurance subsidiaries permitted practices would require authorization georgia insurance department following table presents amount statutory capital surplus companys insurance subsidiaries following table presents amount statutory net income companys insurance subsidiaries minimum amount statutory capital surplus necessary satisfy regulatory requirements georgia insurance department 1000000 bcbsga 3000000 hmo georgia inc greater georgia life insurance company companys insurance subsidiaries may distribute dividends realized profits undistributed accumulated net earnings since organization amount dividends distributable year limited greater prior years net income determined statutory basis 10 prior year statutory surplus addition dividends distributable bcbsga limited conversion order approved georgia commissioner insurance december 27 1995 related bcbsgas conversion forprofit corporation dividend distributions bcbsga hmo georgia inc greater georgia life insurance company defined limits require special approval state georgia insurance commissioner 16 subsequent event january 1998 company terminated 9000000 revolving credit agreement paid full 3500000 note payable outstanding december 31 1997 item 14 exhibits financial statements financial statement schedules reports form 8k following documents filed part annual report form 10k 1 following financial statements incorporated reference part ii item 8 form 10k report independent auditors consolidated balance sheets december 31 1998 1997 consolidated statements income years ended december 31 1998 1997 1996 consolidated statements comprehensive income years ended december 31 1998 1997 1996 consolidated statements shareholders equity years ended december 31 1998 1997 1996 consolidated statements cash flows years ended december 31 1998 1997 1996 notes consolidated financial statements 2 financial statement schedules schedule ii condensed financial information registrant schedule v valuation qualifying accounts schedules omitted applicable required information included elsewhere consolidated financial statements notes thereto financial statement schedules follow signature page 3 exhibits 1 exhibit form s1 registration 3332796 effective may 14 1996 subsequent amendments incorporated herein reference 2 appendix form s4 registration 33364955 filed wellpoint health networks inc september 30 1998 incorporated herein reference 3 exhibit form 10q filed november 13 1998 incorporated herein reference 4 exhibit form 10q filed may 15 1998 incorporated herein reference 5 exhibit form 10q filed november 14 1997 incorporated herein reference 6 exhibit form 10k filed march 31 1998 incorporated herein reference 7 exhibit form 10q filed august 14 1998 incorporated herein reference b reports form 8k company filed report form 8k dated august 21 1998 filing made connection endowment nonprofit foundation described note 8 consolidated financial statements item 8 form 10k incorporated herein reference company filed report form 8k dated september 18 1998 filing made connection september 18 1998 lawsuit described item 3 legal proceedings incorporated herein reference c exhibits following additional exhibit filed concurrently report exhibit filed herewith signatures pursuant requirements section 13 15d securities exchange act 1934 amended registrant duly caused report signed behalf undersigned thereunto duly authorized city atlanta state georgia march 26 1999 cerulean companies inc registrant richard shirk richard shirk president pursuant requirements securities exchange act 1934 report signed following persons behalf company capacities indicated march 26 1999 schedule ii cerulean companies inc parent condensed balance sheets schedule ii continued cerulean companies inc parent condensed statements income schedule ii continued cerulean companies inc parent condensed statements cash flows schedule v cerulean companies inc valuation qualifying accounts years ended december 31 1998 1997 1996 united states securities exchange commission washington dc 20549 form 10k cerulean companies inc commission file number 3332796 consolidated financial statements years ended december 31 1998 1997 1996 report independent auditors cerulean companies inc consolidated financial statements years ended december 31 1998 1997 1996 contents report independent auditors board directors cerulean companies inc audited accompanying consolidated balance sheets cerulean companies inc subsidiaries december 31 1998 1997 related consolidated statements income comprehensive income shareholders equity cash flows three years period ended december 31 1998 audits also included financial statement schedules listed index item 14a financial statements schedules responsibility companys management responsibility express opinion financial statements schedules based audits conducted audits accordance generally accepted auditing standards require plan perform audit obtain reasonable assurance whether financial statements free material misstatement audit includes examining test basis evidence supporting amounts disclosures financial statements audit also includes assessing accounting principles used significant estimates made management well evaluating overall financial statement presentation believe audits provide reasonable basis opinion financial statements referred present fairly material respects consolidated financial position cerulean companies inc subsidiaries december 31 1998 1997 consolidated results operations cash flows three years period ended december 31 1998 conformity generally accepted accounting principles also opinion related financial statement schedules considered relation basic financial statements taken whole present fairly material respects information set forth therein ernst young llp february 5 1999 atlanta georgia cerulean companies inc consolidated balance sheets see accompanying notes cerulean companies inc consolidated statements income see accompanying notes cerulean companies inc consolidated statements comprehensive income see accompanying notes cerulean companies inc consolidated statements shareholders equity see accompanying notes cerulean companies inc consolidated statements cash flows see accompanying notes cerulean companies inc notes consolidated financial statements december 31 1998 1 organization proposed merger organization cerulean companies inc company incorporated laws state georgia february 2 1996 act holding company blue cross blue shield georgia inc bcbsga subsidiaries lawful purposes february 2 1996 company acquired outstanding capital stock bcbsga following bcbsgas conversion notforprofit corporation forprofit corporation pursuant plan conversion approved georgia commissioner insurance december 27 1995 conversion connection conversion company issued 49900 shares class b convertible preferred stock preferred stock raise 49900000 capital deducting offering costs net proceeds company 46645042 although company become holding company bcbsga conversion february 2 1996 consolidated results operations include historical operations bcbsga subsidiaries prior february 2 1996 company including subsidiaries consolidated basis period february 2 1996 december 31 1996 thereafter effective may 14 1996 companys registration securities act 1933 public offering class convertible common stock par value class stock securities exchange commission became effective part conversion company agreed offer bcbsgas approximately 141000 eligible subscribers five shares class stock cost upon completion offering eligible subscribers accepted 351545 shares par value class stock registration class stock section 12g securities exchange act 1934 became effective june 30 1997 currently class stock publicly traded proposed merger july 9 1998 company entered agreement plan merger agreement wellpoint health networks inc wellpoint subsidiary wellpoint pursuant merger agreement company become whollyowned subsidiary wellpoint finalization transaction subject among things approval shareholders company approval commissioner insurance state georgia approval blue cross blue shield association certain approvals health care financing administration upon closing transaction shareholders company exchange shares wellpoint shares cash transaction valued 500 million 2 significant accounting policies basis presentation companys accompanying consolidated financial statements prepared conformity generally accepted accounting principles gaap require use managements estimates companys managed care health life insurance operations gaap varies respects statutory accounting practices permitted prescribed insurance regulatory authorities companys health care plan subsidiary health maintenance organization life insurance subsidiary subject regulation georgia insurance department including minimum capital surplus requirements restrictions payment dividends opinion management material adjustments necessary fair presentation financial position results operations periods presented made adjustments normal recurring nature cerulean companies inc notes consolidated financial statements continued 2 significant accounting policies continued principles consolidation companys accompanying consolidated financial statements include accounts company bcbsga whollyowned life insurance subsidiary health maintenance subsidiary noninsurance subsidiary community health partnership network joint ventures chpns significant intercompany transactions balances eliminated consolidation company owns least 51 voting shares chpn certain circumstances defined chpn shareholder agreements supermajority votes shareholders required amendment chpn articles incorporation liquidation chpn issuance repurchase chpn equity net effect supermajority votes circumstances results consensus shareholders providing minority shareholders protective rights company required chpn agreements provide required additional capital future capital requirements minority shareholders limited prescribed profits chpns allocated shareholders accordance respective stock ownership percentages losses allocated accordance ownership interests previously contributed capital losses exceeding amounts absorbed entirely company accounting sale stock warrants subsidiary gains arising subsidiary issuing stock warrants third parties recorded nonoperating income presented separate line item consolidated statements income earnings per share earnings per share omitted data meaningful present time due likely dilutive events occur prior conversion class stock class b convertible preferred stock presently market class stock equity securities company investments company accounts investments accordance financial accounting standards board fasb statement 115 accounting certain investments debt equity securities statement 115 statement 115 requires fixed maturity securities classified either heldtomaturity availableforsale trading management determines appropriate classification fixed maturity securities time purchase reevaluates designation balance sheet date fixed maturity securities classified heldtomaturity company positive intent ability hold maturity heldtomaturity securities stated amortized cost adjusted amortization premiums accretion discounts maturity amortization well interest earned included investment income fixed maturity equity securities classified heldtomaturity classified availableforsale securities carried fair value unrealized gains losses net tax reported separate component shareholders equity amortized cost debt securities category adjusted amortization premiums accretion discounts maturity amortization interest earned included investment income cost securities sold based specific identification method december 31 1998 1997 company classified fixed maturity equity securities availableforsale companys investment portfolio significantly concentrated particular industry geographic region cerulean companies inc notes consolidated financial statements continued 2 significant accounting policies continued cash equivalents cash equivalents liquid shortterm investments maturities three months less time purchase combined cash account balances investments stated cost approximates fair value property equipment property equipment stated cost less accumulated depreciation costs developing software internal use capitalized technological feasibility established depreciation computed using straightline method estimated useful lives respective assets 15 years buildings 37 years software furniture equipment amortization software developed internal use begins asset placed service estimated benefit liabilities company provides claims reported unpaid claims incurred unreported cost adjudicating claims based primarily past experience membership demographics claims runoff patterns current medical trend information using accepted actuarial methods estimates adjusted changes factors occur adjustments reported year determination portions companys estimated benefit liabilities reimbursable due nature certain rate stabilization reserve programs offsetting receivables recorded consolidated balance sheets premium revenue management services revenue companys premium revenues consist primarily premiums traditional indemnity health insurance managed care products group life insurance products companys individual employer group contracts provide individual group fully insured premiums contracts billed advance respective coverage periods initially recorded premium receivables unearned premiums unearned premiums recognized earned period coverage management services revenue earned services performed consists administrative fees services provided commercial employer groups selffunded arrangements including claims processing management medical services access provider networks services rendered third parties related claims processed commercial selffunded employer groups 499618000 1998 489407000 1997 473506000 1996 management services revenue also includes reimbursements administrative expenses incurred performing services agent federal state government programs national blue cross blue shield interplan system related claims processed programs 43 billion 1998 39 billion 1997 35 billion 1996 rate stabilization reserves company fully insured arrangements certain employer groups whose premium revenues based experience rating groups anniversary date gain loss resulting experience determined premium rates groups based groups historical claims experience plus retention factor appropriate contribution surplus premium revenues include adjustments employer groups rate stabilization contracts extent premiums billed exceed claims incurred plus retention accumulated excess premium revenues claims incurred retention recorded rate stabilization reserve liability terms agreements groups may utilize funds reduce cerulean companies inc notes consolidated financial statements continued 2 significant accounting policies continued rate stabilization reserves continued prospective rates leave excess funds deposit company receive refund accumulated excess claims incurred premiums billed expensed company period incurred however shared risk arrangements net losses recorded receivables extent recoverable respective groups federal employee program company blue cross blue shield plans participate federal employee program fep underwrites voluntary health insurance contract employees dependents federal government blue cross blue shield association designated contract agent premium stabilization reserve liability fep stabilization reserve offsetting asset fep asset held agent recorded consolidated balance sheets premium revenues investment income operating expenses including fep operations center expenses recorded consolidated statements income recognize companys portion feps underwriting results advertising promotion costs associated advertising promoting products expensed year incurred advertising promotion expense 3780629 1998 5012557 1997 1651610 1996 reclassifications certain prior year balances reclassified conform current year presentation 3 investments december 31 1998 1997 follows cerulean companies inc notes consolidated financial statements continued 3 investments continued fair values fixed maturities shortterm investments based quoted market prices available fixed maturities actively traded fair values estimated using values obtained independent pricing services fair values common stocks based quoted market prices substantially companys investments equity securities december 31 1998 1997 comprised stocks industrial companies amortized cost fair values fixed maturities december 31 1998 contractual maturity shown expected maturities differ contractual maturities borrowers may right call prepay obligations without call prepayment penalties bonds certificates deposit money market funds carried value 1012538 deposit insurance regulatory authorities december 31 1998 accordance statutory requirements cerulean companies inc notes consolidated financial statements continued 3 investments continued investment income years ended december 31 1998 1997 1996 summarized follows income loss amount year ended december 31 1997 includes receipt 579000 related settlement lease dispute terms companys primary lease headquarters building modified benefit landlord company paid giving right terms realized unrealized investment gains losses years ended december 31 1998 1997 1996 follows cerulean companies inc notes consolidated financial statements continued 4 accounts receivable accounts receivable consists following 5 property equipment property equipment consists following december 31 1998 1997 furniture equipment includes 3021638 1701673 respectively capitalized costs related development internal use software 1998 company recognized approximately 90000 amortization expense related costs capitalized development internal use software december 31 1997 software developed internal use placed service accordingly amortization recognized year depreciation expense 10743267 9765395 9350458 1998 1997 1996 respectively including 1187550 1998 1063318 1997 965196 1996 building improvements 6 lines credit company available 5500000 line credit bank finance working capital needs interest accrues amounts advanced prime rate borrowings line credit three years ended december 31 1998 terms revolving credit loan agreement group banks finance companys community health partnership networks related costs company could borrow 9000000 borrowings outstanding revolving credit agreement 3500000 december 31 1997 1996 interest accrued amounts advanced 05 libor rate 1997 1996 january 1998 company terminated 9000000 revolving credit agreement paid full 3500000 note payable outstanding december 31 1997 april 1996 company obtained 55000000 insolvency line credit group banks insolvency line credit may drawn solely event insolvency bcbsga pay authorized insurance policy claims insolvency line credit designed satisfy certain membership standards blue cross blue shield association company certain subsidiaries cerulean companies inc notes consolidated financial statements continued 6 lines credit continued exclusive right business georgia name blue cross blue shield use blue cross blue shield names trademarks service marks respect companys indemnity ppo hmo pos products 7 estimated benefit liabilities following table provides reconciliation beginning ending estimated benefit liabilities including claims adjudication expenses net rate stabilization reimbursable reserves life reserves 1998 1997 1996 company uses paid claims completion factors based historical payment patterns estimate incurred claims changes payment patterns claims trends result changes prior years claims estimates reconciliation companys incurred expense total benefits expense shown consolidated statements income follows cerulean companies inc notes consolidated financial statements continued 8 endowment nonprofit foundation september 3 1997 lawsuit filed superior court fulton county plaintiffs lets get together inc statewide independent living council georgia inc living independence everybody inc aids survival project inc womens policy education fund inc disability connections middle georgia center independent living inc physicians national health program inc campaign prosperous georgia inc friends survivors standing together inc collectively plaintiffs behalf class putatively composed 501c3 organizations georgia seeking among things invalidate georgia statute upon certain aspects conversion blue cross blue shield georgia inc notforprofit corporation business corporation based complaint named bcbsga company commissioner insurance state georgia defendants additional similar request declaratory ruling filed georgia insurance department september 3 1997 plaintiffs claims related conversion bcbsga nonprofit entity forprofit entity occurred part plan conversion submitted public hearing november 21 1995 approved georgia commissioner insurance order dated december 27 1995 complaint sought fair market value assets bcbsga december 27 1995 plus interest december 27 1995 placed public trust use benefit class nonprofit charitable organizations october 3 1997 georgia insurance department denied plaintiffs request declaratory ruling decision plaintiffs appealed october 31 1997 company bcbsga filed motion dismiss lawsuit oral argument held january 12 1998 july 8 1998 company entered stipulation agreement settlement lawsuit settlement subject approval superior court fulton county georgia court august 17 1998 six individuals including two shareholders filed motion intervene lawsuit objection settlement hearing held august 20 1998 determine among things terms conditions settlement fair reasonable approved court august 21 1998 judge denied motion intervene entered final order approving settlement effective date settlement september 21 1998 date appeal period expired entry final order terms settlement company established new nonprofit foundation advancement health care georgians paid foundation endowment plaintiffs lawyers together foundation aggregate 10 million cash securities cerulean aggregating 20 ceruleans total equity upon issuance consisting 1 shares class stock approximating 95 total equity cerulean 2 warrants exercisable shares nonvoting series preferred stock series stock company approximate 105 total equity company upon payment foundation exercise price 21 million additionally foundation entered shareholders agreement agreed vote larger number class stock would constitute 5 shares class stock september 1998 company issued 57772 shares class stock 63853 warrants exercisable nonvoting series stock pursuant terms warrants prior consummation transaction proposed merger wellpoint warrants must exercised defined cashless exercise results reduction percentage participation foundation 20 portion total merger consideration company approximately 167 total 1998 company recorded nonrecurring charge 762 million endowment foundation managements judgment represented fair value date settlement cerulean companies inc notes consolidated financial statements continued 9 income taxes income tax expense benefit attributable income taxes minority interests substantially federal consists provision income taxes different amount computed using statutory federal income tax rate 35 follows company recorded benefit 26655000 1998 related settlement reduced expected realizable value 4570000 company also recorded 1619000 benefit 1998 difference book tax basis chpn investments reduced expected realizable value 925000 chpn subsidiaries join filing consolidated tax return company generated tax losses 1998 expected generate benefit currently foreseeable future includes state taxes net federal tax benefit permanent book tax differences including non deductible expenses company whollyowned subsidiaries file consolidated federal income tax return income tax expense consisted primarily federal alternative minimum tax 1998 1996 companys consolidated tax expense 1997 calculated regular tax system reduced available net operating loss carryforwards subjected company alternative minimum tax federal income taxes paid 1998 1997 1996 6030000 2800000 5400000 respectively cerulean companies inc notes consolidated financial statements continued 9 income taxes continued deferred income taxes reflect net tax effects temporary differences carrying amounts assets liabilities financial reporting purposes amounts used income tax purposes significant components deferred tax asset included assets consolidated balance sheets follows temporary differences consist principally differences tax generally accepted accounting principles related estimated benefit liabilities accounting accruals december 31 1998 companys consolidated tax group net operating loss carryforwards 115440000 regular income tax purposes expire years 2001 2018 certain chpn subsidiaries file separate tax returns net operating loss carryforwards 21492000 expire 2011 2018 company recognized benefit consolidated tax group carryforwards 2356000 1997 company qualifies special deduction regular tax system available certain blue cross blue shield plans section 833b internal revenue code effect deduction significantly reduce regular taxable income subjects company alternative minimum tax company expects taxed alternative minimum tax system foreseeable future therefore principally regular tax net operating loss carryforwards consolidated tax group alternative minimum tax credit longlived tax assets deductible well future likely utilized financial reporting purposes valuation allowance recorded reduce deferred tax assets related amount expected realized company reviewed adequacy deferred tax valuation allowance believes appropriate january 1999 internal revenue service completed examination companys consolidated federal income tax returns 1995 1994 company believe ultimate resolution issues adverse effect operations financial position cerulean companies inc notes consolidated financial statements continued 10 capital stock mandatorily redeemable preferred stock class b convertible preferred stock class b stock liquidation preference 1000 per share mandatory redemption value 900 per share dividends class b stock currently paid rate 6000 per annum per share 10000 per annum per share effective 1998 fully cumulative accrue without interest preferred shares mandatorily redeemable december 1 2001 may redeemed prior date upon occurrence certain events upon completion stock conversion share class b stock shall convert number fully paid nonassessable shares common stock equal 0004446420631 rate may adjusted periodically upon occurrence certain events holders class b stock vote separately single class share entitled one vote blank preferred stock board directors board company may time issue shares blank preferred stock series classes terms preferences provisions board shall determine provided issuance approved majority holders preferred stock issued outstanding entitled vote presently blank preferred stock issued outstanding series preferred stock series stock new series preferred stock created specifically settlement series stock economic attributes class stock share series stock economic equivalent one share class stock series stock however voting rights events statutory voting right accorded class series capital stock share series stock automatically converts one unit companys class common stock participation rights companys rights companys rights economic equivalent one share class stock voting rights series stock authorized companys board directors holders majority outstanding shares class b stock amendment companys articles creating series stock filed georgia secretary state class convertible common stock prior december 1 1998 shares class stock could sold transferred encumbered pledged otherwise disposed except upon occurrence certain events established market companys class stock following december 1 1998 shares became transferable certain defined criteria right first refusal company december 31 1998 shares presented company transfer met defined criteria event stock conversion share class stock converted one share common stock long shares companys class b stock issued outstanding entitled vote dividends may paid class stock without approval board holders majority shares class b stock long common stock outstanding holders class stock vote separately single class share entitled one vote companys articles incorporation contain provisions protecting holders class stock dilution event company issues additional shares class stock issues shares common stock blank preferred stock convertible common stock effects stock split stock dividend recapitalization common stock existing class shareholders diluted cerulean companies inc notes consolidated financial statements continued 10 capital stock continued class convertible common stock continued 1998 57772 shares class stock issued part settlement shares terms provisions shares class stock provided companys articles except foundation received shares class stock part settlement entered shareholders agreement pursuant 37305 shares total 57772 shares issued entitled vote additionally foundation right tender redemption shares class stock aggregate redemption price 10 million companys articles redemption right required separately authorized holders majority shares class b stock authorization granted meeting holders class b stock held september 15 1998 common stock unless approved twothirds directors person may directly indirectly acquire hold permissible ownership amount currently 20 total shares common stock outstanding long shares companys class b stock issued outstanding entitled vote dividends may paid common stock without approval board holders majority shares class b stock event class stock class b stock issued outstanding time liquidation dissolution winding affairs company entire assets company available distribution stockholders distributed pro rata among holders common stock outstanding share common stock entitled one vote presently common stock issued outstanding stock warrants exercisable 1998 warrants also issued part settlement 63853 warrants exercisable shares nonvoting series stock circumstances equity interest represented warrants voting rights warrants also provide upon occasion certain defined major events warrants must exercised cashless exercise effect provision warrants automatically converted shares series stock according formula provided warrant agreement 11 operating leases company operating lease arrangement home office facility term lease ten years two fiveyear renewal options annual rental includes base rental plus prorated real estate taxes operating expenses cerulean companies inc notes consolidated financial statements continued 11 operating leases continued addition company leases office space data processing equipment future minimum lease obligations including estimated real estate taxes operating expenses noncancelable operating leases follows rent expense amounted approximately 18413000 1998 14235000 1997 12249000 1996 12 employee benefits 1998 company adopted statement financial accounting standards sfas 132 employers disclosures pensions postretirement benefits application sfas 132 impact companys financial position results operations pension plan company subsidiaries participate multiemployer noncontributory defined benefit pension plan covering substantially employees benefits based years service employees compensation years companys funding policy contribute amounts sufficient meet minimum funding requirements set forth employee retirement income security act 1974 contributions intended provide benefits attributed service date also expected earned future projected unit credit method used determine funding requirements pension expense supplemental executive retirement plan 1996 company subsidiaries established three defined benefit pension plans covering certain executives benefits based years service employees compensation years plans nonqualified unfunded projected unit credit method used determine pension expense company pay benefits eligible participants due terms individual plans postretirement plan company sponsors defined dollar benefit plan provides postretirement health dental vision life insurance benefits fulltime associates least ten years service parttime associates equivalent ten years fulltime employment benefits also available spouses credits based length service provided retirees annually used towards cost postretirement benefits spouses retirees receive one half credits received retirees retired prior january 1 1995 insurance provided company cost retiree additionally group associates meet rule 80 least age 55 ten years service whose combined years service plus age equaled 80 greater december 31 1994 grandfathered receive postretirement benefits cost whenever retire cerulean companies inc notes consolidated financial statements continued 12 employee benefits continued following chart summarizes change plans benefit obligation assets funded status cerulean companies inc notes consolidated financial statements continued 12 employee benefits continued projected benefit obligation accumulated benefit obligation fair value plan assets supplemental executive retirement plan accumulated benefit obligation excess plan assets 2993001 1945537 0 respectively december 31 1998 2172602 1293029 0 respectively december 31 1997 postretirement benefit plan valuation based census information january 1 1998 claims development based benefits provided discount rate assumed 675 salary increase rate assumed varies age health care cost trend rate assumed 80 1998 decreasing 05 year reaching 60 2002 525 2003 health care cost trend rate assumed 85 1997 decreasing 05 year ultimate rate 525 health care cost trend rate assumption significant effect amounts reported example increasing assumed health care cost trend rates one percentage point year would increase accumulated postretirement benefit obligation 982700 december 31 1998 aggregate estimated service interest cost components net periodic postretirement benefit cost 64100 1998 similarly decreasing assumed health care cost trend rates one percentage point year would decrease accumulated postretirement benefit obligation 840300 december 31 1998 aggregate estimated service interest cost components net periodic postretirement benefit cost 60700 1998 defined contribution plan company offers defined contribution plan 401k plan covering substantially employees plan employees contribute 15 base compensation subject certain maximum limitations company matches 50 employees first 500 contributed 25 thereafter maximum 6 employees annual compensation companys matching contributions vest 25 per year commencing end second year participation employee contributions vest immediately company contributed 1125000 401k plan 1998 1031000 1997 799000 1996 cerulean companies inc notes consolidated financial statements continued 13 business segment customer product information effective january 1 1998 company adopted sfas 131 disclosures segments enterprise related information application sfas 131 impact companys financial position results operations company operates predominantly one industry segment health insurance products services reports operations one business segment companys products services sold principally state georgia significant portion customer base concentrated companies located metropolitan atlanta area percentage total revenues premium revenues management services revenues companys largest customer represented 23 total revenues 1998 27 1997 30 1996 companys next two largest customers accounted less 9 total revenues 1998 1997 1996 companys total revenues premium revenues management services revenues primary product groups follows 14 nonoperating income community health partnership networks chpns locally based equity joint ventures company owns 51 interest local physician andor hospital groups remaining equity interests chpns clinical services provided physician hospital partners well providers chpns maintain contracts bcbsga provides sales management administrative services including information systems data management services service contracts chpns january 1998 hospital purchased stock warrants exercisable common stock one companys chpn subsidiaries exchange 10 million note receivable 10 million paid ratably two years december 31 1998 500000 received accordance chpn formation agreement companys 51 equity interest diluted result transaction company recorded nonoperating income 255000 portion transaction increased minority interest liability chpn 245000 1996 hospital purchased 5 interest one companys chpn subsidiaries 1997 another hospital purchased 5 interest subsidiary accordance chpn formation agreement companys 51 equity interest diluted result transactions company recorded nonoperating income 1275000 1997 1996 portion transactions increased minority interest liability chpn 1225000 year deducting deferred income taxes 255000 net income favorably impacted 1020000 1997 1996 15 commitments contingencies legal proceedings december 17 1998 plaintiffs rickey underhill jim kerscher janice young richard collins greg lane keith page individually behalf others similarly situated collectively bartow county plaintiffs filed lawsuit company bcbsga superior court bartow cerulean companies inc notes consolidated financial statements continued 15 commitments contingencies continued legal proceedings continued county court bartow state georgia bearing civil action file cv982656 bartow county plaintiffs identify six individuals entitled receive shares companys stock connection conversion bcbsga nonprofit corporation regular business corporation bartow county plaintiffs assert claims specific performance breach provisions insurance code georgia request declaratory judgment certification class action consisting persons eligible subscribers company september 1 1995 become holders class stock company eligible coverage terminated prior february 1 1996 bartow county plaintiffs allege members purported class entitled receive shares class stock company bartow county plaintiffs allege alternatively offering materials disseminated bcbsga 1996 relating class stock company disseminated bartow county plaintiffs purported class members entitled award damages excess 25 million january 28 1999 company bcbsga filed answers motion dismiss case remains pending discovery taken place date considering complaint management company believes case without merit event believes impact assets company would material september 18 1998 plaintiffs allen saravuth nga nguyen chansamone sengsavath fatana pirzad individually behalf others similarly situated collectively richmond county plaintiffs filed lawsuit company bcbsga james l laboon jr fred l tolbert jr richard shirk james e albright w daniel barker elizabeth w camp louis h felder md edward gillespie joseph greene mel h gregory jr frank j hanna iii r pierce head jr charles h keaton james h leigh jr md julia l mitchellivey charles r underwood mdw jerry vereen max walker dan h willoughby md joe young john b zellars collectively defendant directors superior court richmond county court richmond state georgia bearing civil action file 98rccv806 addition richmond county plaintiffs filed motion temporary restraining order interlocutory injunctive relief heard denied court richmond september 21 1998 richmond county plaintiffs identify four individuals entitled receive shares companys stock connection conversion bcbsga nonprofit corporation regular business corporation richmond county plaintiffs assert claims specific performance fraud breach provisions insurance code georgia breach fiduciary duty requested declaratory judgment certification class action consisting persons eligible subscribers bcbsga february 1 1996 become holders class stock company richmond county plaintiffs allege members purported class entitled receive shares class stock company richmond county plaintiffs allege alternatively offering materials disseminated bcbsga 1996 relating class stock company contained materially misleading deceptive statements omissions richmond county plaintiffs purported class members entitled award damages excess 100 million richmond county plaintiffs also assert derivative causes action defendant directors alleging defendant directors breached fiduciary duties among things approving placement issuance class b stock company 1996 issuance class stock company settlement lets get together inc et al v insurance commissioner et al civil action e61714 superior court fulton county georgia lawsuit certain management compensation october 28 1998 company bcbsga filed answers motion dismiss declaratory judgment hearing held december 9 10 1998 solely respect whether matter law plaintiffs shareholders company december 17 1998 richmond county court ruled favor plaintiffs none matters considered company filed immediate appeal supreme court georgia january 26 1999 supreme court accepted jurisdiction cerulean companies inc notes consolidated financial statements continued 15 commitments contingencies continued legal proceedings continued granted matter expedited treatment date oral argument set considering derivative claims management company believes case without merit event believes impact assets company would material normal course business company involved subject claims contractual disputes uncertainties management reviewing legal counsel actions proceedings believes aggregate losses material effect companys financial position results operations 16 statutory financial information accounting practices bcbsga greater georgia life insurance company life insurance subsidiary hmo georgia inc health maintenance organization domiciled state georgia prepare statutory financial statements accordance accounting principles practices prescribed permitted georgia insurance department currently prescribed statutory accounting practices interspersed throughout state insurance laws regulations national association insurance commissioners naic accounting practices procedures manual variety publications permitted statutory accounting practices encompass accounting practices prescribed practices may differ state may differ company within state may change future 1998 naic adopted codified statutory accounting principles codification likely change extent prescribed statutory accounting practices may result changes accounting practices companys subsidiaries use prepare statutory financial statements codification require adoption various states becomes prescribed statutory basis accounting insurance companies domesticated within states accordingly codification becomes effective companys subsidiaries state georgia must adopt codification prescribed statutory basis accounting domestic insurers must report statutorybasis results insurance department time unclear whether georgia adopt codification however based current guidance management believes impact codification material statutorybasis financial statements companys subsidiaries companys insurance subsidiaries permitted practices would require authorization georgia insurance department minimum amount statutory capital surplus necessary satisfy regulatory requirements georgia insurance department 1000000 bcbsga 3000000 hmo georgia inc greater georgia life insurance company companys insurance subsidiaries may distribute dividends realized profits undistributed accumulated net earnings since organization amount dividends distributable year limited greater prior years net income determined statutory basis 10 prior year statutory surplus addition dividends distributable bcbsga limited conversion order approved georgia commissioner insurance december 27 1995 related bcbsgas conversion forprofit corporation dividend distributions bcbsga hmo georgia inc greater georgia life insurance company defined limits require special approval state georgia insurance commissioner cerulean companies inc notes consolidated financial statements continued 16 statutory financial information accounting practices continued following table presents amount statutory capital surplus companys insurance subsidiaries following table presents amount statutory net income companys insurance subsidiaries item 14 exhibits financial statements financial statement schedules reports form 8k following documents filed part annual report form 10k 1 following financial statements incorporated reference part ii item 8 form 10k report independent auditors consolidated balance sheets december 31 1999 1998 consolidated statements income years ended december 31 1999 1998 1997 consolidated statements comprehensive income years ended december 31 1999 1998 1997 consolidated statements shareholders equity years ended december 31 1999 1998 1997 consolidated statements cash flows years ended december 31 1999 1998 1997 notes consolidated financial statements 2 financial statement schedules schedule ii condensed financial information registrant schedule v valuation qualifying accounts schedules omitted applicable required information included elsewhere consolidated financial statements notes thereto financial statement schedules follow signature page 3 exhibits 1 exhibit form s1 registration 3332796 effective may 14 1996 subsequent amendments incorporated herein reference 2 appendix form s4 registration 33364955 filed wellpoint health networks inc september 30 1998 incorporated herein reference 3 exhibit form 10q filed november 13 1998 incorporated herein reference 4 exhibit form 10q filed august 16 1999 incorporated herein reference 5 exhibit form 10q filed august 14 1998 incorporated herein reference exhibit filed herewith b reports form 8k reports form 8k filed securities exchange commission last quarter period covered report c exhibits following additional exhibit filed concurrently report exhibit filed herewith signatures pursuant requirements section 13 15d securities exchange act 1934 amended registrant duly caused report signed behalf undersigned thereunto duly authorized city atlanta state georgia march 29 2000 cerulean companies inc registrant richard shirk richard shirk president pursuant requirements securities exchange act 1934 report signed following persons behalf company capacities indicated march 29 1999 schedule ii cerulean companies inc parent condensed balance sheets schedule ii continued cerulean companies inc parent condensed statements income schedule ii continued cerulean companies inc parent condensed statements cash flows schedule v cerulean companies inc valuation qualifying accounts years ended december 31 1999 1998 1997 united states securities exchange commission washington dc 20549 form 10k cerulean companies inc commission file number 3332796 consolidated financial statements years ended december 31 1999 1998 1997 report independent auditors cerulean companies inc consolidated financial statements years ended december 31 1999 1998 1997 contents report independent auditors board directors cerulean companies inc audited accompanying consolidated balance sheets cerulean companies inc subsidiaries december 31 1999 1998 related consolidated statements income comprehensive income shareholders equity cash flows three years period ended december 31 1999 audits also included financial statement schedules listed index item 14a financial statements schedules responsibility companys management responsibility express opinion financial statements schedules based audits conducted audits accordance auditing standards generally accepted united states standards require plan perform audit obtain reasonable assurance whether financial statements free material misstatement audit includes examining test basis evidence supporting amounts disclosures financial statements audit also includes assessing accounting principles used significant estimates made management well evaluating overall financial statement presentation believe audits provide reasonable basis opinion financial statements referred present fairly material respects consolidated financial position cerulean companies inc subsidiaries december 31 1999 1998 consolidated results operations cash flows three years period ended december 31 1999 conformity accounting principles generally accepted united states also opinion related financial statement schedules considered relation basic financial statements taken whole present fairly material respects information set forth therein ernst young llp february 11 2000 atlanta georgia cerulean companies inc consolidated balance sheets see accompanying notes cerulean companies inc consolidated statements income see accompanying notes cerulean companies inc consolidated statements comprehensive income see accompanying notes cerulean companies inc consolidated statements shareholders equity see accompanying notes cerulean companies inc consolidated statements cash flows see accompanying notes cerulean companies inc notes consolidated financial statements december 31 1999 1 organization proposed merger organization cerulean companies inc company incorporated laws state georgia february 2 1996 act holding company blue cross blue shield georgia inc bcbsga subsidiaries lawful purposes february 2 1996 company acquired outstanding capital stock bcbsga following bcbsgas conversion notforprofit corporation forprofit corporation pursuant plan conversion approved georgia commissioner insurance december 27 1995 conversion part conversion company agreed offer bcbsgas approximately 141000 eligible subscribers five shares class convertible common stock par value class stock cost upon completion offering eligible subscribers accepted 351545 shares par value class stock registration class stock became effective securities act 1933 section 12g securities exchange act 1934 may 14 1996 june 30 1997 respectively currently class stock publicly traded proposed merger july 9 1998 company entered agreement plan merger agreement wellpoint health networks inc wellpoint subsidiary wellpoint july 9 1999 parties agreed upon extension merger agreement october 15 1999 certain circumstances december 31 1999 effective october 15 1999 parties agreed extend merger agreement december 31 1999 december 30 1999 parties agreed extend merger agreement december 31 2000 pursuant merger agreement company become whollyowned subsidiary wellpoint june 25 1999 shareholders company approved transaction finalization transaction subject among things approval commissioner insurance state georgia commissioner approval blue cross blue shield association certain approvals health care financing administration upon final disposition litigation commenced richmond county plaintiffs described note 15 legal proceedings company expects commissioner schedule public hearing upon closing transaction shareholders company exchange shares wellpoint shares cash transaction valued 500 million 2 significant accounting policies basis presentation companys accompanying consolidated financial statements prepared conformity generally accepted accounting principles gaap require use managements estimates companys managed care health life insurance operations gaap varies respects statutory accounting practices permitted prescribed insurance regulatory authorities companys health care plan subsidiary health maintenance organization life insurance subsidiary subject regulation georgia insurance department including minimum capital surplus requirements restrictions payment dividends opinion management material adjustments necessary fair presentation financial position results operations periods presented made adjustments normal recurring nature cerulean companies inc notes consolidated financial statements continued 2 significant accounting policies continued principles consolidation companys accompanying consolidated financial statements include accounts company bcbsga whollyowned life insurance subsidiary health maintenance subsidiary noninsurance subsidiary community health partnership network joint ventures chpns significant intercompany transactions balances eliminated consolidation company owns least 51 voting shares chpn certain circumstances defined chpn shareholder agreements supermajority votes shareholders required amendment chpn articles incorporation liquidation chpn issuance repurchase chpn equity net effect supermajority votes circumstances results consensus shareholders providing minority shareholders protective rights company required chpn agreements provide required additional capital future capital requirements minority shareholders limited prescribed profits chpns allocated shareholders accordance respective stock ownership percentages losses allocated accordance ownership interests previously contributed capital losses exceeding amounts absorbed entirely company accounting sale stock warrants subsidiary gains arising subsidiary issuing stock warrants third parties recorded nonoperating income presented separate line item accompanying consolidated statements income earnings per share earnings per share omitted data meaningful present time due likely dilutive events occur prior conversion class stock class b convertible preferred stock presently market class stock equity securities company investments company accounts investments accordance financial accounting standards board fasb statement 115 accounting certain investments debt equity securities statement 115 statement 115 requires fixed maturity securities classified either heldtomaturity availableforsale trading management determines appropriate classification fixed maturity securities time purchase reevaluates designation balance sheet date fixed maturity securities classified heldtomaturity company positive intent ability hold maturity heldtomaturity securities stated amortized cost adjusted amortization premiums accretion discounts maturity amortization well interest earned included investment income fixed maturity equity securities classified heldtomaturity classified availableforsale securities carried fair value unrealized gains losses net tax reported separate component shareholders equity amortized cost debt securities category adjusted amortization premiums accretion discounts maturity amortization interest earned included investment income cost securities sold based specific identification method december 31 1999 1998 company classified fixed maturity equity securities availableforsale companys investment portfolio significantly concentrated particular industry geographic region cerulean companies inc notes consolidated financial statements continued 2 significant accounting policies continued cash equivalents cash equivalents liquid shortterm investments maturities three months less time purchase combined cash account balances investments stated cost approximates fair value property equipment property equipment stated cost less accumulated depreciation costs developing software internal use capitalized technological feasibility established depreciation computed using straightline method estimated useful lives respective assets 15 years buildings 37 years software furniture equipment amortization software developed internal use begins asset placed service estimated benefit liabilities company provides claims reported unpaid claims incurred unreported cost adjudicating claims based primarily past experience membership demographics claims runoff patterns current medical trend information using accepted actuarial methods estimates adjusted changes factors occur adjustments reported year determination portions companys estimated benefit liabilities reimbursable due nature certain rate stabilization reserve programs offsetting receivables recorded accompanying consolidated balance sheets premium revenue management services revenue companys premium revenues consist primarily premiums traditional indemnity health insurance managed care products group life insurance products companys individual employer group contracts provide individual group fully insured premiums contracts billed advance respective coverage periods initially recorded premium receivables unearned premiums unearned premiums recognized earned period coverage management services revenue earned services performed consists administrative fees services provided commercial employer groups selffunded arrangements including claims processing management medical services access provider networks services rendered third parties related claims processed commercial selffunded employer groups 515909000 1999 499618000 1998 489407000 1997 management services revenue also includes reimbursements administrative expenses incurred performing services agent federal state government programs national blue cross blue shield interplan system related claims processed programs 42 billion 1999 43 billion 1998 39 billion 1997 rate stabilization reserves company fully insured arrangements certain employer groups whose premium revenues based experience rating groups anniversary date gain loss resulting experience determined premium rates groups based groups historical claims experience plus retention factor appropriate contribution surplus premium revenues include adjustments employer groups rate stabilization contracts extent premiums billed exceed claims incurred plus retention cerulean companies inc notes consolidated financial statements continued 2 significant accounting policies continued rate stabilization reserves continued accumulated excess premium revenues claims incurred retention recorded rate stabilization reserve liability terms agreements groups may utilize funds reduce prospective rates leave excess funds deposit company receive refund accumulated excess claims incurred premiums billed expensed company period incurred federal employee program company blue cross blue shield plans participate federal employee program fep underwrites voluntary health insurance contract employees dependents federal government blue cross blue shield association designated contract agent premium stabilization reserve liability fep stabilization reserve offsetting asset fep assets held agent recorded accompanying consolidated balance sheets premium revenues investment income operating expenses including fep operations center expenses recorded accompanying consolidated statements income recognize companys portion feps underwriting results advertising promotion costs associated advertising promoting products expensed year incurred advertising promotion expense 3608037 1999 3780629 1998 5012557 1997 3 investments december 31 1999 1998 follows cerulean companies inc notes consolidated financial statements continued 3 investments continued fair values fixed maturities shortterm investments based quoted market prices available fixed maturities actively traded fair values estimated using values obtained independent pricing services fair values common stocks based quoted market prices substantially companys investments equity securities december 31 1999 1998 comprised stocks industrial companies amortized cost fair values fixed maturities december 31 1999 contractual maturity shown expected maturities differ contractual maturities borrowers may right call prepay obligations without call prepayment penalties bonds certificates deposit money market funds carried value 1004422 deposit insurance regulatory authorities december 31 1999 accordance statutory requirements cerulean companies inc notes consolidated financial statements continued 3 investments continued investment income years ended december 31 1999 1998 1997 summarized follows income loss amounts generally gains losses disposal assets transactions relate companys primary business operations realized unrealized investment gains losses years ended december 31 1999 1998 1997 follows cerulean companies inc notes consolidated financial statements continued 4 accounts receivable accounts receivable consists following 5 property equipment property equipment consists following december 31 1999 1998 furniture equipment includes 6740544 3021638 respectively capitalized costs related development internal use software 1999 1998 company recognized approximately 564073 90000 amortization expense related costs capitalized development internal use software depreciation expense 10439488 10743267 9765395 1999 1998 1997 respectively including 697594 1999 1187550 1998 1063318 1997 building improvements 6 lines credit company available 5500000 line credit bank finance working capital needs interest accrues amounts advanced prime rate borrowings line credit three years ended december 31 1999 company 55000000 insolvency line credit group banks insolvency line credit may drawn solely event insolvency bcbsga pay authorized insurance policy claims insolvency line credit designed satisfy certain membership standards blue cross blue shield association company certain subsidiaries exclusive right business georgia name blue cross blue shield use blue cross blue shield names trademarks service marks respect companys indemnity ppo hmo pos products terms revolving credit loan agreement group banks finance companys community health partnership networks related costs company could borrow 9000000 january 1998 company terminated 9000000 revolving credit agreement paid full 3500000 note payable outstanding december 31 1997 interest accrued amounts advanced 05 libor rate 1998 1997 cerulean companies inc notes consolidated financial statements continued 7 estimated benefit liabilities following table provides reconciliation beginning ending estimated benefit liabilities including claims adjudication expenses net rate stabilization reimbursable reserves life reserves 1999 1998 1997 company uses paid claims completion factors based historical payment patterns estimate incurred claims changes payment patterns claims trends result changes prior years claims estimates reconciliation companys incurred expense total benefits expense shown accompanying consolidated statements income follows cerulean companies inc notes consolidated financial statements continued 8 endowment nonprofit foundation september 3 1997 lawsuit filed superior court fulton county plaintiffs lets get together inc statewide independent living council georgia inc living independence everybody inc aids survival project inc womens policy education fund inc disability connections middle georgia center independent living inc physicians national health program inc campaign prosperous georgia inc friends survivors standing together inc collectively plaintiffs behalf class putatively composed 501c3 organizations georgia seeking among things invalidate georgia statute upon certain aspects conversion blue cross blue shield georgia inc notforprofit corporation business corporation based complaint named bcbsga company commissioner insurance state georgia defendants additional similar request declaratory ruling filed georgia insurance department september 3 1997 plaintiffs claims related conversion bcbsga nonprofit entity forprofit entity occurred part plan conversion submitted public hearing november 21 1995 approved georgia commissioner insurance order dated december 27 1995 complaint sought fair market value assets bcbsga december 27 1995 plus interest december 27 1995 placed public trust use benefit class nonprofit charitable organizations october 3 1997 georgia insurance department denied plaintiffs request declaratory ruling decision plaintiffs appealed october 31 1997 company bcbsga filed motion dismiss lawsuit oral argument held january 12 1998 july 8 1998 company entered stipulation agreement settlement lawsuit settlement subject approval superior court fulton county georgia court august 17 1998 six individuals including two shareholders filed motion intervene lawsuit objection settlement hearing held august 20 1998 determine among things terms conditions settlement fair reasonable approved court august 21 1998 judge denied motion intervene entered final order approving settlement effective date settlement september 21 1998 date appeal period expired entry final order terms settlement company established new nonprofit foundation advancement health care georgians paid foundation endowment plaintiffs lawyers together foundation aggregate 10 million cash securities cerulean aggregating 20 ceruleans total equity upon issuance consisting 1 shares class stock approximating 95 total equity cerulean 2 warrants exercisable shares nonvoting series preferred stock series stock company approximate 105 total equity company upon payment foundation exercise price 21 million additionally foundation entered shareholders agreement agreed vote larger number class stock would constitute 5 shares class stock september 1998 company issued 57772 shares class stock 63853 warrants exercisable nonvoting series stock pursuant terms warrants prior consummation transaction proposed merger wellpoint warrants must exercised defined cashless exercise results reduction percentage participation foundation 20 portion total merger consideration company approximately 167 total 1998 company recorded nonrecurring charge 762 million endowment foundation managements judgment represented fair value date settlement cerulean companies inc notes consolidated financial statements continued 9 income taxes income tax expense benefit attributable income taxes minority interests substantially federal consists provision income taxes different amount computed using statutory federal income tax rate 35 follows company whollyowned subsidiaries file consolidated federal income tax return income tax expense consisted primarily federal alternative minimum tax 1999 1998 companys consolidated tax expense 1997 calculated regular tax system reduced available net operating loss carryforwards subjected company alternative minimum tax chpn subsidiaries join filing consolidated tax return company certain chpns generated tax losses expected generate benefit currently foreseeable future company recorded benefit 1999 difference book tax basis chpn investments reduced expected realizable value 1872000 1998 company recorded benefit 26655000 related settlement reduced expected realizable value 4570000 includes state taxes net federal tax benefit permanent book tax differences including nondeductible expenses federal income taxes paid 1999 1998 1997 15524000 6403000 2800000 respectively cerulean companies inc notes consolidated financial statements continued 9 income taxes continued deferred income taxes reflect net tax effects temporary differences carrying amounts assets liabilities financial reporting purposes amounts used income tax purposes significant components deferred tax asset included assets accompanying consolidated balance sheets follows temporary differences consist principally differences tax generally accepted accounting principles related estimated benefit liabilities accounting accruals december 31 1999 companys consolidated tax group net operating loss carryforwards 104655000 regular income tax purposes expire years 2003 2018 certain chpn subsidiaries file separate tax returns net operating loss carryforwards 19276000 expire 2011 2019 company qualifies special deduction regular tax system available certain blue cross blue shield plans section 833b internal revenue code effect deduction significantly reduce regular taxable income subjects company alternative minimum tax company expects taxed alternative minimum tax system foreseeable future therefore principally regular tax net operating loss carryforwards consolidated tax group alternative minimum tax credit longlived tax assets deductible well future likely utilized financial reporting purposes valuation allowance recorded reduce related deferred tax assets amount expected realized company reviewed adequacy deferred tax valuation allowance believes appropriate january 1999 internal revenue service completed examination companys consolidated federal income tax returns 1995 1994 company believe ultimate resolution issues adverse effect operations financial position cerulean companies inc notes consolidated financial statements continued 10 capital stock mandatorily redeemable preferred stock class b convertible preferred stock class b stock liquidation preference 1000 per share mandatory redemption value 900 per share dividends class b stock currently paid rate 10000 per annum per share 6000 per annum per share prior 1999 fully cumulative accrue without interest preferred shares mandatorily redeemable december 1 2001 may redeemed prior date upon occurrence certain events upon completion stock conversion share class b stock shall convert number fully paid nonassessable shares common stock equal 0004446420631 rate may adjusted periodically upon occurrence certain events holders class b stock vote separately single class share entitled one vote blank preferred stock board directors board company may time issue shares blank preferred stock series classes terms preferences provisions board shall determine provided issuance approved majority holders preferred stock issued outstanding entitled vote presently blank preferred stock issued outstanding series preferred stock series stock series preferred stock created specifically settlement series stock economic attributes class stock share series stock economic equivalent one share class stock series stock however voting rights events statutory voting right accorded class series capital stock share series stock automatically converts one unit companys class common stock participation rights companys rights companys rights economic equivalent one share class stock voting rights series stock authorized companys board directors holders majority outstanding shares class b stock amendment companys articles incorporation articles creating series stock filed georgia secretary state class convertible common stock prior december 1 1998 shares class stock could sold transferred encumbered pledged otherwise disposed except upon occurrence certain events established market companys class stock following december 1 1998 shares became transferable certain defined criteria right first refusal company december 31 1999 shares presented company transfer met defined criteria event stock conversion share class stock converted one share common stock long shares companys class b stock issued outstanding entitled vote dividends may paid class stock without approval board holders majority shares class b stock long common stock outstanding holders class stock vote separately single class share entitled one vote companys articles contain provisions protecting holders class stock dilution event company issues additional shares class stock issues shares common stock blank preferred stock convertible common stock effects stock split stock dividend recapitalization common stock existing class shareholders diluted cerulean companies inc notes consolidated financial statements continued 10 capital stock continued 1998 57772 shares class stock issued part settlement shares terms provisions shares class stock provided companys articles except foundation received shares class stock part settlement entered shareholders agreement pursuant 37305 shares total 57772 shares issued entitled vote additionally foundation right tender redemption shares class stock aggregate redemption price 10 million companys articles redemption right required separately authorized holders majority shares class b stock authorization granted meeting holders class b stock held september 15 1998 common stock unless approved twothirds directors person may directly indirectly acquire hold permissible ownership amount currently 20 total shares common stock outstanding long shares companys class b stock issued outstanding entitled vote dividends may paid common stock without approval board holders majority shares class b stock event class stock class b stock issued outstanding time liquidation dissolution winding affairs company entire assets company available distribution stockholders distributed pro rata among holders common stock outstanding share common stock entitled one vote presently common stock issued outstanding stock warrants exercisable 1998 warrants also issued part settlement 63853 warrants exercisable shares nonvoting series stock circumstances equity interest represented warrants voting rights warrants also provide upon occasion certain defined major events warrants must exercised cashless exercise effect provision warrants automatically converted shares series stock according formula provided warrant agreement 11 operating leases company operating lease arrangement home office facility term lease ten years two fiveyear renewal options annual rental includes base rental plus prorated real estate taxes operating expenses addition company leases office space data processing equipment future minimum lease obligations including estimated real estate taxes operating expenses noncancelable operating leases follows rent expense amounted approximately 21911000 1999 18413000 1998 14235000 1997 cerulean companies inc notes consolidated financial statements continued 12 employee benefits pension plan company subsidiaries participate multiemployer noncontributory defined benefit pension plan covering substantially employees benefits based years service employees compensation years companys funding policy contribute amounts sufficient meet minimum funding requirements set forth employee retirement income security act 1974 contributions intended provide benefits attributed service date also expected earned future projected unit credit method used determine funding requirements pension expense supplemental executive retirement plan 1996 company subsidiaries established three defined benefit pension plans covering certain executives benefits based years service employees compensation years plans nonqualified unfunded projected unit credit method used determine pension expense company pay benefits eligible participants due terms individual plans postretirement plan company sponsors defined dollar benefit plan provides postretirement health dental vision life insurance benefits fulltime associates least ten years service parttime associates equivalent ten years fulltime employment benefits also available spouses credits based length service provided retirees annually used towards cost postretirement benefits spouses retirees receive one half credits received retirees retired prior january 1 1995 insurance provided company cost retiree additionally group associates meet rule 80 least age 55 ten years service whose combined years service plus age equaled 80 greater december 31 1994 grandfathered receive postretirement benefits cost whenever retire cerulean companies inc notes consolidated financial statements continued 12 employee benefits continued following chart summarizes change plans benefit obligation assets funded status cerulean companies inc notes consolidated financial statements continued 12 employee benefits continued projected benefit obligation accumulated benefit obligation fair value plan assets supplemental executive retirement plan accumulated benefit obligation excess plan assets 5524172 4013284 0 respectively december 31 1999 5185428 3055356 0 respectively december 31 1998 postretirement benefit plan valuation based census information january 1 1999 claims development based benefits provided discount rate assumed 775 salary increase rate assumed varies age health care cost trend rate assumed 75 1999 decreasing gradually 525 2003 health care cost trend rate assumed 80 1998 decreasing 05 year ultimate rate 525 health care cost trend rate assumption significant effect amounts reported example increasing assumed health care cost trend rates one percentage point year would increase accumulated postretirement benefit obligation 690900 december 31 1999 aggregate estimated service interest cost components net periodic postretirement benefit cost 53500 1999 similarly decreasing assumed health care cost trend rates one percentage point year would decrease accumulated postretirement benefit obligation 598000 december 31 1999 aggregate estimated service interest cost components net periodic postretirement benefit cost 46300 1999 defined contribution plan company offers defined contribution plan 401k plan covering substantially employees plan employees contribute 15 base compensation subject certain maximum limitations company matches 50 employees first 500 contributed 25 thereafter maximum 6 employees annual compensation companys matching contributions vest 25 per year commencing end second year participation employee contributions vest immediately company contributed 1201000 401k plan 1999 1125000 1998 1031000 1997 cerulean companies inc notes consolidated financial statements continued 13 business segment customer product information company operates predominantly one industry segment health insurance products services reports operations one business segment companys products services sold principally state georgia significant portion customer base concentrated companies located metropolitan atlanta area percentage total revenues premium revenues management services revenues companys largest customer represented 22 total revenues 1999 23 total revenues 1998 27 1997 companys next two largest customers accounted less 9 total revenues 1999 1998 1997 companys total revenues premium revenues management services revenues primary product groups follows 14 nonoperating income community health partnership networks chpns locally based equity joint ventures company owns 51 interest local physician andor hospital groups remaining equity interests chpns clinical services provided physician hospital partners well providers chpns maintain contracts bcbsga provides sales management administrative services including information systems data management services service contracts chpns january 1998 hospital purchased stock warrants exercisable common stock one companys chpn subsidiaries exchange 10 million paid ratably two years stock warrants expired december 16 1999 accordance chpn formation agreement companys 51 equity interest diluted result transaction company recorded nonoperating income 255000 1999 1998 portion transaction 1997 hospital purchased 5 interest one companys chpn subsidiaries accordance chpn formation agreement companys 51 equity interest diluted result transaction company recorded nonoperating income 1275000 1997 portion transaction 15 commitments contingencies legal proceedings september 18 1998 plaintiffs allen saravuth nga nguyen chansamone sengsavath fatana pirzad individually behalf others similarly situated collectively richmond county plaintiffs filed lawsuit company bcbsga james l laboon jr fred l tolbert jr richard shirk james e albright w daniel barker elizabeth w camp louis h felder md edward gillespie joseph greene mel h gregory jr frank j hanna iii r pierce head jr charles h keaton james h leigh jr md julia l mitchellivey charles r underwood md w jerry vereen max walker dan h willoughby md joe young john b zellars collectively defendant cerulean companies inc notes consolidated financial statements continued 15 commitments contingencies continued directors superior court richmond county state georgia bearing civil action file 98rccv806 addition richmond county plaintiffs filed motion temporary restraining order interlocutory injunctive relief heard denied superior court richmond county september 21 1998 richmond county plaintiffs identify four individuals entitled receive shares companys stock connection conversion bcbsga nonprofit corporation regular business corporation conversion richmond county plaintiffs assert claims specific performance fraud breach provisions insurance code georgia breach fiduciary duty request declaratory judgment certification class action consisting persons eligible subscribers bcbsga february 1 1996 become holders class stock company richmond county plaintiffs allege members purported class entitled receive shares class stock company richmond county plaintiffs allege alternatively offering materials disseminated bcbsga 1996 relating class stock company contained materially misleading deceptive statements omissions richmond county plaintiffs purported class members entitled award damages excess 100 million richmond county plaintiffs also assert derivative causes action defendant directors alleging defendant directors breached fiduciary duties among things approving placement issuance class b stock company 1996 issuance class stock company settlement lets get together inc et al v insurance commissioner et al civil action e61714 superior court fulton county georgia lawsuit certain management compensation november 9 1998 harrell tiller charlie deal olean lokey joined case additional named plaintiffs december 9 10 1998 hearing held plaintiffs request declaratory ruling issue whether plaintiffs properly shareholders company december 17 1998 superior court ruled favor plaintiffs company filed appeal georgia supreme court accepted jurisdiction granted expedited treatment appeal companys board directors appointed special litigation committee review derivative claims april 14 1999 special litigation committee reported board directors concluded derivative claims without substance may 3 1999 georgia supreme court reversed ruling richmond county superior court holding richmond county superior court erred considering ruling upon plaintiffs claims georgia supreme court found georgia commissioner broad power review conversion sufficient administrative remedies georgia commissioner available plaintiffs following conversion richmond county plaintiffs file motion reconsideration georgia supreme courts decision may 5 1999 bcbsga company filed motions summary judgment richmond county plaintiffs fraud claims may 20 1999 company bcbsga filed motion entry judgment remaining counts richmond county plaintiffs complaint july 29 1999 superior court richmond county entered order dismissing claims defendant directors without prejudice september 21 1999 superior court richmond county entered orders denying motions summary judgment motion entry judgment october 27 1999 company bcbsga filed motion reconsideration motion entry judgment case remains pending superior court legal proceedings may 17 1999 harrell tiller charlie deal olean lokey among richmond county plaintiffs filed two separate petitions declaratory ruling petitions georgia commissioner seeking declaration georgia commissioner others similarly situated issued shares class stock june 22 1999 georgia commissioner entered orders petitions denying relief sought june 22 1999 harrell tiller charlie deal olean lokey filed two cerulean companies inc notes consolidated financial statements continued 15 commitments contingencies continued separate proceedings superior court richmond county cases styled harrell tiller individually behalf others similarly situated v commissioner insurance state georgia civil action 1999rccv471 charlie deal olean lokey individually behalf others similarly situated v commissioner insurance state georgia civil action 1999rccv470 petitioners sought judicial review decisions georgia commissioner june 22 1999 judicial review proceedings september 21 1999 superior court richmond county entered orders reversing commissioners orders october 12 1999 company bcbsga filed applications discretionary appeal applications supreme court georgia seeking court reverse superior court richmond countys decisions applications transferred court appeals state georgia november 12 1999 october 21 1999 commissioner filed application appellate relief superior courts decisions court appeals state georgia seeking court overturn superior courts decisions november 22 1999 georgia court appeals granted applications discretionary appeal parties cases docketed december 15 1999 parties completing briefing cases oral argument court appeals scheduled march 23 2000 management company believes case without merit event believes impact assets company would material normal course business company involved subject claims contractual disputes uncertainties management reviewing legal counsel actions proceedings believes aggregate losses material effect companys financial position results operations 16 statutory financial information accounting practices bcbsga greater georgia life insurance company life insurance subsidiary hmo georgia inc health maintenance organization domiciled state georgia prepare statutory financial statements accordance accounting principles practices prescribed permitted georgia insurance department currently prescribed statutory accounting practices interspersed throughout state insurance laws regulations national association insurance commissioners naic accounting practices procedures manual variety naic publications permitted statutory accounting practices encompass accounting practices prescribed practices may differ state may differ company within state may change future 1998 naic adopted codified statutory accounting principles codification effective january 1 2001 codification likely change extent prescribed statutory accounting practices may result changes accounting practices companys subsidiaries use prepare statutory financial statements codification require adoption various states becomes prescribed statutory basis accounting insurance companies domesticated within states accordingly codification becomes effective companys subsidiaries state georgia must adopt codification prescribed statutory basis accounting domestic insurers must report statutorybasis results insurance department time anticipated georgia adopt codification however based current guidance management believes impact codification material statutorybasis financial statements companys subsidiaries companys insurance subsidiaries permitted practices would require authorization georgia insurance department minimum amount statutory capital surplus necessary satisfy regulatory requirements georgia insurance department 1000000 bcbsga 3000000 hmo georgia inc greater georgia life insurance company companys insurance subsidiaries may distribute dividends realized profits undistributed accumulated net earnings since organization amount cerulean companies inc notes consolidated financial statements continued 16 statutory financial information accounting practices continued dividends distributable year limited greater prior years net income determined statutory basis 10 prior year statutory surplus addition dividends distributable bcbsga limited conversion order approved georgia commissioner insurance december 27 1995 related bcbsgas conversion forprofit corporation dividend distributions bcbsga hmo georgia inc greater georgia life insurance company defined limits require special approval state georgia insurance commissioner following table presents amount statutory capital surplus companys insurance subsidiaries following table presents amount statutory net income companys insurance subsidiaries item 14 exhibits financial statements financial statement schedules reports form 8k following documents filed part annual report form 10k 1 following financial statements incorporated reference part ii item 8 report independent auditors consolidated balance sheets december 31 1996 1995 consolidated statements income years ended december 31 1996 1995 1994 consolidated statements shareholders equity years ended december 31 1996 1995 1994 consolidated statements cash flows years ended december 31 1996 1995 1994 notes consolidated financial statements 2 financial statement schedules schedule ii condensed financial information registrant schedule v valuation qualifying accounts schedules omitted applicable required information included elsewhere financial statements notes thereto financial statement schedules follow signature page 3 exhibits following exhibits forms s1 registration 3332796 filed march 27 1996 subsequent amendments incorporated herein reference b reports form 8k reports form 8k filed securities exchange commission last quarter period covered report c exhibits following additional exhibits filed concurrently report supplemental information furnished reports filed pursuant section 15 act registrants registered securities pursuant section 12 act furnished herewith four copies proxy statement relating cerulean companies inc 1997 annual meeting stockholders signatures pursuant requirements section 13 15d securities exchange act 1934 registrant duly caused report signed behalf undersigned thereunto duly authorized city atlanta state georgia march 11 1997 cerulean companies inc registrant richard shirk richard shirk president pursuant requirements securities act 1934 report signed following persons capacities indicated march 11 1997 cerulean companies inc parent schedule ii condensed balance sheet schedule ii continued cerulean companies inc parent condensed statement income schedule ii continued cerulean companies inc parent condensed statement cash flows schedule v cerulean companies inc valuation qualifying accounts years ended december 31 1996 1995 1994 item 7 managements discussion analysis financial condition results operations following discussion read conjunction consolidated financial statements related notes thereto item 8 item 7 managements discussion analysis financial condition results operations following discussion read conjunction accompanying consolidated financial statements related notes thereto item 8 form 10k companys actual future results could differ materially historical results depending among factors changing rates utilization medical services enrollees changing rates medical service costs overview company organized february 2 1996 become holding company bcbsga subsidiaries upon conversion february 2 1996 1997 bcbsga made distribution investments certain subsidiaries including hmoga gbg holding company discussions relate historical operations bcbsga hmoga subsidiaries prior february 2 1996 company including bcbsga hmoga subsidiaries consolidated basis period following conversion historically substantially companys premium management services revenues derived traditional indemnity ppo business however growth revenues earnings recent years result strategic shift focus began 1992 result change strategy hmo pos premiums grown 42 end 1998 8 total premiums end 1994 membership fully insured hmo pos products grown 358000 members end 1998 38000 members end 1994 additionally hmo pos membership management services agreements totaled 82000 29000 end 1998 1994 respectively bringing total hmo pos membership served 440000 67000 periods growth hmo pos products attributable new sales ingroupgrowth lesser degree migration business traditional indemnity products offered company since 1995 medical services substantially companys hmo pos products sold provided chpns management services revenue consists fees administrative services provided commercial employer groups selffunded arrangements including claims processing access provider networks services rendered third parties management services revenue also includes reimbursements administrative expenses incurred performing services agent federal state government programs national blue cross blue shield interplan system membership administrative services contracts grown 870000 members end 1998 825000 members end 1994 membership served insurance products management services arrangements totaled 1620000 members end 1998 compared 1217000 members end 1994 prudent management companys investments played significant role developing maintaining companys financial strength investment earnings including realized gains sales investments represented average 128 operating income period january 1 1994 december 31 1998 benefits expense consists primarily health care claims payments physicians hospitals health care providers companys profitability largely depends ability accurately predict effectively manage health care costs accordingly company continues efforts improve contractual terms providers delivery medical services effectively manage business mix changes indemnity ppo products hmo pos products companys emphasis managed care products expenses associated change infrastructure support managed care products investment strategic information systems plan reflected level operating expenses percentage premium management services revenues average 22 last five years state georgia insurers required pay tax insurance premiums lieu state income tax premium taxes charged operating expenses incurred company pays federal taxes alternative minimum tax system result special deduction available section 833b internal revenue code deduction longer available bcbsga would subject federal income taxes regular corporate tax rate currently 35 see certain federal income tax consequences section 833 code form s1 registration 3332796 effective may 14 1996 subsequent amendments incorporated herein reference however 1997 utilization net operating loss carryforwards special deduction section 833b subjected company alternative minimum tax significant health care legislation continues proposed federal state levels legislation could material impact companys business without legislation consumers employer groups expected continue exert pressure pricing health care products meet demands predictable lower cost products required results operations directly affected premium rate adequacy depends pricing underwriting decisions level membership serviced performance companys physician hospital pharmacy ancillary health care services networks since january 1995 companys chpns estimates medical benefits health care utilization estimates health care cost trends effective administration benefit payments operating efficiencies investment returns federal state laws regulations results operations 1998 compared 1997 premium revenue increased 20 11897 million year ended december 31 1998 9898 million year ended december 31 1997 companys membership indemnity managed care insurance products increased 750000 members december 31 1998 compared 649000 members december 31 1997 hmo pos premiums increased 1717 million 5031 million year ended december 31 1998 resulting 34 increase insured membership rate increases 1998 period new sales ingroupgrowth lesser extent migrations traditional indemnity products hmo pos products continued drive hmo pos membership growth 358000 members december 31 1998 267000 members december 31 1997 premium revenue indemnity ppo products increased 270 million 6706 million year ended december 31 1998 primarily result rate increases 1998 period offset part shift product mix consumers selected products lower cost benefit design 1998 period management services revenue increased 1180 million year ended december 31 1998 compared 965 million year ended december 31 1997 due primarily increased administrative fee revenue services provided selffunded employer groups third parties network access fees blue cross blue shield plans 1998 period membership selffunded employer groups increased 870000 members december 31 1998 863000 members december 31 1997 investment income year ended december 31 1998 172 million slightly investment income prior year although companys average investment portfolio increased year investment return excluding realized gains losses declined 51 1998 due lower interest rates compared investment return 54 1997 additionally income 1997 included 06 million related nonrecurring income realized gains 93 million sale marketable securities year ended december 31 1998 20 million lower gains realized year ended december 31 1997 results 1998 1997 necessarily indicative results expected future magnitude realized gains quarter fluctuate due fixed equity market performance well timing individual sale transactions subject decisions made individual investment portfolio managers finance committee companys board directors companys loss ratio benefits expense percentage premium revenue improved 868 year ended december 31 1998 891 year ended december 31 1997 primarily result rate increases 1998 period actions control medical costs implemented late 1997 early 1998 part improvement payment patterns claims trends prior years claims estimates principally companys hmo pos products loss ratio hmo pos products improved 856 1998 895 1997 loss ratio indemnity ppo products improved 885 1998 period 896 period 1997 operating expenses increased 20 2792 million year ended december 31 1998 2337 million year ended december 31 1997 principally due growth companys infrastructure necessary support increased hmo pos membership base information technology changes year 2000 readiness costs medicare risk product development year 2000 readiness costs 46 million 1998 additionally year ended december 31 1998 company recognized increased operating expenses related settlement lawsuit proposed merger wellpoint operating expense ratio operating expenses percentage premium revenue management services revenue 214 year ended december 31 1998 compared 215 year ended december 31 1997 july 8 1998 company entered stipulation agreement settlement lawsuit company endowed new nonprofit foundation issued cash class stock warrants pursuant settlement connection transaction company recorded nonrecurring charge 762 million year ended december 31 1998 january 1998 hospital purchased stock warrants exercisable common stock one companys chpn subsidiaries exchange note receivable january 1997 hospital purchased 5 interest one companys chpn subsidiaries transactions recorded nonoperating income years ending december 31 1998 1997 company recorded tax expense 21 million 1998 period compared tax benefit 21 million 1997 period net tax expense 1998 alternative minimum tax increased chpn losses expected generate benefit foreseeable future offset tax benefits related settlement lawsuit difference book tax bases chpn investments reduced expected realizable value net tax benefit 1997 included utilization loss carryforwards tax benefits companys longlived tax assets difference book tax bases chpn investments reduced expected realizable value result foregoing factors operating income increased 223 million year ended december 31 1998 operating loss 04 million year ended december 31 1997 endowment nonprofit foundation nonoperating income minority interests earnings losses joint venture investments company recognized net loss 572 million year ended december 31 1998 compared net income 44 million year ended december 31 1997 compared 1996 premium revenue 1997 9898 million increase 21 premium revenues 8184 million 1996 companys members indemnity managed care insurance products increased 17 649000 members december 31 1997 555000 members end prior year hmo pos premiums increased 3314 million 1997 1804 million 1996 result rate increases 1997 60 increase membership 266000 members december 31 1997 166000 members december 31 1996 new sales ingroupgrowth lesser extent migrations business traditional indemnity products offered company hmo pos products continued drive hmo pos membership growth hmo pos membership management services agreements totaled 70000 58000 december 31 1997 1996 respectively bringing total hmo pos membership served 336000 members 224000 members periods premium revenue indemnity ppo products increased 164 million 6436 million 1997 6272 million 1996 due year rate increases 3 management services revenue increased 92 million 965 million year ended december 31 1997 compared 873 million year ended december 31 1996 due primarily increased administrative fee revenue services provided commercial employer groups selffunded arrangements third parties network access fees blue cross blue shield plans 1997 period membership selffunded employer groups increased 863000 members december 31 1997 861000 members december 31 1996 total membership served insurance products management services arrangements totaled 1512000 members year end 1997 1416000 end 1996 investment income increased 173 million 1997 144 million 1996 principally due growth companys investment portfolio improvement investment return excluding realized gains losses prior years 54 53 increase 06 million nonrecurring income 1997 period realized gains 113 million sale marketable securities 1997 72 million higher gains realized 1996 results necessarily indicative results expected future magnitude realized gains period fluctuate due fixed income equity market performance well timing individual sale transactions subject decisions made individual investment portfolio managers finance committee companys board directors companys total loss ratio increased 891 1997 858 1996 company experienced higher cost trends utilization managed care networks increasing medical cost trends higher utilization indemnity ppo products markets accordingly loss ratio hmo pos products increased 895 1997 847 1996 loss ratio indemnity ppo products increased 896 1997 867 1996 operating expenses increased 16 2337 million 1997 2021 million 1996 principally due growth companys infrastructure necessary support medicare risk product development information technology development costs increased hmo pos membership base information technology costs 1997 included approximately 22 million incurred year 2000 computer software readiness result operating expenses increasing slower rate growth premium management services revenue operating expense ratio decreased 215 1997 223 1996 may 23 1996 hospital purchased 5 interest one bcbsgas chpn subsidiaries january 1 1997 another hospital purchased 5 interest chpn subsidiary transactions recorded nonoperating income 1997 1996 respectively company recorded tax benefit 21 million 1997 compared tax expense 32 million 1996 net tax benefit 1997 included utilization loss carryforwards well tax benefits reduced expected realizable value companys longlived tax assets differences book tax bases chpn investments offset chpn losses expected generate benefit foreseeable future net tax expense 32 million 1996 consisted federal alternative minimum tax reduced primarily benefit expected realized companys longlived tax assets result foregoing factors net income decreased 44 million 1997 compared net income 175 million 1996 liquidity capital resources liquidity company shortterm longterm liquidity needs structured investment portfolios accordingly companys total investment portfolio december 31 1998 3043 million held insurance subsidiaries invested subject limitations prescribed georgia insurance statutes shortterm liquidity needs fund companys operating costs well payment obligations customers met funds invested primarily institutional money market accounts shortterm government agency notes assets required shortterm liquidity needs transferred portfolio investments fixed income equity markets portfolio provides reserves future payment obligations funds longterm liquidity needs managed several independent advisory firms companys investment policies designed provide liquidity meet anticipated payment obligations preserve capital maximize yield conformance regulatory requirements cash investments 3778 million 64 total assets december 31 1998 allocation companys external investment portfolio consistently maintained 68 fixed maturities investment grade balance equity securities corporate government bonds issues ratings better moodys investors service standard poors rating group investments equity securities domestic dividend paying companies companys portfolio currently contain derivative securities instruments real estate investments equity investments corporations engaged solely real estate activities management believes companys conservative investment portfolio contributes financial stability companys balance sheet improved steadily since 1994 total assets growing 5873 million december 31 1998 3422 million december 31 1994 substantial portion increase result growth companys cash investment portfolio invested excess cash generated operating activities investment earnings company historically satisfied ordinary cash requirements operations net cash provided operating activities amounted 660 million 1998 compared net cash provided operating activities 22 million 1997 increase primarily result higher operating earnings 1998 nature companys business current cash flows operations necessarily expected indicative future results however company believe future cash resources adequate meet operating requirements company analyzed information technology executing comprehensive plan either modify replace portions software hardware systems properly function processing information involving dates 1999 total year 2000 computer software readiness costs estimated 130 million funded operating cash flows december 31 1998 company incurred 41 million capital expenditures expensed 68 million renovation expenses incurred 46 million expensed 1998 period remaining year 2000 capital expenditures renovation expenses estimated 04 million 17 million respectively april 1996 bcbsga obtained 55 million insolvency line credit group banks insolvency line credit may drawn solely event insolvency bcbsga pay authorized insurance policy claims insolvency line credit designed satisfy certain membership standards bcbsa company certain subsidiaries exclusive license business georgia name blue cross blue shield use blue cross blue shield names trademarks service marks respect companys indemnity ppo hmo pos life insurance products company anticipate making draws insolvency line credit bcbsga hmoga ggl domiciled state georgia prepare statutory statements accordance accounting principles practices prescribed georgia insurance department entities may distribute dividends realized profits undistributed accumulated net earnings since organization amount dividends distributable year limited greater prior years net income determined statutory basis 10 prior year statutory surplus addition dividends distributable bcbsga limited conversion order approved georgia commissioner insurance december 27 1995 related bcbsgas conversion forprofit corporation dividend distributions bcbsga hmoga ggl defined limits require filing cases special approval state georgia insurance commissioner capital resources company anticipates principal elements future capital requirements information technology needs product development potential medical access points equity contributions chpn joint ventures subsidiaries strategic acquisitions medical access point development including physician practice acquisition establishment urgent care 24hour primary care clinic facilities physician recruitment relocation costs could occur chpns able adequately cover geography range services desired capital cost develop medical access point varies differing factors available facilities extent existing infrastructure company anticipates development single medical access point could cost range 05 million 20 million date chpn produced access need translated additional capital requirements terms revolving credit loan agreement group banks finance companys chpns related costs company could borrow 90 million borrowings outstanding totaled 35 million december 31 1997 1996 january 1998 company terminated 90 million revolving credit agreement paid full 35 million note payable outstanding december 31 1997 company believes future capital requirements met combination companys current resources ii cash flows operations iii borrowings iv potential debt equity offerings management believes consummation merger provide company additional capital alternatives year 2000 computer software readiness companies operate mature computer software programs face difficult task reprogram replace existing systems protocols address dates terms two digits rather four define applicable year date sensitive software may recognize date using 00 year 1900 instead year 2000 year 2000 issue company analyzed systems executing comprehensive plan either modify replace portions software hardware systems properly function processing information involving dates beyond december 31 1999 companys plans resolve year 2000 issue involve following phases 1 awareness assessment 2 renovation 3 validation 4 implementation 5 contingency planning 1997 company began assessment systems could significantly affected year 2000 issue detailed plans renovation finalized early 1998 end february 1999 companys state year 2000 readiness summarized follows companys data center already year 2000 compliant company anticipates client server desk top computers software telephone voice mail systems compliant end june 1999 companys claims processing membership billing primary payment system currently handles 70 companys membership renovated certification testing production implementation scheduled completion end june 1999 claims processing system approximately 27 companys membership representing nonhmo membership largest customer process renovation scheduled production implementation end june 1999 expanded certification testing companys large customers including federal employee program fep national system continue september 1999 medicare part processing system year 2000 compliant certification testing continue june 30 1999 electronic data interchange testing implementation scheduled completion third quarter general ledger related financial system applications targeted production implementation start third quarter second quarter 1999 company assess certain applications initially identified systems require year 2000 solution determine circumstances changed year 2000 solution would required security systems elevators leased owned facilities certified external parties year 2000 compliant company utilizes internal external resources renovate replace test implement software equipment satisfy year 2000 requirements total cost year 2000 changes estimated 130 million funded operating cash flows december 31 1998 company incurred 41 million capital expenditures expensed 68 million 46 million expensed 1998 period remaining year 2000 costs estimated 21 million include 17 million renovation expense costs new software included capital expenditures amortized three five years company conducts business electronically certain external parties including suppliers customers physicians hospitals financial service organizations company contacted substantially external parties interacts determine year 2000 compliance issues certification testing external parties began january 1999 50 physicians hospitals provide health care services companys 16 million members reported year 2000 ready end february 1999 certification testing interfaces vendors suppliers physicians hospitals continue october company also dependent interfaces several government agencies including hcfa fep although company continues monitor year 2000 readiness significant external parties cannot guarantee systems external parties upon company depends year 2000 ready additionally company uses external money managers manage investment portfolio historically company dependent investment advisors timely monitor performance investment portfolio predetermined benchmarks effect year 2000 noncompliance investment advisors national securities exchanges certain financial institutions corporations company either bond stock investment determinable noncompliance entities could material impact companys investment earnings accounted significant portion operating income last five years company received independent reviews third parties year 2000 compliance activities time neither third party reviews companys reviews identified business function would suffer year 2000 problems year 2000 plan successfully implemented however failure successfully execute plan failure external parties achieve year 2000 compliance could material adverse impact companys financial position results operations late 1998 company began contingency planning third party consulting group event phases year 2000 plan completed risks cannot mitigated company expects identify specific contingency actions mid1999 due increased requirements contingency planning required hcfa testing contingency plan scheduled completion third quarter 1999 commitments contingencies refer item 3 legal proceedings form 10k description incorporated herein reference forwardlooking statements matters discussed form 10k contain certain forwardlooking statements made pursuant safe harbor provisions section 27a securities act section 21e exchange act represent companys expectations beliefs including without limitation statements concerning future revenue future investment earnings value certain year 2000 information statements involve risks uncertainties may cause actual results differ materially implied form 10k among things risks uncertainties include need accurately predict health care costs ability control future health care costs product benefit design underwriting criteria utilization management negotiation favorable provider hospital contracts changes mandated benefits utilization rates demographic characteristics health care practices inflation new pharmaceuticals technologies clusters highcost cases response regulatory environment numerous factors beyond companys control may adversely affect ability predict control health care costs claims periodic renegotiation hospital provider contracts coupled continued consolidation physician hospital provider groups may result increased health care costs limit companys ability negotiate favorable rates control costs subject company increased credit risk risks network stability related provider groups competitive pressure contain premium prices fiscal concerns regarding continued viability governmentsponsored programs medicare potential decreasing reimbursement rates programs limitations companys ability increase maintain premium levels design products select underwriting criteria negotiate competitive provider contracts risk factors described companys securities exchange commission reports filings item 7a item 7 managements discussion analysis financial condition results operations following discussion read conjunction accompanying consolidated financial statements related notes thereto item 8 form 10k companys actual future results could differ materially historical results depending among factors changing rates utilization medical services enrollees changing rates medical service costs overview company organized february 2 1996 become holding company bcbsga subsidiaries upon conversion february 2 1996 1997 bcbsga made distribution investments certain subsidiaries including hmoga gbg holding company discussions relate historical operations bcbsga hmoga subsidiaries prior february 2 1996 company including bcbsga hmoga subsidiaries consolidated basis period following conversion historically substantially companys premium management services revenues derived traditional indemnity ppo business however growth revenues earnings recent years result strategic shift focus began 1992 result change strategy hmo pos premiums grown 44 end 1999 13 total premiums end 1995 membership fully insured hmo pos products grown 409000 members end 1999 81000 members end 1995 additionally hmo pos membership management services agreements totaled 97000 51000 end 1999 1995 respectively bringing total hmo pos membership served 506000 132000 periods growth hmo pos products attributable new sales ingroupgrowth lesser degree migration business traditional indemnity products offered company 80 total medical services companys hmo pos products sold provided chpns 1999 compared 59 1995 management services revenue consists fees administrative services provided commercial employer groups selffunded arrangements including claims processing access provider networks services rendered third parties management services revenue also includes reimbursements administrative expenses incurred performing services agent federal state government programs national blue cross blue shield interplan system membership administrative services contracts declined 850000 members end 1999 888000 members end 1995 decline administrative services membership due primarily migration segment state georgia employees traditional indemnity benefit designs hmo plans including companys hmo additionally certain self funded employer groups shifted national interplan teleprocessing system blue cross blue shield plans membership served insurance products management services arrangements totaled 1689000 members end 1999 compared 1333000 members end 1995 prudent management companys investments played significant role developing maintaining companys financial strength investment earnings including realized gains sales investments represented average 123 operating income period january 1 1995 december 31 1999 benefits expense consists primarily health care claims payments physicians hospitals health care providers companys profitability largely depends ability accurately predict effectively manage health care costs accordingly company continues efforts improve contractual terms providers delivery medical services effectively manage business mix changes indemnity ppo products hmo pos products companys emphasis managed care products expenses associated change infrastructure support managed care products investment strategic information systems plan reflected level operating expenses percentage premium management services revenues average 21 last five years state georgia insurers required pay tax insurance premiums lieu state income tax premium taxes charged operating expenses incurred company pays federal taxes alternative minimum tax system result special deduction available section 833b internal revenue code deduction longer available bcbsga would subject federal income taxes regular corporate tax rate currently 35 however 1997 utilization net operating loss carryforwards special deduction section 833b subjected company alternative minimum tax significant health care legislation continues proposed federal state levels legislation could material impact companys business without legislation consumers employer groups expected continue exert pressure pricing health care products meet demands predictable lower cost products required results operations directly affected premium rate adequacy depends pricing underwriting decisions level membership serviced performance companys physician hospital pharmacy ancillary health care services networks since january 1995 companys chpns estimates medical benefits health care utilization estimates health care cost trends effective administration benefit payments operating efficiencies investment returns federal state laws regulations results operations 1999 compared 1998 premium revenues increased 2966 million 14863 million year ended december 31 1999 11897 million year ended december 31 1998 hmo pos premiums increased 31 6584 million 1999 period 5031 million 1998 primarily result 14 increase membership rate increases 1999 period hmo pos insured membership increased 409000 members december 31 1999 358000 members december 31 1998 due new sales ingroup growth premium revenues indemnity ppo products increased 21 1400 million 8106 million year ended december 31 1999 result rate increases 1999 10 growth members served management services revenue increased 242 million 1422 million year ended december 31 1999 compared 1180 million year ended december 31 1998 company continued experience increased administrative fee revenue services provided selffunded employer groups third parties interplan network access fees blue cross blue shield plans selffunded employer group membership 850000 december 31 1999 declined 870000 members december 31 1998 certain selffunded employer groups shifted national blue cross blue shield plans membership served insurance products management services arrangements totaled 1689000 members december 31 1999 increase 4 total membership 1620000 december 31 1998 realized gains 72 million sale marketable securities year ended december 31 1999 lower gains realized 93 million prior year magnitude realized gains period fluctuate due fixed income equity market performance well timing individual sale transactions subject decisions made finance committee companys board directors individual investment portfolio managers results one period necessarily indicative results expected future companys medical loss ratio benefits expense percentage premium revenue increased 875 year ended december 31 1999 868 year ended december 31 1998 higher cost trends identified resulting higher loss ratios companys employer group products 1999 incurred periods operating expenses 3136 million year ended december 31 1999 increase 12 period year ago premium revenue management services revenues increased 25 due positive impact premium increases 1999 realized rate higher operating expense increases operating expenses percentage premium revenue management services revenue continued improve operating expenses 19 premium revenue management services revenue year ended december 31 1999 compared 21 year ended december 31 1998 year 2000 readiness costs 74 million years 1999 1998 included operating expenses additionally 1999 period includes approximately 76 million legal professional expenses related pending merger wellpoint litigation referred note 8 notes consolidated financial statements compared 49 million incurred 1998 period july 8 1998 company entered stipulation agreement settlement lawsuit concerning conversion company forprofit corporation company endowed new nonprofit foundation issued cash class stock warrants pursuant settlement connection transaction company recorded nonrecurring charge 762 million year ended december 31 1998 company recorded tax benefit 267 million related settlement reduced expected realizable value 46 million company recorded tax expense 91 million year ended december 31 1999 compared tax expense 21 million year ended december 31 1998 companys effective tax rate periods excluding effect 1998 endowment nonprofit foundation consists primarily federal alternative minimum tax state income taxes adjusted effect permanent book tax differences including nondeductible expenses losses chpn subsidiaries expected generate tax benefit currently foreseeable future result foregoing factors operating income increased 409 million year ended december 31 1999 223 million year ended december 31 1998 company recognized net income 328 million year ended december 31 1999 compared net income 144 million year ended december 31 1998 excluding 762 million endowment nonprofit foundation net tax benefit 46 million 1998 compared 1997 premium revenue increased 20 11897 million year ended december 31 1998 9898 million year ended december 31 1997 companys membership indemnity managed care insurance products increased 750000 members december 31 1998 compared 649000 members december 31 1997 hmo pos premiums increased 1717 million 5031 million year ended december 31 1998 resulting 34 increase insured membership rate increases 1998 period new sales ingroup growth lesser extent migrations traditional indemnity products hmo pos products continued drive hmo pos membership growth 358000 members december 31 1998 267000 members december 31 1997 premium revenue indemnity ppo products increased 270 million 6706 million year ended december 31 1998 primarily result rate increases 1998 period offset part shift product mix consumers selected products lower cost benefit design 1998 period management services revenue increased 1180 million year ended december 31 1998 compared 965 million year ended december 31 1997 due primarily increased administrative fee revenue services provided selffunded employer groups third parties interplan network access fees blue cross blue shield plans 1998 period membership selffunded employer groups increased 870000 members december 31 1998 863000 members december 31 1997 investment income year ended december 31 1998 172 million slightly investment income prior year although companys average investment portfolio increased year investment yield excluding realized gains losses declined 51 1998 due lower interest rates compared investment yield 54 1997 additionally income 1997 included 06 million related nonrecurring income realized gains 93 million sale marketable securities year ended december 31 1998 20 million lower gains realized year ended december 31 1997 results 1998 1997 necessarily indicative results expected future magnitude realized gains period fluctuate due fixed equity market performance well timing individual sale transactions subject decisions made individual investment portfolio managers finance committee companys board directors companys loss ratio benefits expense percentage premium revenue improved 868 year ended december 31 1998 891 year ended december 31 1997 primarily result rate increases 1998 period actions control medical costs implemented late 1997 early 1998 part improvement payment patterns claims trends prior years claims estimates principally companys hmo pos products loss ratio hmo pos products improved 856 1998 895 1997 loss ratio indemnity ppo products improved 885 1998 period 896 period 1997 operating expenses increased 20 2792 million year ended december 31 1998 2337 million year ended december 31 1997 principally due growth companys infrastructure necessary support increased hmo pos membership base information technology changes year 2000 readiness costs medicare risk product development year 2000 readiness costs 46 million 1998 additionally year ended december 31 1998 company recognized increased operating expenses 49 million related settlement lawsuit proposed merger wellpoint operating expense ratio operating expenses percentage premium revenue management services revenue 214 year ended december 31 1998 compared 215 year ended december 31 1997 july 8 1998 company entered stipulation agreement settlement lawsuit company endowed foundation issued cash class stock warrants foundation shareholders pursuant settlement connection transaction company recorded nonrecurring charge 762 million year ended december 31 1998 january 1998 hospital purchased stock warrants exercisable common stock one companys chpn subsidiaries exchange note receivable january 1997 hospital purchased 5 interest one companys chpn subsidiaries transactions recorded nonoperating income years ending december 31 1998 1997 company recorded tax expense 21 million 1998 period compared tax benefit 21 million 1997 period net tax expense 1998 alternative minimum tax increased chpn losses expected generate benefit foreseeable future offset tax benefits related lawsuit settlement difference book tax bases chpn investments reduced expected realizable value net tax benefit 1997 included utilization loss carryforwards tax benefits companys longlived tax assets difference book tax bases chpn investments reduced expected realizable value result foregoing factors operating income increased 223 million year ended december 31 1998 operating loss 04 million year ended december 31 1997 endowment nonprofit foundation nonoperating income minority interests earnings losses joint venture investments company recognized net loss 572 million year ended december 31 1998 compared net income 44 million year ended december 31 1997 liquidity capital resources liquidity company shortterm longterm liquidity needs structured investment portfolios accordingly shortterm liquidity needs fund operating costs well payment obligations customers met funds invested primarily institutional money market accounts shortterm government agency notes assets required shortterm liquidity needs transferred portfolio investments fixed income equity markets portfolio provides reserves future payment obligations funds longterm liquidity needs managed several independent advisory firms companys investment policies designed provide liquidity meet anticipated payment obligations preserve capital maximize yield conformance regulatory requirements companys total investment portfolio december 31 1999 3210 million held insurance subsidiaries invested subject limitations prescribed georgia insurance statutes cash investments 3887 million 64 total assets december 31 1999 allocation companys external investment portfolio consistently maintained approximately 70 fixed maturities investment grade balance equity securities corporate government bonds issues ratings better moodys investors service standard poors rating group investments equity securities domestic dividend paying companies companys portfolio currently contain derivative securities instruments real estate investments equity investments corporations engaged solely real estate activities management believes companys conservative investment portfolio contributes financial stability companys balance sheet improved steadily since 1995 total assets growing 6121 million december 31 1999 3535 million december 31 1995 substantial portion increase result growth companys cash investment portfolio invested excess cash generated operating activities investment earnings company historically satisfied ordinary cash requirements operations net cash provided operating activities amounted 396 million 1999 nature companys business current cash flows operations necessarily expected indicative future results however company believe future cash resources adequate meet operating requirements bcbsga maintains 550 million insolvency line credit group banks insolvency line credit may drawn solely event insolvency bcbsga pay authorized insurance policy claims insolvency line credit designed satisfy certain membership standards bcbsa company certain subsidiaries exclusive license business georgia name blue cross blue shield use blue cross blue shield names trademarks service marks respect companys indemnity ppo hmo pos life insurance products company anticipate making draws insolvency line credit bcbsga hmoga ggl domiciled state georgia prepare statutory statements accordance accounting principles practices prescribed georgia insurance department entities may distribute dividends realized profits undistributed accumulated net earnings since organization amount dividends distributable year limited greater prior years net income determined statutory basis 10 prior year statutory surplus addition dividends distributable bcbsga limited conversion order approved georgia commissioner insurance december 27 1995 related bcbsgas conversion forprofit corporation dividend distributions bcbsga hmoga ggl defined limits require filing cases special approval georgia commissioner capital resources company anticipates principal elements future capital requirements information technology needs product development potential medical access points equity contributions chpn joint ventures subsidiaries strategic acquisitions medical access point development including physician practice acquisition establishment urgent care 24hour primary care clinic facilities physician recruitment relocation costs could occur chpns able adequately cover geography range services desired capital cost develop medical access point varies differing factors available facilities extent existing infrastructure company anticipates development single medical access point could cost range 05 million 20 million date chpn produced access need translated additional capital requirements prior years company discussed nature progress plans become year 2000 ready late 1999 company completed remediation testing systems result planning implementation efforts company experienced disruptions mission critical information technology noninformation technology systems believes systems successfully responded year 2000 date change company aware material problems resulting year 2000 issues either products internal systems products services third parties company continue monitor mission critical computer applications suppliers vendors throughout year 2000 ensure latent year 2000 matters may arise addressed promptly three years ended december 31 1999 company expended 196 million year 2000 readiness costs capital expenditures new hardware software totaled 83 million renovation expenses 113 million expensed incurred 46 million expensed 1999 period expenditures funded cash flows operations company believes future capital requirements met combination companys current resources ii cash flows operations iii borrowings iv potential debt equity offerings management believes consummation merger provide company significant additional capital alternatives commitments contingencies refer item 3 legal proceedings form 10k description incorporated herein reference item 7a item 7 managements discussion analysis financial condition results operations following discussion read conjunction consolidated financial statements notes thereto companys actual future results could differ materially historical results overview company organized february 2 1996 become holding company blue cross blue shield georgia inc bcbsga subsidiaries conversion february 2 1996 discussions relate historical operations bcbsga subsidiaries prior february 2 1996 company including bcbsga subsidiaries consolidated basis period following conversion historically substantially companys premium revenues net income derived traditional indemnity ppo business however growth revenues earnings recent years result strategic shift focus began 1992 result new strategy hmo pos premiums grown 6 total premiums end 1992 19 end 1996 hmo pos membership grown 45000 members end 1992 224000 members end 1996 growth hmo pos products attributable new sales group growth lesser degree migration business traditional indemnity products offered company 1996 medical services substantially companys hmo pos products sold provided community health partnership networks chpns prudent management companys investments played significant role developing maintaining companys financial strength investment earnings including realized gains sales investments represented average 78 pretax income period january 1 1992 december 31 1996 benefits expense consists primarily health care claims payments physicians hospitals health care providers companys profitability largely depends ability accurately predict effectively manage health care costs companys loss ratio benefits expense divided premiums improved 910 1992 888 1996 company continued efforts improve contractual terms providers delivery medical services effectively manage business mix changes indemnity ppo hmo pos products companys emphasis managed care products expenses associated change infrastructure reflected increase operating expense ratio operating expenses divided premiums grew 87 1992 111 1996 state georgia insurers required pay tax insurance premiums lieu state income tax premium taxes charged operating expenses incurred company paid federal income taxes alternative minimum tax system special deduction available certain blue cross blue shield plans section 833b internal revenue code deduction provided section 833b longer available company would subject federal income taxes regular corporate tax rate currently 35 see certain federal income tax consequences section 833 code form s1 registration 3332796 filed march 27 1996 subsequent amendments incorporated herein reference significant health care legislation continues proposed federal state level legislation could material impact companys business without legislation consumers employer groups expected continue exert pressure pricing health care products meet demands predictable lower cost products required results operations directly affected premium rate adequacy depends pricing underwriting decisions level membership serviced performance companys physician hospital pharmacy ancillary health care services networks since january 1995 companys chpns estimates medical benefits health care utilization estimates health care cost trends effective administration benefit payments operating efficiencies investment returns federal state laws regulations results operations 1996 compared 1995 premium revenues 1996 13237 million increase 14 premium revenues 11595 million 1995 premium revenues indemnity ppo products increased 521 million 10587 million 1996 10065 million 1995 principally due growth ppo products number indemnity contracts declined 9 1995 ppo contracts grew 18 hmo pos premiums increased 2542 million 1996 1447 million 1995 result 70 increase membership new sales ingroupgrowth lesser extent migrations traditional indemnity products hmo pos products continued drive hmo pos membership growth 224000 members december 31 1996 132000 members december 31 1995 hmo pos products accounted 19 total premiums 1996 compared 13 total premiums 1995 investment income increased 20 144 million 1996 120 million 1995 principally due increase companys cash investment portfolio proceeds relating issuance preferred stock realized gains sale marketable securities 41 million 1996 112 million less realized gains 153 million 1995 company took advantage strong market performance realized gains 99 million sale marketable securities november 1995 loss ratio hmo pos products 852 1996 compared 837 1995 loss ratio hmo pos products unfavorably impacted higher levels utilization nonchpn markets 1996 startup chpn markets small risk pools less 10000 members offset risk sharing settlements favorably impacted loss ratios years excluding impact favorable settlements loss ratio 1996 would 857 compared 850 1995 loss ratio indemnity ppo products decreased 901 1996 compared 907 1995 company realized favorable loss ratio experience traditional indemnity products 1996 period 1995 company experienced increasing medical cost trends markets indemnity products related third fourth quarters 1994 result additional 62 million recorded benefit expenses 1995 prior period combination factors resulted favorable overall loss ratio 888 1996 compared 896 1995 operating expense ratio 111 1996 increased 1995 operating expense ratio 109 principally due costs related product development enhanced managed care information administrative capabilities nonoperating income 13 million 1996 related gain sale 5 interest one companys chpn subsidiaries third party effective income tax rate 15 1996 decreased effective income tax rate 18 1995 principally due increase valuation certain longlived tax assets tax deductions occur future result foregoing factors net income 175 million 1996 comparable net income 174 million 1995 compared 1994 premiums increased 12 billion 1995 10 billion 1994 premiums hmo pos products posted strongest gains 65 1447 million 1995 reflecting 98 growth hmo pos membership new sales ingroupgrowth lesser extent migration traditional indemnity products company accounted membership growth hmo pos products represented 13 premiums 1995 compared 8 premiums 1994 premiums indemnity ppo products totaled 10 billion 1995 7 increase 1994 indemnity contracts declined slightly 1995 ppo products increased 18 1995 compared 1994 investment income 120 million 1995 27 1994 result increase companys cash investment portfolio income 1995 also included 20 million related settlement lease dispute pertaining leased headquarters office atlanta realized gains increased 153 million 1995 25 million 1994 due primarily strong performance bond stock markets 1995 take advantage strong market performance company realized gains 99 million sale marketable securities november 1995 cost 172 million benefits expense increased 14 10 billion 1995 hmo pos benefits expense increased 55 1211 million 1995 compared 781 million 1994 result strong membership growth 98 partially offset 7 reduction medical cost per member per month medical loss ratio hmo pos products improved significantly 837 1995 medical loss ratio hmo pos products 1995 favorably impacted adjustments medical costs prior periods medical loss ratio 1995 excluding favorable adjustments would 850 still reflects significant improvement medical loss ratio 892 1994 companys continuing efforts improve medical utilization management delivery medical services efficiencies companys first chpn partnership atlanta market chpnatlanta primary reasons improvement 1995 first year operation membership chpnatlanta increased approximately 50000 members january 1 approximately 96000 members december 31 loss ratio experience hmo pos products continued improve 1995 experience indemnity ppo lines business declined benefits expenses indemnity products increased 10 enrollment increased 7 generating higher loss ratio indemnity ppo products 907 1995 compared 882 1994 additionally company identified increasing medical cost trends markets indemnity products second quarter 1995 related third fourth quarters 1994 increase cost trends occurred throughout industry period result company recorded additional 62 million benefits expense 1995 furthermore upward trend medical costs indemnity products continued throughout 1995 combination factors resulted companys total loss ratio increasing 896 1995 880 1994 companys infrastructure changed significantly last half 1994 expanded managed care administration information systems increased product development marketing capabilities enhanced medical utilization management additionally company adopted fasb 106 employers accounting postretirement benefits pensions fasb 106 1995 effect change accounting certain postretirement benefits increased operating expenses 16 million 1995 result infrastructure changes fasb 106 accounting change operating expenses increased 14 1995 1261 million 1110 million 1994 result foregoing factors net income 174 million 1995 21 million less net income 195 million 1994 liquidity capital resources liquidity company shortterm longterm liquidity needs structured investment portfolios accordingly 1699 million companys investment portfolio held bcbsga invested subject limitations prescribed georgia insurance statutes shortterm liquidity needs fund companys operating costs well payment obligations customers met funds invested primarily institutional money market accounts assets required shortterm liquidity needs transferred portfolio investments fixed income equity markets portfolio provides reserves future payment obligations funds longterm liquidity needs managed several independent advisory firms companys investment policies designed provide liquidity meet anticipated payment obligations preserve capital maximize yield conformance regulatory requirements december 31 1996 cash investments 3072 million 59 total assets allocation companys external investment portfolio consistently maintained 70 fixed maturities investment grade balance equity securities corporate government bonds issues ratings better moodys investors service standard poors rating group investments equity securities domestic dividend paying companies companys portfolio currently contain derivative securities instruments real estate investments equity investments corporations engaged solely real estate activities management believes companys conservative investment portfolio contributes financial stability companys balance sheet improved steadily since 1992 total assets growing 5172 million december 31 1996 3180 million december 31 1992 substantial portion increase result growth companys cash investment portfolio invested excess cash generated operating activities investment earnings company historically satisfied ordinary cash requirements operations net cash provided operating activities amounted 381 million 1996 compared net cash provided operating activities 86 million 1995 cash provided operations 1995 reduced increase claim payouts onetime payout january 1995 unused vacation accumulated prior years company available 55 million line credit bank finance working capital needs interest accrues amounts advanced prime rate borrowings line credit company believes future cash resources adequate meet operating requirements april 1996 bcbsga obtained 55 million insolvency line credit group banks insolvency line credit may drawn solely event insolvency bcbsga pay authorized insurance policy claims insolvency line credit designed satisfy certain membership standards bcbsa company certain subsidiaries exclusive license business georgia name blue cross blue shield use blue cross blue shield names trademarks service marks respect companys indemnity ppo hmo pos life insurance products company anticipate making draws insolvency line credit bcbsga two insurance subsidiaries hmo georgia inc hmoga greater georgia life insurance company ggl domiciled state georgia prepare statutory statements accordance accounting principles practices prescribed georgia insurance department bcbsga insurance subsidiaries may distribute dividends realized profits undistributed accumulated net earnings since organization amount dividends distributable year limited greater prior years net income determined statutory basis 10 prior year statutory surplus addition dividends distributable bcbsga limited conversion order approved georgia commissioner insurance december 27 1995 related bcbsgas conversion forprofit corporation dividend distributions bcbsga hmoga ggl defined limits require filing cases special approval state georgia insurance commissioner capital resources company anticipates principal elements future capital requirements information technology needs product development potential medical access points equity contributions chpn joint ventures strategic acquisitions medical access point development could occur chpns able adequately cover geography range services desired solution access needs could take form physician practice acquisition establishment urgent care 24hour primary care clinic facilities physician recruitment relocation costs capital cost develop medical access point varies differing factors available facilities extent existing infrastructure company anticipates development single medical access point could cost range 05 million 20 million date chpn produced access need translated additional capital requirements 1994 bcbsga entered revolving credit loan agreement group banks finance community health partnership networks related costs terms agreement bcbsga could borrow 250 million december 1996 bcbsga reduced total amount available revolving credit agreement 90 million margin libor loans 07 05 interest accrues amounts advanced variable libor rate plus margin mentioned previously borrowings outstanding totaled 35 million december 31 1996 20 million december 31 1995 february 1996 company received 466 million connection preferred stock offering net offering costs 33 million company believes future capital requirements met combination companys current resources including proceeds sale preferred stock ii cash flow operations iii potential debt equity offerings item 8 item 7a quantitative qualitative disclosures market risk primary emphasis protection capital board directorsapproved guidelines seek appropriate asset distribution diversification risk use professional external money managers manage levels risk company maintains two investment portfolios company hold derivative financial instruments derivative commodity instruments either portfolio foreign currency exposure company subject market risk exposure associated changes interest rates equity prices investment portfolios sensitivity analysis measure potential losses market value companys fixed income equity investments portfolios classified trading indicates following market risk exposures december 31 1998 approximately 736 value 2395 million consolidated portfolios held financial instruments fixed maturities described item 1 business investment portfolio primary market risk exposure changes interest rates immediate one percentage point decrease interest rates would increase net aggregate market value fixed income portfolio 81 million immediate one percentage point increase interest rates would decrease net aggregate market value fixed income portfolio 82 million corporate treasury manages interest rate exposure maintaining short duration modeling technique used company considers net present value cash flows including duration estimates shortterm debt instruments approximately 28 value 92 million consolidated portfolios fair value equal cost excluded aggregate net market value market risk exposure analysis fair value common equity portfolio excluding investments affiliated entities 1 common equity portfolio 754 million december 31 1998 equity portfolio highly diversified limited high quality domestic dividend paying stocks primary market risk exposure therefore overall decline market prices balanced portfolios composed equity securities seasoned domestic companies assuming immediate 10 decrease equity security price hypothetical pretax loss fair value 75 million likewise assuming immediate 10 increase equity security price hypothetical pretax gain fair value 75 million companys unrealized net gains losses recorded net taxes accumulated comprehensive income shareholders equity section accompanying consolidated financial statements item 8 item 7a quantitative qualitative disclosures market risk primary emphasis protection capital board directorsapproved guidelines seek appropriate asset distribution diversification risk use professional external money managers manage levels risk company maintains two investment portfolios one internally managed shortterm liquidity externally managed fixed income equity markets longterm liquidity needs company hold derivative financial instruments derivative commodity instruments either portfolio foreign currency exposure company subject market risk exposure associated changes interest rates equity prices investment portfolios sensitivity analysis measure potential losses market value companys fixed income equity investments portfolios classified trading indicates following market risk exposures december 31 1999 approximately 778 value 2568 million consolidated portfolios held financial instruments fixed maturities described item 1 businessinvestment portfolio primary market risk exposure changes interest rates december 31 1999 immediate one percentage point decrease interest rates would increase net aggregate market value fixed income portfolio 90 million immediate one percentage point increase interest rates would decrease net aggregate market value fixed income portfolio 91 million comparatively december 31 1998 immediate one percentage point decrease interest rates would increase net aggregate market value fixed income portfolio 81 million immediate one percentage point increase interest rates would decrease net aggregate market value fixed income portfolio 82 million corporate treasury manages interest rate exposure maintaining short duration modeling technique used company considers net present value cash flows including duration estimates shortterm debt instruments approximately 01 value 03 million consolidated portfolios fair value equal cost excluded aggregate net market value market risk exposure analysis fair value common equity portfolio excluding investments affiliated entities 01 common equity portfolio 723 million december 31 1999 equity portfolio highly diversified limited high quality domestic dividend paying stocks primary market risk exposure therefore overall decline market prices balanced portfolios composed equity securities seasoned domestic companies december 31 1999 assuming immediate 10 decrease equity security price hypothetical pretax loss fair value 73 million likewise assuming immediate 10 increase equity security price hypothetical pretax gain fair value 73 million comparatively december 31 1998 assuming immediate 10 decrease equity security price hypothetical pretax loss fair value 75 million likewise assuming immediate 10 increase equity security price hypothetical pretax gain fair value 75 million companys unrealized net gains losses recorded net taxes accumulated comprehensive income shareholders equity section accompanying consolidated financial statements item 8 item 8 financial statements supplementary data financial statements listed item 14a1 included form 10k beginning page item 9 item 8 financial statements supplementary data financial statements listed item 14a1 included report beginning page item 9 item 8 form 10k first two months 2000 unfavorable equities eg standard poors index declined 70 due rising shortterm interest rates company anticipate material change primary market risk exposure entire year 2000 portfolios management also described discussed item 1 businessinvestment portfolio item 7 managements discussion analysis financial condition results operations liquidity capital resources liquidity item 8 financial statements supplementary data financial statements listed item 14a1 included report beginning page item 9 item 8 financial statements supplementary data report independent auditors consolidated financial statements company pages 1996 annual report incorporated herein reference item 9 