<PAGE>   1
 
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                                 UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549
                             ---------------------
 
                                   FORM 10-K
                 FOR ANNUAL AND TRANSITION REPORTS PURSUANT TO
          SECTIONS 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934
 
<TABLE>
<C>               <S>
   (MARK ONE)
      [X]         ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D)
                  OF THE SECURITIES EXCHANGE ACT OF 1934
                  FOR THE FISCAL YEAR ENDED DECEMBER 31, 1998
                                               OR
      [  ]        TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D)
                  OF THE SECURITIES EXCHANGE ACT OF 1934
                  FOR THE TRANSITION PERIOD FROM ____________ TO ____________
</TABLE>
 
                        COMMISSION FILE NUMBER: 333-2796
 
                            CERULEAN COMPANIES, INC.
             (Exact name of Registrant as specified in its charter)
 
<TABLE>
<S>                                       <C>
                GEORGIA                       58-2217138
    (State or other jurisdiction of        (I.R.S. Employer
     incorporation or organization)       Identification No.)
       3350 PEACHTREE ROAD, N.E.,
            ATLANTA, GEORGIA                     30326
(Address of principal executive offices)      (Zip Code)
</TABLE>
 
      (Registrant's telephone number, including area code: (404) 842-8000
 
        Securities registered pursuant to Section 12(b) of the Act: NONE
 
          Securities registered pursuant to Section 12(g) of the Act:
                 CLASS A CONVERTIBLE COMMON STOCK, NO PAR VALUE
 
     Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.  [X] Yes  [ ]No
 
     Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K.  [X]
 
     The aggregate market value of the Class A Convertible Common Stock and
Class B Convertible Preferred Stock (voting stock) held by non-affiliates of the
registrant as of March 26, 1999: The Class A Convertible Common Stock and the
Class B Convertible Preferred Stock are not traded.
 
     The number of shares of the registrant's Class A Convertible Common Stock,
no par value, $0.01 stated value, outstanding as of February 28, 1999 was
409,392.
 
                      DOCUMENTS INCORPORATED BY REFERENCE
 
     Portions of the registrant's Form S-1, Registration No. 333-2796, effective
May 14, 1996 and subsequent amendments are incorporated by reference into Part
II -Items 6 and 7 of this Form 10-K.
 
     Exhibits to Forms S-1, Registration No. 333-2796, effective May 14, 1996
and subsequent amendments are incorporated by reference into Part IV -- Item 14
of this Form 10-K.
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<PAGE>   2
 
                            CERULEAN COMPANIES, INC.
 
                               TABLE OF CONTENTS
                      FOR THE YEAR ENDED DECEMBER 31, 1998
 
<TABLE>
<CAPTION>
                                                                        PAGE
                                                                        ----
<S>       <C>                                                           <C>
                                   PART I
Item 1    BUSINESS....................................................    1
Item 2    PROPERTIES..................................................   13
Item 3    LEGAL PROCEEDINGS...........................................   14
Item 4    SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.........   15
                                  PART II
Item 5    MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED
            STOCKHOLDER MATTERS.......................................   16
Item 6    SELECTED FINANCIAL DATA.....................................   17
Item 7    MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
            AND RESULTS OF OPERATIONS.................................   19
Item 7A   QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK..   26
Item 8    FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.................   27
Item 9    CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
            AND FINANCIAL DISCLOSURE..................................   27
                                  PART III
Item 10   DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT..........   28
Item 11   EXECUTIVE COMPENSATION......................................   35
Item 12   SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
            MANAGEMENT................................................   44
Item 13   CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS..............   45
                                  PART IV
Item 14   EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM
            8-K.......................................................   46
Signatures............................................................   49
</TABLE>
 
                                        i
<PAGE>   3
 
                                     PART I
 
ITEM 1.  BUSINESS
 
THE COMPANY
 
     Cerulean Companies, Inc. (the "Company") was incorporated under the laws of
the State of Georgia on February 2, 1996 to act as the holding company for Blue
Cross and Blue Shield of Georgia, Inc. ("BCBSGA") and its subsidiaries and for
other lawful purposes. BCBSGA was established in 1937 and through a series of
business combinations and subsidiary operations had, by 1985, and has currently,
the largest health insurance company market share in Georgia. During 1997,
BCBSGA made a distribution of its investments in certain subsidiaries, including
HMO Georgia, Inc. ("HMO-Ga") and Group Benefits of Georgia, Inc. ("GBG") to the
holding company. As of December 31, 1998, BCBSGA and HMO-Ga had 825,000
insurance and administrative service contracts covering or administering
benefits for approximately 1.6 million members. This represents more than 21% of
the total Georgia population and includes approximately 22% of the over 3.5
million residents of the metropolitan Atlanta area.
 
THE CONVERSION
 
     On February 2, 1996, the Company acquired all of the outstanding capital
stock of BCBSGA, following BCBSGA's conversion from a not-for-profit corporation
to a for-profit corporation, pursuant to a Plan of Conversion approved by the
Georgia Commissioner of Insurance (the "Commissioner") on December 27, 1995 (the
"Conversion"). As a part of the Conversion, the Company agreed to offer to each
of BCBSGA's eligible subscribers five shares of its Class A Convertible Common
Stock, no par value (the "Class A Stock"), at no cost.
 
     Following the Conversion, the Company issued 49,900 shares of Class B
Convertible Preferred Stock (the "Preferred Stock") to raise $49.9 million in
capital. After deducting offering costs, the net proceeds to the Company were
$46.6 million. On May 14, 1996, the Company's registration under the Securities
Act of 1933, as amended (the "Securities Act"), of the public offering of its
Class A Stock with the Securities and Exchange Commission (the "Commission")
became effective. The registration of the Class A Stock under Section 12(g) of
the Securities Exchange Act of 1934, as amended (the "Exchange Act"), became
effective on June 30, 1997. As of February 28, 1999, a total of 70,323 eligible
subscribers held 409,392 shares of Class A Stock. Presently, there is no market
for Class A Stock or any equity securities of the Company.
 
PROPOSED MERGER
 
     On July 9, 1998, the Company entered into an agreement and plan of merger
(the "Merger") with WellPoint Health Networks Inc. ("WellPoint") and a
subsidiary of WellPoint. Pursuant to the Merger, the Company will become a
wholly-owned subsidiary of WellPoint. Finalization of the transaction is subject
to, among other things, the approval of the shareholders of the Company, the
Commissioner and the Blue Cross and Blue Shield Association ("BCBSA"). Upon
closing the transaction, shareholders of the Company will exchange their shares
for WellPoint shares or cash in a transaction valued at $500 million.
 
     The Company and WellPoint have jointly filed a registration statement on
Form S-4, Registration No. 333-64955 of WellPoint filed December 4, 1998,
containing a proxy statement related to the Merger. Upon the effective date of
the registration statement with the Commission, the Company will mail a proxy
statement to its shareholders, soliciting their proxies for the approval of the
Merger with WellPoint and in the case of Class A shareholders, their election of
cash or stock. The Company expects to hold the related shareholder meeting
during the second quarter of 1999.
 
INDUSTRY OVERVIEW
 
     According to the Health Care Financing Administration ("HCFA"), health care
spending in the U.S. rose from $836.5 billion in 1992 to $1,092.4 billion in
1997, an average annual increase of approximately 5.5%. This rate was
considerably more than the average annual increase of the Consumer Price Index
("CPI") of
 
                                        1
<PAGE>   4
 
approximately 2.6% for the same period. Health care spending accounted for over
13% of the Gross Domestic Product ("GDP") from 1992 through 1997. On an absolute
dollar basis, as well as on a percentage of GDP basis, the United States spends
more on health care than any other country in the world. Several factors have
contributed to the dramatic increase in health care expenditures, including the
aging of the population, increased use of high-technology treatments and tests,
the rising cost of malpractice insurance and higher operating costs for
hospitals, physicians and other health care providers. Prior to the development
of managed health care, most health insurers offered health care benefit plans
known as indemnity, or fee-for-service plans, which do not typically provide
incentives to use particular providers for the provision of discounted care or
include other cost-containment features.
 
     Due to the escalating cost of health care services, customers (both groups
and individuals) began to demand lower cost alternatives to traditional
indemnity insurance plans. Managed health care plans were developed to attempt
to provide access to appropriate health care services in an affordable manner.
Typically, health maintenance organization ("HMO") and preferred provider
organization ("PPO") plans develop networks of health care providers to deliver
health care at favorable rates while participating in quality initiatives
together with utilization management and other cost control measures. An
important factor in controlling costs is the number of members (i.e., enrolled
health care consumers) that a managed care benefit plan can direct to providers.
Under many managed care plans, providers are reimbursed based on either
capitation (a fixed monthly fee per member regardless of frequency of use,
generally used by HMOs for physicians and ancillary medical services such as
laboratory services) or a negotiated per diem (daily rates, generally used for
hospitals) or limited fee schedules (generally used for specialty physicians).
Managed health care plans also feature a variety of methods of health care
utilization management to monitor the type, quantity and setting of services
obtained. Utilization management programs are designed to provide incentives to
encourage providers to use health care resources effectively.
 
     Different types of health care utilization management and cost control
methods differentiate managed health care plans. HMOs generally require members
to use network providers exclusively, except in emergency cases, and to consult
with a primary care physician prior to obtaining treatment from specialists. In
addition, HMOs generally include capitated payment arrangements with network
providers who charge members only modest copayments. A point of service network
plan ("POS") provides members with an HMO service option for network coverage
and also permits the member, at the time medical service is required, to choose
a provider that is not a member of the HMO network at additional cost. POS plans
generally require the use of a primary care physician within the network to
coordinate health care services for the members, while PPO plans often do not.
PPO and POS plans also provide members with the option of using non-network
providers under indemnity-type coverage terms which require higher coinsurance
payments by members and higher deductibles. These member payments are generally
limited to an out-of-pocket maximum. Coinsurance and higher deductible
requirements for non-network care in POS and PPO plans are designed to encourage
greater utilization of the network care by members, thereby reducing costs. See
"Business -- Business Lines and Products."
 
     According to a compilation of industry sources, in 1997 the total number of
HMO members nationwide grew by an estimated 6.4 million people, to 83.4 million.
Since 1992, HMO enrollment nationally has more than doubled. The Georgia
marketplace is extremely diverse, ranging from the major metropolitan area of
Atlanta with a 1997 population in excess of 3.5 million to several mid-sized
cities to very rural areas. The southern half of the State of Georgia is
primarily rural and dominated by an agrarian economy. The State of Georgia has
an HMO market penetration of only 18%. Based on industry sources, the five
states with the highest HMO penetration in the country at the end of 1997 have
HMO market shares ranging from 42% to 61%. HMO membership in the State of
Georgia for 1997 increased approximately 187% over 1992, at a rate greater than
the rate of growth nationally, due in part to the state's low HMO market
penetration in the early 1990s. HMO membership for 1997 in the metropolitan
Atlanta area, where the 1997 HMO market penetration was approximately 40%,
increased more than 200% over 1992, reflecting the increased consumer demand for
managed care plans in the Atlanta area.
 
     The Company's rate of growth in HMO membership exceeded both the national
and state rates of growth, increasing over 640% for the 1992-1997 period. The
higher rate of growth for the Company is
                                        2
<PAGE>   5
 
attributable to its growth in HMO membership specifically in the metropolitan
Atlanta area. The Company experienced a rate of growth in the Atlanta market of
over 600% for the 1992-1997 period.
 
GENERAL
 
     The Company, through its subsidiaries, has the largest health insurance
company market share in Georgia, with 825,000 insurance and administrative
service contracts covering or administering benefits for approximately 1.6
million members as of December 31, 1998 (including HMO, PPO and POS members).
This represents over 21% of the total Georgia population. BCBSGA has one of the
State's largest PPO memberships, serving approximately 354,000 members as of
December 31, 1998. HMO-Ga, a health maintenance organization which also offers
POS products, serves an additional 440,000 members. Greater Georgia Life
Insurance Company, Inc. ("GGL"), a subsidiary of BCBSGA and GBG, a subsidiary of
the Company, are also part of the consolidated group. GGL offers group life,
accident and disability insurance products that are sold in conjunction with the
Company's health products. GGL has an "A-" rating from A.M. Best and is licensed
to offer its products in Alabama, Georgia, Mississippi, North Carolina, South
Carolina and Tennessee. GBG principally provides workers compensation medical
management services.
 
     The Company's core business products are its traditional indemnity products
and its HMO, POS and PPO products. The Company's current business strategy
centers around the belief that development of managed care products, with a
strong HMO at the core, represents the most prudent response to current
marketplace demands. In areas where there is no managed care, the Company's
strategy is to solidify market presence through PPO network expansion, favorable
changes in provider reimbursement and benefit design alterations that meet
employers' needs.
 
     The Company offers its traditional indemnity products and its HMO, POS and
PPO products exclusively within the boundaries of the State of Georgia. The
Company and certain of its subsidiaries are licensed by BCBSA to use the Blue
Cross and Blue Shield names and logos only in the State of Georgia. While there
are only limited BCBSA restrictions on the conduct of business by the Company or
its subsidiaries outside the State of Georgia under a different name,
substantially all of the Company's revenue is currently associated with Georgia
business.
 
     BCBSGA and HMO-Ga have a comprehensive quality management program which
focuses on assessment, management and monitoring of inpatient and ancillary
service costs. The quality management program monitors, collects data on and
evaluates inpatient and outpatient medical care, inclusive of preventive and
mental health services, as well as the level of customer service provided to
members by physicians and other medical providers. The Company has a disciplined
credentialing function which monitors the recruitment and retention of its
provider panels throughout the state. BCBSGA's PPO was the first preferred
provider organization in Georgia to receive full accreditation from the
Utilization Review Accreditation Commission. Additionally, in 1997, HMO-Ga was
awarded a full, three year accreditation by the National Committee for Quality
Assurance ("NCQA"). The NCQA is a nationwide organization which evaluates
quality assurance programs for HMOs.
 
     At present, HMO-Ga is licensed and operational as an HMO in eight markets
in Georgia representing more than 5.9 million residents, including Atlanta.
HMO-Ga's HMO and POS products are serviced through networks of primary care
physicians, specialist physicians and hospitals. Beginning in January 1995,
HMO-Ga also began supporting its products through Community Health Partnership
Networks ("CHPNs").
 
ORGANIZATIONAL STRUCTURE
 
     The Company's primary operating subsidiary, BCBSGA, is organized in a
Business Unit, Support Unit and Governance Unit structure. Business Units have
responsibility to sell products, at appropriate prices, and to manage the
effective delivery of product benefits at acceptable levels. Support Units
manage the delivery of administrative services to individual or multiple
Business Units within defined cost parameters, while meeting customer service
expectations. The Governance Units establish policy, provide direction for
BCBSGA and monitor compliance.
 
                                        3
<PAGE>   6
 
     Within the Individual Business Unit, health insurance products are sold to
individuals (or individual families) under age 65, or to persons over age 65 who
are Medicare eligible. Local Market Business Units offer a full line of health
insurance products for employer groups of less than 500 employees. The
Major/National Business Unit offers a full line of health benefit products to
employer groups with 500 or more covered employees and the National Par Business
Unit supports participating plan accounts of Georgia employees of national
employers sold through other Blue Cross and Blue Shield plans.
 
STRATEGIC INITIATIVES
 
  CHPNs
 
     As a result of concern with rising health care costs and changing trends in
the health care industry, the Company determined to develop its own integrated
delivery systems for managed health care products. The Company's CHPNs are the
cornerstone of this strategy. CHPNs have facilitated the introduction of the
Company's HMO and POS products into new markets which have provided alternatives
to group customer demand for lower cost health care. CHPNs are locally based
equity ventures between the Company and a local physician group and/or hospital,
which owns the remaining equity interests in the CHPN. The Company owns at least
51% of the equity interests in each CHPN it has organized, and the local
physician group and/or hospital owns the remaining equity interest. Clinical
services are provided by the physician or hospital partners as well as other
providers with which the CHPN maintains contracts, and BCBSGA provides sales,
management and administrative services, including information systems and data
management services through service contracts with the CHPNs. Premium and fee
revenues are received from subscribers by HMO-Ga which retains a flat percentage
for administration and as a contribution to surplus. After deduction for premium
taxes, the remaining premium revenue is used for payment of medical expenses and
for contribution to the CHPN's retained earnings.
 
     The Company has taken several actions to support the CHPNs, including (i)
providing initial and additional capital, (ii) hiring experienced managers to
oversee sales, medical network management and financial performance in the local
markets, (iii) providing dedicated claims processing and membership services,
(iv) developing a strategic information systems plan that addresses the
information requirements, applications needs and systems architecture necessary
to support the CHPNs and (v) enhancing medical management activities and
continued development of NCQA processes and Health Plan Employer Data and
Information Set ("HEDIS") reporting. Atlanta Healthcare Partners, Inc. (which
operates in the Atlanta metropolitan area and surrounding counties) was the
first CHPN to become operational. At the end of 1998 additional CHPNs, jointly
owned by the Company and health care providers, were operational in the Augusta,
Athens, Macon and Savannah markets. On February 22, 1999, the Company and the
health care providers that were parties to the CHPN in the Macon market entered
into a Termination Agreement that terminates the Macon CHPN, effective March 31,
1999.
 
  Information Technology
 
     The Company's comprehensive multi-year Strategic Information Systems Plan
("SISP") identified the capital, equipment, software and intellectual property
necessary to employ and support traditional kinds of systems effectively in an
evolving managed care and customer service environment. The software
applications and hardware architecture necessary to support the Company's
strategic CHPN business initiative were essential requirements of the SISP.
 
     The Company believes that the information technology strategies employed in
the execution of the SISP have resulted in more efficient interrelated uses of
information both through systems targeted to specific uses and through the use
of networks to deploy solutions company-wide.
 
     Historically, the Company used a mixture of systems and processing
platforms to meet its information requirements. Integral features of the SISP
include a principal software application, GTE's Q/Care product, as modified for
the Company, for claims processing and membership billing; a single hardware
platform for claims processing; client server technology; and an Enterprise Data
Warehouse ("EDW"). At the end of 1998, over 70% of the Company's membership was
processed through the Q/Care system. The Company
 
                                        4
<PAGE>   7
 
expects to migrate the remainder of its membership which includes the Company's
largest customer to the Q/Care system at the start of third quarter 1999.
Remaining predecessor systems will be retired during 1999. The EDW has been
operational with medical management and claims data since December 1997. The EDW
will include membership and premium revenue data by the end of second quarter
1999, completing the initial phase of the evolution of the Company's EDW. With
the update to the EDW and the migration of all membership to Q/Care by mid-1999,
the Company expects to have established a technical infrastructure to provide
highly available, reliable and responsive business and clinical systems that
will position the Company to continue to excel in the dynamic health care
marketplace.
 
     The Company also performs paperless claim clearinghouse / electronic data
interchange activities and provides on-line eligibility, claims status and
preauthorization / referral processing options to providers as well as on-line
access by some large employer groups to their eligibility and summary claims
information. Provider and employer on-line functionality has strengthened the
Company's position for health care electronic commerce.
 
YEAR 2000 COMPUTER SOFTWARE READINESS
 
     All companies that operate on mature computer software programs face the
difficult task of how to reprogram or replace their existing systems, which have
protocols that address dates in terms of two digits rather than four to define
the applicable year. Date sensitive software may recognize a date using "00" as
the year 1900 instead of the year 2000 (the "Year 2000 Issue"). The Company has
analyzed its systems and is executing a comprehensive plan to either modify or
replace portions of its software and hardware so that those systems will
properly function when processing information involving dates beyond December
31, 1999. The Company's plans to resolve the Year 2000 Issue involve the
following phases: (1) awareness and assessment; (2) renovation; (3) validation;
(4) implementation and (5) contingency planning. For a discussion of the
Company's plans, refer to Item 7. "Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Liquidity and Capital
Resources -- Year 2000 Computer Software Readiness."
 
BUSINESS LINES AND PRODUCTS
 
  Overview
 
     The Company operates predominantly in one industry segment, health
insurance products and services. As a full service provider of health benefit
programs in the Georgia marketplace, the Company markets life, health and
disability insurance products to employer groups and individuals. The overall
product portfolio available includes standard indemnity insurance, PPO, HMO and
POS health benefits plans, life insurance products and ancillary products
including dental insurance, a vision affinity product, vision insurance and
specialty products for mental health and pharmacy benefits.
 
     Various funding arrangements are available for each health benefit product.
These arrangements range from fully insured to administrative services only
("ASO/Cost Plus"). For example, under a fully insured indemnity arrangement,
BCBSGA assumes the full risk (subject to deductibles and other adjustments) with
direct payment by BCBSGA, generally to the provider. In an ASO/Cost Plus
indemnity arrangement, BCBSGA administers the health insurance program for its
customer and is compensated according to the terms of the contract for its
services by management services fees. The formula for compensation in ASO/Cost
Plus arrangements varies from contract to contract, but conceptually in such
arrangements, BCBSGA receives reimbursement for benefit payments processed and
related management services fees. ASO/Cost Plus funding is generally utilized by
employers with at least 500 covered enrollees. Some employers may choose
individual member or aggregate reinsurance to protect against catastrophic
losses. Additionally, the Company provides access to its provider networks and
other services to employer groups and other third parties under various
management services arrangements.
 
                                        5
<PAGE>   8
 
     Shown below is certain information on each of the Company's major product
lines.
 
                             PERFORMANCE BY PRODUCT
 
<TABLE>
<CAPTION>
                                                                 AT                 YEAR ENDED
                                                          DECEMBER 31, 1998      DECEMBER 31, 1998
                                                          -----------------   -----------------------
                                                             MEMBERS(1)        PREMIUMS    LOSS RATIO
                                                          -----------------   ----------   ----------
<S>                                                       <C>                 <C>          <C>
INSURANCE PRODUCTS
Indemnity and PPO.......................................        391,111       $  670,588      88.5%
HMO and POS.............................................        358,485          503,135      85.6
Life....................................................             --           15,942      52.6
                                                              ---------       ----------      ----
     Total..............................................        749,596       $1,189,665      86.8%
                                                              ---------       ==========      ====
MANAGEMENT SERVICES PRODUCTS(2)
Indemnity and PPO networks..............................        789,038
HMO and POS networks....................................         81,063
                                                              ---------
     Total..............................................        870,101
                                                              ---------
          Total -- All Products.........................      1,619,697
                                                              =========
</TABLE>
 
---------------
 
(1) Includes actual membership for HMO and POS products and indemnity and PPO
    products with estimates for the FEP program and certain national
    participating business.
(2) Revenues for these administrative services arrangements in 1998 totaled
    $118.0 million.
 
  HMO and POS
 
     The Company's HMO product has been offered by HMO-Ga since 1986. From 1986
through 1993, the product did not experience substantial growth. However, in
1993, new management and an increased emphasis on sales of managed care products
dramatically increased the market acceptance of HMO-Ga's products. HMO-Ga's HMO
and POS products are now the Company's fastest growing products, due, in part,
to the Company's CHPN initiatives. At present, HMO-Ga is licensed and
operational as an HMO in eight separate markets in Georgia, including Athens,
Atlanta, Augusta, Columbus, Gainesville, Macon, Rome and Savannah, representing
more than 5.9 million residents. HMO-Ga's HMO and POS products are offered to
group subscribers as "Blue Choice Healthcare Plan," which is a prepaid coverage
and preventive care product and as "Blue Choice Option," which is a
point-of-service product that allows members to choose between HMO-Ga network
providers and out-of-network providers. Premiums and management services fees
are collected on a monthly basis from employers. Some employers allow members to
elect, at annual enrollment, whether they wish to be in the "Blue Choice
Healthcare Plan" or the "Blue Choice Option."
 
     Under the Company's HMO product, HMO members select a primary care
physician who provides basic medical care for the member pursuant to a contract
with HMO-Ga. The primary care physician coordinates all of the medical and
health care for each HMO member, including physical examinations, specialist
care and hospitalization. Each primary care provider is credentialed and
periodically re-credentialed by the Company to maintain physician network
standards. The primary care physician coordinates with the member and the
Company to promote the delivery of appropriate care in a cost-effective manner.
HMO benefit plans require varying copayments for health care services. Coverage
for non-emergency hospitalization services requires prior approval by the
member's primary care physician and must be provided in network facilities,
except for certain specified services. HMO benefit plans also provide coverage
for preventive treatment and wellness programs. Benefits such as dental
services, pharmacy services and vision care may be purchased as options to the
basic benefit plan with a variety of copayment levels.
 
     Blue Choice Option members are required to use a primary care physician for
basic medical services and pre-certification of specialist services whether
performed by network or non-network providers. Network hospitalization is fully
covered. Non-network services and services obtained without primary care
physician approval are subject to deductibles and significant coinsurance
requirements.
 
                                        6
<PAGE>   9
 
  BlueChoice Platinum
 
     HMO-Ga's application to offer a Medicare Risk HMO product in nine counties
within the Atlanta metropolitan statistical area was approved by HCFA in
December 1996. This product, "BlueChoice Platinum" became operational in April
1997 and had 9,300 members as of December 31, 1998. The individual BlueChoice
Platinum product has no member premium and includes all traditional Medicare
benefits plus preventive services, immunizations, annual vision screening,
annual hearing screening and limited outpatient prescription coverage. The core
benefits of the group BlueChoice Platinum product are those of the BlueChoice
Platinum individual product with additional benefits defined by each employer.
 
  PPO
 
     The Company's PPO was first introduced in Georgia in the mid-1980's and
began being offered as "Blue Choice PPO" in 1995. The Company's PPO is one of
the three largest statewide provider networks in Georgia, serving approximately
354,000 members as of December 31, 1998.
 
     The Company's PPO products are intended to deliver health care benefits to
employer groups at lower premium costs than traditional indemnity products due
to benefit design, favorable pricing arrangements with network providers and
utilization management and other cost control arrangements with network
providers. The Company introduced its first PPO product for the individual
market in February 1999. Typically, 80% to 90% of the cost of covered health
care services received by a subscriber through the PPO network is covered by the
Company's PPO benefit plans. Non-network services are generally covered at 60%
to 70%, subject to higher deductible and coinsurance requirements. Currently,
the Atlanta, Athens, Augusta, Columbus and Savannah PPO networks are utilizing a
fee schedule for providers rather than a traditional discount from the
providers' customary charges. The Company anticipates that its other PPO
networks will also convert to utilizing a fee schedule rather than a traditional
discount from charge, which will further enhance the cost effectiveness of this
product.
 
     Full coverage for covered services is provided after a member has paid a
specified annual out-of-pocket maximum (coinsurance). The Company offers a broad
range of PPO benefit plans which enables the employer to choose the mix of
benefits that is suited to its employees' needs. Higher deductibles, coinsurance
and out-of-pocket maximums and other financial incentives encourage subscribers
to use network provider services. The Company's PPO also offers preventive
health benefit coverage, such as health assessments, immunizations and prenatal
visits. Premiums and management services fees for the Company's PPO product are
collected monthly from employers.
 
  Indemnity
 
     The Company's traditional indemnity product line includes benefit options
for both the individual and group markets through products that reimburse for
covered health care services on a fee-for-service basis. Premiums and management
services fees are collected on a monthly basis. Traditional indemnity products
may utilize the statewide networks that the Company has established for
physicians, hospitals and pharmacies. The majority of new business opportunities
for traditional indemnity group business are in the rural markets where, the
Company believes, the flexibility of its indemnity products, in terms of
provider access, is an advantage.
 
     The Company's indemnity products are offered to group subscribers as "New
CHIP," the traditional indemnity insurance product with certain managed care
features. Indemnity products are offered to individual subscribers as (i) "Flex
Plus," a comprehensive major medical product for people under age 65, that
provides a full range of benefits related to hospital, surgical, pharmacy and
other associated medical expenses with varying deductible and coinsurance
options, (ii) "hospital/surgical," a lower cost product than "Flex Plus" which
insures only catastrophic non-routine services associated with a more serious
medical condition related to a surgical procedure or inpatient hospital stay and
which is also offered to people under 65 and (iii) "65 PLUS," a guaranteed issue
plan that acts as a supplement to the federally insured Medicare program.
 
                                        7
<PAGE>   10
 
  Life Insurance
 
     GGL offers group life and disability products to employers of all sizes and
is licensed to do business in six states throughout the Southeast although its
revenues are derived primarily from business in the State of Georgia. Term life
insurance is commonly offered with accidental death and dismemberment ("AD&D")
for all groups with less than 100 employees. For larger groups, the life product
may be offered with health insurance. In addition to the standard term life and
AD&D products, GGL also offers a contributory, voluntary life insurance product
as well as a dependent life insurance product. GGL offers a variety of plan
designs and coverage amounts. GGL also offers short-term and long-term
disability insurance.
 
  Ancillary and Specialty Network Benefits
 
     The Company offers a variety of ancillary and specialty network benefits to
enhance the Company's competitive position and is developing other such
products. Offering an array of ancillary products and specialty networks permits
the Company to capitalize on its name recognition and to appeal to employer
groups that are increasingly seeking a variety of benefit options. Currently,
these ancillary and specialty network benefits are offered in conjunction with
the Company's medical benefit plan designs.
 
     The Company has offered dental insurance since 1982.  Dental insurance is
typically offered as a benefit enhancement that may be purchased in conjunction
with group products. A number of major commercial carriers and other entities
are offering managed dental care products, although BCBSGA does not currently
offer such a product.
 
     The Company offers vision, mental health/substance abuse and pharmacy
benefits as part of certain of its medical plan designs. These benefits have not
been designed as stand-alone products and are not sold separately from medical
products.
 
     The Company provides workers compensation medical management services to
employer customers.
 
MARKETING AND SALES
 
  General
 
     The Company's marketing operations vary depending upon the market at which
sales efforts are directed; individuals (i.e., direct pay), small employer
groups (defined as groups of two to 99 employees), large employer groups
(defined as groups of 100 or more employees) and major national groups (defined
as groups of 500 or more employees). The Company's marketing efforts are
coordinated by Vice Presidents who serve as local market managers in each of the
established local market regions, as well as by an Assistant Vice-President of
Major/National Accounts and a Director of Individual Sales. Each of these
individuals is supervised by the Executive Vice-President of Market Operations.
 
     From a competitive perspective, the Company addresses its market generally
by geography, product and customer group size. Significant competition exists in
the Atlanta and Augusta markets for managed care products. In other metropolitan
areas, the majority of competition is generally for indemnity or PPO products,
although new market entrants with managed care capabilities are beginning to
penetrate these areas.
 
     The Company believes that a large percentage of profitable marketing
opportunities exist in the small group market, and it has become more active and
competitive in this area. The Company has pioneered cooperative buying programs
as an enhancement to its existing distribution channels. These programs are
developed with a "market sponsor" and offer an exclusive endorsement of the
Company's products and the opportunity for a reduction in sales costs. The
Company believes that these cooperative programs provide enhanced product access
to small group customers. Cooperative programs are currently active in Albany,
Athens, Cartersville, Gainesville and Rome, Georgia.
 
     The Company has also been highly successful in developing Major and
National account business, especially for its HMO and POS products, because of
its unique position regarding statewide capabilities.
 
                                        8
<PAGE>   11
 
  Internal Sales and Service Force
 
     The Company employs an internal sales staff of account executives and group
sales representatives to sell and service all of the Company's group product
lines. The sales force works with other members of the distribution channel,
including independent agents and brokers. They also make direct calls on
selected target accounts and work with nationally recognized consulting firms.
Each geographic area has a local market manager and a sales manager directly
responsible for the results of the unit. In addition, a centralized
communications department develops direct mail advertising and promotional
material that targets specific audiences for potential distribution of products.
Service representatives are assigned specific accounts and work directly with
the internal sales force and independent agents and brokers. Service
representatives become the principal administrative contact for employers and
their benefit managers. Their duties include conducting on-site meetings,
providing health data reports and resolving potential service issues.
 
     The Company also maintains an additional fully-commissioned staff of sales
employees who sell the Company's individual indemnity insurance products (other
than the Medicare supplement). The Medicare supplement is sold by a
telemarketing staff.
 
  Independent Insurance Agents and Brokers
 
     The Company's group sales representatives also market health insurance and
managed care products through independent agents, brokers and consultants who
may be paid commissions from the premiums received by the Company. Brokers who
meet selected production and underwriting criteria are also eligible for a
"Preferred Producer" bonus. These independent agents and brokers are responsible
for a significant portion of the Company's enrollment growth over the past three
years. Any future growth in ensuing calendar years will also be dependent on the
Company's ability to continue productive relationships with these independent
agents and brokers. Independent agents and brokers are not salaried employees of
any insurance company or managed care company and are free to sell multiple
products from multiple insurance firms. Some agents and brokers are career
agents of other insurance companies whom they represent, and for whom they may
be required to maintain product exclusivity for a given type of product but are
able to sell group health insurance and managed care products from a number of
carriers, including the Company. The distribution channel for the majority of
sales opportunities in the Georgia market is dominated by independent agents and
brokers, particularly in rural areas, and most insurance companies utilize them
to distribute their products.
 
UNDERWRITING
 
     In determining whether to accept groups and to establish appropriate rates
for its plans, the Company uses specific underwriting criteria based on its
accumulated actuarial data, with adjustments for factors such as claims
experience, member mix and risk characteristic differences, to evaluate
anticipated health care costs. The risk selection criteria utilized by the
Company employ generally accepted risk characteristics and a flexible
underwriting formula to generate new business and renewal rates. Rates and the
rating process are monitored monthly with appropriate adjustments made
quarterly. New business ratings for all groups with 100 or fewer employees are
applied through the use of an automated proposal system, with rates and risk
selection criteria being implemented by field sales personnel. For employer
groups with 100 or more employees, all rates are determined by home office
underwriting personnel, who utilize the same screening of risk characteristics
that is conducted for employer groups of smaller size, but who attempt to blend
actual claim experience (utilizing a flexible credibility formula and
underwriting intervention) in order to establish an appropriate rate based on
the Company's desired competitive position. Rates for groups smaller than 50 are
regulated by Georgia law.
 
CUSTOMERS
 
     The Company has contracts with certain employer groups and government
agencies that account for a significant portion of the Company's total business.
One group accounted for 23% of the Company's total premium and management
services revenues in 1998. The Company's next two largest customers accounted
for less than 9% of premium and management services revenues in 1998. The
Company also serves as fiscal
 
                                        9
<PAGE>   12
 
intermediary for the Medicare program. Claims processed for the Medicare
program, state agencies and the BCBSA Out-Of-Area program totaled $4.3 billion
in 1998. The Company receives fees for performing these services.
 
     The Company's contract with the State of Georgia was renewed for a one-year
contract with six annual renewal options in July 1994. The State of Georgia
program accounts for over 35% of the Company's membership and plays an integral
part in the development of the Company's long-term provider network strategies.
On June 30, 1998, the State of Georgia renewed the contract for another year and
on July 7, 1998 informed BCBSGA that it intended to seek competitive bids with
respect to certain programs covered by the contract. However, this action has
been delayed pending passage of legislation creating a state health agency by
the 1999 Georgia Legislature. BCBSGA expects that it will participate in some or
all of these programs as a bidder and that, in any event, its role as a provider
of administrative services will remain unchanged through the current renewal
option period, which ends on June 30, 2001.
 
     The non-renewal or termination of any of these contracts with major
employer groups could have a material adverse effect on the Company's business,
financial condition and results of operations. There can be no assurance that
the subscribers or providers will renew their contracts or enter into new
contracts with the Company, or, in the case of provider contracts, will not seek
terms that are less favorable to the Company in connection with any such
renewal.
 
INVESTMENT PORTFOLIO
 
     The Company's conservative management of the investment process has played
an integral role in creating and maintaining its financial strength. Earnings
from the investment portfolio have contributed significantly to the profits of
the Company. Over the five-year period from January 1, 1994 to December 31,
1998, investment income plus gains realized on sales of investments represented
128% of consolidated operating income. In 1998, such income and gains were $26.4
million compared to consolidated operating income of $22.3 million.
 
     Investment discretion of the Company's insurance subsidiaries is governed
by investment guidelines which comply with the Georgia Insurance Code. The
Company has established a two-tiered investment portfolio. Liquidity needs are
met through an internally managed investment portfolio (the "Internal
Portfolio") which is invested primarily in institutional money market accounts
and short-term government agency notes. Those assets not required for liquidity
are transferred to external money managers for long-term investment in the fixed
income and equity markets (the "External Portfolio"). Applicable assets in both
portfolios are held in custody by Wachovia Bank. All bonds in the investment
portfolios must have quality ratings of "A" or higher by Moody's Investors
Service and Standard & Poor's Ratings Group. The equity investments in the
Company's investment portfolios are highly diversified and limited to high
quality, dividend paying, domestic equity securities. There are no derivative
securities or instruments in the Company's investment portfolios. The Board of
Directors of each insurance subsidiary reviews and approves investment related
activities at least quarterly.
 
     BCBSGA's investment portfolio represented 69% of the Company's consolidated
investment portfolio at December 31, 1998. BCBSGA's Internal Portfolio is
managed by management staff, who report to the Treasurer and Chief Financial
Officer ("CFO") of BCBSGA who in turn reports to the Treasurer of the Company.
BCBSGA's External Portfolio is managed by independent advisory firms and is
subject to the review of BCBSGA's CFO and the Finance Committee of BCBSGA's
Board of Directors. The CFO monitors the performance of BCBSGA's investment
managers and compares their performance on a monthly basis to predetermined
benchmarks. The Finance Committee of the BCBSGA Board of Directors formally
reviews performance of each investment manager on a quarterly basis. Performance
is also calculated quarterly by an outside consultant, ING Baring Furman Selz
LLC, including benchmarking to an extensive group of other professionally
managed investment portfolios. The investment process is dynamic and continually
reviewed for improvements and refinements.
 
                                       10
<PAGE>   13
 
     Shown below are the Company's consolidated invested assets by category. The
following tables should be read in conjunction with the accompanying
Consolidated Financial Statements and the related Notes thereto at Item 8 of
this Form 10-K and with the discussion at Item 7A. "Quantitative and Qualitative
Disclosures About Market Risk" of this Form 10-K.
 
                            INVESTMENTS BY CATEGORY
 
<TABLE>
<CAPTION>
                                                                     AS OF                 AS OF
                                                               DECEMBER 31, 1998     DECEMBER 31, 1997
                                                              -------------------   -------------------
                                                                           % OF                  % OF
                                                              CARRYING   CARRYING   CARRYING   CARRYING
                                                               VALUE      VALUE      VALUE      VALUE
                                                              --------   --------   --------   --------
                                                                           ($ IN MILLIONS)
<S>                                                           <C>        <C>        <C>        <C>
Fixed maturities............................................   $239.5      73.6%     $192.9      68.8%
Equity securities...........................................     76.9      23.6        67.9      24.2
Short-term investments......................................      9.2       2.8        19.5       7.0
                                                               ======     =====      ======     =====
          Total investments.................................   $325.6     100.0%     $280.3     100.0%
                                                               ======     =====      ======     =====
</TABLE>
 
     The Company's consolidated portfolio is comprised primarily of highly
liquid investment securities. The Company's fixed maturities consist of United
States Government securities and corporate securities. At December 31, 1998, all
of the Company's fixed maturities consisted of instruments bearing fixed, rather
than variable, rates of interest. The following summarizes the Company's fixed
maturities by category.
 
                          FIXED MATURITIES BY CATEGORY
 
<TABLE>
<CAPTION>
                                                                     AS OF
                                                               DECEMBER 31, 1998
                                                              -------------------
                                                                           % OF
                                                              CARRYING   CARRYING
                                                               VALUE      VALUE
                                                              --------   --------
                                                                ($ IN MILLIONS)
<S>                                                           <C>        <C>
U.S. Treasury securities and obligations of U.S. government
  agencies..................................................   $163.0      68.1%
Corporate securities........................................     54.7      22.8
Mortgage-backed securities..................................     21.8       9.1
                                                               ------     -----
          Total fixed maturities............................   $239.5     100.0%
                                                               ======     =====
</TABLE>
 
     The following table summarizes the Company's fixed maturities by
contractual maturity. Expected maturities will differ from contractual
maturities because borrowers may have the right to call or prepay obligations
with or without a call or prepayment premium.
 
                     FIXED MATURITIES BY MATURITY CATEGORY
 
<TABLE>
<CAPTION>
                                                                     AS OF
                                                               DECEMBER 31, 1998
                                                              -------------------
                                                                           % OF
                                                              CARRYING   CARRYING
                                                               VALUE      VALUE
                                                              --------   --------
                                                                ($ IN MILLIONS)
<S>                                                           <C>        <C>
Due in one year or less.....................................   $ 31.6      13.2%
Due after one year through five years.......................     84.8      35.4
Due after five years through ten years......................     99.6      41.6
Due after ten years.........................................      1.7       0.7
Mortgage-backed securities..................................     21.8       9.1
                                                               ------     -----
          Total fixed maturities............................   $239.5     100.0%
                                                               ======     =====
</TABLE>
 
                                       11
<PAGE>   14
 
COMPETITION
 
     The market for each of the Company's products in Georgia is highly
competitive on both a regional and statewide basis and has undergone significant
changes in recent years. From a competitive perspective, the market is generally
addressed by geography, product and employer group size. Significant competition
exists in the metropolitan Atlanta market for managed care products, while
outside of this area the majority of competition currently is for either
traditional indemnity or PPO products, although new market entrants with managed
care capabilities are beginning to penetrate this area. The Company has many
competitors in its indemnity, PPO and HMO operations, many of which have
substantially greater financial and other resources than the Company. However,
based upon current data available in publications circulated generally and
within the health care industry, no single competitor is dominant in any one of
the Company's eight geographic markets in the state.
 
     Price competition among benefit plans in the Company's markets,
particularly the Atlanta metropolitan area, has intensified. According to public
information, as of September 1998, 86% of the Georgia HMO and POS market was
held by the Company and four national competitors: Kaiser Foundation Health Plan
of Georgia, Inc., United Health Care of Georgia, Inc., Prudential Health Care
Plan of Georgia, Inc. and Aetna U.S. Healthcare of Georgia, Inc. The Company's
share was 31% and the largest competitor's share, Kaiser Foundation Health, was
18%. Because the Company's existing business operations are confined to markets
within the State of Georgia, the Company currently is unable to subsidize losses
in these markets with profits from other markets as national companies can. The
Company believes that certain larger, national competitors are able to subsidize
losses in the Georgia market with profits from other markets in which they
operate and could pursue such a strategy in the Company's markets in an effort
to increase market share. The national health care industry has recently seen a
consolidation of companies that offer health care insurance, including
traditional indemnity and managed care products. In addition to intensifying
competition, this consolidation may result in corporations with enhanced
financial resources positioned to pursue a strategy of subsidizing losses to
increase their market position in Georgia.
 
     Further, future legislation at the federal and state levels may also result
in increased competition in the Company's markets. Competition may also be
affected by independent agents and brokers who sell the Company's health care
benefit plans as well as the benefit plans of the Company's competitors.
Additionally, provider-sponsored initiatives, through which certain hospital and
physician alliances compete with traditional means of health care financing, are
developing in some market segments. No assurance can be given that the Company
will be able to compete effectively with such competition in the future.
 
EMPLOYEES
 
     The Company had 2,494 employees at December 31, 1998. No Company employees
are represented by any union, and the Company believes that its relations with
its employees are satisfactory.
 
GOVERNMENT REGULATIONS
 
  Holding Company Regulation
 
     The Company is an insurance holding company and as such is subject to
regulation by the Georgia Insurance Department (the "Department"). Georgia
regulations require the filing of financial and other information concerning the
operations and interrelationships of entities within an insurance holding
company system. Such regulations extend to contracts, loans, dividends,
distributions, management agreements and other transactions between holding
company entities. Certain of these agreements must be submitted to the
Department for approval, based on concepts of fair and reasonable terms,
reasonable charges and fees, and the condition that following any such related
party transaction the insurer's surplus with regard to policyholders shall be
reasonable in relation to the insurer's outstanding liabilities and adequate to
meet its financial needs.
 
                                       12
<PAGE>   15
 
  Regulation of Insurance Subsidiaries
 
     BCBSGA, HMO-Ga and GGL are subject to comprehensive regulation. The
Department has broad authority to regulate, among other things: licenses to
transact the business of insurance; investment activity of insurers; premium
rates for certain insurance products; trade practices of insurers; agent
licensing; policy forms; insurance underwriting and claims practices; and
reserve adequacy and solvency. BCBSGA, HMO-Ga and GGL are required to file
detailed annual reports with the Department. BCBSGA, HMO-Ga and GGL's accounts
are subject to periodic examination by the Department. The regulation of
insurance holding company systems includes the acquisition and sales of licensed
entities, payment of dividends by regulated entities, the terms of affiliate
transactions and other related matters. HMO-Ga is a licensed HMO under Georgia
insurance law. Pursuant to Georgia law, HMOs are considered insurers and, except
as specifically provided to the contrary, are regulated by the same provisions
that apply with respect to BCBSGA and GGL.
 
  Change or Acquisition of Control
 
     Georgia insurance law requires the Commissioner's prior approval of any
transaction affecting change of control of, or other acquisition of, a domestic
insurer, or of any person or entity that controls a domestic insurer. In
general, a presumption of control exists if any person or entity beneficially
owns or controls 10% or more of the voting securities of a domestic insurer or
of a person that controls a domestic insurer. Any direct or indirect change in
control of a domestic insurer or an entity which controls a domestic insurer is
subject to the approval of the Commissioner, following a public hearing.
 
  Examinations
 
     BCBSGA, HMO-Ga and GGL are each subject to examination of their affairs by
the Department. The Department conducts triennial examinations of insurance
companies domiciled in Georgia. During the last quarter of 1995, the Department
completed its financial examination of BCBSGA, HMO-Ga and GGL for the period
January 1, 1992 through December 31, 1994. As a result of that examination, no
matters were raised by the Department that would have a material impact upon the
statutory financial statements of either BCBSGA, HMO-Ga or GGL. In May 1998, the
Department began its triennial financial examination covering the years January
1, 1995 through December 31, 1997, and during fourth quarter 1998, the
Department began a routine Market Conduct examination of BCBSGA's operations.
The examinations are not complete as of the date of this filing. Management
expects that there will be no findings that would have a material impact on the
statutory financial statements of BCBSGA, HMO-Ga or GGL.
 
TRADE NAMES, TRADE MARKS, SERVICE MARKS AND LICENSES
 
     Pursuant to licenses from BCBSA, the Company has the exclusive right to
conduct business under the name "Blue Cross and Blue Shield of Georgia" and to
use the Blue Cross and Blue Shield names, trademarks and service marks for all
of the indemnity, life and managed health care products and services it offers
in all 159 counties in Georgia. The Company believes that the well-recognized
Blue Cross and Blue Shield names, trademarks and service marks will continue to
provide a significant marketing advantage in its licensed service area,
particularly as competitive pressures narrow differences among health care
benefit plans. The Company cannot do business using the Blue Cross and Blue
Shield names, trademarks and service marks outside of its licensed service area.
 
ITEM 2.  PROPERTIES
 
     The Company's corporate headquarters occupies approximately 261,000 square
feet of leased space in a 17-story building located in Atlanta, Georgia, and its
main claims operations center occupies approximately 176,000 square feet of
owned space in a four-story building located in Columbus, Georgia. Both
facilities are in desirable and accessible locations. The Company leases space
in 25 other buildings in communities throughout Georgia for a variety of
corporate purposes. If the current rate of the Company's business growth
continues, additional space may be required.
 
                                       13
<PAGE>   16
 
ITEM 3.  LEGAL PROCEEDINGS
 
     The Company and its subsidiaries from time to time are parties to legal
proceedings arising out of, and incidental to, the Company's normal course of
business. In the opinion of the Company, adequate provision has been made for
losses which may result from currently known actions and, accordingly, the
outcome of these proceedings is not expected to have a material adverse effect
on the financial condition of the Company.
 
     On December 17, 1998, Plaintiffs Rickey Underhill, Jim Kerscher, Janice
Young, Richard Collins, Greg Lane and Keith Page, individually and on behalf of
all others similarly situated (collectively, the "Bartow County Plaintiffs"),
filed a lawsuit against the Company and BCBSGA in the Superior Court of Bartow
County ("the Court of Bartow"), State of Georgia, bearing Civil Action File No.
CV98-2656. The Bartow County Plaintiffs identify themselves as six individuals
who were entitled to receive shares of the Company's stock in connection with
the Conversion of BCBSGA from a non-profit corporation to a regular business
corporation. The Bartow County Plaintiffs assert claims for specific performance
and breach of provisions of the Insurance Code of Georgia and request
declaratory judgment and certification of a class action consisting of all
persons who were "eligible subscribers" of the Company on September 1, 1995, but
who did not become holders of Class A Stock of the Company because their
eligible coverage terminated prior to February 1, 1996. The Bartow County
Plaintiffs allege that they and the members of the purported class are entitled
to receive shares of Class A Stock in the Company. The Bartow County Plaintiffs
allege alternatively that offering materials disseminated by BCBSGA during 1996
relating to Class A Stock of the Company were not disseminated to the Bartow
County Plaintiffs and that the Bartow County Plaintiffs and the purported class
members are entitled to an award of damages in excess of $2.5 million. On
January 28, 1999, the Company and BCBSGA filed answers and a motion to dismiss.
The case remains pending. Only preliminary discovery has taken place as of this
date. After considering the complaint, management of the Company believes the
case to be without merit and, in any event, believes that its impact on the
assets of the Company, if any, would not be material.
 
     On September 18, 1998, Plaintiffs Allen Saravuth, Nga Nguyen, Chansamone
Sengsavath and Fatana Pirzad, individually and on behalf of all others similarly
situated (collectively, the "Richmond County Plaintiffs), filed a lawsuit
against the Company, BCBSGA, James L. Laboon, Jr., Fred L. Tolbert, Jr., Richard
D. Shirk, James E. Albright, W. Daniel Barker, Elizabeth W. Camp, Louis H.
Felder, M.D., Edward M. Gillespie, Joseph D. Greene, Mel H. Gregory, Jr., Frank
J. Hanna, III, R. Pierce Head, Jr., Charles H. Keaton, James H. Leigh, Jr.,
M.D., Julia L. Mitchell-Ivey, Charles R. Underwood, M.D.,W. Jerry Vereen, A. Max
Walker, Dan H. Willoughby, M.D., Joe M. Young, and John B. Zellars
(collectively, the "Defendant Directors") in the Superior Court of Richmond
County ("the Court of Richmond"), State of Georgia, bearing Civil Action File
No. 98-RCCV-806. In addition, the Richmond County Plaintiffs filed a Motion for
Temporary Restraining Order and Interlocutory Injunctive Relief, which was heard
and denied by the Court of Richmond on September 21, 1998. The Richmond County
Plaintiffs identify themselves as four individuals who were entitled to receive
shares of the Company's stock in connection with the Conversion of BCBSGA from a
non-profit corporation to a regular business corporation. The Richmond County
Plaintiffs assert claims for specific performance, fraud, breach of provisions
of the Insurance Code of Georgia and breach of fiduciary duty and requested
declaratory judgment and certification of a class action consisting of all
persons who were "eligible subscribers" of BCBSGA as of February 1, 1996, and
who did not become holders of Class A Stock of the Company. The Richmond County
Plaintiffs allege that they and the members of the purported class are entitled
to receive shares of Class A Stock in the Company. The Richmond County
Plaintiffs allege alternatively that offering materials disseminated by BCBSGA
during 1996 relating to Class A Stock of the Company contained materially
misleading and deceptive statements and omissions and that the Richmond County
Plaintiffs and the purported class members are entitled to an award of damages
in excess of $100 million. The Richmond County Plaintiffs also assert derivative
causes of action against the Defendant Directors alleging that the Defendant
Directors breached fiduciary duties by, among other things, approving the
placement and issuance of Class B Stock in the Company during 1996, the issuance
of Class A Stock in the Company, the settlement of the Let's Get Together, Inc.
et al. v. Insurance Commissioner, et al., Civil Action E-61714 (Superior Court
of Fulton County, Georgia) lawsuit, and certain management compensation. On
October 28, 1998, the Company and BCBSGA filed answers and a motion to dismiss.
A declaratory
 
                                       14
<PAGE>   17
 
judgment hearing was held December 9 and 10, 1998, solely with respect to
whether, as a matter of law, the plaintiffs were to be recognized as
shareholders of the Company. On December 17, 1998, the Richmond County court
ruled in favor of the plaintiffs. None of the other matters have been
considered. The Company filed an appeal with the Supreme Court of Georgia on
January 26, 1999. The Supreme Court accepted jurisdiction and granted the matter
expedited treatment. Oral argument was heard on March 8, 1999, though no
decision has been delivered. The Company's Board of Directors has appointed a
Special Litigation Committee to review the derivative claims. Management of the
Company believes the case to be without merit and, in any event, believes that
its impact on the assets of the Company, if any, would not be material.
 
ITEM 4.  SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
 
     An annual meeting of holders of Class A Stock was called for December 30,
1998 for the election of Class A Designated Directors (as defined herein) as
provided in the Company's Articles of Incorporation. Following the ruling
rendered by the Court of Richmond on December 17, 1998, the Company adjourned
the meeting until February 2, 1999. At this adjourned meeting, the meeting was
further adjourned to an undetermined date, pending a ruling of the Supreme Court
of Georgia on the Company's appeal of the Court of Richmond ruling. Following
this adjournment, there existed two vacancies on the Board of Directors for
Class A Designated Directors. In order to comply with the Plan of Conversion
approved by the Commissioner in connection with the Conversion, effective March
15, 1999 the Board of Directors unanimously appointed John W. Robinson and
Warren Y. Jobe as Class A Designated Directors in Class One and Class Three,
respectively. Messrs. Robinson and Jobe will serve as Directors until the 1999
Annual Meeting and the 2001 Annual Meeting, respectively, or, in each case,
until his successor is elected and qualified. The holders of Class A Stock are
expected to ratify these appointments at the 1999 Annual Meeting. Until the 1999
Annual Meeting, the other Directors of the Company whose terms continued after
the meeting of holders of Class B Stock held on September 15, 1998 shall
continue to serve as Directors of the Company. For biographical and other
information regarding the Directors of the Company, see Item 10. "Directors and
Executive Officers of the Registrant" in Part III of this Form 10-K.
 
                                       15
<PAGE>   18
 
                                    PART II
 
ITEM 5.  MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
 
     As of February 28, 1999, the Company had 70,323 Class A shareholders of
record. Presently, there is no market for the Class A Stock or any equity
securities of the Company. The Company does not anticipate that any dividends
will be paid on Class A Stock.
 
     On August 21, 1998, following a hearing, the judge entered a final order
approving the stipulation and agreement of settlement (the "Settlement") in the
Let's Get Together, Inc. et al v. Insurance Commissioner, et al. lawsuit (the
"Lawsuit") filed in the Superior Court of Fulton County against the Company on
behalf of a number of non-profit organizations (the "Plaintiffs") alleging that
the reserves of BCBSGA transferred to the Company in connection with the
Conversion pursuant to the authorizing legislation for the Conversion should
instead have been transferred to non-profit entities in the State of Georgia. In
carrying out the Settlement, which became effective on September 21, 1998, the
Company established a non-profit foundation (the "Foundation") for the
advancement of health care in the State of Georgia and paid to the Foundation,
as endowment, and to the Plaintiffs' lawyers an aggregate of $1.0 million in
cash, 57,772 shares of Class A Stock and 63,853 warrants (the "Warrants")
exercisable for shares of non-voting Series A Preferred Stock (the "Series A
Stock") in the Company. The aggregate exercise price for the Warrants is $21
million.
 
     The Class A Stock and the Series A Stock were issued to the Foundation and
the Plantiffs' lawyers pursuant to an exemption from registration under Section
3(a)(10) of the Securities Act, which provides for an exemption from
registration where the terms and conditions of such issuance are approved, after
a hearing upon the fairness of such terms and conditions, by any court.
 
     The shares of Class A Stock issued pursuant to the Settlement are subject
to a voting restriction so that the amount of shares voted by any shareholder
does not exceed 5% of the outstanding Class A Stock. Each share of Series A
Stock entitles holders thereof to the same economic benefits as shares of Class
A Stock, but the Series A Stock has no voting rights of any kind. In the event
of a statutory vote (such as the Merger) the Series A Stock is by its terms
converted to a participation right which also has no voting rights, but each
participation right is also entitled to all of the economic benefits of a share
of Class A Stock. The Class A Stock is convertible into common stock of the
Company under the terms provided in the Articles of Incorporation of the Company
and as described in the Form S-1, Registration No. 333-2796, effective May 14,
1996.
 
                                       16
<PAGE>   19
 
ITEM 6.  SELECTED FINANCIAL DATA
 
     The following is Selected Consolidated Financial and Operating Data of
BCBSGA, HMO-Ga and all subsidiaries for the periods described therein prior to
the Conversion and of the Company for the period following the Conversion. The
following data, prepared in accordance with generally accepted accounting
principles, should be read in conjunction with the accompanying Consolidated
Financial Statements, the related Notes thereto at Item 8 of this Form 10-K and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" at Item 7 of this Form 10-K.
 
<TABLE>
<CAPTION>
                                                           YEAR ENDED DECEMBER 31,
                                           --------------------------------------------------------
                                              1998         1997        1996       1995       1994
                                           ----------   ----------   --------   --------   --------
                                                               ($ IN THOUSANDS)
<S>                                        <C>          <C>          <C>        <C>        <C>
STATEMENT OF INCOME DATA:
  Revenues:
     Premium revenue.....................  $1,189,665   $  989,789   $818,351   $709,425   $635,177
     Management services revenue.........     117,963       96,470     87,262     74,297     67,768
     Investment and other income.........      17,183       17,259     14,358     11,980      9,462
     Realized gains......................       9,254       11,300      4,113     15,265      2,512
                                           ----------   ----------   --------   --------   --------
       Total revenues....................   1,334,065    1,114,818    924,084    810,967    714,919
  Benefits expense.......................   1,032,520      881,554    702,234    613,031    531,973
  Operating expenses.....................     279,218      233,651    202,072    176,387    157,864
                                           ----------   ----------   --------   --------   --------
  Operating income (loss)................      22,327         (387)    19,778     21,549     25,082
  Endowment of a non-profit
     foundation(1).......................     (76,157)          --         --         --         --
  Non-operating income...................         255        1,275      1,275         --         --
                                           ----------   ----------   --------   --------   --------
  Income (loss) before income taxes and
     minority interests..................     (53,575)         888     21,053     21,549     25,082
  Income tax expense (benefit)(2)........       2,073       (2,050)     3,159      3,857      5,621
  Minority interests in (earnings) losses
     of joint venture investments........      (1,520)       1,460       (421)      (282)        --
                                           ----------   ----------   --------   --------   --------
  Net income (loss)......................  $  (57,168)  $    4,398   $ 17,473   $ 17,410   $ 19,461
                                           ==========   ==========   ========   ========   ========
</TABLE>
 
---------------
 
(1) During 1998, the Company endowed a non-profit foundation (See Note 8 of the
    accompanying Consolidated Financial Statements at Item 8 of this Form 10-K
    and "Management Discussion and Analysis of Financial Condition and Results
    of Operations" at Item 7 of this Form 10-K.)
(2) The Company pays taxes under the alternative minimum tax system as the
    result of a special deduction available under Section 833(b) of the Internal
    Revenue Code (See "Management's Discussion and Analysis of Financial
    Condition and Results of Operations -- Overview" at Item 7 of this Form
    10-K). If the deduction were no longer available, BCBSGA would be subject to
    federal income taxes at the regular corporate tax rate, which is currently
    35%. See "Certain Federal Income Tax Consequences -- Section 833 of the
    Code" in the Form S-1, Registration No. 333-2796, effective May 14, 1996 and
    subsequent amendments, as incorporated herein by reference. However, in
    1997, the utilization of net operating loss carryforwards, not the special
    deduction under Section 833(b), subjected the Company to alternative minimum
    tax.
 
     Earnings per share are omitted because such data is not meaningful at the
present time due to the likely dilutive events that will occur prior to or in
conjunction with the conversion of the Class A Stock or the Preferred Stock.
Currently there is no public trading market for the Company's Class A Stock or
any equity securities of the Company.
 
                                       17
<PAGE>   20
 
<TABLE>
<CAPTION>
                                                       YEAR ENDED DECEMBER 31,
                                       --------------------------------------------------------
                                          1998         1997        1996       1995       1994
                                       ----------   ----------   --------   --------   --------
                                                           ($ IN THOUSANDS)
<S>                                    <C>          <C>          <C>        <C>        <C>
OPERATING DATA BY PRODUCT GROUP:
Premium Revenue by Product Group:
  HMO and POS........................  $  503,135   $  331,393   $180,432   $ 89,943   $ 48,375
  Indemnity and PPO..................     670,588      643,626    627,155    611,211    580,129
  Life...............................      15,942       14,770     10,764      8,271      6,673
                                       ----------   ----------   --------   --------   --------
  Total premium revenue..............   1,189,665      989,789    818,351    709,425    635,177
Management services revenue..........     117,963       96,470     87,262     74,297     67,768
                                       ----------   ----------   --------   --------   --------
       Total premium revenue and
          management services
          revenue....................  $1,307,628   $1,086,259   $905,613   $783,722   $702,945
                                       ==========   ==========   ========   ========   ========
As a Percentage of Premium Revenue:
  HMO and POS........................        42.3%        33.5%      22.1%      12.7%       7.6%
  Indemnity and PPO..................        56.4%        65.0%      76.6%      86.2%      91.3%
  Life...............................         1.3%         1.5%       1.3%       1.1%       1.1%
                                       ----------   ----------   --------   --------   --------
       Total.........................       100.0%       100.0%     100.0%     100.0%     100.0%
                                       ==========   ==========   ========   ========   ========
Loss Ratio (Benefits Expense as a
  Percentage of Premium Revenue):
  HMO and POS........................        85.6%        89.5%      84.7%      80.0%      85.7%
  Indemnity and PPO..................        88.5%        89.6%      86.7%      87.8%      84.0%
  Life...............................        52.6%        52.9%      53.9%      56.5%      52.2%
                                       ----------   ----------   --------   --------   --------
       Total loss ratio..............        86.8%        89.1%      85.8%      86.4%      83.8%
                                       ==========   ==========   ========   ========   ========
Operating Expense Ratio (Operating
  Expenses as a Percentage of Premium
  Revenue and Management Services
  Revenue)...........................        21.4%        21.5%      22.3%      22.5%      22.5%
                                       ==========   ==========   ========   ========   ========
Effective Income Tax Rate(1).........         3.9%      -230.9%      15.0%      17.9%      22.4%
                                       ==========   ==========   ========   ========   ========
BALANCE SHEET DATA (AT PERIOD END):
Cash & investments...................  $  377,830   $  315,323   $307,190   $223,994   $201,976
Total assets.........................     587,342      496,532    459,131    353,468    342,210
Total estimated benefit
  liabilities........................     184,075      149,581    119,511    110,374    102,046
Total liabilities....................     325,018      254,850    224,916    180,429    193,540
Mandatorily redeemable preferred
  stock..............................      46,645       46,645     46,645         --         --
Common Stock.........................           4            4          4         --         --
Additional paid-in capital(2)........      45,188           --         --         --         --
Stock warrants exercisable(2)........      29,968           --         --         --         --
Shareholders' equity.................     215,679      195,037    187,570    173,039    148,670
</TABLE>
 
---------------
 
(1) The Company pays taxes under the alternative minimum tax system as the
    result of a special deduction available under Section 833(b) of the Internal
    Revenue Code (See "Management's Discussion and Analysis of Financial
    Condition and Results of Operations-Overview" at Item 7 of this Form 10-K).
    If the deduction were no longer available, BCBSGA would be subject to
    federal income taxes at the regular corporate tax rate, which is currently
    35%. See "Certain Federal Income Tax Consequences -- Section 833 of the
    Code" in the Form S-1, Registration No. 333-2796, effective May 14, 1996 and
    subsequent amendments, as incorporated herein by reference. However, in
    1997, the utilization of net operating loss carryforwards, not the special
    deduction under Section 833(b), subjected the Company to alternative minimum
    tax.
(2) During 1998, the Company endowed a non-profit foundation (See Note 8 of the
    accompanying Consolidated Financial Statements at Item 8 of this Form 10-K
    and "Management Discussion and Analysis of Financial Condition and Results
    of Operations" at Item 7 of this Form 10-K).
 
                                       18
<PAGE>   21
 
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
        OF OPERATIONS
 
     The following discussion should be read in conjunction with the
accompanying Consolidated Financial Statements and the related Notes thereto at
Item 8 of this Form 10-K. The Company's actual future results could differ
materially from its historical results, depending on, among other factors,
changing rates of utilization of medical services by its enrollees and changing
rates of medical service costs.
 
OVERVIEW
 
     The Company was organized on February 2, 1996 to become a holding company
for BCBSGA and its subsidiaries upon the Conversion on February 2, 1996. During
1997, BCBSGA made a distribution of its investments in certain subsidiaries,
including HMO-Ga and GBG to the holding company. The discussions below relate to
the historical operations of BCBSGA, HMO-Ga and all subsidiaries prior to
February 2, 1996 and to the Company (including BCBSGA, HMO-Ga and all
subsidiaries on a consolidated basis) for the period following the Conversion.
 
     Historically, substantially all of the Company's premium and management
services revenues were derived from its traditional indemnity and PPO business;
however, the growth of revenues and earnings in recent years is the result of a
strategic shift in focus that began in 1992. As a result of the change in
strategy, HMO and POS premiums have grown to 42% at the end of 1998 from 8% of
total premiums at the end of 1994. Membership for fully insured HMO and POS
products has grown to over 358,000 members at the end of 1998 from 38,000
members at the end of 1994. Additionally, HMO and POS membership under
management services agreements totaled 82,000 and 29,000 at the end of 1998 and
1994, respectively, bringing total HMO and POS membership served to 440,000 and
67,000 for the same periods. The growth in the HMO and POS products is
attributable to new sales, in-group-growth and, to a lesser degree, migration of
business from other traditional indemnity products offered by the Company. Since
1995, medical services for substantially all of the Company's HMO and POS
products sold were provided through its CHPNs.
 
     Management services revenue consists of fees for administrative services
provided to commercial employer groups under self-funded arrangements, including
claims processing, access to provider networks and other services rendered to
third parties. Management services revenue also includes reimbursements for
administrative expenses incurred in performing services as agent for federal and
state government programs and for the national Blue Cross Blue Shield interplan
system. Membership in these administrative services contracts has grown to
870,000 members at the end of 1998 from 825,000 members at the end of 1994.
 
     Membership served under insurance products and management services
arrangements totaled 1,620,000 members at the end of 1998 compared to 1,217,000
members at the end of 1994.
 
     Prudent management of the Company's investments has played a significant
role in developing and maintaining the Company's financial strength. Investment
earnings, including realized gains on sales of investments, have represented an
average of over 128% of operating income during the period January 1, 1994
through December 31, 1998.
 
     Benefits expense consists primarily of health care claims and payments to
physicians, hospitals and other health care providers. The Company's
profitability largely depends on the ability to accurately predict and
effectively manage these health care costs. Accordingly, the Company continues
its efforts to improve contractual terms with providers for the delivery of
medical services, and effectively manage business mix changes from indemnity and
PPO products into HMO and POS products.
 
     The Company's emphasis on managed care products, and the expenses
associated with the change in its infrastructure to support managed care
products and its investment in a Strategic Information Systems Plan, is
reflected in its level of operating expenses as a percentage of premium and
management services revenues, an average of 22% over the last five years.
 
     In the State of Georgia, insurers are required to pay a tax on insurance
premiums in lieu of a state income tax. Premium taxes are charged to operating
expenses as incurred.
 
                                       19
<PAGE>   22
 
     The Company pays federal taxes under the alternative minimum tax system as
the result of a special deduction available under Section 833(b) of the Internal
Revenue Code. If the deduction were no longer available, BCBSGA would be subject
to federal income taxes at the regular corporate tax rate, which is currently
35%. See "Certain Federal Income Tax Consequences -- Section 833 of the Code" in
the Form S-1, Registration No. 333-2796, effective May 14, 1996 and subsequent
amendments, as incorporated herein by reference. However, in 1997, the
utilization of net operating loss carryforwards, not the special deduction under
Section 833(b), subjected the Company to alternative minimum tax.
 
     Significant health care legislation has been, and continues to be, proposed
at both the federal and state levels. Any such legislation could have a material
impact on the Company's business. With or without legislation, consumers and
employer groups are expected to continue to exert pressure on pricing of health
care products. To meet these demands, more predictable, lower cost products will
be required.
 
     Results of operations are directly affected by premium rate adequacy which
depends on pricing and underwriting decisions, the level of membership serviced
by and the performance by the Company's physician, hospital, pharmacy and
ancillary health care services networks (and since January 1995, by the
Company's CHPNs), estimates of medical benefits, health care utilization,
estimates of health care cost trends, effective administration of benefit
payments, operating efficiencies, investment returns and federal and state laws
and regulations.
 
RESULTS OF OPERATIONS
 
  1998 Compared to 1997
 
     Premium revenue increased 20% to $1,189.7 million for the year ended
December 31, 1998 from $989.8 million for the year ended December 31, 1997. The
Company's membership in its indemnity and managed care insurance products
increased to 750,000 members as of December 31, 1998 compared to 649,000 members
as of December 31, 1997. HMO and POS premiums increased $171.7 million to $503.1
million for the year ended December 31, 1998 resulting from a 34% increase in
insured membership and rate increases in the 1998 period. New sales,
in-group-growth, and to a lesser extent, migrations from traditional indemnity
products into HMO and POS products, continued to drive HMO and POS membership
growth to 358,000 members at December 31, 1998 from 267,000 members at December
31, 1997. Premium revenue for indemnity and PPO products increased $27.0 million
to $670.6 million for the year ended December 31, 1998, primarily as a result of
rate increases during the 1998 period, offset in part by a shift in product mix
as consumers selected products with lower cost benefit design in the 1998
period.
 
     Management services revenue increased to $118.0 million for the year ended
December 31, 1998 compared to $96.5 million for the year ended December 31,
1997, due primarily to increased administrative fee revenue from services
provided to self-funded employer groups, other third parties and network access
fees from other Blue Cross Blue Shield plans in the 1998 period. Membership in
self-funded employer groups increased to 870,000 members at December 31, 1998
from 863,000 members at December 31, 1997.
 
     Investment and other income for the year ended December 31, 1998 was $17.2
million, slightly below investment and other income for the prior year. Although
the Company's average investment portfolio increased year over year, the
investment return (excluding realized gains and losses) declined to 5.1% in 1998
due to lower interest rates compared to an investment return of 5.4% in 1997.
Additionally, other income in 1997 included $0.6 million related to
non-recurring income.
 
     Realized gains of $9.3 million on the sale of marketable securities for the
year ended December 31, 1998 were $2.0 million lower than gains realized in the
year ended December 31, 1997. The results in 1998 and 1997 are not necessarily
indicative of results to be expected in the future. The magnitude of realized
gains in any quarter can fluctuate due to fixed and equity market performance,
as well as timing of individual sale transactions, which are subject to
decisions made by individual investment portfolio managers or by the Finance
Committee of the Company's Board of Directors.
 
     The Company's loss ratio (benefits expense as a percentage of premium
revenue) improved to 86.8% for the year ended December 31, 1998 from 89.1% for
the year ended December 31, 1997. This was primarily a
 
                                       20
<PAGE>   23
 
result of rate increases in the 1998 period, actions to control medical costs
implemented in late 1997 and early 1998, and in part to an improvement in
payment patterns and claims trends from prior year's claims estimates,
principally for the Company's HMO and POS products. The loss ratio for HMO and
POS products improved to 85.6% for 1998 from 89.5% for 1997. The loss ratio for
indemnity and PPO products improved to 88.5% for the 1998 period from 89.6% for
the same period in 1997.
 
     Operating expenses increased 20% to $279.2 million for the year ended
December 31, 1998 from $233.7 million for the year ended December 31, 1997,
principally due to growth in the Company's infrastructure necessary to support
the increased HMO and POS membership base, information technology changes, Year
2000 readiness costs and Medicare Risk product development. Year 2000 readiness
costs were $4.6 million in 1998. Additionally, during the year ended December
31, 1998, the Company recognized increased operating expenses related to the
settlement of the Lawsuit and the proposed Merger with WellPoint. The operating
expense ratio (operating expenses as a percentage of premium revenue and
management services revenue) was 21.4% for the year ended December 31, 1998,
compared to 21.5% for the year ended December 31, 1997.
 
     On July 8, 1998, the Company entered into a stipulation and agreement of
settlement of the Lawsuit. The Company endowed a new non-profit foundation and
issued cash, Class A Stock and Warrants pursuant to the Settlement; in
connection with this transaction, the Company recorded a nonrecurring charge of
$76.2 million for the year ended December 31, 1998.
 
     In January 1998, a hospital purchased stock warrants exercisable for common
stock of one of the Company's CHPN subsidiaries in exchange for a note
receivable. In January 1997, a hospital purchased a 5% interest in one of the
Company's CHPN subsidiaries. These transactions were recorded as non-operating
income for the years ending December 31, 1998 and 1997.
 
     The Company recorded tax expense of $2.1 million for the 1998 period
compared to a tax benefit of $2.1 million for the 1997 period. Net tax expense
in 1998 is from the alternative minimum tax, increased for CHPN losses that are
not expected to generate benefit in the foreseeable future, offset by tax
benefits related to the settlement of the Lawsuit, and the difference in book
and tax bases in CHPN investments both reduced to expected realizable value. The
net tax benefit in 1997 included the utilization of loss carryforwards and tax
benefits from the Company's long-lived tax assets and the difference in book and
tax bases of its CHPN investments reduced to expected realizable value.
 
     As a result of the foregoing factors, operating income increased to $22.3
million for the year ended December 31, 1998 from an operating loss of $0.4
million for the year ended December 31, 1997. After the endowment of a
non-profit foundation, non-operating income and minority interests in (earnings)
losses of joint venture investments, the Company recognized a net loss of $57.2
million for the year ended December 31, 1998 compared to net income of $4.4
million for the year ended December 31, 1997.
 
  1997 Compared to 1996
 
     Premium revenue for 1997 was $989.8 million, an increase of 21% over the
premium revenues of $818.4 million for 1996. The Company's members with
indemnity and managed care insurance products increased 17% to 649,000 members
at December 31, 1997, up from 555,000 members at the end of the prior year. HMO
and POS premiums increased to $331.4 million for 1997, up from $180.4 million
for 1996, as a result of rate increases in 1997 and a 60% increase in membership
to over 266,000 members at December 31, 1997 from 166,000 members at December
31, 1996. New sales, in-group-growth, and to a lesser extent, migrations of
business from traditional indemnity products offered by the Company into HMO and
POS products, continued to drive HMO and POS membership growth. HMO and POS
membership under management services agreements totaled 70,000 and 58,000 at
December 31, 1997 and 1996, respectively, bringing total HMO and POS membership
served to 336,000 members and 224,000 members for the same periods. Premium
revenue for indemnity and PPO products increased $16.4 million to $643.6 million
for 1997 from $627.2 million for 1996 due to year over year rate increases of
over 3%.
 
     Management services revenue increased $9.2 million to $96.5 million for the
year ended December 31, 1997 compared to $87.3 million for the year ended
December 31, 1996 due primarily to increased
 
                                       21
<PAGE>   24
 
administrative fee revenue from services provided to commercial employer groups
under self-funded arrangements, other third parties and from network access fees
from other Blue Cross Blue Shield plans in the 1997 period. Membership in
self-funded employer groups increased to 863,000 members at December 31, 1997
from 861,000 members at December 31, 1996.
 
     Total membership served under insurance products and management services
arrangements totaled 1,512,000 members at year end 1997 and 1,416,000 at the end
of 1996.
 
     Investment and other income increased to $17.3 million in 1997 from $14.4
million in 1996 principally due to growth in the Company's investment portfolio,
to an improvement of the investment return (excluding realized gains and losses)
over the prior years to 5.4% up from 5.3%, and to an increase of $0.6 million in
non-recurring other income in the 1997 period.
 
     Realized gains of $11.3 million on the sale of marketable securities for
1997 were $7.2 million higher than gains realized for 1996. These results are
not necessarily indicative of results to be expected in the future. The
magnitude of realized gains in any period can fluctuate due to fixed income and
equity market performance, as well as timing of individual sale transactions,
which are subject to decisions made by individual investment portfolio managers
or by the Finance Committee of the Company's Board of Directors.
 
     The Company's total loss ratio increased to 89.1% for 1997 from 85.8% for
1996 as the Company experienced higher cost trends and utilization in all of its
managed care networks and increasing medical cost trends and higher utilization
in its indemnity and PPO products in all markets. Accordingly, the loss ratio
for HMO and POS products increased to 89.5% for 1997 from 84.7% for 1996 and the
loss ratio for indemnity and PPO products increased to 89.6% for 1997 from 86.7%
for 1996.
 
     Operating expenses increased 16% to $233.7 million for 1997 from $202.1
million for 1996, principally due to growth in the Company's infrastructure
necessary to support its Medicare Risk product development, information
technology development costs and the increased HMO and POS membership base.
Information technology costs for 1997 included approximately $2.2 million
incurred for Year 2000 computer software readiness. As a result of operating
expenses increasing at a slower rate of growth than premium and management
services revenue, the operating expense ratio decreased to 21.5% for 1997, from
22.3% for 1996.
 
     On May 23, 1996, a hospital purchased a 5% interest in one of BCBSGA's CHPN
subsidiaries. On January 1, 1997, another hospital purchased a 5% interest in
the same CHPN subsidiary. These transactions were recorded as non-operating
income for 1997 and 1996, respectively.
 
     The Company recorded a tax benefit of $2.1 million for 1997 compared to tax
expense of $3.2 million in 1996. The net tax benefit in 1997 included the
utilization of loss carryforwards as well as tax benefits reduced to expected
realizable value from the Company's long-lived tax assets and differences in
book and tax bases of its CHPN investments offset by CHPN losses that are not
expected to generate benefit in the foreseeable future. The net tax expense of
$3.2 million in 1996 consisted of federal alternative minimum tax reduced
primarily by a benefit expected to be realized from the Company's long-lived tax
assets.
 
     As a result of the foregoing factors, net income decreased to $4.4 million
for 1997 compared to net income of $17.5 million in 1996.
 
LIQUIDITY AND CAPITAL RESOURCES
 
  Liquidity
 
     The Company has both short-term and long-term liquidity needs and has
structured its investment portfolios accordingly. Of the Company's total
investment portfolio at December 31, 1998, $304.3 million is held at its
insurance subsidiaries and is invested subject to limitations prescribed by
Georgia insurance statutes. Short-term liquidity needs to fund the Company's
operating costs, as well as payment obligations to its customers, are met from
funds invested primarily in institutional money market accounts and short-term
government agency notes. Assets not required for short-term liquidity needs are
transferred to a portfolio of investments in the fixed income and equity
markets. This portfolio, which provides reserves for future payment obligations
and funds for long-term liquidity needs, is managed by several independent
advisory firms. The
 
                                       22
<PAGE>   25
 
Company's investment policies are designed to provide liquidity to meet
anticipated payment obligations, to preserve capital and to maximize yield in
conformance with all regulatory requirements.
 
     Cash and investments were $377.8 million or 64% of total assets at December
31, 1998. The allocation of the Company's external investment portfolio has been
consistently maintained with over 68% in fixed maturities, all of which are
investment grade, and the balance in equity securities. Corporate and government
bonds are in issues with ratings of "A" or better by Moody's Investors Service
and Standard & Poor's Rating Group and investments in equity securities are in
domestic, dividend paying companies. The Company's portfolio currently does not
contain any derivative securities or instruments, or any real estate investments
or equity investments in corporations engaged solely in real estate activities.
Management believes that the Company's conservative investment portfolio
contributes to its financial stability.
 
     The Company's balance sheet has improved steadily since 1994, with total
assets growing to $587.3 million at December 31, 1998, up from $342.2 million at
December 31, 1994. A substantial portion of the increase was a result of growth
in the Company's cash and investment portfolio as it invested excess cash
generated from operating activities and investment earnings.
 
     The Company has historically satisfied its ordinary cash requirements from
operations. Net cash provided by operating activities amounted to $66.0 million
for 1998 compared to net cash provided by operating activities of $2.2 million
for 1997. This increase was primarily the result of higher operating earnings in
1998. Because of the nature of the Company's business, current cash flows from
operations are not necessarily expected to be indicative of future results;
however, the Company does believe its future cash resources will be adequate to
meet its operating requirements.
 
     The Company has analyzed its information technology and is executing a
comprehensive plan to either modify or replace portions of its software and
hardware so that those systems will properly function when processing
information involving dates after 1999. Total Year 2000 computer software
readiness costs are estimated at $13.0 million and are being funded through
operating cash flows. Through December 31, 1998, the Company has incurred $4.1
million in capital expenditures and has expensed $6.8 million as renovation
expenses when incurred, with $4.6 million expensed in the 1998 period. Remaining
Year 2000 capital expenditures and renovation expenses are estimated at $0.4
million and $1.7 million, respectively.
 
     In April 1996, BCBSGA obtained a $55 million insolvency line of credit with
a group of banks. The insolvency line of credit may be drawn on solely in the
event of any insolvency of BCBSGA to pay authorized insurance policy claims. The
insolvency line of credit is designed to satisfy certain membership standards of
the BCBSA from which the Company and certain of its subsidiaries have the
exclusive license to do business in Georgia under the name "Blue Cross and Blue
Shield", and to use the Blue Cross and Blue Shield names, trademarks, and
service marks with respect to the Company's indemnity, PPO, HMO, POS and life
insurance products. The Company does not anticipate making draws on the
insolvency line of credit.
 
     BCBSGA, HMO-Ga and GGL are domiciled in the state of Georgia and prepare
their statutory statements in accordance with accounting principles and
practices prescribed by the Georgia Insurance Department. These entities may
distribute dividends only out of realized profits (undistributed, accumulated,
net earnings since organization). The amount of dividends distributable each
year is limited to the greater of the prior year's net income determined on a
statutory basis or 10% of prior year statutory surplus. In addition, dividends
distributable by BCBSGA are further limited by the Conversion order (approved by
the Georgia Commissioner of Insurance on December 27, 1995 related to BCBSGA's
conversion to a for-profit corporation). Dividend distributions by BCBSGA,
HMO-Ga and GGL above these defined limits require a filing with, and in some
cases special approval by, the State of Georgia Insurance Commissioner.
 
  Capital Resources
 
     The Company anticipates that the principal elements of its future capital
requirements are information technology needs, product development, development
of potential medical access points, equity contributions to its CHPN joint
ventures and other subsidiaries and strategic acquisitions.
 
                                       23
<PAGE>   26
 
     Medical access point development, including physician practice acquisition,
the establishment of urgent care, 24-hour, or primary care clinic facilities, or
physician recruitment or relocation costs, could occur if the CHPNs are not able
to adequately cover the geography or range of services desired. The capital cost
to develop a medical access point varies because of differing factors such as
available facilities and extent of existing infrastructure. The Company
anticipates that the development of a single medical access point could cost in
the range of $0.5 million to $2.0 million. To date, no CHPN has produced an
access need that has translated into additional capital requirements.
 
     Under the terms of a revolving credit loan agreement with a group of banks
to finance the Company's CHPNs and other related costs, the Company could borrow
up to $9.0 million. Borrowings outstanding totaled $3.5 million at December 31,
1997 and 1996. During January 1998, the Company terminated its $9.0 million
revolving credit agreement and paid in full the $3.5 million note payable
outstanding at December 31, 1997.
 
     The Company believes that future capital requirements can be met with a
combination of (i) the Company's current resources, (ii) cash flows from
operations, (iii) borrowings and (iv) potential debt or equity offerings.
Management believes that the consummation of the Merger will provide the Company
with additional capital alternatives.
 
  Year 2000 Computer Software Readiness
 
     All companies that operate on mature computer software programs face the
difficult task of how to reprogram or replace their existing systems, which have
protocols that address dates in terms of two digits rather than four to define
the applicable year. Date sensitive software may recognize a date using "00" as
the year 1900 instead of the year 2000 (the "Year 2000 Issue"). The Company has
analyzed its systems and is executing a comprehensive plan to either modify or
replace portions of its software and hardware so that those systems will
properly function when processing information involving dates beyond December
31, 1999. The Company's plans to resolve the Year 2000 Issue involve the
following phases: (1) awareness and assessment; (2) renovation; (3) validation;
(4) implementation and (5) contingency planning.
 
     During 1997, the Company began its assessment of all systems that could be
significantly affected by the Year 2000 Issue. Detailed plans for renovation
were finalized in early 1998. At the end of February 1999, the Company's state
of Year 2000 readiness can be summarized as follows:
 
     - The Company's data center is already Year 2000 compliant; the Company
       anticipates that all client server, desk top computers and software,
       telephone and voice mail systems will be compliant by the end of June
       1999.
 
     - The Company's claims processing, membership billing and primary payment
       system, which currently handles over 70% of the Company's membership, is
       renovated; certification testing and production implementation is
       scheduled for completion by the end of June 1999.
 
     - The claims processing system for approximately 27% of the Company's
       membership (representing the non-HMO membership for its largest customer)
       is in the process of renovation and is scheduled for production
       implementation by the end of June 1999.
 
     - Expanded certification testing for the Company's other large customers,
       including the Federal Employee Program ("FEP") and for the national ITS
       system will continue through September 1999.
 
     - Medicare Part A processing system is Year 2000 compliant and
       certification testing will continue through June 30, 1999.
 
     - Electronic data interchange testing and implementation is scheduled for
       completion during the third quarter.
 
     - The general ledger and related financial system applications are targeted
       for production implementation at the start of the third quarter.
 
                                       24
<PAGE>   27
 
     - During the second quarter of 1999, the Company will assess certain other
       applications that were initially identified as systems which did not
       require a Year 2000 solution to determine if circumstances have changed
       such that a Year 2000 solution would now be required.
 
     - Security systems and elevators in leased and owned facilities have been
       certified by external parties as Year 2000 compliant.
 
     The Company utilizes both internal and external resources to renovate,
replace, test and implement the software and equipment to satisfy Year 2000
requirements. The total cost of the Year 2000 changes is estimated at $13.0
million and is being funded through operating cash flows. Through December 31,
1998, the Company has incurred $4.1 million in capital expenditures and has
expensed $6.8 million with $4.6 million expensed in the 1998 period. Remaining
Year 2000 costs are estimated at $2.1 million and include $1.7 million of
renovation expense. Costs of new software are included in capital expenditures
and will be amortized over three to five years.
 
     The Company conducts business electronically with certain external parties,
including suppliers, customers, physicians, hospitals and financial service
organizations. The Company has contacted substantially all of the external
parties with which it interacts to determine Year 2000 compliance issues.
Certification testing with external parties began in January 1999. Over 50% of
the physicians and hospitals that provide health care services to the Company's
1.6 million members reported that they were Year 2000 ready at the end of
February 1999. Certification testing of interfaces with vendors, suppliers,
physicians and hospitals will continue through October. The Company is also
dependent on interfaces with several government agencies, including HCFA and
FEP. Although the Company continues to monitor the Year 2000 readiness of
significant external parties, it cannot guarantee that the systems of external
parties upon which the Company depends will be Year 2000 ready.
 
     Additionally, the Company uses external money managers to manage its
investment portfolio. Historically, the Company has been dependent on its
investment advisors to timely monitor performance of its investment portfolio
against predetermined benchmarks. The effect of Year 2000 non-compliance by its
investment advisors, any of the national securities exchanges, certain financial
institutions or the corporations in which the Company has either a bond or stock
investment is not determinable. Non-compliance by these entities could have a
material impact on the Company's investment earnings which have accounted for a
significant portion of operating income over the last five years.
 
     The Company has received independent reviews from third parties of all its
Year 2000 compliance activities. At this time, neither the third party reviews
nor the Company's reviews have identified any business function which would
suffer from Year 2000 problems, if the Year 2000 plan is successfully
implemented. However, failure to successfully execute the plan or the failure of
external parties to achieve their Year 2000 compliance could have a material
adverse impact on the Company's financial position and results of operations.
 
     In late 1998, the Company began contingency planning with a third party
consulting group in the event that all phases of its Year 2000 plan are not
completed. For those risks which cannot be mitigated, the Company expects to
identify specific contingency actions by mid-1999. Due to increased requirements
for contingency planning as required by HCFA, testing of the contingency plan
has been scheduled for completion during third quarter 1999.
 
  Commitments and Contingencies
 
     Refer to Item 3.  "Legal Proceedings" of this Form 10-K which description
is incorporated herein by reference.
 
  Forward-Looking Statements
 
     The matters discussed in this Form 10-K contain certain forward-looking
statements made pursuant to the safe harbor provisions of Section 27A of the
Securities Act, and Section 21E of the Exchange Act, that represent the
Company's expectations or beliefs including, without limitation, statements
concerning future
                                       25
<PAGE>   28
 
revenue, future investment earnings and value and certain Year 2000 information.
Such statements involve risks and uncertainties that may cause actual results to
differ materially from those implied in this Form 10-K. Among other things,
these risks and uncertainties include: the need to accurately predict health
care costs and the ability to control future health care costs through product
and benefit design, underwriting criteria, utilization management and
negotiation of favorable provider and hospital contracts; changes in mandated
benefits, utilization rates, demographic characteristics, health care practices,
inflation, new pharmaceuticals and technologies, clusters of high-cost cases,
response to the regulatory environment and numerous other factors that are
beyond the Company's control and may adversely affect its ability to predict and
control health care costs and claims; periodic renegotiation of hospital and
other provider contracts coupled with continued consolidation of physician,
hospital and other provider groups which may result in increased health care
costs, limit the Company's ability to negotiate favorable rates and control
costs and subject the Company to increased credit risk or risks of network
stability related to provider groups; competitive pressure to contain premium
prices; fiscal concerns regarding the continued viability of
government-sponsored programs such as Medicare and the potential of decreasing
reimbursement rates for these programs; and any other limitations on the
Company's ability to increase or maintain its premium levels, design products,
select underwriting criteria or negotiate competitive provider contracts. Other
risk factors are described in the Company's Securities and Exchange Commission
reports and filings.
 
ITEM 7A.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
 
     With a primary emphasis on protection of capital, the Board of
Directors-approved guidelines seek appropriate asset distribution,
diversification of risk, and use of professional external money managers to
manage levels of risk. The Company maintains two investment portfolios. The
Company does not hold derivative financial instruments or derivative commodity
instruments in either portfolio and has no foreign currency exposure. The
Company is subject to market risk exposure associated with changes in interest
rates and equity prices in its investment portfolios. A sensitivity analysis to
measure potential losses in the market value of the Company's fixed income and
equity investments in both portfolios (both portfolios are classified as other
than trading) indicates the following market risk exposures:
 
          As of December 31, 1998, approximately 73.6% of the value ($239.5
     million) of the consolidated portfolios was held in financial instruments
     with fixed maturities, which are described above at Item 1.
     "Business -- Investment Portfolio." The primary market risk exposure is to
     changes in interest rates. An immediate one percentage point decrease in
     interest rates would increase the net aggregate market value of the fixed
     income portfolio by $8.1 million. An immediate one percentage point
     increase in interest rates would decrease the net aggregate market value of
     the fixed income portfolio by $8.2 million. Corporate Treasury manages
     interest rate exposure by maintaining a short duration. The modeling
     technique used by the Company considers the net present value of cash flows
     (including duration estimates). Short-term debt instruments, approximately
     2.8% of the value ($9.2 million) of the consolidated portfolios, with a
     fair value equal to their cost are excluded from the aggregate net market
     value market risk exposure analysis.
 
          The fair value of the common equity portfolio, excluding investments
     in affiliated entities (1% of the common equity portfolio), was $75.4
     million as of December 31, 1998. The equity portfolio is highly diversified
     and limited to high quality domestic dividend paying stocks. The primary
     market risk exposure is therefore an overall decline in market prices for
     balanced portfolios composed of the equity securities of seasoned domestic
     companies. Assuming an immediate 10% decrease in each equity security
     price, the hypothetical pre-tax loss in fair value is $7.5 million.
     Likewise, assuming an immediate 10% increase in each equity security price,
     the hypothetical pre-tax gain in fair value is $7.5 million. The Company's
     unrealized net gains and losses are recorded net of taxes as accumulated
     other comprehensive income in the Shareholders' equity section of the
     accompanying Consolidated Financial Statements at Item 8 of this Form 10-K.
 
     The Company does not anticipate any material change in primary market risk
exposure in 1999.
 
                                       26
<PAGE>   29
 
     The portfolios and their management are also described and discussed above
at Item 1. "Business -- Investment Portfolio" and Item 7. "Management's
Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources -- Liquidity."
 
ITEM 8.  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
 
     The financial statements listed in Item 14(a)(1) are included in this
report beginning on page F-1.
 
ITEM 9.  CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
 
     None.
 
                                       27
<PAGE>   30
 
                                    PART III
 
ITEM 10.  DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
 
     The following table sets forth certain information as of March 6, 1999
regarding each of the Directors of the Company and the executive officers of the
Company or BCBSGA. Each Director of the Company also serves as a Director of
BCBSGA.
 
<TABLE>
<CAPTION>
NAME                                         AGE                      TITLE
----                                         ---                      -----
<S>                                          <C>   <C>
James L. LaBoon, Jr........................  62    Chairman of the Board of Directors of the
                                                   Company and Blue Cross and Blue Shield of
                                                   Georgia, Inc.
Fred L. Tolbert, Jr........................  69    Vice Chairman of the Board of Directors of
                                                   the Company and Blue Cross and Blue Shield
                                                   of Georgia, Inc.
Richard D. Shirk...........................  53    Chief Executive Officer, President and
                                                   Director of the Company and Blue Cross and
                                                   Blue Shield of Georgia, Inc.
William A. Alias, Jr.......................  57    Director
Elizabeth W. Camp..........................  47    Director
Edward M. Gillespie........................  63    Director
Joseph D. Greene...........................  58    Director
Mel H. Gregory, Jr.........................  62    Director
Frank J. Hanna, III........................  37    Director
R. Pierce Head, Jr.........................  71    Director
Warren Y. Jobe.............................  58    Director
James H. Leigh, Jr., M.D...................  56    Director
James R. Lientz, Jr........................  55    Director
Julia L. Mitchell-Ivey.....................  66    Director
John W. Robinson, Jr.......................  59    Director
Arnold M. Tenenbaum........................  62    Director
W. Jerry Vereen............................  58    Director
Joe M. Young...............................  70    Director
John A. Harris.............................  48    Treasurer of the Company, Executive Vice
                                                   President of Finance & Strategic Planning
                                                   of Blue Cross and Blue Shield of Georgia,
                                                   Inc.
Hugh J. Stedman............................  51    Secretary of the Company, Senior Vice
                                                   President and General Counsel of Blue Cross
                                                   and Blue Shield of Georgia, Inc.
Raymond J. Colleran........................  56    Executive Vice President, Market Operations
                                                   of Blue Cross and Blue Shield of Georgia,
                                                   Inc.
Mark Kishel, M.D...........................  52    Executive Vice President, Chief Medical
                                                   Officer of Blue Cross and Blue Shield of
                                                   Georgia, Inc.
Richard F. Rivers..........................  45    Executive Vice President, Chief Operating
                                                   Officer of Blue Cross and Blue Shield of
                                                   Georgia, Inc.
Richard A. Steinhausen.....................  55    Executive Vice President, Service
                                                   Operations and Information Systems of Blue
                                                   Cross and Blue Shield of Georgia, Inc.
R. Neil Vannoy.............................  52    Executive Vice President, Community
                                                   Operations of Blue Cross and Blue Shield of
                                                   Georgia, Inc.
</TABLE>
 
                                       28
<PAGE>   31
 
     James L. LaBoon, Jr., is the Chairman and President of Athens First Bank
and Trust Company, an affiliate of Synovus Financial Corporation, in Athens,
Georgia. Prior to joining Athens Bank and Trust, Mr. LaBoon was Vice President
of Finance and Chief Financial Officer of Wilkins Industries, Inc. He presently
serves as a Director of Athens First Bank and Trust Company, Synovus Mortgage
Corp., Athens Y.M.C.A. and Athens Symphony, Inc. Mr. LaBoon has been Chairman of
the Board of Directors of BCBSGA since 1994 and a Director since 1984. He has
also served as a Director of the Company since its organization in February 1996
and as its Chairman since March 22, 1996. He is also a member of the Board of
Directors of GBG.
 
     Fred L. Tolbert, Jr., is retired as President of Albany First Federal
Savings and Loan in Albany, Georgia. He currently operates his own real estate
investment company in Albany, Georgia. Mr. Tolbert is a Trustee of the Darton
College Foundation. He has been a Director of BCBSGA since 1983 and Vice
Chairman of the Board since 1994. He has been Vice Chairman of the Board and a
Director of the Company since its organization in February 1996, and its Vice
Chairman since March 22, 1996. He also serves as Chairman of the Board of GBG.
 
     Richard D. Shirk joined BCBSGA as President and Chief Executive Officer on
April 1, 1992 and has been a Director of BCBSGA since that date. He has been
President, Chief Executive Officer and a Director of the Company since its
organization in February 1996. Mr. Shirk has been Chairman of GGL since 1992. He
is also a Director of HMO-Ga and GBG. Mr. Shirk has more than 25 years of
experience in employee benefits and managed care. He was a key senior officer of
Equicor in its formation in 1986, serving as President of the Southern Region.
When Equicor combined business operations with CIGNA in 1990, Mr. Shirk was
named Senior Vice President of the Central Region and coordinated the
integration of managed care operations of the companies. Mr. Shirk is a board
member of the Georgia Coalition for Health, the National Institute of Health
Care Management and the Georgia Caring Program for Children Foundation. He is a
Board Member of Central Atlanta Progress and serves as Chairman of the Georgia
U.S.O.C. Steering Committee, as well as on the Board of Directors of the Georgia
Chamber of Commerce and the Board of SSgA Mutual Funds. He is Director of the
Buckhead Coalition and Metropolitan Atlanta Chapter of the American Red Cross.
 
     William A. Alias, Jr., is an entrepreneur holding various private
investments. Formerly, Mr. Alias was President of Rollins Protective Services, a
residential security company. Prior to joining Rollins, he was Executive Vice
President and Chief Operating Officer of Across the Street Restaurants of
America, Inc. He also held positions at Royal Crown Cola Company and the
National Icee Corporation. Mr. Alias is a former member of the Board of Trustees
of the Lovett School and is a Board Member of Security Check. He has been a
member of the Boards of Directors of the Company and BCBSGA since December 1996.
He is also a member of the Board of Directors of HMO-Ga.
 
     Elizabeth W. Camp is President of Camp Oil Company in Rome, Georgia. Prior
to joining Camp Oil, Ms. Camp held positions as an attorney at Silver, Freedman
& Taff, attorneys in Washington, D.C., and as an accountant at Arthur Andersen,
LLP in Atlanta, Georgia. Ms. Camp is a member of the Boards of Directors of
Citizens First Bank in Rome, Camp Oil Company, Inc. and Sav-A-Ton Oil. She is a
member and past Chairman of the Board of Alumni Advisors for the Terry School of
Business at the University of Georgia. She is also a member of the Board of
Trustees of Darlington School in Rome. She has been a Director of BCBSGA since
1993 and a Director of the Company since its organization in February 1996.
 
     Edward M. Gillespie is retired from University Hospital in Augusta,
Georgia, where he served as President and Executive Director until 1991. Prior
to joining University Hospital, Mr. Gillespie held various hospital
administrative positions including Hospital Administrator of Rochester Methodist
Hospital in Rochester, Minnesota. Mr. Gillespie serves on the advisory board of
South Trust and Brandon Wilde retirement community. He is also President of
Health Advance, a health care consulting organization. Mr. Gillespie has been a
Director of BCBSGA since 1980 and a Director of the Company since its
organization in February 1996.
 
     Joseph D. Greene is a professor of Business Administration for the College
of Business at Augusta State University in Augusta, Georgia. Before joining
Augusta State University, Mr. Greene was employed by Pilgrim Health and Life
Insurance Company, where he retired as Executive Vice President after 32 years
of
                                       29
<PAGE>   32
 
employment with the company. Mr. Greene is past Chairman of the Georgia Board of
Regents. He currently serves on the Boards of Directors of McDuffie Bank & Trust
of Thomson, the Greater Augusta Community Foundation, Morris Museum of Arts,
Southeastern Technology Center, the National Science Center Discovery and the
University of Georgia Terry College of Business. Mr. Greene has been a Director
of BCBSGA since 1993 and a Director of the Company since its organization in
February 1996. He is also Vice Chairman of the Board of Directors of HMO-Ga.
 
     Mel H. Gregory, Jr., is retired, following a 35-year career in executive
insurance positions with The Equitable Companies. He held positions as Executive
Vice President, Agency Operations; President and Chief Operating Officer,
Equitable Variable Life Insurance Company; Chief Executive Officer, Equico
Securities; and as a member of The Equitable's Executive Committee. He is a
member of the Board of Directors of Stetson University School of Business. Mr.
Gregory has been a Director of the Company since its organization in February
1996 and a Director of BCBSGA since 1996. Mr. Gregory is also a Director of GGL.
 
     Frank J. Hanna, III is, and has been since 1993, the Chief Executive
Officer of HBR Capital, Ltd., an investment firm based in Atlanta, Georgia. Mr.
Hanna began his career in Atlanta as a corporate attorney with the Atlanta law
firm of Troutman Sanders LLP. Mr. Hanna is also extensively involved in
education, including serving as a founding member of the Board of Directors of
the Archbishop Donnellan School and as a Director of Pinecrest Academy. Mr.
Hanna is a Director of Outsourcing Solutions Inc. Mr. Hanna is a graduate of the
University of Georgia and the University of Georgia School of Law. Mr. Hanna
became a Director of the Company and BCBSGA in February 1996.
 
     R. Pierce Head, Jr., is a retired Senior Vice President of Georgia Power
Company, where he worked for 40 years in various capacities in the risk
management, employee benefits, information systems, general services and labor
relations areas. While at Georgia Power, Mr. Head chaired several task forces
and received a number of awards, including a Presidential Citation for hiring
the physically challenged. Mr. Head has been a Director of BCBSGA since 1981 and
a Director of the Company since its organization in February 1996. He is also a
member of the Board of Directors of HMO-Ga.
 
     Warren Y. Jobe, is Senior Vice President of Southern Company responsible
for corporate development including customer relations and civic affairs. Mr.
Jobe is also Executive Vice President and a member of the Board of Directors of
Georgia Power Company. He is president of the Georgia Power Foundation. Mr. Jobe
is a member of the Board of Regents of the University System of Georgia. He
currently serves on the Boards of the Visiting Nurse Health Systems of Atlanta,
the Georgia Chamber of Commerce, the Y.M.C.A. of Metro Atlanta, the Atlanta
Symphony Orchestra and several other civic organizations. He is Vice Chairman of
the Board of Trustees of Oglethorpe University. Mr. Jobe became a Director of
BCBSGA and the Company in March 1999.
 
     James H. Leigh, Jr., M.D., is a surgeon in Gainesville, Georgia, where he
has a private practice. He is a member of the Northeast Georgia Medical Center
staff and the Lanier Park Hospital consultant staff. Dr. Leigh is also past
Chief of Surgery and Chief of Staff at Northeast Georgia Medical Center. Dr.
Leigh served as an Assistant Professor of Surgery at the University of Tennessee
College of Medicine. Dr. Leigh was a member of the Board of Directors of the
Northeast Georgia Health Association and was previously an Alternate Director of
the Medical Association of Georgia. He has been a Director of BCBSGA since 1975
and a Director of the Company since its organization in February 1996. Dr. Leigh
is also a member of the Board of Directors of HMO-Ga.
 
     James R. Lientz, Jr., is President of NationsBank, Mid-South Banking Group.
Prior to joining NationsBank, he was President and CEO of C&S National Bank of
South Carolina, a predecessor of NationsBank. Mr. Lientz is a member of the
Board of Directors of Georgia Power Company. He is a trustee of Rhodes College,
The Lovett School, the Georgia Research Alliance and the Georgia State
University Foundation. He serves as Chairman of the Georgia Chamber of Commerce
and the Georgia Council on Economic Education. He is also a member of the
Executive Committee of the Metropolitan Atlanta Chamber of Commerce. Mr. Lientz
has been a Director of BCBSGA and the Company since 1997.
 
     Julia L. Mitchell-Ivey is a consultant and former Vice President and
Assistant Corporate Secretary at First Union National Bank of Georgia.
Previously, she held various positions at Decatur Federal Savings and
 
                                       30
<PAGE>   33
 
Loan Association including Corporate Treasurer, Corporate Secretary and Division
Vice President. Ms. Mitchell-Ivey is a past Chairperson of the Board of
Directors of Metropolitan Atlanta Rapid Transit Authority (MARTA) and
Chairperson of the Board of Directors of Private Colleges and Universities
Authority and a member of the Board of Directors of the Y.W.C.A. and the DeKalb
Chamber of Commerce. She has been a Director of BCBSGA since 1980 and a Director
of the Company since its organization in February 1996. She is Chairperson of
the Board of Directors of HMO-Ga.
 
     John W. Robinson, Jr., is President of Southern Waistbands Incorporated, a
manufacturer of textile interlinings. Until June 1996, he was also a
manufacturer's representative for Threads USA. He has served as a member of the
Board of Directors of the Bank of Bartow and Bank South Corporation and is
currently an Advisory Director to NationsBank Northeast Georgia. He is a Trustee
of The Georgia Baptist Foundation, serves on the Executive Committee and is a
past Chairman. Mr. Robinson has served on the Georgia Board of Natural Resources
and the Board of Regents of the University System of Georgia and has been a
Trustee of Athens Academy and a Director of the Barrow County Chamber of
Commerce. Mr. Robinson became a Director of BCBSGA and the Company in March
1999.
 
     Arnold M. Tenenbaum is President of Chatham Steel Corporation. He is a
member of the Boards of Directors of the Georgia Lottery Commission, First Union
National Bank of Savannah, First Union Bank of Georgia and Savannah Electric &
Power Company. Mr. Tenenbaum is a past President of the Telfair Academy of Arts
& Sciences, the Chairman of the Steel Service Center Institute and past Chairman
of the Georgia Chamber of Commerce. He has been a Director of the Company and
BCBSGA since 1997. He is also a member of the Board of Directors of HMO-Ga.
 
     W. Jerry Vereen is President and Chief Executive Officer of Riverside
Manufacturing Company in Moultrie, Georgia and is acting Chairman of the Board
of Directors of Riverside Manufacturing Company and all of its subsidiary
corporations. Mr. Vereen serves on the Boards of Directors of Georgia Power
Company, Georgia Chamber of Commerce, Gerber Scientific, Inc., American Apparel
Manufacturers Association, and the Textile Clothing Technological Corporation,
the International Apparel Federation, the Georgia Research Alliance and the
Georgia Board of Industry, Trade and Tourism. He is also a member of the Board
of Governor's Development Council. He has been a Director of BCBSGA since 1993
and a Director of the Company since its organization in February 1996.
 
     Joe M. Young is the General Manager of LOR, Inc. and Rollins Investment
Fund, two entities which manage the holdings of the family of the late O. Wayne
Rollins. His service with LOR, Inc. commenced in 1979 and with Rollins
Investment Fund at its inception in 1988. He also serves as an Officer and
Director of several other related entities and as a Trustee of several Rollins
Family Foundations and Trusts. Since 1992 he has been a Director of Valley
Systems, Inc., a public company traded on The NASDAQ Stock Market. Mr. Young
became a Director of the Company and BCBSGA in February 1996.
 
     John A. Harris has served as BCBSGA's Executive Vice-President, Finance and
Strategic Planning since January 1993. He has served as Treasurer of the Company
since its organization in February 1996. Prior to joining BCBSGA, he worked in
the health care industry for 10 years, primarily in managed care companies, but
also with multi-line carriers. His positions included Chief Financial Officer,
Western Market Group, for the Employee Benefits Division of Lincoln National;
Assistant Corporate Controller for Financial Planning, Reporting and Analysis
for Equicor; President, VIP Health Plan (an IPA model HMO in California); and
Vice-President, Finance for CIGNA Health Plans for Southern California.
 
     Hugh J. Stedman currently serves as Secretary of the Company and Senior
Vice President and General Counsel to BCBSGA. Mr. Stedman has been Counsel to
BCBSGA since 1985. Mr. Stedman obtained his J.D. from Rutgers University and is
admitted to practice law in Georgia and Pennsylvania. Prior to joining BCBSGA,
Mr. Stedman was Associate Counsel for Healthdyne, Inc., a manufacturer of
medical devices and supplier of home-health services. Mr. Stedman is a member of
the American, Georgia and Cobb County Bar Associations, the Cobb County Chamber
of Commerce and the National Health Lawyers' Association.
 
     Raymond J. Colleran joined BCBSGA in February 1993, as BCBSGA's Executive
Vice President, Market Operations. Prior to February 1993, Mr. Colleran held a
number of key management positions with Equitable Life, Equicor and CIGNA. These
positions included Regional Financial Officer and Regional
 
                                       31
<PAGE>   34
 
Account Vice President with Equitable Life, Vice President in Charge of Sales
and Accounts for Equicor, President of the East Central Region for Equicor and
most recently, Senior Vice President in Charge of Sales for the East Central
Region for CIGNA. Mr. Colleran has served as Corporate Secretary and Treasurer
for GGL since November 1994. Mr. Colleran is a past member of the Blue Cross and
Blue Shield Association National Labor Office Board and the Buckhead Chamber of
Commerce Executive Committee.
 
     Mark Kishel, M.D., has been Executive Vice President and Chief Medical
Officer of BCBSGA since October 1993. Prior to joining BCBSGA, he developed
staff, group and IPA model HMOs, as well as PPOs, for major carriers and other
managed care organizations including Travelers, Lincoln National and Health
America. His management experience includes capitated Medicaid, managed workers
compensation, POS and HMO networks. Dr. Kishel has developed quality management
and utilization management programs for various start-up companies and consulted
in physician hospital organizations and university-sponsored health plan
development. As a practicing pediatrician and family physician for 11 years, Dr.
Kishel assisted in the development of a model primary care system that addressed
the needs of the indigent and uninsured in Arizona. He is a Director of the
Atlanta Boys and Girls Clubs, Inc.
 
     Richard F. Rivers joined BCBSGA as Executive Vice President and Chief
Operating Officer in September 1997. Prior to joining BCBSGA, Mr. Rivers worked
for Prudential Insurance Company for 22 years. Most recently, he was Senior Vice
President of Health Plan Operations with Prudential Healthcare and was
responsible for the operations of 32 local health plans nationwide. Prior to
this, he was President of South Central Operations and had full responsibility
for operations in ten states.
 
     Richard A. Steinhausen joined BCBSGA in August 1995 as Executive Vice
President, Service Operations and Information Systems. Mr. Steinhausen has more
than 30 years of health care industry experience. Most recently, he served as
Vice President, Employee Benefits Division of Washington National. Previously,
he was a Senior Vice President of Equicor and President of its National Benefits
Sector. He also served as a Regional Vice President, Claims for Equitable Life
Assurance Society.
 
     R. Neil Vannoy joined BCBSGA as Senior Vice President of Public Affairs and
Product Development in July 1992. In 1994, he was appointed Executive Vice
President of Community Operations of BCBSGA and is responsible for community
healthcare partnership developments and government programs. Prior to joining
BCBSGA, Mr. Vannoy served in management positions with Prudential Insurance
Company for 16 years, including Vice President, Group Corporate at Prudential's
New Jersey headquarters, Vice President in charge of the Company's Southern
Group Operations, Vice President of Florida Group Operations and Vice President
of Group Marketing and Sales at the New York City group office. Mr. Vannoy is a
member of the Boards of Directors of the Georgia Business Forum, the Georgia
Caring Program for Children Foundation and the Company's Community Health
Partnership Network joint ventures in Atlanta, Athens, Augusta and Savannah. He
serves on the Professional Advisory Council of Mission New Hope in Atlanta,
supported the development of the Georgia Coalition for Health as a member of the
formation steering committee and serves on the technical advisory committee of
the Georgia Health Policy Center. Mr. Vannoy holds a Chartered Life Underwriter
designation.
 
INFORMATION REGARDING THE BOARD OF DIRECTORS
 
     The Company's Articles of Incorporation provide that the Board of Directors
shall consist of not more than 21 members with the actual number of Directors to
be fixed from time to time by the Board of Directors. The Articles of
Incorporation provide for the classification of the Company's Directors into
three classes, with each class containing approximately the same number of
Directors and the term of one class expiring each year. At each Annual Meeting
of Shareholders, the Directors of one class are elected by the shareholders
entitled to vote thereon, to hold office for a term of three years or until
their successors are elected and qualified. Set forth below is the name of each
Director, the class in which he or she serves and the year in which his or her
current term expires.
 
                                       32
<PAGE>   35
 
  Class  One -- Term Expires at the 1999 Annual Meeting of Shareholders
 
         Elizabeth W. Camp(1)
         Mel H. Gregory, Jr.
         James L. LaBoon, Jr.
         James H. Leigh, Jr., M.D.
         Julia L. Mitchell-Ivey
         John W. Robinson, Jr.(1)
 
  Class  Two -- Term Expires at the 2000 Annual Meeting of Shareholders
 
         Edward M. Gillespie
         Joseph D. Greene, CLU(1)
         James R. Lientz, Jr.(1)
         W. Jerry Vereen
         Joe M. Young(2)
 
  Class  Three -- Term Expires at the 2001 Annual Meeting of Shareholders
 
         William A. Alias, Jr.
         Frank J. Hanna, III(2)
         R. Pierce Head, Jr.(3)
         Richard D. Shirk
         Arnold M. Tenenbaum(1)
         Fred L. Tolbert, Jr.
         Warren Y. Jobe(1)
---------------
 
(1) Ms. Camp and Messrs. Robinson, Greene, Lientz, Tenenbaum and Jobe are Class
    A Designated Directors.
(2) Mr. Young is a Class Two, Preferred Designated Director. Mr. Hanna is a
    Class Three, Preferred Designated Director.
(3) According to the retirement policy set forth in the Company's bylaws, this
    Director will retire effective at the conclusion of the Company's next
    Annual Meeting.
 
     Under the Articles of Incorporation, so long as shares of Preferred Stock
are issued, outstanding and entitled to vote and no shares of the Company's
common stock, no par value (the "Common Stock"), are outstanding, the holders of
outstanding shares of Class A Stock, voting separately as a single class (with
each share being entitled to one vote) and to the exclusion of all other classes
and series of capital stock of the Company, are entitled to elect two Directors
to each of the Company's three Classes of Directors ("Class A Designated
Directors"), for a total of six of the total number of members of the Board of
Directors following the third annual election. Prior to the Special Meeting of
the holders of Class A Stock held on December 18, 1996 (the "Special Meeting"),
a special nominating committee composed of two Continuing Directors (as defined
below) and the two Preferred Designated Directors (as defined below) nominated
the two Class A Designated Directors to be voted on by all of the holders of the
Class A Stock at the Special Meeting. At the Special Meeting, Joseph D. Greene
was elected as a Class A Designated Director to serve as a Class Two Director
until the 1997 Annual Meeting and Elizabeth W. Camp was elected as a Class A
Designated Director to serve as a Class One Director until the 1999 Annual
Meeting.
 
     On March 4, 1997 a special nominating committee composed of two Continuing
Directors and Ms. Camp and Mr. Greene, the then current Class A Designated
Directors, nominated Mr. Greene and James R. Lientz, Jr. as Class A Designated
Directors to serve as Class Two Directors until the 2000 Annual Meeting or until
their successors are duly elected and qualified and Arnold Tenenbaum as a Class
A Designated Director to serve as a Class Three Director until the 1998 Annual
Meeting to be voted on by all of the holders of the Class A Stock at the Annual
Meeting of Shareholders held on April 25, 1997 (the "1997 Annual Meeting"). The
three nominees were elected as Class A Designated Directors at the 1997 Annual
Meeting. Prior to the third meeting of the holders of Class A Stock scheduled
for December 30, 1998 at which Class A Designated Directors were to be elected
(the "1998 Annual Meeting"), a special nominating committee composed of two
Continuing Directors and the Class A Designated Directors nominated Arnold
Tenenbaum and Warren Y. Jobe as Class A Designated Directors to serve as Class
Three Directors until the Annual Meeting of
 
                                       33
<PAGE>   36
 
Shareholders held in 2001 and John W. Robinson, Jr. as a Class A Designated
Director to serve as a Class One Director until the Annual Meeting of
Shareholders held in 1999. As described herein at Part I, Item 4, the 1998
Annual Meeting was adjourned until an undetermined date. Following this
adjournment, there existed two vacancies on the Board of Directors for Class A
Designated Directors. In order to comply with the Plan of Conversion approved by
the Commissioner in connection with the Conversion, effective March 15, 1999 the
Board of Directors unanimously appointed John W. Robinson, Jr. and Warren Y.
Jobe as Class A Designated Directors in Class One and Class Three, respectively.
The holders of Class A Stock are expected to ratify these appointments at the
1999 Annual Meeting. Following these Director appointments, at each annual
meeting until the Class A Stock is converted to Common Stock as provided in the
Articles of Incorporation, a special nominating committee composed of the six
Class A Designated Directors will nominate, and the holders of the Class A Stock
will be entitled to elect, two Class A Designated Directors each year to replace
the Class A Designated Directors whose terms expire during such year.
 
     Notwithstanding any nomination by a special nominating committee, the
holders of the Class A Stock are entitled to nominate and elect any eligible
individual to fill the Class A Designated Director positions subject to election
each year.
 
     The holders of shares of Preferred Stock, voting separately as a single
class (with each share being entitled to one vote) and to the exclusion of all
other classes and series of capital stock of the Company, are entitled to
nominate and elect two directors (the "Preferred Designated Directors") and all
of the remaining Directors of the Company other than the Class A Designated
Directors, who are elected exclusively by the holders of Class A Stock. However,
pursuant to the terms of a Shareholders' Agreement (the "Shareholders'
Agreement") among the holders of Preferred Stock, BCBSGA and the Company, so
long as no shares of the Company's Common Stock are issued and outstanding, the
holders of Preferred Stock will be obligated to vote their shares so that the
persons (other than the Preferred Designated Directors) nominated by the
Nominating Committee of the Company's Board of Directors and approved by
two-thirds of the Continuing Directors of the Company are elected Directors of
the Company. As a result, the current Board of Directors will have the ability
to designate a majority of the Directors of the Company.
 
     "Continuing Directors" are those individuals who: (i) were named as members
of the initial Board of Directors of the Company (other than the Preferred
Designated Directors), together with any new Directors whose election or
nomination to the Board of Directors was approved by a vote of two-thirds of the
Directors then still in office who were such Directors or whose election or
nomination was previously so approved; (ii) are not beneficial owners of more
than five percent of the total shares of any class of equity securities of the
Company outstanding; and (iii) were not nominated by such a beneficial owner
and, prior to such Director's election, did not have any agreement, arrangement,
or understanding with any such beneficial owner with respect to any action to be
taken by such person as a Director.
 
     If no shares of Preferred Stock or Common Stock are issued, outstanding and
entitled to vote, all rights to vote in the election of Directors are vested in
the holders of outstanding Class A Stock and Blank Preferred Stock.
 
                  SECTION 16(A) OF THE SECURITIES EXCHANGE ACT
                         BENEFICIAL OWNERSHIP REPORTING
 
     Section 16(a) of the Exchange Act and regulations of the Commission
thereunder require the Company's executive officers and Directors and persons
who own more than ten percent of the Company's Class A Stock, if any, as well as
certain affiliates of such persons, to file initial reports of ownership and
reports of changes in ownership with the Commission. Executive officers,
Directors and persons owning more than ten percent of the Company's Class A
Stock are required by Commission regulation to furnish the Company with copies
of all Section 16(a) forms they file. Based solely on its review of the copies
of such reports received by it and written representations from the reporting
persons that no other reports were required for those persons, to the Company's
knowledge, during and with respect to the fiscal year ended December 31, 1998,
all filing
 
                                       34
<PAGE>   37
 
requirements applicable to its executive officers and Directors were complied
within a timely manner. To the Company's knowledge, there is no person that owns
more than ten percent of the Company's Class A Stock.
 
ITEM 11.  EXECUTIVE COMPENSATION
 
GENERAL
 
     The following table summarizes by various categories, for the fiscal years
ended December 31, 1998, 1997 and 1996, the total compensation earned by (i) the
Chief Executive Officer of the Company, and (ii) each of the four most highly
compensated executive officers of the Company who were serving as executive
officers at December 31, 1998 and whose salary and bonus for the fiscal year
ended December 31, 1998 exceeded $100,000 (collectively referred to as the
"Named Executive Officers").
 
                      TABLE 1: SUMMARY COMPENSATION TABLE
 
<TABLE>
<CAPTION>
                                                                                     LONG-TERM
                                                      ANNUAL COMPENSATION           COMPENSATION
                                               ----------------------------------   ------------
                                                                     OTHER ANNUAL       LTIP        ALL OTHER
                                                SALARY     BONUS     COMPENSATION     PAYOUTS      COMPENSATION
NAME AND PRINCIPAL POSITION             YEAR    ($)(1)     ($)(2)       ($)(3)         ($)(4)         ($)(5)
---------------------------             ----   --------   --------   ------------   ------------   ------------
<S>                                     <C>    <C>        <C>        <C>            <C>            <C>
Richard D. Shirk......................  1998   $500,000   $423,940     $     --       $     --        $4,505
  Chief Executive Officer,              1997    481,250         --           --        281,437         4,030
  President and Director of the         1996    425,000    412,979           --        432,225         5,878
  Company and BCBSGA
Richard F. Rivers.....................  1998    307,500    183,600           --             --         2,376
  Executive Vice President              1997     77,299         --           --             --           279
  and Chief Operating Officer
  of BCBSGA(6)
John A. Harris........................  1998    254,000    162,432           --             --         3,460
  Treasurer of the Company,             1997    225,750         --           --         89,967         3,202
  Executive Vice President,             1996    195,000    115,814           --         67,392         3,185
  Finance and Strategic
  Planning of BCBSGA
Mark Kishel, M.D......................  1998    225,000    121,525           --             --         3,276
  Executive Vice President              1997    208,750         --           --         89,967         3,238
  and Chief Medical Officer of          1996    205,000    130,015           --         70,848         3,507
  BCBSGA
Richard A. Steinhausen, Jr............  1998    244,250     99,509           --             --         3,345
  Executive Vice President,             1997    199,000         --           --         72,611         3,151
  Service Operations and                1996    175,000     94,370           --         12,096         3,383
  Information Systems of
  BCBSGA
</TABLE>
 
---------------
(1) Includes amounts deferred at the election of the officers pursuant to the
    Tax-Favored Savings Program and other deferred compensation plans.
(2) Threshold financial performance criteria pursuant to the Annual Incentive
    Program was not achieved for 1997; no bonuses were earned for that period.
(3) Perquisites for Named Executive Officers were less than 10% of their total
    salary for all periods presented.
(4) No payments were made in 1998 as threshold financial performance criteria
    was not achieved for the 1995-1997 performance period. Includes payments in
    1997 to the Named Executive Officers for long-term incentive payments for
    the 1994-1996 performance period, in 1996 for long-term incentive payments
    for the 1993-1995 performance period and a long-term incentive payment for
    the 1992-1994 performance period for Mr. Shirk whose payment for the
    1992-1994 performance period was deferred by the Compensation Committee
    until 1996. The long-term incentive plan was replaced by the performance
    unit plan during 1997.
(5) Reflects contributions to the Tax-Favored Savings Program in 1998 and 1997,
    respectively, of $2,525 and $2,500 for Mr. Shirk, Mr. Harris and Mr.
    Steinhausen, $2,444 and $2,500 for Dr. Kishel and $1,188 and $-0- for Mr.
    Rivers, as well as the following premium payments on group term life
    insurance in 1998 and 1997, respectively: Mr. Shirk, $1,980 and $1,530; Mr.
    Rivers, $1,188 and $279; Mr. Harris, $935 and $702; Dr. Kishel, $832 and
    $738; and Mr. Steinhausen, $820 and $651.
(6) Mr. Rivers joined the Company in September 1997.
 
                                       35
<PAGE>   38
 
LONG-TERM INCENTIVE COMPENSATION
 
     Prior to fiscal year 1997, BCBSGA maintained a Long-Term Incentive Plan
("LTIP"). The LTIP was designed to reward participants for their contributions
to the successful achievement of specific financial (60%), market share (20%)
and customer service (20%) goals based on the Company's long-term business
strategy. Goals were established for three-year performance periods. The LTIP
had minimum threshold, target and maximum performance levels. Participants were
required to be employed by one of the Company's subsidiaries on the last day of
the performance period. Prior to 1997, long-term incentive award opportunities
had been established for four performance cycles, the 1992-1994 performance
period, the 1993-1995 performance period, the 1994-1996 performance period and
the 1995-1997 performance period. The Compensation Committee makes the final
award determination related to the achievement of the defined goals for each
performance period. Named Executive Officers received payouts for the 1993-1995
performance cycle and the 1994-1996 performance cycle which are reflected in the
Summary Compensation Table. Minimum threshold levels for financial performance
were not achieved for the 1995-1997 cycle. No payouts to Named Executive
Officers were due for this performance period. The LTIP was terminated as of
December 31, 1997, and there are no remaining payments due under the LTIP with
respect to any period for which it was in effect.
 
     In July 1997, the Company adopted the Performance Unit Plan (the "PUP")
effective February 2, 1996 to replace the LTIP and to reward key employees for
creating and increasing the value of the Company. The Compensation Committee of
the Board of Directors of the Company is responsible for the administration of
the PUP including designation of participants and granting of units. The PUP
provides that the Compensation Committee will award up to an aggregate of one
million (1,000,000) units to designated key employees. The terms of the PUP
established a beginning value of the Company of $221,000,000, as determined as
of February 2, 1996, with a beginning per unit value of $22.11. Under the PUP,
participants become vested in their units upon the occurrence of the earliest of
a "Change in Control" of the Company, the participant's death, disability or
retirement under the Company's tax-qualified retirement plan, the end of a
Measurement Period (as defined in the PUP) or December 31, 1999. The term
"Measurement Period" is defined in the PUP as the period beginning on February
2, 1996 and ending on the date when the Company's value is first determinable,
i.e., upon a market event that creates a definite value and results in
liquidity. The Company's Board is granted authority to determine when such a
market event has occurred, until such time as the Company's Common Stock is
listed or traded on a recognized United States exchange. At the end of 1998,
there was no market/liquidity event as defined in the plan; therefore, units
granted under the plan did not have any assigned value.
 
     Payments are to be made at the end of the Measurement Period; provided,
that if a Change in Control of the Company (as defined in the PUP) occurs first,
payment is to be made as soon as practicable thereafter. A "Change in Control"
is defined in the PUP to include (i) an acquisition of 50% or more of the
Company's voting stock; (ii) the termination of a majority of the members of the
Company's Board of Directors within a two-year period without certain approvals;
(iii) the approval by the Company's shareholders of any merger, consolidation or
share exchange of the voting stock, a liquidation of the Company or any sale of
50% of the Company's assets or earning power; or (iv) the approval by the
Company's shareholders of any merger, consolidation or share exchange which
would result in the persons who were shareholders immediately before such
transaction having beneficial ownership of less than 50% of the voting
securities. Under this definition, the shareholders' approval of the proposed
Merger would constitute a Change in Control for purposes of the PUP.
 
     In order for any amount to be payable under the PUP, the per unit value of
the Company must have increased sufficiently from the beginning per unit value
to meet the performance hurdle established under the PUP, which is the average
yield of One-Year Treasury Bills (as specified in The Wall Street Journal on the
published date nearest to the end of each quarter for the preceding year),
compounded over the Measurement Period. Assuming that the value exceeds the
performance hurdle, payment is to be made in the amount of the difference
between the beginning per unit value of the Company and the per unit value of
the Company at the end of the Measurement Period multiplied by the number of
units awarded. Payment is to be made in cash, Company stock or any combination
of the two, subject to withholding for taxes. Payment is to be made as soon
                                       36
<PAGE>   39
 
as practicable after the end of the later of (i) when vesting occurs or (ii) the
end of a Measurement Period. The Merger establishes a value that satisfies the
performance hurdle.
 
     One million unit awards have been granted to 285 key employees during 1998
and 1997. Awards to the Named Executive Officers and the amounts that become
payable to them under the PUP due to the Merger, assuming the purchase price of
$500,000,000 (and therefore an ending unit value of $50.00; $50.00 -- $22.11 =
$27.89 per unit), are as follows: Richard D. Shirk, 138,000 units, $3,848,820;
Richard F. Rivers, 30,000 units, $836,700; John A. Harris, 67,000 units,
$1,868,630; Mark Kishel, 55,000 units, $1,533,950; and Richard A. Steinhausen,
58,000 units, $1,617,620.
 
DEFINED BENEFITS
 
  Retirement Plan
 
     The Non-Contributory Retirement Program for Certain Employees of BCBSGA
(the "Retirement Plan") is a tax-qualified defined benefit pension plan that
covers all employees of BCBSGA and its participating affiliated companies, who
have attained age 21 and have completed 1,000 hours of service in a 12-month
period after their date of hire or who complete 1,000 hours of service in any
calendar year thereafter. Benefits under the Retirement Plan are based upon
length of service with any Blue Cross/Blue Shield plan, with varying provisions
for employees who are terminated or take early, normal or deferred retirement.
The annual retirement benefit is calculated according to a specific formula. The
benefit is 60% of the participant's Final Average Earnings (i.e., the average of
the highest five consecutive years of annual salaries and annual incentive
payments out of the last ten years of credited service) reduced by 50% of the
participant's anticipated Social Security benefit. If the participant has less
than 30 years of service, the result is multiplied by a service fraction. The
fraction is the number of the participant's years of credited service up to 30
divided by 30. For purposes of the Retirement Plan, a participant's earnings
that may be considered may be limited by provisions of Section 401(a)(17) of the
Internal Revenue Code of 1986, as amended (the "Code"), and the annual additions
to his benefit may be limited by Code Section 415. A participant becomes fully
vested after five years of service. Generally, upon retirement, participants may
elect to receive their benefits in the form of a lump sum payment, lifetime
annuity, lifetime annuity with a guaranteed payout period (ten or 20 years), or
a joint and survivor annuity with 50%, 66 2/3% or 100% survivor benefits. The
Retirement Plan also provides, subject to certain conditions, for the payment of
vested benefits of a deceased employee to his or her spouse during such spouse's
lifetime.
 
     The amount of contributions required by BCBSGA to fund benefits for its
employees is determined each year by actuaries. Participant contributions are
not permitted. Benefits under the Retirement Plan are insured by the Pension
Benefit Guaranty Corporation. The Retirement Plan is administered by the BCBSA.
All contributions are held in a tax-qualified trust, and Bankers Trust Company
serves as Trustee to the Retirement Plan. BCBSGA made a contribution of $2.9
million to the Retirement Plan for the plan year ended December 31, 1998. The
amounts shown in the Summary Compensation Table above do not include BCBSGA's
contributions in connection with the Retirement Plan for the Named Executive
Officers. Such amounts are not and cannot be readily separated or individually
calculated.
 
     In order to provide benefits to certain of its highly compensated or
management employees whose benefits under the Retirement Plan will be limited
due to requirements of the Code, BCBSGA maintains the Blue Cross and Blue Shield
of Georgia, Inc. Executive Benefit Restoration Plan (the "Restoration Plan"), in
which all of the Named Executive Officers participate. Generally, participants
are recommended by the Chief Executive Officer and approved by the Compensation
Committee. The Restoration Plan provides benefits to participants whose benefits
under the Retirement Plan are restricted by the compensation and annual addition
limitations described in Code Sections 401(a)(17) and 415. A participant becomes
vested in his benefit under the Restoration Plan upon retirement or disability
after attainment of age 55 and completion of five years of service (as defined
in the Retirement Plan). A participant whose employment is terminated within one
year following a change in control (as defined in the Restoration Plan) for
reasons other than death or disability will have a fully vested right to receive
all benefits accrued under the Restoration Plan as of the date of termination if
his employment is terminated without just cause (as defined in the Restoration
Plan) or if
 
                                       37
<PAGE>   40
 
the participant terminates with good reason (as defined in the Restoration
Plan). The benefit payable under the Restoration Plan is equal to the difference
between (i) the benefit the participant would be entitled to under the
Retirement Plan, calculated without regard to the compensation and annual
addition limits in effect under the Code, and (ii) the sum of the benefit
payable under the Retirement Plan and any nonqualified defined benefit plan
sponsored by another Blue Cross/Blue Shield employer, that relates to a period
of service for which credit is given under the Restoration Plan. The benefits
provided by the Restoration Plan are generally an unfunded obligation of BCBSGA.
The accrued benefits payable under the Restoration Plan at the end of 1998 for
the Named Executive Officers were $5,920 for Mr. Rivers; $15,209 for Mr. Harris;
$13,073 for Dr. Kishel; and $6,166 for Mr. Steinhausen.
 
  BCBSGA Supplemental Executive Retirement Plan
 
     Effective as of July 1, 1996, BCBSGA adopted the Supplemental Executive
Retirement Plan (the "SERP") to provide additional, non-qualified retirement
benefits to a designated group of management employees. The SERP is administered
by BCBSGA's Compensation Committee and is designed as a supplement to the
Retirement Plan. Participants are recommended by the Chief Executive Officer of
BCBSGA and designated by the Compensation Committee. In general, each
participant in the SERP becomes entitled to receive a retirement benefit equal
to the difference between (A) and (B) where (A) equals the benefit that the
participant would be entitled to under the Retirement Plan calculated as if the
participant were credited with two years of service for each year of actual
service (up, to a maximum of 30 years) and without application of the
compensation or annual additions limitations imposed under Sections 401(a)(17)
and 415 of the Code, and (B) equals the sum of the participant's vested accrued
benefit under the Retirement Plan and his vested accrued benefit under the Blue
Cross and Blue Shield of Georgia, Inc. Executive Restoration Plan and any other
non-qualified defined benefit plan sponsored by BCBSGA or any affiliate which
pertains to the same periods of service.
 
     Benefits under the SERP generally become payable upon the participant's
termination of employment due to disability or retirement after reaching age 55
and completing five years of service. Payments may be made in a lump sum or any
form offered under the Retirement Plan. If payment commences before the
participant's attainment of age 65, the benefit amount will be subject to a
reduction of 0.25% for each month by which payment precedes the first day of the
month coinciding with or next following the participant's attainment of age 62.
 
     The SERP provides that if a participant is terminated from employment
within one year following a Change in Control (as defined below) for reasons
other than death or disability, the participant becomes vested and entitled to
receive all benefits accrued under the SERP as of the date of such termination
if such termination arose from voluntary termination for "Good Reason" (as
defined below) or dismissal without "Just Cause" (as defined below). In this
instance, payment is to be made as of the later of the first day of the month
following the termination of employment or the first day of the month following
the participant's 55th birthday.
 
     The SERP contains a definition of "Change in Control" that is similar to
that contained in the PUP. The term "Good Reason" is defined as the occurrence
after a Change in Control of either a reduction in the nature or status of the
participant's responsibilities or a reduction of the participant's base salary.
The term "Just Cause" is defined as (i) an act of fraud, embezzlement, theft or
other felonious criminal act; (ii) willful and continued failure to
substantially perform his duties; or (iii) willful engagement in conduct that is
demonstrably and materially injurious to BCBSGA and its affiliated companies.
 
     The SERP is generally an unfunded obligation of BCBSGA. As of January 1,
1997, BCBSGA entered into a trust agreement with Wachovia Bank of North
Carolina, N.A., as Trustee, to establish the Blue Cross and Blue Shield of
Georgia, Inc. Non-qualified Retirement Trust (the "Trust"), to which BCBSGA
would contribute assets for the purpose of payment of the benefits under the
SERP and other non-qualified plans, subject to the claims of BCBSGA's creditors
in the event of its insolvency or bankruptcy. The terms of the Trust provide
that no later than 30 days following a Change in Control, BCBSGA will make an
irrevocable contribution to the Trust in an amount sufficient to fund more than
100% of the benefits accrued under the
 
                                       38
<PAGE>   41
 
various non-qualified plans of BCBSGA. For these purposes, the definition of
"Change in Control" is similar to that contained in the PUP and the SERP
documents. The BCBSGA Board of Directors has the responsibility of informing the
Trustee that a Change in Control has occurred. The timing of payment under the
non-qualified plans is not accelerated due to the Change in Control. Shareholder
approval of the Merger would constitute a Change in Control.
 
     Supplemental benefits accrued under the SERP at the end of 1998 for the
Named Executive Officers were $9,528 for Mr. Rivers; $31,823 for Mr. Harris;
$27,645 for Dr. Kishel; and $15,738 for Mr. Steinhausen. Four other key
management employees participate in the SERP. The funding obligation of the
Trust will require, within 30 days following the shareholders' approval of the
proposed Merger, contributions to be made to the Trust for these eight
individuals. See "Interest of Certain Persons in the Merger -- Blue Cross and
Blue Shield of Georgia, Inc. Supplemental Executive Retirement Plan" in Form
S-4, Registration No. 333-64955 of WellPoint filed December 4, 1998 for the
estimate of the funding obligation if the Merger is consummated.
 
  Agreement for Supplemental Executive Retirement Benefits between BCBSGA and
Richard D. Shirk
 
     On December 1, 1996, BCBSGA entered into an agreement with Richard D. Shirk
to provide him a non-qualified retirement benefit to supplement the benefit
provided to him under the Retirement Plan (the "RDS SERP"), as amended by that
certain First Amendment to the RDS SERP, dated March 7, 1998 with an effective
date of January 1, 1998. Mr. Shirk becomes eligible for benefits under the RDS
SERP upon the termination of his employment for any reason other than his
voluntary termination without "Good Reason." The term "Good Reason" is defined
in Mr. Shirk's employment agreement with the Company and BCBSGA, dated January
1, 1997, as amended by that certain First Amendment to Employment Agreement
dated March 7, 1998, with an effective date of January 1, 1998 (the "Employment
Agreement"), as (i) any assignment of duties significantly different from those
contemplated by the Employment Agreement or any material limitation in his
authority, powers or responsibilities, (ii) failure to be elected or removal as
a member of the Board of Directors of either the Company or BCBSGA unless
required by a change in Georgia law, (iii) receipt of any notice limiting the
term of the Employment Agreement to two years, (iv) a material breach by either
the Company or BCBSGA of any of the material provisions of the Employment
Agreement which are not cured within 30 days after notice, and (v) a Change in
Control. For purposes of the Employment Agreement and the RDS SERP, the term
"Change in Control" is defined as (i) the acquisition of ownership of stock or
securities of either the Company or BCBSGA representing 5% or more of the voting
power of any class of stock or securities of either the Company or BCBSGA
(except as may be acquired by institutional investors if the stock or securities
are traded on a recognized exchange or through The NASDAQ Stock Market); (ii)
the date on which a majority of the members of the board of either the Company
or BCBSGA are no longer Continuing Directors, as defined in the license
agreement between the Company and the BCBSA, originally dated February 2, 1996;
(iii) approval by the shareholders of the Company or BCBSGA of any merger,
consolidation or share exchange as a result of which the securities of the
Company or BCBSGA will be changed, converted or exchanged into the shares of
another corporation or the liquidation of the Company or BCBSGA or the sale or
disposition of 50% or more of the assets or earning power of either the Company
or BCBSGA; or (iv) approval by the shareholders of any plan of consolidation,
merger or share exchange which would result in the persons who were shareholders
immediately prior to such transaction retaining less than 50% of the voting
power to elect directors of the surviving corporation. Shareholder approval of
the Merger would constitute a Change in Control.
 
     The benefits payable under the RDS SERP vary, depending on Mr. Shirk's age
at the time of his termination of employment. If he is less than age 55 at the
time of his termination, his monthly benefit shall equal 2% of his "Final
Average Earnings" times his years of credited service, minus 21% (which
represents a reduction of 3% per year for each year that the benefit begins
before age 62), minus the monthly annuity amount he would receive from the
Retirement Plan, and minus the actuarial equivalent value of the monthly benefit
he would receive from Social Security at age 62. If termination occurs after age
55 but before age 60, his monthly benefit would equal 2% of his Final Average
Earnings for each of his first 25 years of credited service, minus 0.25% for
each month that his termination precedes his 62nd birthday, plus 3% of his Final
Average Earnings for each of his next five years of credited service, minus the
monthly annuity amount he
 
                                       39
<PAGE>   42
 
would receive from the Retirement Plan, and minus the actuarial equivalent of
the monthly benefit he would receive from Social Security at age 62. If his
employment is terminated after age 60, his monthly benefit would equal 65% of
his Final Average Earnings, minus the monthly annuity amount he would receive
from the Retirement Plan, minus the actuarial equivalent value of the monthly
benefit he would receive from Social Security at age 62.
 
     For purposes of the RDS SERP, Mr. Shirk is deemed to have completed 25
years of credited service at age 55. For each year after age 55, he will earn an
additional year of service, up to a maximum of 30 years. Pursuant to the First
Amendment to the RDS SERP, dated December 1, 1996, the term "Final Average
Earnings" is defined to equal one-twelfth of the Final Average Earnings amount
determined under the Retirement Plan, with the following modifications: (i)
Final Average Earnings would not be limited to the Compensation limits imposed
by Section 401(a)(17) of the Code; (ii) cash incentive payments would be
included, regardless of whether they were received or deferred by Mr. Shirk,
(iii) if his market target rate for any given calendar year exceeds his base
salary rate, the market target rate is to be used in the calculation, and market
target rate is to equal the 50th percentile market rate as determined by the
Compensation Committee on an annual basis.
 
     The RDS SERP provides that the benefit should be continuously funded by
BCBSGA through a grantor trust. BCBSGA has made contributions to the
aforementioned Trust for this purpose.
 
     The amount of Mr. Shirk's benefit accrued at December 31, 1998 under the
RDS SERP was $282,614. The Trust held assets valued at $1,206,464 as of December
31, 1998. See "Interest of Certain Persons in the Merger-Agreement for
Supplemental Executive Retirement Benefits between Blue Cross and Blue Shield of
Georgia, Inc. and Richard D. Shirk" in Form S-4, Registration No. 333-64955 of
WellPoint filed December 4, 1998, for the related funding obligation upon
consummation of the Merger.
 
     If Mr. Shirk terminates employment following a Change in Control for any
reason other than voluntarily without Good Reason, the amount of his monthly
benefit is to be the greater of the normal calculation described above
(depending on his age at that time); or 60% of his Final Average Earnings,
without reduction for early commencement, but with reductions for benefits
payable under the Retirement Plan and Social Security. Benefits may be paid in a
lump sum payment or any optional form of payment permitted under the Retirement
Plan.
 
     Because Mr. Shirk's Employment Agreement defines "Good Reason" to include a
Change in Control, he may voluntarily terminate his employment at any time
following a Change in Control of the Company or BCBSGA and be entitled to
immediate payment of the benefits under the RDS SERP. In addition, due to the
continuous funding requirement of the RDS SERP and the Change in Control funding
requirement of the Trust, it is anticipated that contributions will be required
to the Trust within 30 days of a Change in Control, to prefund Mr. Shirks'
entire benefit.
 
     In addition, as of January 1, 1997, the Company amended Mr. Shirk's
Employment Agreement to state that the Company will provide Mr. Shirk an
additional cash payment sufficient to cover any excise tax imposed on him under
Sections 280G or 4999 of the Code on the total payments (made under the PUP, the
RDS SERP, the Employment Agreement and any other plan or arrangement) he
receives as a result of a Change in Control (the "Excise Tax Payment"), and an
additional payment to cover the state and Federal income taxes and employment
taxes on the Excise Tax Payment (the "Gross Up Payment.")
 
                                       40
<PAGE>   43
 
     The following Table 2 -- Pension Plan Table indicates an estimated annual
benefit payable after reductions for a portion of Social Security benefits to
participants in the Retirement Plan and the Restoration Plan, assuming continued
employment until retirement at age 65. The table indicates the estimated annual
benefit calculated on a straight-line annuity basis in persons in specified
Final Average Earnings and completed years of service categories. As of December
31, 1998, years of credited service under the Retirement Plan for the Named
Executive Officers were: Mr. Shirk -- 6 3/4 years; Mr. Harris -- 6 years; Dr.
Kishel -- 5 1/4 years; Mr. Steinhausen -- 3 5/12 years; and Mr. Rivers -- 1 1/4
years. The compensation covered by the Retirement Plan generally includes the
base rate of annual earnings and annual incentive payments actually paid to a
participant by BCBSGA up to $160,000, the maximum amount of compensation that
may be recognized under qualified pension plans. For each Named Executive
Officer, the compensation in the Summary Compensation Table exceeds this maximum
amount.
 
                          TABLE 2: PENSION PLAN TABLE
 
<TABLE>
<CAPTION>
FINAL                                                           YEARS OF SERVICE
AVERAGE                                       ----------------------------------------------------
EARNINGS                                         10         15         20         25         30
--------                                      --------   --------   --------   --------   --------
<S>                                           <C>        <C>        <C>        <C>        <C>
$ 100,000...................................  $ 17,314   $ 25,972   $ 34,629   $ 43,286   $ 51,943
   150,000..................................    27,314     40,972     54,629     68,286     81,943
   200,000..................................    37,314     55,972     74,629     93,286    111,943
   250,000..................................    47,314     70,972     94,629    118,286    141,943
   300,000..................................    57,314     85,972    114,629    143,286    171,943
   350,000..................................    67,314    100,972    134,629    168,286    201,943
   400,000..................................    77,314    115,972    154,629    193,286    231,943
   500,000..................................    97,314    145,972    194,629    243,286    291,943
   600,000..................................   117,314    175,972    234,629    293,286    351,943
   700,000..................................   137,314    205,972    274,629    343,286    411,943
   800,000..................................   157,314    235,972    314,629    393,286    471,943
   900,000..................................   177,314    265,972    354,629    443,286    531,943
 1,000,000..................................   197,314    295,972    394,629    493,286    591,943
 1,250,000..................................   247,314    370,972    494,629    618,286    741,943
 1,500,000..................................   297,314    445,972    594,629    743,286    891,943
</TABLE>
 
  Tax-Favored Savings Program
 
     The Blue Cross and Blue Shield of Georgia, Inc. Tax-Favored Savings Program
is a tax-qualified profit sharing plan with a cash or deferred arrangement under
Code Section 401(k) (the "Savings Program"). The Savings Program is designed to
help participants build long-term savings for the future. Generally, all
employees are eligible to participate after they complete 30 days of service and
have attained age 21. A participant may contribute to the Savings Program on a
before-tax basis from 1% to 15% of pay up to the maximum dollar contribution
amount ($10,000 in 1998). The employer will match $0.50 for every dollar the
participant contributes up to $500 (maximum $250). For the remaining
contribution, the employer will add $0.25 for each dollar the participant
contributes up to $2,275 for a total employer match of $2,525. Participants
become 25% vested in all employer matching contributions after two years, 50%
vested after three years, 75% vested after four years, and 100% vested once they
complete five years of service. Lump sum distributions generally may be made
from the Savings Program upon termination of employment or attainment of age 59
1/2. Participants also may obtain a hardship withdrawal or borrow money from
their account. All contributions to the Savings Program and investment earnings
are held in trust for the exclusive benefit of participants and their
beneficiaries. The name of the trust is Blue Cross and Blue Shield Association
National 401(k) Master Trust for the Tax-Favored Savings Program. The trustee is
INVESCO Trust Company. The Company's contributions to the Savings Program for
the Named Executive Officers for 1998 and 1997 are included in "All Other
Compensation" in Compensation Table.
 
                                       41
<PAGE>   44
 
  Deferred Compensation Plans
 
     The Company offers certain Directors and employees the opportunity to defer
income pursuant to the Company's "Deferred Compensation Plan for Select
Management." Qualified Directors and employees may elect to defer payment of all
or any portion of such person's compensation during any year for a period of
three years or more. At the election of the qualified Director or employee, such
deferred compensation may be paid in a lump sum or in monthly installments over
a period from 5 to 20 years. Approximately 39 Directors and employees
participate in these arrangements and become general creditors of the Company
thereunder. The Company's total obligation to these participants, which is
unsecured, was approximately $4.0 million as of December 31, 1998.
 
EXECUTIVE OR OTHER SEVERANCE AGREEMENTS
 
  Chief Executive Officer
 
     Pursuant to the Employment Agreement, each of the Company and BCBSGA
employs Mr. Shirk as President and Chief Executive Officer. The Employment
Agreement has a term of two years commencing on January 1, 1997, provided that
the term of the Employment Agreement automatically extends for an additional
month on the first day of each month so that the Employment Agreement always has
an unexpired term of two years unless the Board of Directors of either the
Company or BCBSGA affirmatively notifies Mr. Shirk to the contrary in writing,
in which event the monthly term extension ceases and the two year term becomes
fixed. The Employment Agreement provides Mr. Shirk with an annual base salary of
$425,000, which may be adjusted upward by the Boards of Directors or the
Compensation Committees of the Company and BCBSGA. The Employment Agreement
entitles Mr. Shirk to participate in all incentive compensation plans of the
Company and BCBSGA on a basis consistent with his position, but in no event less
than on an equal basis with any other executives of the Company and BCBSGA.
 
     The Employment Agreement provides that if Mr. Shirk is terminated for any
reason other than "For Cause" or by Mr. Shirk for "Good Reason," then "all
payments" (broadly defined to include salary and certain other benefits under
the Employment Agreement) shall continue at the same rate for a period of two
years. If Mr. Shirk's employment is terminated "For Cause," or Mr. Shirk
voluntarily terminates his employment without "Good Reason," Mr. Shirk will not
be entitled to any compensation whatsoever after the effective date of
termination other than benefits as may be vested at such time. The Employment
Agreement defines "For Cause" as (i) the willful engagement by Mr. Shirk in
conduct, or the taking by him of any action, which is materially injurious to
the Company of BCBSGA, (ii) the willful and repeated failure by Mr. Shirk to
substantially perform his duties; or (iii) gross misconduct or conduct involving
moral turpitude. The Employment Agreement provides that "For Cause" shall first
be determined by the Governance Committees of the Boards of Directors of the
Company and BCBSGA and then approved by an absolute majority of the members of
the Boards of Directors of the Company and BCBSGA. The Employment Agreement
affirmatively provides that differences in management philosophy or the
structure of operations of the Company or BCBSGA shall not be deemed to be "For
Cause."
 
     The Employment Agreement provides that in the event Mr. Shirk dies while
employed, he is entitled to three months of salary and all other compensation
benefits, and thereafter all benefits shall terminate except benefits which are
vested on or prior to the date of death. In the event that Mr. Shirk becomes
physically or mentally disabled, he would become entitled to a continuation of
his salary for two years, and his benefit under the RDS SERP would immediately
become vested. The Employment Agreement entitles Mr. Shirk to six weeks of
vacation each year, an automobile allowance, and the right to reimbursement for
the cost of memberships in luncheon and civic clubs and for any costs and
expenses incurred in connection with the negotiation or renegotiation of the
Employment Agreement or the enforcement of any provision thereof.
 
     The Employment Agreement provides Mr. Shirk with the RDS SERP. The
Employment Agreement also provides that if any portion of payments under the
Employment Agreement or any other agreement or plan of the Company or BCBSGA
qualifies as an "excess parachute payment" under Section 280G of the Code and is
thereby subject to excise tax as described in Section 4999 of the Code, the
Company and
 
                                       42
<PAGE>   45
 
BCBSGA will provide Mr. Shirk with a cash Gross Up Payment equal to Mr. Shirk's
excise tax liability plus an additional amount to cover Mr. Shirk's state and
Federal income taxes on the Gross Up Payment.
 
  Change in Control Severance Agreements
 
     In January 1998, the Company entered into individual Change in Control
Severance Agreements with 38 key employees. Ten executives entered into Tier I
agreements, and 28 key employees entered into Tier II agreements. These
agreements each have an initial term that ends on December 31, 2001, which is
automatically extended for an additional year absent notice from either party or
upon a public announcement of an intended Change in Control of the Company.
 
     The agreements provide that if, during the term of the agreement, the
employment of the employee is terminated by the Company without "Cause," by the
employee for "Good Reason" or due to disability following a public announcement
of an intended Change in Control of the Company, or if the Company fails to
renew the agreement within 90 days prior to the public announcement of an
intended Change in Control, then the employee becomes entitled to payment of
severance benefits in a lump sum no later than 30 days following termination of
employment. Shareholder approval of the Merger would constitute a Change in
Control.
 
     The severance benefits for employees under the agreements include:
 
          (i) all earned but unpaid base salary, earned and accrued vacation
     pay, universal leave pay, unreimbursed business expenses and other amounts
     owed;
 
          (ii) an amount equal to two times (for Tier II, one times) the sum of
     (a) and (b) where (a) equals the greater of annual base salary at the time
     of termination or annual base salary prior to public announcement of
     intended Change in Control, and (b) equals the average of the bonuses, if
     any, received by the employee under the Company's Annual Incentive Plan and
     the Company's Long-Term Incentive Plan during the two-year period that
     ended immediately before the year in which the public announcement of the
     intended Change in Control occurs;
 
          (iii) if the employee is at least age 50 or has completed ten "years
     of service" (as defined in the Retirement Plan) as of the date of
     termination, for purposes of calculating his benefits under the Retirement
     Plan, the SERP, the Restoration Plan or any other tax-qualified or
     non-qualified defined benefit pension plan, he shall be considered to be
     100% vested as of the date of his termination and he shall be considered to
     have either three additional years of service or three additional years of
     age, whichever produces the greater benefit payable to the employee (except
     that the additional three years of service will not be eligible for the
     double counting under the SERP);
 
          (iv) an amount sufficient for the employee to purchase health and
     dental insurance, life insurance and long-term disability insurance
     coverage for himself and his dependents for 24 months, at the same cost and
     level of coverage as the employee had at his date of termination (with the
     COBRA continuation period beginning on date of termination); and
 
          (v) up to $20,000 (for Tier II, up to $10,000) of outplacement
     services from a nationally recognized outplacement firm chosen by the
     employee.
 
     The Change in Control Severance Agreements also provide that if a Change in
Control occurs during the term of the agreement, or if an intended Change in
Control is publicly announced within 90 days after the term of the agreement has
ended, certain benefits become payable regardless of whether the employee is
terminated from employment. These benefits include (i) the bonus, if any, which
would be earned under the Company's Annual Incentive Plan if the level of goal
achievement were annualized, then adjusted on a pro rata basis for the number of
days that the employee was actually employed during the year, and (ii) the
amount payable under the award to the employee under the PUP. These amounts are
required to be paid no later than 30 days following the Change in Control. In
addition, all stock options, restricted stock or performance shares that have
been granted to the employee during the term of the agreement become fully
vested upon a Change in Control.
 
                                       43
<PAGE>   46
 
     Each of the Change in Control Severance Agreements contains provisions
requiring the Company to provide the employee an additional cash payment
sufficient to cover any Excise Tax Payment and an additional Gross Up Payment.
 
     The Named Executive Officers who have entered into Tier I Change in Control
Severance Agreements are Richard F. Rivers, John A. Harris, Mark Kishel, and
Richard A. Steinhausen.
 
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
 
     There were no transactions or relationships requiring disclosure under Item
404 of Regulation S-K for the fiscal year ended December 31, 1998.
 
DIRECTORS' COMPENSATION
 
     Non-employee Directors each receive aggregate annual retainers of $20,000
for service on the Board of Directors of the Company and BCBSGA plus meeting
fees for attendance at Board of Directors and Committee meetings of the Company
and of BCBSGA. The Chairman, the Vice Chairman and each Committee Chairman
receive additional aggregate retainers of $10,000, $5,000 and $3,000,
respectively. Each non-employee Director receives $1,000 for attendance at Board
of Directors meetings, $1,000 for attendance at Committee meetings and $500 for
participation in telephone meetings for each of the two companies. Each
non-employee Director may defer his or her Director fees pursuant to certain of
the Company's non-qualified, deferred compensation plans. Directors also are
reimbursed for reasonable expenses incurred in connection with the performance
of their duties.
 
COMPENSATION COMMITTEE; INTERLOCKS AND INSIDER PARTICIPATION
 
     The Compensation Committee is comprised of Directors Vereen (Chair),
Gillespie, Gregory, Hanna and Tolbert. Mr. LaBoon sits with the Compensation
Committee ex officio. The Compensation Committee meets quarterly. The
Compensation Committee sets the compensation for the Chief Executive Officer and
the other Named Executive Officers at a meeting early in each fiscal year after
reviewing, in each case, the performance targets established for the prior year
in comparison to the prior year's actual performance. At this meeting the
Compensation Committee also sets performance targets for the new fiscal year as
well as any targets for additional compensation plans pursuant to which the
Chief Executive Officer and the other Named Executive Officers may earn
compensation with respect to that fiscal year and sets annual salaries in
accordance with the same considerations. None of the members of the Compensation
Committee is or has ever been an officer or employee of the Company. There were
no interlocking relationships between any executive officers of the Company and
any entity whose Directors or executive officers served on the Company's
Compensation Committee. None of the members of the Compensation Committee
engaged in transactions or had relationships requiring disclosure under Item 404
of Regulation S-K in the fiscal year ended December 31, 1998.
 
ITEM 12.  SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
 
     Currently, no shares of Common Stock are outstanding or beneficially owned
by any person and no shares of Blank Preferred Stock are outstanding or
beneficially owned by any person.
 
     As of February 28, 1999, a total of 70,323 eligible subscribers held
409,392 shares of Class A Stock, all of which were outstanding.
 
     The Foundation owns 53,150 shares (or approximately 13%) of the Class A
Stock. Pursuant to a Shareholders' Agreement between the Company and the
Foundation, dated September 22, 1998 (the "Shareholders Agreement"), the
Foundation is not entitled to vote any shares in excess of 5% of the Class A
Stock, or 20,469 shares of Class A Stock as of December 3, 1998. The address of
the Foundation is: c/o Long Aldridge & Norman LLP, 303 Peachtree Street, Suite
5300, Atlanta, Georgia 30308.
 
     No directors or officers of the Company or of BCBSGA beneficially own any
shares of capital stock of the Company except Frank J. Hanna, III and John W.
Robinson, Jr. Mr. Robinson owns five shares (less than
                                       44
<PAGE>   47
 
1%) of the Class A Stock outstanding. Georgia Strategic Healthcare, LLC ("GSH")
owns 40,000 (approximately 80%) of the Preferred Stock outstanding. Frank J.
Hanna, III, Frank J. Hanna, Jr. and David Hanna share voting and dispositive
power with regard to all of the shares of Preferred Stock owned by GSH. Frank J.
Hanna, III, is, therefore, deemed to be the indirect beneficial owner of the
40,000 shares held by GSH. The address of GSH is: Suite 1750, Two Ravinia Drive,
Atlanta, Georgia 30346.
 
     On July 9, 1998, the Company entered into an agreement and plan of merger
with WellPoint and a subsidiary of WellPoint. Pursuant to the Merger, the
Company will become a wholly-owned subsidiary of WellPoint. Finalization of the
transaction is subject to, among other things, the approval of the shareholders
of the Company, the Commissioner of Insurance of the State of Georgia and BCBSA.
Upon closing the transaction, shareholders of the Company will exchange their
shares for WellPoint shares or cash in a transaction valued at $500 million.
 
ITEM 13.  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
 
     None.
 
                                       45
<PAGE>   48
 
                                    PART IV
 
ITEM 14.  EXHIBITS, FINANCIAL STATEMENTS, FINANCIAL STATEMENT SCHEDULES AND
          REPORTS ON FORM 8-K
 
     (a) The following documents are filed as part of this Annual Report on Form
10-K.
 
     1. The following financial statements are incorporated by reference into
Part II, Item 8 of this Form 10-K:
 
        Report of Independent Auditors Consolidated Balance Sheets -- December
         31, 1998 and 1997
        Consolidated Statements of Income -- Years Ended December 31, 1998, 1997
         and 1996
        Consolidated Statements of Comprehensive Income -- Years Ended December
         31, 1998, 1997 and 1996
        Consolidated Statements of Shareholders' Equity -- Years Ended December
         31, 1998, 1997 and 1996
        Consolidated Statements of Cash Flows -- Years Ended December 31, 1998,
         1997 and 1996
        Notes to Consolidated Financial Statements
 
     2. Financial Statement Schedules
 
         Schedule II -- Condensed Financial Information of Registrant
         Schedule V -- Valuation and Qualifying Accounts
 
     All other schedules are omitted because they are not applicable, not
required or the information is included elsewhere in the Consolidated Financial
Statements or Notes thereto. The financial statement schedules follow the
signature page.
 
     3. Exhibits
 
<TABLE>
<CAPTION>
EXHIBIT
NUMBER                                 DESCRIPTION
-------                                -----------
<C>       <C>  <S>
   2.1    --   Blue Cross and Blue Shield of Georgia, Inc. Plan of
               Conversion, filed with the Insurance Department of the State
               of Georgia, October 30, 1995.(1)
   2.2    --   Form A Statement regarding the Acquisition of Control of or
               Merger with a Domestic Insurer filed with respect to Blue
               Cross and Blue Shield of Georgia, Inc. by Cerulean
               Companies, Inc. on October 30, 1995, as amended and
               supplemented.(1)
   2.3    --   Conversion Order dated December 27, 1995 from Georgia
               Insurance Commissioner.(1)
   2.4    --   Agreement and Plan of Merger, dated July 9, 1998, by and
               among Cerulean Companies, Inc., WellPoint Health Networks
               Inc. and Water Polo Acquisition Corp.(2)
   3.1    --   Amended Articles of Incorporation of Cerulean Companies,
               Inc.(3)
   3.2    --   Bylaws of Cerulean Companies, Inc.(1)
   4.1    --   Stock Escrow Agreement among Cerulean Companies, Inc., Blue
               Cross and Blue Shield of Georgia, Inc. and SunTrust Bank,
               Atlanta.(1)
   4.2    --   Specimen form of Class A Convertible Common Stock
               certificate.(1)
   4.3    --   Amended Articles of Incorporation of Cerulean Companies,
               Inc. (included in Exhibit 3.1).(3)
  10.1    --   Administrative Services Agreement between the State
               Personnel Board and Blue Cross and Blue Shield of Georgia,
               Inc., dated July 1, 1994.(1)
  10.2    --   Plaza Lease Capital Plaza Associate ("Landlord") and Blue
               Cross and Blue Shield of Georgia, Inc. ("Tenant") dated
               December 23, 1986.(1)
</TABLE>
 
                                       46
<PAGE>   49
 
<TABLE>
<CAPTION>
EXHIBIT
NUMBER                                 DESCRIPTION
-------                                -----------
<C>       <C>  <S>
  10.3    --   Executive Compensation Plans and Arrangements.
               (a) Deferred Compensation Plan.(1)
               (b) Annual Executive Incentive Plan.(1)
               (c) Long-Term Incentive Plan.(1)
               (d) First Amendment, effective January 1, 1998, to the
               Employment Agreement between Blue Cross and Blue Shield of
                   Georgia, Inc., Cerulean Companies, Inc., and Richard D.
                   Shirk, dated January 1, 1997.(4)
               (e) Performance Unit Plan, effective February 2, 1996.(5)
               (f) First Amendment, effective January 1, 1998, to the
               Agreement for Supplemental Executive Retirement Benefits
                   between Blue Cross and Blue Shield of Georgia, Inc. and
                   Richard D. Shirk, dated December 1, 1996.(4)
               (g) Blue Cross and Blue Shield of Georgia, Inc. Supplemental
               Executive Retirement Plan effective July 1, 1996.(6)
               (h) Blue Cross and Blue Shield of Georgia, Inc. Executive
               Benefit Restoration Plan effective July 1, 1996.(6)
               (i) Form of Change in Control Severance Protection Agreement
               for Certain Employees of: Cerulean Companies, Inc., Blue
                   Cross and Blue Shield of Georgia, Inc., HMO Georgia,
                   Inc., Greater Georgia Life Insurance Company, Inc., and
                   Group Benefits of Georgia, Inc., effective January 1,
                   1998, entered into by Cerulean Companies, Inc., and each
                   of Messrs. Raymond J. Colleran, John A. Harris, Mark
                   Kishel, M.D., Richard A. Steinhausen, R. Neil Vannoy,
                   Hugh J. Stedman, Richard F. Rivers, Robert A. Yungk and
                   two additional management employees of Blue Cross and
                   Blue Shield of Georgia, Inc.(7)
               (j) Form of Change in Control Severance Protection Agreement
               for Certain Employees of: Cerulean Companies, Inc., Blue
                   Cross and Blue Shield of Georgia, Inc., HMO Georgia,
                   Inc., Greater Georgia Life Insurance Company, Inc. and
                   Group Benefits of Georgia, Inc., effective January 1,
                   1998, entered into by Cerulean Companies, Inc. and
                   twenty-eight management employees in addition to those
                   listed in Exhibit 10.3(i).(7)
  10.4    --   $55,000,000 Insolvency Credit Agreement dated as of April
               18, 1996 among Blue Cross and Blue Shield of Georgia, Inc.,
               the Banks Listed Herein and Wachovia Bank of Georgia, N.A.,
               as agent.(1)
  21      --   Subsidiaries of the registrant.(1)
</TABLE>
 
---------------
 
(1) This exhibit to Form S-1, Registration No. 333-2796, effective May 14, 1996
    and subsequent amendments are incorporated herein by reference.
(2) This Appendix A of Form S-4, Registration No. 333-64955, filed by WellPoint
    Health Networks, Inc. on September 30, 1998, is incorporated herein by
    reference.
(3) This exhibit to Form 10-Q filed on November 13, 1998 is incorporated herein
    by reference.
(4) This exhibit to Form 10-Q filed on May 15, 1998 is incorporated herein by
    reference.
(5) This exhibit to Form 10-Q filed on November 14, 1997 is incorporated herein
    by reference.
(6) This exhibit to Form 10-K filed on March 31, 1998 is incorporated herein by
    reference.
(7) This exhibit to Form 10-Q filed on August 14, 1998 is incorporated herein by
    reference.
 
     (b) Reports on Form 8-K
 
     The Company filed a report on Form 8-K dated August 21, 1998. This filing
was made in connection with the endowment of a non-profit foundation described
in Note 8 to the Consolidated Financial Statements at Item 8 of this Form 10-K
which is incorporated herein by reference.
 
     The Company filed a report on Form 8-K dated September 18, 1998. This
filing was made in connection with the September 18, 1998 lawsuit described in
Item 3. "Legal Proceedings," which is incorporated herein by reference.
 
                                       47
<PAGE>   50
 
     (c) Exhibits
 
     The following additional exhibit is being filed concurrently with this
report.
 
<TABLE>
<CAPTION>
EXHIBIT
NUMBER                               DESCRIPTION
-------                              -----------
<C>     <C>  <S>
  27    --   Financial Data Schedule (for SEC use only).*
</TABLE>
 
---------------
 
* This exhibit is filed herewith.
 
                                       48
<PAGE>   51
 
                                   SIGNATURES
 
     Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934 as amended, the Registrant has duly caused this report to
be signed on its behalf by the undersigned, thereunto duly authorized in the
City of Atlanta, State of Georgia, on March 26, 1999.
 
                                          CERULEAN COMPANIES, INC.
                                                (Registrant)
 
                                          By:     /s/ RICHARD D. SHIRK
                                            ------------------------------------
                                                      Richard D. Shirk
                                                         President
 
     Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed by the following persons on behalf of the Company and in
the capacities indicated on March 26, 1999.
 
<TABLE>
<CAPTION>
                      SIGNATURE                                      TITLE
                      ---------                                      -----
<S>                                                      <C>                             <C>
 
/s/ RICHARD D. SHIRK                                     President
-----------------------------------------------------      (Principal Executive
      Richard D. Shirk                                     Officer)
                                                           and Director
 
/s/ JOHN A. HARRIS                                       Treasurer
-----------------------------------------------------      (Principal Financial and
      John A. Harris                                       Accounting Officer)
 
/s/ WILLIAM A. ALIAS, JR.                                Director
-----------------------------------------------------
      William A. Alias, Jr.
 
/s/ ELIZABETH W. CAMP                                    Director
-----------------------------------------------------
      Elizabeth W. Camp
 
/s/ EDWARD M. GILLESPIE                                  Director
-----------------------------------------------------
      Edward M. Gillespie
 
/s/ JOSEPH D. GREENE                                     Director
-----------------------------------------------------
      Joseph D. Greene
 
/s/ MEL H. GREGORY, JR.                                  Director
-----------------------------------------------------
      Mel H. Gregory, Jr.
 
/s/ FRANK J. HANNA, III                                  Director
-----------------------------------------------------
      Frank J. Hanna, III
 
/s/ R. PIERCE HEAD, JR.                                  Director
-----------------------------------------------------
      R. Pierce Head, Jr.
 
/s/ WARREN Y. JOBE                                       Director
-----------------------------------------------------
      Warren Y. Jobe
 
/s/ JAMES L. LABOON, JR.                                 Director
-----------------------------------------------------
      James L. LaBoon, Jr.
</TABLE>
 
                                       49
<PAGE>   52
 
<TABLE>
<CAPTION>
                      SIGNATURE                                      TITLE
                      ---------                                      -----
<S>                                                      <C>                             <C>
 
/s/ JAMES H. LEIGH, JR., M.D.                            Director
-----------------------------------------------------
      James H. Leigh, Jr., M.D.
 
/s/ JAMES R. LIENTZ, JR.                                 Director
-----------------------------------------------------
      James R. Lientz, Jr.
 
/s/ JULIA L. MITCHELL-IVEY                               Director
-----------------------------------------------------
      Julia L. Mitchell-Ivey
 
/s/ JOHN W. ROBINSON, JR.                                Director
-----------------------------------------------------
      John W. Robinson, Jr.
 
/s/ ARNOLD M. TENENBAUM                                  Director
-----------------------------------------------------
      Arnold M. Tenenbaum
 
/s/ FRED L. TOLBERT, JR.                                 Director
-----------------------------------------------------
      Fred L. Tolbert, Jr.
 
/s/ W. JERRY VEREEN                                      Director
-----------------------------------------------------
      W. Jerry Vereen
 
/s/ JOE M. YOUNG                                         Director
-----------------------------------------------------
      Joe M. Young
</TABLE>
 
                                       50
<PAGE>   53
 
                                                                     SCHEDULE II
 
                     CERULEAN COMPANIES, INC. (PARENT ONLY)
 
                            CONDENSED BALANCE SHEETS
 
<TABLE>
<CAPTION>
                                                                     DECEMBER 31,
                                                              ---------------------------
                                                                  1998           1997
                                                              ------------   ------------
<S>                                                           <C>            <C>
                                         ASSETS
Investment in subsidiaries..................................  $232,794,069   $202,553,748
Investments in available-for-sale securities................    10,841,198     27,881,234
Cash and cash equivalents...................................    12,957,346      8,892,626
Accrued interest and other assets...........................    11,461,886      4,306,645
                                                              ------------   ------------
          Total assets......................................  $268,054,499   $243,634,253
                                                              ============   ============
 
                          LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
  Accounts payable and accrued expenses.....................  $  5,729,415   $  1,951,423
                                                              ------------   ------------
          Total liabilities.................................     5,729,415      1,951,423
Mandatorily redeemable preferred stock:
  Class B Convertible Preferred Stock, no par value.
     Authorized, issued and outstanding, 49,900 shares at
      December 31, 1998 and 1997; aggregate liquidation
      preference, $49,900,000; aggregate mandatory
      redemption $44,910,000................................    46,646,042     46,646,042
                                                              ------------   ------------
Shareholders' equity:
  Blank Preferred Stock, no par value.
     Authorized and unissued 100,000,000 shares.............            --             --
  Series A Preferred Stock, no par value, $0.01 stated
     value.
     Authorized and unissued 64,000 shares..................            --             --
  Class A Convertible Common Stock, no par value, $0.01
     stated value.
     Authorized 50,000,000 shares; issued and outstanding
      409,392 and 351,545 shares at December 31, 1998 and
      1997, respectively....................................         4,094          3,515
  Additional paid-in capital................................    45,188,422             --
  Common Stock, no par value.
     Authorized and unissued 100,000,000 shares.............            --             --
  Stock warrants exercisable................................    29,968,000             --
  Accumulated other comprehensive income (unrealized
     appreciation on securities, net of taxes)..............    19,596,908     13,949,895
  Retained earnings.........................................   120,921,618    181,083,378
                                                              ------------   ------------
          Total shareholders' equity........................   215,679,042    195,036,788
                                                              ------------   ------------
          Total liabilities and shareholders' equity........  $268,054,499   $243,634,253
                                                              ============   ============
</TABLE>
 
                                       51
<PAGE>   54
 
                                                         SCHEDULE II (CONTINUED)
 
                     CERULEAN COMPANIES, INC. (PARENT ONLY)
 
                         CONDENSED STATEMENTS OF INCOME
 
<TABLE>
<CAPTION>
                                                               YEAR ENDED DECEMBER 31,
                                                              -------------------------
                                                                  1998          1997
                                                              ------------   ----------
<S>                                                           <C>            <C>
Investment income...........................................  $  1,653,771   $2,531,695
Realized gains..............................................            --          155
Operating expenses..........................................     7,718,546    1,752,533
                                                              ------------   ----------
Operating income (loss).....................................    (6,064,775)     779,317
Endowment of a non-profit foundation........................   (76,157,000)          --
Non-operating income........................................       255,000           --
                                                              ------------   ----------
Income (loss) before income taxes...........................   (81,966,775)     779,317
Income tax benefit..........................................    (8,981,000)  (3,395,000)
                                                              ------------   ----------
Income (loss) before equity in earnings of subsidiaries.....   (72,985,775)   4,174,317
Equity in earnings of subsidiaries..........................    15,818,016      223,366
                                                              ------------   ----------
Net income (loss)...........................................  $(57,167,759)  $4,397,683
                                                              ============   ==========
</TABLE>
 
                                       52
<PAGE>   55
 
                                                         SCHEDULE II (CONTINUED)
 
                     CERULEAN COMPANIES, INC. (PARENT ONLY)
                       CONDENSED STATEMENTS OF CASH FLOWS
 
<TABLE>
<CAPTION>
                                                                YEAR ENDED DECEMBER 31,
                                                              ---------------------------
                                                                  1998           1997
                                                              ------------   ------------
<S>                                                           <C>            <C>
OPERATING ACTIVITIES
Net income (loss)...........................................  $(57,167,759)  $  4,397,683
Adjustments to reconcile net income (loss) to net cash (used
  in) provided by operating activities:
  Non-cash and non-operating items:
     Equity in earnings of subsidiaries.....................   (15,818,016)      (223,366)
     Accretion..............................................       (16,878)           (22)
     Endowment of a non-profit foundation...................    75,157,000             --
     Non-operating income...................................      (255,000)            --
     Gain on sale of investments............................            --           (155)
  Increase in accrued interest and other assets.............    (7,575,593)    (4,057,591)
  Increase in accounts payable and accrued expenses.........     3,777,992        234,562
  Minority interest in sale of stock and stock warrants by a
     subsidiary.............................................      (245,000)            --
                                                              ------------   ------------
Net cash (used in) provided by operating activities.........    (2,143,254)       351,111
INVESTING ACTIVITIES
Investments purchased.......................................   (36,699,079)   (63,580,809)
Investment in subsidiaries..................................    (8,370,307)    (5,420,000)
Investments sold or matured.................................    53,771,360     35,685,205
                                                              ------------   ------------
Net cash provided by (used in) investing activities.........     8,701,974    (33,315,604)
FINANCING ACTIVITIES
Dividends paid and accrued..................................    (2,994,000)    (2,994,000)
Sale of stock warrants by a subsidiary......................       500,000             --
                                                              ------------   ------------
Net cash used in financing activities.......................    (2,494,000)    (2,994,000)
                                                              ------------   ------------
Increase (decrease) in cash and cash equivalents............     4,064,720    (35,958,493)
Cash and cash equivalents at beginning of year..............     8,892,626     44,851,119
                                                              ------------   ------------
Cash and cash equivalents at end of year....................  $ 12,957,346   $  8,892,626
                                                              ============   ============
</TABLE>
 
                                       53
<PAGE>   56
 
                                                                      SCHEDULE V
 
                            CERULEAN COMPANIES, INC.
 
                       VALUATION AND QUALIFYING ACCOUNTS
                  YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
 
<TABLE>
<CAPTION>
                                              BALANCE AT    CHARGED TO                    BALANCE
                                               BEGINNING     COSTS AND                    AT END
DESCRIPTION                                     OF YEAR      EXPENSES     DEDUCTIONS      OF YEAR
-----------                                   -----------   -----------   -----------   -----------
<S>                                           <C>           <C>           <C>           <C>
Deferred Tax Asset Valuation Allowance
     1998...................................  $62,150,000   $28,764,000   $(1,164,000)  $89,750,000
                                              ===========   ===========   ===========   ===========
     1997...................................  $58,011,000   $10,169,000   $(6,030,000)  $62,150,000
                                              ===========   ===========   ===========   ===========
     1996...................................  $29,805,000   $29,325,000   $(1,119,000)  $58,011,000
                                              ===========   ===========   ===========   ===========
</TABLE>
 
                                       54
<PAGE>   57
 
                                 UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                              WASHINGTON, DC 20549
 
                                   FORM  10-K
 
                            CERULEAN COMPANIES, INC.
                        Commission File number: 333-2796
 
                       CONSOLIDATED FINANCIAL STATEMENTS
                  Years Ended December 31, 1998, 1997 and 1996
                      With Report of Independent Auditors
<PAGE>   58
 
                            CERULEAN COMPANIES, INC.
 
                       CONSOLIDATED FINANCIAL STATEMENTS
                  YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
 
                                    CONTENTS
 
<TABLE>
<CAPTION>
                                                              PAGE
                                                              ----
<S>                                                           <C>
Report of Independent Auditors..............................  F-1
Audited Consolidated Financial Statements
Consolidated Balance Sheets.................................  F-2
Consolidated Statements of Income...........................  F-3
Consolidated Statements of Comprehensive Income.............  F-3
Consolidated Statements of Shareholders' Equity.............  F-4
Consolidated Statements of Cash Flows.......................  F-5
Notes to Consolidated Financial Statements..................  F-6
</TABLE>
<PAGE>   59
 
                         REPORT OF INDEPENDENT AUDITORS
 
Board of Directors
Cerulean Companies, Inc.
 
We have audited the accompanying consolidated balance sheets of Cerulean
Companies, Inc. and subsidiaries as of December 31, 1998 and 1997, and the
related consolidated statements of income, comprehensive income, shareholders'
equity and cash flows for each of the three years in the period ended December
31, 1998. Our audits also included the financial statement schedules listed in
the Index at Item 14(a). These financial statements and schedules are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements and schedules based on our audits.
 
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
 
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Cerulean
Companies, Inc. and subsidiaries at December 31, 1998 and 1997, and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended December 31, 1998, in conformity with generally
accepted accounting principles. Also, in our opinion, the related financial
statement schedules, when considered in relation to the basic financial
statements taken as a whole, present fairly in all material respects the
information set forth therein.
 
                                                           /s/ ERNST & YOUNG LLP
 
February 5, 1999
Atlanta, Georgia
 
                                       F-1
<PAGE>   60
 
                            CERULEAN COMPANIES, INC.
 
                          CONSOLIDATED BALANCE SHEETS
 
<TABLE>
<CAPTION>
                                                                     DECEMBER 31,
                                                              ---------------------------
                                                                  1998           1997
                                                              ------------   ------------
<S>                                                           <C>            <C>
                                         ASSETS
Investments (Note 3):
  Fixed maturities:
    Available-for-sale, at fair value (amortized cost:
$235,441,231; $190,296,461).................................  $239,548,185   $192,850,322
  Equity securities, at fair value (cost: $55,866,571;
    $53,090,009)............................................    76,906,525     67,915,043
  Short-term investments, at fair value (cost: $9,215,878;
    $19,555,875)............................................     9,215,878     19,555,875
                                                              ------------   ------------
         Total investments..................................   325,670,588    280,321,240
Cash and cash equivalents...................................    52,159,196     35,001,855
Accounts receivable (Note 4)................................    61,777,995     59,624,899
Reimbursable portion of estimated benefit liabilities.......    47,816,000     43,278,000
FEP assets held by agent....................................    38,786,536     25,553,200
Property and equipment (Note 5).............................    36,898,538     33,735,541
Other assets................................................    24,232,739     19,017,199
                                                              ------------   ------------
         Total assets.......................................  $587,341,592   $496,531,934
                                                              ============   ============
                          LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
  Estimated benefit liabilities (Note 7)....................  $184,075,293   $149,581,004
  Unearned premiums.........................................    16,077,960      8,301,197
  FEP stabilization reserve.................................    38,786,536     25,553,200
  Accounts payable and accrued expenses.....................    43,893,056     31,210,088
  Other liabilities.........................................    42,184,663     36,704,615
  Note payable (Note 6).....................................            --      3,500,000
                                                              ------------   ------------
         Total liabilities..................................   325,017,508    254,850,104
                                                              ------------   ------------
Mandatorily redeemable preferred stock:
  Class B Convertible Preferred Stock, no par value.
    Authorized, issued and outstanding, 49,900 shares at
     December 31, 1998 and 1997; aggregate liquidation
     preference $49,900,000; aggregate mandatory redemption,
     $44,910,000 (Note 10)..................................    46,645,042     46,645,042
                                                              ------------   ------------
Shareholders' equity:
  Blank Preferred Stock, no par value.
    Authorized and unissued 100,000,000 shares (Note 10)....            --             --
  Series A Preferred Stock, no par value, $0.01 stated
    value.
    Authorized and unissued 64,000 shares (Note 10).........            --             --
  Class A Convertible Common Stock, no par value, $0.01
    stated value.
    Authorized 50,000,000 shares; issued and outstanding
     409,392 and 351,545 shares at December 31, 1998 and
     1997, respectively (Note 10)...........................         4,094          3,515
  Additional paid-in capital................................    45,188,422             --
  Common Stock, no par value.
    Authorized and unissued 100,000,000 shares (Note 10)....            --             --
  Stock warrants exercisable (Note 10)......................    29,968,000             --
  Accumulated other comprehensive income (unrealized
    appreciation on securities, net of taxes)...............    19,596,908     13,949,895
  Retained earnings.........................................   120,921,618    181,083,378
                                                              ------------   ------------
         Total shareholders' equity.........................   215,679,042    195,036,788
  Commitments and contingencies (Note 15)...................            --             --
                                                              ------------   ------------
         Total liabilities and shareholders' equity.........  $587,341,592   $496,531,934
                                                              ============   ============
</TABLE>
 
                            See accompanying notes.
 
                                       F-2
<PAGE>   61
 
                            CERULEAN COMPANIES, INC.
 
                       CONSOLIDATED STATEMENTS OF INCOME
 
<TABLE>
<CAPTION>
                                                               YEAR ENDED DECEMBER 31,
                                                    ----------------------------------------------
                                                         1998             1997            1996
                                                    --------------   --------------   ------------
<S>                                                 <C>              <C>              <C>
Revenues (Note 2):
  Premium revenue.................................  $1,189,665,302   $  989,789,161   $818,350,742
  Management services revenue.....................     117,962,641       96,470,348     87,262,224
  Investment and other income.....................      17,183,747       17,258,952     14,358,273
  Realized gains..................................       9,253,506       11,299,757      4,112,863
                                                    --------------   --------------   ------------
          Total revenues..........................   1,334,065,196    1,114,818,218    924,084,102
Benefits expense (Note 7).........................   1,032,519,546      881,554,366    702,233,786
Operating expenses................................     279,218,246      233,650,574    202,071,817
                                                    --------------   --------------   ------------
Operating income (loss)...........................      22,327,404         (386,722)    19,778,499
Endowment of a non-profit foundation (Note 8).....     (76,157,000)              --             --
Non-operating income (Note 14)....................         255,000        1,275,000      1,275,000
                                                    --------------   --------------   ------------
Income (loss) before income taxes and minority
  interests.......................................     (53,574,596)         888,278     21,053,499
Income tax expense (benefit) (Note 9).............       2,073,000       (2,050,000)     3,159,000
Minority interests in (earnings) losses of joint
  venture investments.............................      (1,520,163)       1,459,405       (421,099)
                                                    --------------   --------------   ------------
          Net income (loss).......................  $  (57,167,759)  $    4,397,683   $ 17,473,400
                                                    ==============   ==============   ============
</TABLE>
 
                            See accompanying notes.
 
                            CERULEAN COMPANIES, INC.
 
                CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
 
<TABLE>
<CAPTION>
                                                               YEAR ENDED DECEMBER 31,
                                                    ----------------------------------------------
                                                         1998             1997            1996
                                                    --------------   --------------   ------------
<S>                                                 <C>              <C>              <C>
Net income (loss).................................  $  (57,167,759)  $    4,397,683   $ 17,473,400
Other comprehensive income, net of tax:
  Unrealized holding gains arising during the
     period, net of reclassification adjustment
     for gains included in net income of
     $7,402,805, $9,039,806, and $3,290,290,
     respectively.................................       5,647,013        6,063,577      1,456,943
                                                    --------------   --------------   ------------
Comprehensive income (loss).......................  $  (51,520,746)  $   10,461,260   $ 18,930,343
                                                    ==============   ==============   ============
</TABLE>
 
                            See accompanying notes.
 
                                       F-3
<PAGE>   62
 
                            CERULEAN COMPANIES, INC.
 
                CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
 
<TABLE>
<CAPTION>
                                CLASS A                                  ACCUMULATED
                              CONVERTIBLE   ADDITIONAL       STOCK          OTHER
                                COMMON        PAID-IN      WARRANTS     COMPREHENSIVE     RETAINED
                                 STOCK        CAPITAL     EXERCISABLE      INCOME         EARNINGS        TOTAL
                              -----------   -----------   -----------   -------------   ------------   ------------
<S>                           <C>           <C>           <C>           <C>             <C>            <C>
Balance at December 31,
  1995......................    $   --      $        --   $        --    $ 6,429,375    $166,610,051   $173,039,426
  Issuance of Class A Common
    Stock to eligible
    subscribers.............     3,506               --            --             --          (3,506)            --
  Net income................        --               --            --             --      17,473,400     17,473,400
  Dividends paid and
    accrued.................        --               --            --             --      (2,727,867)    (2,727,867)
  S-1 registration costs....        --               --            --             --      (1,672,374)    (1,672,374)
  Accumulated other
    comprehensive income
    (unrealized appreciation
    on securities, net of
    taxes of $331,000)......        --               --            --      1,456,943              --      1,456,943
                                ------      -----------   -----------    -----------    ------------   ------------
Balance at December 31,
  1996......................     3,506               --            --      7,886,318     179,679,704    187,569,528
  Issuance of Class A Common
    Stock to eligible
    subscribers.............         9               --            --             --              (9)            --
  Net income................        --               --            --             --       4,397,683      4,397,683
  Dividends paid and
    accrued.................        --               --            --             --      (2,994,000)    (2,994,000)
  Accumulated other
    comprehensive income
    (unrealized appreciation
    on securities, net of
    taxes of $1,543,000)....        --               --            --      6,063,577              --      6,063,577
                                ------      -----------   -----------    -----------    ------------   ------------
Balance at December 31,
  1997......................     3,515               --            --     13,949,895     181,083,378    195,036,788
  Issuance of Class A Common
    Stock to eligible
    subscribers.............         1               --            --             --              (1)            --
  Endowment of a non-profit
    foundation (Note 8).....       578       45,188,422    29,968,000             --              --     75,157,000
  Net income (loss).........        --               --            --             --     (57,167,759)   (57,167,759)
  Dividends paid and
    accrued.................        --               --            --             --      (2,994,000)    (2,994,000)
  Accumulated other
    comprehensive income
    (unrealized appreciation
    on securities, net of
    taxes of $2,121,000)....        --               --            --      5,647,013              --      5,647,013
                                ------      -----------   -----------    -----------    ------------   ------------
Balance at December 31,
  1998......................    $4,094      $45,188,422   $29,968,000    $19,596,908    $120,921,618   $215,679,042
                                ======      ===========   ===========    ===========    ============   ============
</TABLE>
 
                            See accompanying notes.
 
                                       F-4
<PAGE>   63
 
                            CERULEAN COMPANIES, INC.
 
                     CONSOLIDATED STATEMENTS OF CASH FLOWS
 
<TABLE>
<CAPTION>
                                                               YEAR ENDED DECEMBER 31,
                                                    ---------------------------------------------
                                                        1998            1997            1996
                                                    -------------   -------------   -------------
<S>                                                 <C>             <C>             <C>
OPERATING ACTIVITIES
Net income (loss).................................  $ (57,167,759)  $   4,397,683   $  17,473,400
Adjustments to reconcile net income (loss) to net
  cash provided by operating activities:
  Non-cash and non-operating items:
     Depreciation.................................     10,743,267       9,765,395       9,350,458
     Amortization.................................        444,737         277,183         319,673
     Uncollectible receivables....................      1,296,515       1,356,180       1,128,796
     Gain on sale of investments..................     (9,253,506)    (11,299,757)     (4,112,863)
     Loss (gain) on sale of property and
       equipment..................................        184,030         (13,419)         21,304
     Endowment of a non-profit foundation.........     75,157,000              --              --
     Non-operating income.........................       (255,000)     (1,275,000)     (1,275,000)
  (Increase) decrease in certain assets:
     Accounts receivable..........................     (3,449,611)    (14,301,581)     (9,883,655)
     Reimbursable portion of estimated benefit
       liabilities................................     (4,538,000)     (3,840,000)     (2,778,000)
     Other assets.................................     (7,336,540)     (8,751,532)     (3,341,080)
  Increase (decrease) in certain liabilities:
     Estimated benefit liabilities................     34,494,289      30,070,211       9,136,843
     Unearned premiums............................      7,776,763        (682,759)      1,694,830
     Accounts payable and accrued expenses........     12,682,968        (309,640)     14,884,194
     Other liabilities............................      5,480,048      (1,947,055)      6,659,788
     Minority interest in sale of stock and stock
       warrants by a subsidiary...................       (245,000)     (1,225,000)     (1,225,000)
                                                    -------------   -------------   -------------
Net cash provided by operating activities.........     66,014,201       2,220,909      38,053,688
 
INVESTING ACTIVITIES
Investments available-for-sale:
  Investments purchased...........................   (275,784,389)   (211,187,305)   (134,652,892)
  Investments sold or matured.....................    247,011,823     167,660,837      96,757,972
Property and equipment purchased..................    (14,123,924)    (12,434,970)     (7,773,300)
Property and equipment sold.......................         33,630         211,974       1,089,453
                                                    -------------   -------------   -------------
Net cash used in investing activities.............    (42,862,860)    (55,749,464)    (44,578,767)
 
FINANCING ACTIVITIES
Repayment of note payable.........................     (3,500,000)             --              --
Proceeds from note payable........................             --              --       1,500,000
Dividends paid and accrued........................     (2,994,000)     (2,994,000)     (2,727,867)
Proceeds from the issuance of preferred stock.....             --              --      46,645,042
S-1 registration costs............................             --              --      (1,672,374)
Sale of stock and stock warrants by a
  subsidiary......................................        500,000       2,500,000       2,500,000
                                                    -------------   -------------   -------------
Net cash (used in) provided by financing
  activities......................................     (5,994,000)       (494,000)     46,244,801
                                                    -------------   -------------   -------------
 
Increase (decrease) in cash and cash
  equivalents.....................................     17,157,341     (54,022,555)     39,719,722
Cash and cash equivalents at beginning of year....     35,001,855      89,024,410      49,304,688
                                                    -------------   -------------   -------------
Cash and cash equivalents at end of year..........  $  52,159,196   $  35,001,855   $  89,024,410
                                                    =============   =============   =============
</TABLE>
 
                            See accompanying notes.
 
                                       F-5
<PAGE>   64
 
                            CERULEAN COMPANIES, INC.
 
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 
                               DECEMBER 31, 1998
 
1. ORGANIZATION AND PROPOSED MERGER
 
ORGANIZATION
 
     Cerulean Companies, Inc. (the "Company") was incorporated under the laws of
the State of Georgia on February 2, 1996 to act as the holding company for Blue
Cross and Blue Shield of Georgia, Inc. ("BCBSGA") and its subsidiaries, and for
other lawful purposes. On February 2, 1996, the Company acquired all of the
outstanding capital stock of BCBSGA, following BCBSGA's conversion from a
not-for-profit corporation to a for-profit corporation pursuant to a Plan of
Conversion approved by the Georgia Commissioner of Insurance on December 27,
1995 (the "Conversion"). In connection with the Conversion, the Company issued
49,900 shares of Class B Convertible Preferred Stock ("Preferred Stock") to
raise $49,900,000 in capital. After deducting offering costs, the net proceeds
to the Company were $46,645,042.
 
     Although the Company did not become a holding company for BCBSGA until the
Conversion on February 2, 1996, the consolidated results of operations include
the historical operations of BCBSGA and its subsidiaries prior to February 2,
1996 and the Company (including its subsidiaries on a consolidated basis) from
the period February 2, 1996 through December 31, 1996 and thereafter.
 
     Effective May 14, 1996, the Company's registration under the Securities Act
of 1933 of the public offering of its Class A Convertible Common Stock, no par
value (the "Class A Stock") with the Securities and Exchange Commission became
effective. As part of the Conversion, the Company agreed to offer to each of
BCBSGA's approximately 141,000 eligible subscribers five shares of Class A Stock
at no cost. Upon completion of the offering eligible subscribers accepted
351,545 shares of no par value Class A Stock. The registration of the Class A
Stock under section 12(g) of the Securities Exchange Act of 1934 became
effective on June 30, 1997. Currently, the Class A Stock is not publicly traded.
 
PROPOSED MERGER
 
     On July 9, 1998, the Company entered into an agreement and plan of merger
(the "Merger Agreement") with WellPoint Health Networks Inc. ("WellPoint") and a
subsidiary of WellPoint. Pursuant to the Merger Agreement, the Company will
become a wholly-owned subsidiary of WellPoint. Finalization of the transaction
is subject to, among other things, the approval of the shareholders of the
Company, the approval of the Commissioner of Insurance of the State of Georgia,
the approval of the Blue Cross and Blue Shield Association and certain approvals
of the Health Care Financing Administration. Upon closing the transaction,
shareholders of the Company will exchange their shares for WellPoint shares or
cash in a transaction valued at $500 million.
 
2. SIGNIFICANT ACCOUNTING POLICIES
 
BASIS OF PRESENTATION
 
     The Company's accompanying consolidated financial statements have been
prepared in conformity with generally accepted accounting principles ("GAAP")
and require the use of management's estimates. As to the Company's managed care,
health and life insurance operations, GAAP varies in some respects from
statutory accounting practices permitted or prescribed by insurance regulatory
authorities. The Company's health care plan subsidiary, its health maintenance
organization and its life insurance subsidiary are subject to regulation by the
Georgia Insurance Department including minimum capital and surplus requirements
and restrictions on payment of dividends. In the opinion of management, all
material adjustments necessary for a fair presentation of the financial position
and results of operations for the periods presented have been made. All such
adjustments are of a normal recurring nature.
 
                                       F-6
<PAGE>   65
                            CERULEAN COMPANIES, INC.
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
2. SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED)
PRINCIPLES OF CONSOLIDATION
 
     The Company's accompanying consolidated financial statements include the
accounts of the Company, BCBSGA and its wholly-owned life insurance subsidiary,
a health maintenance subsidiary, a non-insurance subsidiary and community health
partnership network joint ventures ("CHPNs"). All significant intercompany
transactions and balances have been eliminated in consolidation.
 
     The Company owns at least 51% of the voting shares of each CHPN. Under
certain circumstances defined in the CHPN shareholder agreements, supermajority
votes of shareholders are required for amendment of the CHPN articles of
incorporation; liquidation of the CHPN; and issuance and repurchase of CHPN
equity. The net effect of supermajority votes in these circumstances results in
consensus of the shareholders, providing minority shareholders protective
rights. Only the Company is required under the CHPN agreements to provide
required additional capital. Future capital requirements of minority
shareholders are limited or prescribed. Profits of CHPNs are allocated to
shareholders in accordance with their respective stock ownership percentages.
Losses are allocated in accordance with ownership interests up to previously
contributed capital; losses exceeding such amounts are absorbed entirely by the
Company.
 
ACCOUNTING FOR A SALE OF STOCK AND STOCK WARRANTS BY A SUBSIDIARY
 
     Gains arising from a subsidiary issuing its own stock and stock warrants to
third parties are recorded as non-operating income and are presented as a
separate line item in the consolidated statements of income.
 
EARNINGS PER SHARE
 
     Earnings per share are omitted because such data is not meaningful at the
present time due to the likely dilutive events that will occur prior to the
conversion of the Class A Stock or the Class B Convertible Preferred Stock.
Presently there is no market for Class A Stock or any equity securities of the
Company.
 
INVESTMENTS
 
     The Company accounts for its investments in accordance with Financial
Accounting Standards Board ("FASB") Statement No. 115, Accounting for Certain
Investments in Debt and Equity Securities ("Statement No. 115"). Statement No.
115 requires that fixed maturity securities are to be classified as either
"held-to-maturity", "available-for-sale", or "trading".
 
     Management determines the appropriate classification of its fixed maturity
securities at the time of purchase and reevaluates such designation as of each
balance sheet date. Fixed maturity securities are classified as held-to-maturity
when the Company has the positive intent and ability to hold them to maturity.
Held-to-maturity securities are stated at amortized cost, adjusted for
amortization of premiums and accretion of discounts to maturity. Such
amortization as well as interest earned is included in investment and other
income.
 
     Fixed maturity and equity securities not classified as held-to-maturity are
classified as available-for-sale. Available-for-sale securities are carried at
fair value, with the unrealized gains and losses, net of tax, reported in a
separate component of shareholders' equity. The amortized cost of debt
securities in this category is adjusted for amortization of premiums and
accretion of discounts to maturity. Such amortization and interest earned is
included in investment and other income. The cost of securities sold is based on
the specific identification method. At December 31, 1998 and 1997, the Company
classified all of its fixed maturity and equity securities as
available-for-sale. The Company's investment portfolio is not significantly
concentrated in any particular industry or geographic region.
 
                                       F-7
<PAGE>   66
                            CERULEAN COMPANIES, INC.
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
2. SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED)
CASH AND CASH EQUIVALENTS
 
     Cash equivalents are liquid, short-term investments with maturities of
three months or less at the time of purchase and are combined with cash account
balances. These investments are stated at cost, which approximates fair value.
 
PROPERTY AND EQUIPMENT
 
     Property and equipment are stated at cost less accumulated depreciation.
The costs of developing software for internal use are capitalized when
technological feasibility has been established. Depreciation is computed using
the straight-line method over the estimated useful lives of the respective
assets, which are 15 years for buildings and 3-7 years for software, furniture
and equipment. Amortization of software developed for internal use begins when
the asset is placed in service.
 
ESTIMATED BENEFIT LIABILITIES
 
     The Company provides for claims reported but unpaid and for claims incurred
but unreported and the cost of adjudicating claims based primarily on past
experience, membership demographics, claims run-off patterns and other current
medical trend information, using accepted actuarial methods. Estimates are
adjusted as changes in these factors occur and such adjustments are reported in
the year of determination. Portions of the Company's estimated benefit
liabilities are reimbursable due to the nature of certain rate stabilization
reserve programs. Offsetting receivables have been recorded in the consolidated
balance sheets.
 
PREMIUM REVENUE AND MANAGEMENT SERVICES REVENUE
 
     The Company's premium revenues consist primarily of premiums for
traditional indemnity health insurance, managed care products and group life
insurance products. All of the Company's individual and employer group contracts
provide for the individual or the group to be fully insured. Premiums for these
contracts are billed in advance of the respective coverage periods and are
initially recorded as premium receivables and as unearned premiums. Unearned
premiums are recognized as earned in the period of coverage.
 
     Management services revenue is earned as services are performed and
consists of administrative fees for services provided to commercial employer
groups under self-funded arrangements, including claims processing, management
of medical services, access to provider networks and for other services rendered
to third parties. Related claims processed for commercial self-funded employer
groups were $499,618,000 in 1998, $489,407,000 in 1997 and $473,506,000 in 1996.
Management services revenue also includes reimbursements for administrative
expenses incurred in performing services as agent for federal and state
government programs and for the national Blue Cross Blue Shield interplan
system. Related claims processed for these programs were $4.3 billion in 1998,
$3.9 billion in 1997 and $3.5 billion in 1996.
 
RATE STABILIZATION RESERVES
 
     The Company has fully insured arrangements with certain employer groups
whose premium revenues are based on experience rating. On each group's
anniversary date, the gain or loss resulting from its experience is determined.
Premium rates for these groups are based on the group's historical claims
experience plus a retention factor for an appropriate contribution to surplus.
Premium revenues include adjustments to employer groups under rate stabilization
contracts to the extent premiums billed exceed claims incurred plus retention.
 
     Any accumulated excess of premium revenues over claims incurred and
retention is recorded as a rate stabilization reserve liability. Under the terms
of these agreements, groups may utilize these funds to reduce
 
                                       F-8
<PAGE>   67
                            CERULEAN COMPANIES, INC.
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
2. SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED)
 
RATE STABILIZATION RESERVES -- (CONTINUED)
prospective rates, leave the excess funds on deposit with the Company or receive
a refund. An accumulated excess of claims incurred over premiums billed is
expensed by the Company in the period incurred. However, in a few shared risk
arrangements, net losses are recorded as receivables to the extent recoverable
from the respective groups.
 
FEDERAL EMPLOYEE PROGRAM
 
     The Company and other Blue Cross and Blue Shield plans participate in the
Federal Employee Program ("FEP") which underwrites a voluntary health insurance
contract for employees (and their dependents) of the federal government. The
Blue Cross and Blue Shield Association has been designated as the contract
agent. A premium stabilization reserve liability (FEP stabilization reserve) and
an offsetting asset (FEP asset held by agent) have been recorded in the
consolidated balance sheets, and premium revenues, investment income and
operating expenses, including FEP operations center expenses, have been recorded
in the consolidated statements of income to recognize the Company's portion of
the FEP's underwriting results.
 
ADVERTISING AND PROMOTION
 
     All costs associated with advertising and promoting products are expensed
in the year incurred. Advertising and promotion expense was $3,780,629 in 1998,
$5,012,557 in 1997 and $1,651,610 in 1996.
 
RECLASSIFICATIONS
 
     Certain prior year balances have been reclassified to conform to the
current year presentation.
 
3. INVESTMENTS
 
     Investments at December 31, 1998 and 1997 are as follows:
 
<TABLE>
<CAPTION>
                                                                              DECEMBER 31, 1998
                                                                        AVAILABLE-FOR-SALE SECURITIES
                                                    ----------------------------------------------------------------------
                                                      COST OR         GROSS         GROSS
                                                     AMORTIZED     UNREALIZED    UNREALIZED        FAIR         CARRYING
                                                        COST          GAINS        LOSSES         VALUE          VALUE
                                                    ------------   -----------   -----------   ------------   ------------
<S>                                                 <C>            <C>           <C>           <C>            <C>
Fixed Maturities:
  U.S. Treasury securities and obligations of U.S.
     government agencies..........................  $160,529,318   $ 2,911,851   $  (414,659)  $163,026,510   $163,026,510
  Corporate securities............................    53,501,824     1,248,926       (41,695)    54,709,055     54,709,055
  Mortgage-backed securities......................    21,410,089       441,500       (38,969)    21,812,620     21,812,620
                                                    ------------   -----------   -----------   ------------   ------------
Total fixed maturities............................   235,441,231     4,602,277      (495,323)   239,548,185    239,548,185
Equity Securities:
  Preferred stocks................................       596,000            --            --        596,000        596,000
  Common stocks...................................    55,270,571    23,701,632    (2,661,678)    76,310,525     76,310,525
                                                    ------------   -----------   -----------   ------------   ------------
Total equity securities...........................    55,866,571    23,701,632    (2,661,678)    76,906,525     76,906,525
Short-term investments............................     9,215,878            --            --      9,215,878      9,215,878
                                                    ------------   -----------   -----------   ------------   ------------
Total available-for-sale securities...............  $300,523,680   $28,303,909   $(3,157,001)  $325,670,588   $325,670,588
                                                    ============   ===========   ===========   ============   ============
</TABLE>
 
                                       F-9
<PAGE>   68
                            CERULEAN COMPANIES, INC.
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
3. INVESTMENTS -- (CONTINUED)
 
<TABLE>
<CAPTION>
                                                                              DECEMBER 31, 1997
                                                                        AVAILABLE-FOR-SALE SECURITIES
                                                    ----------------------------------------------------------------------
                                                      COST OR         GROSS         GROSS
                                                     AMORTIZED     UNREALIZED    UNREALIZED        FAIR         CARRYING
                                                        COST          GAINS        LOSSES         VALUE          VALUE
                                                    ------------   -----------   -----------   ------------   ------------
<S>                                                 <C>            <C>           <C>           <C>            <C>
Fixed Maturities:
  U.S. Treasury securities and obligations of U.S.
     government agencies..........................  $137,711,070   $ 2,006,357   $  (168,937)  $139,548,490   $139,548,490
  Corporate securities............................    27,994,540       419,864       (59,242)    28,355,162     28,355,162
  Mortgage-backed securities......................    24,590,851       376,052       (20,233)    24,946,670     24,946,670
                                                    ------------   -----------   -----------   ------------   ------------
Total fixed maturities............................   190,296,461     2,802,273      (248,412)   192,850,322    192,850,322
Equity Securities:
  Preferred stocks................................       745,000            --            --        745,000        745,000
  Common stocks...................................    52,345,009    15,793,174      (968,140)    67,170,043     67,170,043
                                                    ------------   -----------   -----------   ------------   ------------
Total equity securities...........................    53,090,009    15,793,174      (968,140)    67,915,043     67,915,043
Short-term investments............................    19,555,875            --            --     19,555,875     19,555,875
                                                    ------------   -----------   -----------   ------------   ------------
Total available-for-sale securities...............  $262,942,345   $18,595,447   $(1,216,552)  $280,321,240   $280,321,240
                                                    ============   ===========   ===========   ============   ============
</TABLE>
 
     Fair values for fixed maturities and short-term investments are based on
quoted market prices, where available. For fixed maturities not actively traded,
fair values are estimated using values obtained from independent pricing
services. The fair values for common stocks are based on quoted market prices.
 
     Substantially all of the Company's investments in equity securities at
December 31, 1998 and 1997 are comprised of stocks in industrial companies.
 
     The amortized cost and fair values of fixed maturities at December 31,
1998, by contractual maturity, are shown below. Expected maturities will differ
from contractual maturities because borrowers may have the right to call or
prepay obligations with or without call or prepayment penalties.
 
<TABLE>
<CAPTION>
                                                                    DECEMBER 31, 1998
                                                              AVAILABLE-FOR-SALE SECURITIES
                                                              -----------------------------
                                                                AMORTIZED         FAIR
                                                                  COST            VALUE
                                                              -------------   -------------
<S>                                                           <C>             <C>
Due in one year or less.....................................  $ 31,672,851    $ 31,574,980
Due after one year through five years.......................    83,033,700      84,766,711
Due after five years through ten years......................    97,549,171      99,618,455
Due after ten years.........................................     1,775,420       1,775,419
Mortgage-backed securities..................................    21,410,089      21,812,620
                                                              ------------    ------------
Total fixed maturity securities.............................  $235,441,231    $239,548,185
                                                              ============    ============
</TABLE>
 
     Bonds, certificates of deposit and money market funds carried at a value of
$1,012,538 were on deposit with insurance regulatory authorities at December 31,
1998 in accordance with statutory requirements.
 
                                      F-10
<PAGE>   69
                            CERULEAN COMPANIES, INC.
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
3. INVESTMENTS -- (CONTINUED)
     Investment and other income for the years ended December 31, 1998, 1997 and
1996 is summarized as follows:
 
<TABLE>
<CAPTION>
                                                          YEAR ENDED DECEMBER 31,
                                                  ---------------------------------------
                                                     1998          1997          1996
                                                  -----------   -----------   -----------
<S>                                               <C>           <C>           <C>
Fixed maturities................................  $13,354,658   $11,464,768   $ 9,618,411
Equity securities...............................      881,667     1,302,477     1,057,287
Short-term investments and cash equivalents.....    4,061,482     5,165,927     4,803,801
                                                  -----------   -----------   -----------
Interest and dividend income....................   18,297,807    17,933,172    15,479,499
Less: investment expenses.......................     (771,950)     (947,913)     (834,828)
                                                  -----------   -----------   -----------
Net investment income...........................   17,525,857    16,985,259    14,644,671
Other income (loss).............................     (342,110)      273,693      (286,398)
                                                  -----------   -----------   -----------
Investment and other income.....................  $17,183,747   $17,258,952   $14,358,273
                                                  ===========   ===========   ===========
</TABLE>
 
     The other income (loss) amount for the year ended December 31, 1997
includes the receipt of $579,000 related to the settlement of a lease dispute.
Some terms in the Company's primary lease for its headquarters building were
modified to the benefit of the landlord, and the Company was paid for giving up
its right to those terms.
 
     Realized and unrealized investment gains and losses for the years ended
December 31, 1998, 1997 and 1996 were as follows:
 
<TABLE>
<CAPTION>
                                                          YEAR ENDED DECEMBER 31,
                                                  ---------------------------------------
                                                     1998          1997          1996
                                                  -----------   -----------   -----------
<S>                                               <C>           <C>           <C>
Realized gains:
  Fixed maturities..............................  $ 2,685,201   $   248,942   $   686,260
  Equity securities.............................    8,191,839    11,910,540     4,473,669
                                                  -----------   -----------   -----------
Total gains.....................................   10,877,040    12,159,482     5,159,929
Realized losses:
  Fixed maturities..............................       (7,778)     (127,366)     (244,172)
  Equity securities.............................   (1,615,756)     (732,359)     (802,894)
                                                  -----------   -----------   -----------
Total losses....................................   (1,623,534)     (859,725)   (1,047,066)
                                                  -----------   -----------   -----------
Net realized investment gains...................    9,253,506    11,299,757     4,112,863
Changes in unrealized gains (losses):
  Fixed maturities..............................    1,553,093     1,936,513    (4,251,603)
  Equity securities.............................    6,214,920     5,618,852     6,063,183
  Short-term investments........................           --        51,212       (23,637)
                                                  -----------   -----------   -----------
Net unrealized gains............................    7,768,013     7,606,577     1,787,943
                                                  -----------   -----------   -----------
Total realized and unrealized gains.............  $17,021,519   $18,906,334   $ 5,900,806
                                                  ===========   ===========   ===========
</TABLE>
 
                                      F-11
<PAGE>   70
                            CERULEAN COMPANIES, INC.
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
4. ACCOUNTS RECEIVABLE
 
     Accounts receivable consists of the following:
 
<TABLE>
<CAPTION>
                                                                    DECEMBER 31,
                                                              -------------------------
                                                                 1998          1997
                                                              -----------   -----------
<S>                                                           <C>           <C>
Groups and subscribers......................................  $37,132,624   $37,350,669
Other Blue Cross and Blue Shield plans......................      389,467     2,971,988
Federal Employee Program....................................    3,499,777     3,312,909
Other.......................................................   27,062,123    20,998,784
Less: Allowance for doubtful accounts.......................   (6,305,996)   (5,009,451)
                                                              -----------   -----------
                                                              $61,777,995   $59,624,899
                                                              ===========   ===========
</TABLE>
 
5. PROPERTY AND EQUIPMENT
 
     Property and equipment consists of the following:
 
<TABLE>
<CAPTION>
                                                                   DECEMBER 31,
                                                            ---------------------------
                                                                1998           1997
                                                            ------------   ------------
<S>                                                         <C>            <C>
Land......................................................  $  1,046,773   $  1,046,773
Building and improvements.................................    15,161,667     14,742,097
Furniture and equipment...................................    86,286,171     73,988,271
                                                            ------------   ------------
                                                             102,494,611     89,777,141
Less: accumulated depreciation............................   (65,596,073)   (56,041,600)
                                                            ------------   ------------
                                                            $ 36,898,538   $ 33,735,541
                                                            ============   ============
</TABLE>
 
     At December 31, 1998 and 1997, furniture and equipment includes $3,021,638
and $1,701,673, respectively, of capitalized costs related to the development of
internal use software. During 1998, the Company recognized approximately $90,000
of amortization expense related to costs capitalized for the development of
internal use software. As of December 31, 1997, the software developed for
internal use had not been placed in service; accordingly, no amortization was
recognized during the year.
 
     Depreciation expense was $10,743,267, $9,765,395 and $9,350,458 for 1998,
1997 and 1996, respectively, including $1,187,550 in 1998, $1,063,318 in 1997
and $965,196 in 1996 for building improvements.
 
6. LINES OF CREDIT
 
     The Company has available a $5,500,000 line of credit with a bank to
finance its working capital needs. Interest accrues on amounts advanced at the
prime rate. There were no borrowings on this line of credit during the three
years ended December 31, 1998.
 
     Under the terms of a revolving credit loan agreement with a group of banks
to finance the Company's community health partnership networks and other related
costs, the Company could borrow up to $9,000,000. Borrowings outstanding under
the revolving credit agreement were $3,500,000 at December 31, 1997 and 1996.
Interest accrued on amounts advanced at 0.5% over the LIBOR rate in 1997 and
1996. During January 1998, the Company terminated its $9,000,000 revolving
credit agreement and paid in full the $3,500,000 note payable outstanding at
December 31, 1997.
 
     In April 1996, the Company obtained a $55,000,000 insolvency line of credit
with a group of banks. The insolvency line of credit may be drawn on solely in
the event of an insolvency of BCBSGA to pay authorized insurance policy claims.
The insolvency line of credit is designed to satisfy certain membership
standards of the Blue Cross and Blue Shield Association, from which the Company
and certain of its subsidiaries have the
 
                                      F-12
<PAGE>   71
                            CERULEAN COMPANIES, INC.
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
6. LINES OF CREDIT -- (CONTINUED)
exclusive right to do business in Georgia under the name "Blue Cross and Blue
Shield" and to use the Blue Cross and Blue Shield names, trademarks and service
marks with respect to the Company's indemnity, PPO, HMO and POS products.
 
7. ESTIMATED BENEFIT LIABILITIES
 
     The following table provides a reconciliation of the beginning and ending
estimated benefit liabilities including claims adjudication expenses, net of
rate stabilization reimbursable reserves and life reserves, for 1998, 1997 and
1996:
 
<TABLE>
<CAPTION>
                                                        YEAR ENDED DECEMBER 31,
                                               ------------------------------------------
                                                   1998           1997           1996
                                               ------------   ------------   ------------
<S>                                            <C>            <C>            <C>
Balance at January 1.........................  $149,581,004   $119,510,793   $110,373,950
Less: Reimbursable reserves and life
  reserves...................................    49,699,319     44,663,227     41,587,598
                                               ------------   ------------   ------------
Net balance at January 1.....................    99,881,685     74,847,566     68,786,352
Plus incurred related to:
  Current year...............................   729,799,455    576,250,933    424,307,017
  Prior year.................................   (13,801,953)       901,109     (2,201,775)
                                               ------------   ------------   ------------
  Total incurred.............................   715,997,502    577,152,042    422,105,242
Less paid related to:
  Current year...............................   603,369,042    478,159,277    352,344,803
  Prior year.................................    82,998,478     73,958,646     63,699,225
                                               ------------   ------------   ------------
  Total paid.................................   686,367,520    552,117,923    416,044,028
                                               ------------   ------------   ------------
Net balance at December 31...................   129,511,667     99,881,685     74,847,566
Plus: Reimbursable reserves and life
  reserves...................................    54,563,626     49,699,319     44,663,227
                                               ------------   ------------   ------------
Balance at December 31.......................  $184,075,293   $149,581,004   $119,510,793
                                               ============   ============   ============
</TABLE>
 
     The Company uses paid claims and completion factors based on historical
payment patterns to estimate incurred claims. Changes in payment patterns and
claims trends can result in changes to prior year's claims estimates.
 
     A reconciliation of the Company's incurred expense to total benefits
expense as shown in the consolidated statements of income is as follows:
 
<TABLE>
<CAPTION>
                                                       YEAR ENDED DECEMBER 31,
                                             --------------------------------------------
                                                  1998            1997           1996
                                             --------------   ------------   ------------
<S>                                          <C>              <C>            <C>
Incurred related to current and prior
  year.....................................  $  715,997,502   $577,152,042   $422,105,242
Benefits expense related to life insurance
  claims and claims reimbursed by certain
  rate stabilization accounts..............     316,522,044    304,402,324    280,128,544
                                             --------------   ------------   ------------
Total benefits expense.....................  $1,032,519,546   $881,554,366   $702,233,786
                                             ==============   ============   ============
</TABLE>
 
                                      F-13
<PAGE>   72
                            CERULEAN COMPANIES, INC.
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
8. ENDOWMENT OF NON-PROFIT FOUNDATION
 
     On September 3, 1997, a lawsuit (the "Lawsuit") was filed in the Superior
Court of Fulton County by Plaintiffs Let's Get Together, Inc.; Statewide
Independent Living Council of Georgia, Inc.; Living Independence for Everybody,
Inc.; AIDS Survival Project, Inc.; Women's Policy Education Fund, Inc.;
Disability Connections - The Middle Georgia Center for Independent Living, Inc.;
Physicians for a National Health Program, Inc.; Campaign for a Prosperous
Georgia, Inc.; and Friends and Survivors Standing Together, Inc. (collectively,
the "Plaintiffs") on behalf of themselves and a class putatively composed of all
other 501(c)(3) organizations in Georgia seeking, among other things, to
invalidate a Georgia statute upon which certain aspects of the conversion of
Blue Cross and Blue Shield of Georgia, Inc. from a not-for-profit corporation to
a business corporation was based. The complaint named BCBSGA, the Company and
the Commissioner of Insurance of the State of Georgia as defendants. An
additional, similar request for declaratory ruling was filed with the Georgia
Insurance Department on September 3, 1997.
 
     The Plaintiffs' claims related to the conversion of BCBSGA from a
non-profit entity to a for-profit entity which occurred as part of a Plan of
Conversion submitted to a public hearing November 21, 1995, and approved by the
Georgia Commissioner of Insurance in an order dated December 27, 1995. The
complaint sought to have the fair market value of the assets of BCBSGA as of
December 27, 1995, plus interest from December 27, 1995, placed in a public
trust for the use and benefit of a class of nonprofit charitable organizations.
On October 3, 1997, the Georgia Insurance Department denied the Plaintiffs'
request for declaratory ruling, which decision the Plaintiffs appealed. On
October 31, 1997, the Company and BCBSGA filed a motion to dismiss the Lawsuit.
Oral argument was held on January 12, 1998.
 
     On July 8, 1998, the Company entered into a stipulation and agreement of
settlement of the Lawsuit (the "Settlement") subject to the approval of the
Superior Court of Fulton County, Georgia (the "Court"). On August 17, 1998, six
individuals, including two shareholders, filed a motion to intervene in the
lawsuit and an objection to the Settlement. A settlement hearing was held on
August 20, 1998 to determine, among other things, if the terms and conditions of
the Settlement were fair and reasonable and should be approved by the Court.
 
     On August 21, 1998, the judge denied the motion to intervene and entered a
final order approving the Settlement. The effective date of the Settlement was
September 21, 1998, the date on which the appeal period expired after the entry
of the final order. Under the terms of the Settlement, the Company established a
new non-profit foundation for the advancement of health care for all Georgians
and paid to the foundation, as endowment, and to the Plaintiff's lawyers
(together, the "Foundation"), an aggregate of $1.0 million in cash, and
securities of Cerulean aggregating 20% of Cerulean's total equity upon their
issuance consisting of: (1) shares of Class A Stock approximating 9.5% of the
total equity of Cerulean and (2) warrants (the "Warrants") exercisable for
shares on non-voting Series A Preferred Stock (the "Series A Stock") in the
Company (which will approximate 10.5% of the total equity of the Company) upon
payment by the Foundation of an exercise price of $21 million. Additionally, the
Foundation entered into a shareholder's agreement to which it agreed not to vote
any larger number of its Class A Stock than would constitute 5% of the shares of
its Class A Stock.
 
     In September 1998, the Company issued 57,772 shares of Class A Stock and
63,853 warrants exercisable for non-voting Series A Stock. Pursuant to the terms
of the Warrants, prior to consummation of a transaction such as the proposed
merger with WellPoint, the Warrants must be exercised in a defined "cash-less
exercise" which results in a reduction in the percentage participation by the
Foundation from a 20% portion of the total merger consideration of the Company
to approximately 16.7% of the total.
 
     During 1998, the Company recorded a nonrecurring charge of $76.2 million
for the endowment of the Foundation, which, in management's judgment,
represented fair value as of the date of the Settlement.
 
                                      F-14
<PAGE>   73
                            CERULEAN COMPANIES, INC.
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
9. INCOME TAXES
 
     Income tax expense (benefit) attributable to income before income taxes and
minority interests, substantially all of which is federal, consists of:
 
<TABLE>
<CAPTION>
                                                           YEAR ENDED DECEMBER 31,
                                                    -------------------------------------
                                                       1998         1997          1996
                                                    ----------   -----------   ----------
<S>                                                 <C>          <C>           <C>
Current tax expense...............................  $8,293,000   $ 3,330,000   $6,671,000
Deferred tax benefit..............................  (6,220,000)   (5,380,000)  (3,512,000)
                                                    ----------   -----------   ----------
Total tax expense (benefit).......................  $2,073,000   $(2,050,000)  $3,159,000
                                                    ==========   ===========   ==========
</TABLE>
 
     The provision for income taxes is different than the amount computed using
the statutory federal income tax rate of 35% as follows:
 
<TABLE>
<CAPTION>
                                                          YEAR ENDED DECEMBER 31,
                                                  ---------------------------------------
                                                      1998          1997          1996
                                                  ------------   -----------   ----------
<S>                                               <C>            <C>           <C>
Tax expense (benefit) at statutory rate.........  $(18,751,000)  $   311,000   $7,368,000
Changes in valuation allowance related to:
  Increase in loss carryforwards................    22,085,000            --           --
  Utilization of carryforwards..................            --    (2,356,000)          --
  Alternative minimum tax.......................    (3,282,000)           --   (3,162,000)
  Long-lived tax assets.........................            --    (2,119,000)  (1,590,000)
  CHPN investments..............................      (925,000)   (2,132,000)          --
  CHPN losses with no benefit...................     2,676,000     4,231,000      781,000
  Other temporary differences...................      (542,000)     (375,000)    (320,000)
Other...........................................       812,000       390,000       82,000
                                                  ------------   -----------   ----------
                                                  $  2,073,000   $(2,050,000)  $3,159,000
                                                  ============   ===========   ==========
</TABLE>
 
     The Company recorded a benefit of $26,655,000 in 1998 related to the
Settlement, reduced to its expected realizable value of $4,570,000. The Company
also recorded a $1,619,000 benefit in 1998 for the difference in book and tax
basis for its CHPN investments, reduced to its expected realizable value of
$925,000. CHPN subsidiaries which do not join in the filing of the consolidated
tax return with the Company generated tax losses in 1998 that are not expected
to generate benefit currently or in the foreseeable future. Other includes state
taxes, net of federal tax benefit, and other permanent book to tax differences,
including non deductible expenses.
 
     The Company and its wholly-owned subsidiaries file a consolidated federal
income tax return. Income tax expense consisted primarily of federal alternative
minimum tax in 1998 and 1996. The Company's consolidated tax expense in 1997
calculated under the regular tax system was reduced by available net operating
loss carryforwards, which subjected the Company to alternative minimum tax.
Federal income taxes paid during 1998, 1997 and 1996 were $6,030,000, $2,800,000
and $5,400,000, respectively.
 
                                      F-15
<PAGE>   74
                            CERULEAN COMPANIES, INC.
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
9. INCOME TAXES -- (CONTINUED)
     Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. The significant
components of the deferred tax asset, which is included in other assets in the
consolidated balance sheets, are as follows:
 
<TABLE>
<CAPTION>
                                                                   DECEMBER 31,
                                                            ---------------------------
                                                                1998           1997
                                                            ------------   ------------
<S>                                                         <C>            <C>
Deferred tax asset:
  Regular tax operating loss carryforwards for the
     consolidated tax group...............................  $ 40,400,000   $ 19,590,000
  Regular tax operating loss carryforwards for CHPNs......     8,160,000      6,050,000
  Long-lived tax assets...................................    23,900,000     24,590,000
  Other temporary differences.............................    12,880,000      8,629,000
  Alternative minimum tax credit..........................    16,470,000     10,750,000
  Basis difference in CHPN investments....................     5,350,000      3,731,000
                                                            ------------   ------------
  Total deferred tax asset................................   107,160,000     73,340,000
  Valuation allowance for deferred tax asset..............   (89,750,000)   (62,150,000)
                                                            ------------   ------------
  Deferred tax asset, net of valuation allowance..........    17,410,000     11,190,000
                                                            ------------   ------------
Deferred tax liability:
  Unrealized investment gains.............................     5,550,000      3,429,000
                                                            ------------   ------------
  Total deferred tax liability............................     5,550,000      3,429,000
                                                            ------------   ------------
Net deferred tax asset....................................  $ 11,860,000   $  7,761,000
                                                            ============   ============
</TABLE>
 
     Other temporary differences consist principally of differences between tax
and generally accepted accounting principles related to estimated benefit
liabilities and accounting accruals.
 
     At December 31, 1998, the Company's consolidated tax group has net
operating loss carryforwards of $115,440,000 for regular income tax purposes
that expire in the years 2001 through 2018. Certain of the CHPN subsidiaries
which file separate tax returns have net operating loss carryforwards of
$21,492,000 that expire in 2011 through 2018. The Company recognized a benefit
from consolidated tax group carryforwards of $2,356,000 in 1997.
 
     The Company qualifies for a special deduction under the regular tax system
available to certain Blue Cross and Blue Shield plans under Section 833(b) of
the Internal Revenue Code. The effect of this deduction is to significantly
reduce regular taxable income and subjects the Company to alternative minimum
tax. The Company expects to be taxed under the alternative minimum tax system
into the foreseeable future and therefore principally all of the regular tax net
operating loss carryforwards of the consolidated tax group, the alternative
minimum tax credit and the long-lived tax assets which will not be deductible
until well into the future, will most likely not be utilized. For financial
reporting purposes, a valuation allowance has been recorded to reduce the
deferred tax assets related to the amount expected to be realized. The Company
reviewed the adequacy of the deferred tax valuation allowance and believes it is
appropriate.
 
     During January 1999, the Internal Revenue Service completed its examination
of the Company's consolidated federal income tax returns for 1995 and 1994. The
Company does not believe that the ultimate resolution of the issues will have an
adverse effect on its operations or financial position.
 
                                      F-16
<PAGE>   75
                            CERULEAN COMPANIES, INC.
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
10. CAPITAL STOCK
 
MANDATORILY REDEEMABLE PREFERRED STOCK
 
     The Class B Convertible Preferred Stock (the "Class B Stock") has a
liquidation preference of $1,000 per share and a mandatory redemption value of
$900 per share. Dividends on the Class B Stock are currently paid at the rate of
$60.00 per annum per share ($100.00 per annum per share effective after 1998),
are fully cumulative and accrue without interest. The preferred shares are
mandatorily redeemable on December 1, 2001 or may be redeemed prior to this date
upon the occurrence of certain events. Upon completion of a Stock Conversion,
each share of Class B Stock shall convert into the number of fully paid and
nonassessable shares of Common Stock equal to .0004446420631%. This rate may be
adjusted periodically upon the occurrence of certain events. The holders of the
Class B Stock vote separately as a single class with each share being entitled
to one vote.
 
BLANK PREFERRED STOCK
 
     The Board of Directors (the "Board") of the Company may from time to time
issue shares of Blank Preferred Stock in such series or classes with such terms,
preferences and other provisions as the Board shall determine, provided that
such issuance is approved by the majority of the holders of the Preferred Stock
then issued, outstanding and entitled to vote. Presently, there is no Blank
Preferred Stock issued or outstanding.
 
SERIES A PREFERRED STOCK
 
     The Series A Stock is a new series of preferred stock created specifically
for the Settlement. The Series A Stock has all of the economic attributes of
Class A Stock, and each share of Series A Stock is the economic equivalent of
one share of Class A Stock. The Series A Stock, however, has no voting rights.
In those events in which there is a statutory voting right accorded to any class
or series of capital stock, each share of Series A Stock automatically converts
into one unit of the Company's Class A Common Stock Participation Rights (the
"Company's Rights"). Each of the Company's Rights is the economic equivalent of
one share of Class A Stock but has no voting rights.
 
     The Series A Stock has been authorized by the Company's Board of Directors
and holders of a majority of the outstanding shares of Class B Stock, and an
amendment to the Company's Articles creating the Series A Stock was filed with
the Georgia Secretary of State.
 
CLASS A CONVERTIBLE COMMON STOCK
 
     Prior to December 1, 1998, shares of Class A Stock could not be sold,
transferred, encumbered, pledged or otherwise disposed of except upon the
occurrence of certain events. While there is no established market for the
Company's Class A Stock, following December 1, 1998, these shares became
transferable under certain defined criteria, with a right of first refusal by
the Company. As of December 31, 1998, no shares had been presented to the
Company for transfer that met the defined criteria. In the event of a Stock
Conversion, each share of Class A Stock will be converted into one share of
Common Stock. So long as any shares of the Company's Class B Stock are issued,
outstanding and entitled to vote, no dividends may be paid on the Class A Stock
without the approval of the Board and the holders of a majority of the shares of
Class B Stock. As long as no Common Stock is outstanding, the holders of the
Class A Stock vote separately as a single class with each share being entitled
to one vote. The Company's Articles of Incorporation do not contain any
provisions protecting holders of Class A Stock against dilution. In the event
the Company issues additional shares of Class A Stock, or issues shares of
Common Stock or Blank Preferred Stock convertible into Common Stock or effects a
stock split, stock dividend or other recapitalization of or on its Common Stock,
the then existing Class A Shareholders will be diluted.
 
                                      F-17
<PAGE>   76
                            CERULEAN COMPANIES, INC.
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
10. CAPITAL STOCK -- (CONTINUED)
 
CLASS A CONVERTIBLE COMMON STOCK -- (CONTINUED)
     During 1998, 57,772 shares of Class A Stock were issued as part of the
Settlement. These shares have all of the same terms and provisions as the other
shares of Class A Stock as provided in the Company's Articles, except that the
Foundation, which received shares of Class A Stock as part of the Settlement,
entered into a shareholders' agreement pursuant to which 37,305 shares of the
total 57,772 shares issued are not entitled to vote. Additionally, the
Foundation has the right to tender for redemption shares of Class A Stock for an
aggregate redemption price of $1.0 million. Under the Company's Articles, this
redemption right was required to be separately authorized by holders of a
majority of the shares of Class B Stock which authorization was granted at a
meeting of holders of Class B Stock held on September 15, 1998.
 
COMMON STOCK
 
     Unless approved by two-thirds of the Directors, no person may directly or
indirectly acquire or hold more than the permissible ownership amount which is
currently 20% of the total shares of Common Stock outstanding. So long as any
shares of the Company's Class B Stock are issued, outstanding and entitled to
vote, no dividends may be paid on the Common Stock without the approval of the
Board and the holders of a majority of the shares of Class B Stock. In the event
no Class A Stock or Class B Stock is issued or outstanding at the time of a
liquidation, dissolution or winding up of the affairs of the Company, the entire
assets of the Company available for distribution to stockholders will be
distributed pro rata among the holders of the Common Stock. Each outstanding
share of Common Stock is entitled to one vote. Presently, there is no Common
Stock issued or outstanding.
 
STOCK WARRANTS EXERCISABLE
 
     During 1998, Warrants were also issued as part of the Settlement. The
63,853 warrants are exercisable for shares of non-voting Series A Stock. There
are no circumstances under which the equity interest represented by the Warrants
has any voting rights. The Warrants also provide that upon the occasion of
certain defined "Major Events," the Warrants must be exercised in a cashless
exercise. The effect of this provision is that the Warrants will be
automatically converted into shares of Series A Stock according to a formula
provided in the Warrant Agreement.
 
11. OPERATING LEASES
 
     The Company has an operating lease arrangement for its home office
facility. The term of the lease is ten years, with two five-year renewal
options. Annual rental includes base rental plus pro-rated real estate taxes and
operating expenses.
 
                                      F-18
<PAGE>   77
                            CERULEAN COMPANIES, INC.
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
11. OPERATING LEASES -- (CONTINUED)
     In addition, the Company leases other office space and data processing
equipment. Future minimum lease obligations (including estimated real estate
taxes and operating expenses) under all non-cancelable operating leases are as
follows:
 
<TABLE>
<S>                                                           <C>
1999........................................................  $15,922,531
2000........................................................    5,419,833
2001........................................................    2,257,540
2002........................................................    1,146,223
2003........................................................      921,048
Thereafter..................................................      772,323
                                                              -----------
                                                              $26,439,498
                                                              ===========
</TABLE>
 
     Rent expense amounted to approximately $18,413,000 in 1998, $14,235,000 in
1997, and $12,249,000 in 1996.
 
12. EMPLOYEE BENEFITS
 
     During 1998, the Company adopted Statement of Financial Accounting
Standards ("SFAS") No. 132, Employer's Disclosures about Pensions and Other
Postretirement Benefits. The application of SFAS No. 132 had no impact on the
Company's financial position or results from operations.
 
PENSION PLAN
 
     The Company and its subsidiaries participate in a multi-employer
non-contributory defined benefit pension plan covering substantially all of its
employees. The benefits are based on years of service and the employee's
compensation during those years. The Company's funding policy is to contribute
amounts sufficient to meet the minimum funding requirements set forth in the
Employee Retirement Income Security Act of 1974. Contributions are intended to
provide not only for benefits attributed to service to date but also for those
expected to be earned in the future. The Projected Unit Credit Method is used to
determine funding requirements and pension expense.
 
SUPPLEMENTAL EXECUTIVE RETIREMENT PLAN
 
     During 1996, the Company and its subsidiaries established three defined
benefit pension plans (the "Plans") covering certain executives. The benefits
are based on years of service and the employee's compensation during those
years. The Plans are non-qualified and unfunded. The Projected Unit Credit
Method is used to determine pension expense. The Company will pay benefits to
eligible participants when due under terms of the individual plans.
 
POSTRETIREMENT PLAN
 
     The Company sponsors a Defined Dollar Benefit Plan that provides
postretirement health, dental, vision and life insurance benefits to full-time
associates with at least ten years of service or part-time associates with the
equivalent of ten years full-time employment. These benefits are also available
to spouses. Credits based on length of service are provided to retirees annually
to be used towards the cost of postretirement benefits. Spouses of retirees
receive one half of the credits received by retirees. For those who retired
prior to January 1, 1995, insurance is provided by the Company at no cost to the
retiree. Additionally, a group of associates who meet the "rule of 80" (those
who were at least age 55 with ten years of service, and whose combined years of
service plus age equaled 80 or greater) by December 31, 1994 are grandfathered
and will receive postretirement benefits at no cost whenever they retire.
 
                                      F-19
<PAGE>   78
                            CERULEAN COMPANIES, INC.
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
12. EMPLOYEE BENEFITS -- (CONTINUED)
     The following chart summarizes the change in the plans' benefit obligation,
assets and funded status:
 
<TABLE>
<CAPTION>
                                                                              POSTRETIREMENT
                                                PENSION PLANS                  BENEFIT PLANS
                                          --------------------------   -----------------------------
                                              1998          1997           1998            1997
                                          ------------   -----------   -------------   -------------
<S>                                       <C>            <C>           <C>             <C>
Change in benefit obligation
  Benefit obligation at beginning of
     year...............................  $ 66,669,719   $54,768,635   $  17,802,200   $  16,750,000
  Service cost..........................     5,153,127     3,731,909         581,500         475,900
  Interest cost.........................     5,029,628     4,225,087       1,140,700       1,264,200
  Actuarial loss (gain).................    10,225,989     6,228,498      (1,245,700)         92,700
  Amendments............................       713,929            --              --              --
  Benefits paid.........................    (2,902,658)   (2,284,410)       (727,300)       (780,600)
                                          ------------   -----------   -------------   -------------
  Benefit obligation at end of year.....    84,889,734    66,669,719      17,551,400      17,802,200
                                          ------------   -----------   -------------   -------------
Change in plan assets
  Fair value of plan assets at beginning
     of year............................    56,731,183    46,102,492              --              --
  Actual return on plan assets..........     8,870,572     9,492,285              --              --
  Employer contributions................     2,905,231     3,420,816              --              --
  Benefits paid.........................    (2,902,658)   (2,284,410)             --              --
                                          ------------   -----------   -------------   -------------
  Fair value of plan assets at end of
     year...............................    65,604,328    56,731,183              --              --
                                          ------------   -----------   -------------   -------------
Reconciliation of funded status
  Funded status.........................   (19,285,406)   (9,938,536)    (17,551,400)    (17,802,200)
  Unrecognized actuarial loss (gain)....     7,783,506     2,084,223      (2,854,300)     (1,723,500)
  Unrecognized prior service cost.......     4,676,823     4,512,503              --              --
  Unrecognized transition (asset)
     obligation.........................      (665,153)     (799,526)     12,880,500      13,685,600
                                          ------------   -----------   -------------   -------------
  Net amount recognized.................  $ (7,490,230)  $(4,141,336)  $  (7,525,200)  $  (5,840,100)
                                          ============   ===========   =============   =============
Amounts recognized in the consolidated
  balance sheets consist of:
  Accrued benefit liability.............  $ (7,490,230)  $(4,141,336)  $  (7,525,200)  $  (5,840,100)
  Intangible asset......................      (459,022)     (436,696)             --              --
                                          ------------   -----------   -------------   -------------
  Net amount recognized.................  $ (7,949,252)  $(4,578,032)  $  (7,525,200)  $  (5,840,100)
                                          ============   ===========   =============   =============
Weighted-average assumptions as of December 31,
  Discount rate.........................     6.75%          7.25%          6.75%           7.25%
  Expected long-term rate of return on
     plan assets........................     9.00%          9.00%           N/A             N/A
  Rate of increase in future
     compensation.......................   3.0 - 6.5%    3.5 - 7.0%    Varies by age   Varies by age
</TABLE>
 
                                      F-20
<PAGE>   79
                            CERULEAN COMPANIES, INC.
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
12. EMPLOYEE BENEFITS -- (CONTINUED)
 
<TABLE>
<CAPTION>
                                                                              POSTRETIREMENT
                                       PENSION PLANS                          BENEFIT PLANS
                            ------------------------------------   ------------------------------------
                               1998         1997         1996         1998         1997         1996
                            ----------   ----------   ----------   ----------   ----------   ----------
<S>                         <C>          <C>          <C>          <C>          <C>          <C>
Components of net periodic
  benefit cost:
  Service cost............  $5,153,127   $3,731,909   $3,630,715   $  581,500   $  475,900   $  442,900
  Interest cost...........   5,029,628    4,225,087    4,006,656    1,140,700    1,264,200    1,231,800
  Expected return on plan
     assets...............  (4,580,790)  (3,817,799)  (3,458,760)          --           --           --
  Amortization of
     actuarial loss
     (gain)...............     236,924       67,886      342,990     (114,900)     (23,400)          --
  Amortization of prior
     service cost.........     549,609      462,788      462,787           --           --           --
  Amortization of
     transition obligation
     (asset)..............    (134,373)    (134,373)    (134,373)     805,100      805,100      805,100
                            ----------   ----------   ----------   ----------   ----------   ----------
  Net periodic benefit
     cost.................  $6,254,125   $4,535,498   $4,850,015   $2,412,400   $2,521,800   $2,479,800
                            ==========   ==========   ==========   ==========   ==========   ==========
</TABLE>
 
     The projected benefit obligation, accumulated benefit obligation and fair
value of plan assets for the supplemental executive retirement plan, which has
an accumulated benefit obligation in excess of plan assets, were $2,993,001,
$1,945,537 and $-0-, respectively, as of December 31, 1998, and $2,172,602,
$1,293,029 and $-0-, respectively, as of December 31, 1997.
 
     The postretirement benefit plan valuation is based on census information as
of January 1, 1998 and claims development based on the benefits provided. The
discount rate assumed is 6.75% and the salary increase rate assumed varies by
age. The health care cost trend rate is assumed to be 8.0% in 1998, decreasing
0.5% each year reaching 6.0% in 2002, and 5.25% in 2003 and after. The health
care cost trend rate was assumed to be 8.5% in 1997, decreasing 0.5% each year
to an ultimate rate of 5.25%. The health care cost trend rate assumption has a
significant effect on the amounts reported. For example, increasing the assumed
health care cost trend rates by one percentage point each year would increase
the accumulated postretirement benefit obligation by $982,700 as of December 31,
1998, and the aggregate of the estimated service and interest cost components of
net periodic postretirement benefit cost by $64,100 for 1998. Similarly,
decreasing the assumed health care cost trend rates by one percentage point each
year would decrease the accumulated postretirement benefit obligation by
$840,300 as of December 31, 1998, and the aggregate of the estimated service and
interest cost components of net periodic postretirement benefit cost by $60,700
for 1998.
 
DEFINED CONTRIBUTION PLAN
 
     The Company offers a defined contribution plan ("401(k) plan") covering
substantially all employees. Under this plan, employees can contribute up to 15%
of their base compensation, subject to certain maximum limitations. The Company
matches 50% of the employee's first $500 contributed and 25% thereafter, up to a
maximum of 6% of the employee's annual compensation. The Company's matching
contributions vest 25% per year commencing at the end of the second year of
participation. Employee contributions vest immediately. The Company contributed
$1,125,000 to this 401(k) plan during 1998, $1,031,000 during 1997 and $799,000
during 1996.
 
                                      F-21
<PAGE>   80
                            CERULEAN COMPANIES, INC.
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
13. BUSINESS SEGMENT, CUSTOMER AND PRODUCT INFORMATION
 
     Effective January 1, 1998, the Company adopted SFAS No. 131, Disclosures
about Segments of an Enterprise and Related Information. The application of SFAS
No. 131 had no impact on the Company's financial position or results from
operations.
 
     The Company operates predominantly in one industry segment, health
insurance products and services, and reports its operations as one business
segment. The Company's products and services are sold principally in the State
of Georgia. A significant portion of its customer base is concentrated with
companies that are located in the metropolitan Atlanta area. As a percentage of
total revenues (premium revenues and management services revenues), the
Company's largest customer represented 23% of total revenues in 1998, 27% in
1997 and 30% in 1996. The Company's next two largest customers accounted for
less than 9% of total revenues in 1998, 1997 and 1996.
 
     The Company's total revenues (premium revenues and management services
revenues), by primary product groups are as follows:
 
<TABLE>
<CAPTION>
                                                         1998             1997            1996
                                                    --------------   --------------   ------------
<S>                                                 <C>              <C>              <C>
Indemnity and PPO insurance products and
  services........................................  $  771,080,787   $  727,786,073   $704,328,416
HMO and POS insurance products and services.......     520,317,074      343,613,408    190,500,817
Life insurance and other products and services....      16,230,082       14,860,028     10,783,733
                                                    --------------   --------------   ------------
Total.............................................  $1,307,627,943   $1,086,259,509   $905,612,966
                                                    ==============   ==============   ============
</TABLE>
 
14. NON-OPERATING INCOME
 
     Community health partnership networks ("CHPNs") are locally based equity
joint ventures between the Company, which owns a 51% interest, and local
physician and/or hospital groups, which own the remaining equity interests in
the CHPNs. Clinical services are provided by the physician or hospital partners
as well as other providers with which the CHPNs maintain contracts, and BCBSGA
provides sales, management and administrative services, including information
systems and data management services through service contracts with the CHPNs.
 
     In January 1998, a hospital purchased stock warrants exercisable for common
stock of one of the Company's CHPN subsidiaries in exchange for a $1.0 million
note receivable. The $1.0 million will be paid ratably over two years. As of
December 31, 1998, $500,000 has been received. In accordance with the CHPN
formation agreement, the Company's 51% equity interest was not diluted as a
result of this transaction. The Company recorded non-operating income of
$255,000 for its portion of this transaction and increased the minority interest
liability for this CHPN by $245,000.
 
     In 1996, a hospital purchased a 5% interest in one of the Company's CHPN
subsidiaries. In 1997, another hospital purchased a 5% interest in the same
subsidiary. In accordance with the CHPN formation agreement, the Company's 51%
equity interest was not diluted as a result of these transactions. The Company
recorded non-operating income of $1,275,000 in 1997 and 1996 for its portion of
these transactions and increased the minority interest liability for this CHPN
by $1,225,000 in each year. After deducting deferred income taxes of $255,000,
net income was favorably impacted by $1,020,000 in 1997 and 1996.
 
15. COMMITMENTS AND CONTINGENCIES
 
LEGAL PROCEEDINGS
 
     On December 17, 1998, Plaintiffs Rickey Underhill, Jim Kerscher, Janice
Young, Richard Collins, Greg Lane and Keith Page, individually and on behalf of
all others similarly situated (collectively, the "Bartow County Plaintiffs"),
filed a lawsuit against the Company and BCBSGA in the Superior Court of Bartow
 
                                      F-22
<PAGE>   81
                            CERULEAN COMPANIES, INC.
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
15. COMMITMENTS AND CONTINGENCIES -- (CONTINUED)
 
LEGAL PROCEEDINGS -- (CONTINUED)
County ("the Court of Bartow"), State of Georgia, bearing Civil Action File No.
CV98-2656. The Bartow County Plaintiffs identify themselves as six individuals
who were entitled to receive shares of the Company's stock in connection with
the conversion of BCBSGA from a non-profit corporation to a regular business
corporation. The Bartow County Plaintiffs assert claims for specific
performance, breach of provisions of the Insurance Code of Georgia, and request
declaratory judgment and certification of a class action consisting of all
persons who were "eligible subscribers" of the Company on September 1, 1995, but
who did not become holders of Class A Stock of the Company because their
eligible coverage terminated prior to February 1, 1996. The Bartow County
Plaintiffs allege that they and the members of the purported class are entitled
to receive shares of Class A Stock in the Company. The Bartow County Plaintiffs
allege alternatively that offering materials disseminated by BCBSGA during 1996
relating to Class A Stock of the Company were not disseminated to The Bartow
County Plaintiffs and that Plaintiffs and the purported class members are
entitled to an award of damages in excess of $2.5 million. On January 28, 1999,
the Company and BCBSGA filed answers and a motion to dismiss. The case remains
pending. No discovery has taken place as of this date. After considering the
complaint, management of the Company believes the case to be without merit and,
in any event, believes that its impact on the assets of the Company, if any,
would not be material.
 
     On September 18, 1998, Plaintiffs Allen Saravuth, Nga Nguyen, Chansamone
Sengsavath and Fatana Pirzad, individually and on behalf of all others similarly
situated (collectively, the "Richmond County Plaintiffs"), filed a lawsuit
against the Company, BCBSGA, James L. Laboon, Jr., Fred L. Tolbert, Jr., Richard
D. Shirk, James E. Albright, W. Daniel Barker, Elizabeth W. Camp, Louis H.
Felder, M.D., Edward M. Gillespie, Joseph D. Greene, Mel H. Gregory, Jr., Frank
J. Hanna, III, R. Pierce Head, Jr., Charles H. Keaton, James H. Leigh, Jr.,
M.D., Julia L. Mitchell-Ivey, Charles R. Underwood, M.D.,W. Jerry Vereen, A. Max
Walker, Dan H Willoughby, M.D., Joe M. Young, and John B. Zellars (collectively,
the "Defendant Directors") in the Superior Court of Richmond County ("the Court
of Richmond"), State of Georgia, bearing Civil Action File No. 98-RCCV-806. In
addition, the Richmond County Plaintiffs filed a Motion for Temporary
Restraining Order and Interlocutory Injunctive Relief, which was heard and
denied by the Court of Richmond on September 21, 1998. The Richmond County
Plaintiffs identify themselves as four individuals who were entitled to receive
shares of the Company's stock in connection with the conversion of BCBSGA from a
non-profit corporation to a regular business corporation. The Richmond County
Plaintiffs assert claims for specific performance, fraud, breach of provisions
of the Insurance Code of Georgia, breach of fiduciary duty, and requested
declaratory judgment and certification of a class action consisting of all
persons who were "eligible subscribers" of BCBSGA as of February 1, 1996, and
who did not become holders of Class A Stock of the Company. The Richmond County
Plaintiffs allege that they and the members of the purported class are entitled
to receive shares of Class A Stock in the Company. The Richmond County
Plaintiffs allege alternatively that offering materials disseminated by BCBSGA
during 1996 relating to Class A Stock of the Company contained materially
misleading and deceptive statements and omissions and that the Richmond County
Plaintiffs and the purported class members are entitled to an award of damages
in excess of $100 million. The Richmond County Plaintiffs also assert derivative
causes of action against the Defendant Directors alleging that the Defendant
Directors breached fiduciary duties by, among other things, approving the
placement and issuance of Class B Stock in the Company during 1996, the issuance
of Class A Stock in the Company, the settlement of the Let's Get Together, Inc.
et al. v. Insurance Commissioner, et al., Civil Action E-61714 (Superior Court
of Fulton County, Georgia) lawsuit, and certain management compensation. On
October 28, 1998, the Company and BCBSGA filed answers and a motion to dismiss.
A declaratory judgment hearing was held December 9 and 10, 1998, solely with
respect to whether, as a matter of law, the plaintiffs were to be shareholders
of the Company. On December 17, 1998, the Richmond County court ruled in favor
of the plaintiffs. None of the other matters have been considered. The Company
filed an immediate appeal with the Supreme Court of Georgia on January 26, 1999.
The Supreme Court has accepted jurisdiction
                                      F-23
<PAGE>   82
                            CERULEAN COMPANIES, INC.
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
15. COMMITMENTS AND CONTINGENCIES -- (CONTINUED)
 
LEGAL PROCEEDINGS -- (CONTINUED)
and granted the matter expedited treatment. No date for oral argument has been
set. After considering the derivative claims, management of the Company believes
the case to be without merit and, in any event, believes that its impact on the
assets of the Company, if any, would not be material.
 
     In the normal course of business, the Company is involved in and subject to
claims, contractual disputes and other uncertainties. Management, after
reviewing with legal counsel all of these actions and proceedings, believes that
the aggregate losses, if any, will not have a material effect on the Company's
financial position or results of operations.
 
16. STATUTORY FINANCIAL INFORMATION AND ACCOUNTING PRACTICES
 
     BCBSGA, Greater Georgia Life Insurance Company, a life insurance
subsidiary, and HMO Georgia, Inc., a health maintenance organization are
domiciled in the State of Georgia and prepare their statutory financial
statements in accordance with accounting principles and practices prescribed or
permitted by the Georgia Insurance Department. Currently, prescribed statutory
accounting practices are interspersed throughout state insurance laws and
regulations of the National Association of Insurance Commissioners' ("NAIC")
"Accounting Practices and Procedures Manual" and a variety of other
publications. Permitted statutory accounting practices encompass all accounting
practices that are not prescribed; such practices may differ from state to
state, may differ from company to company within a state and may change in the
future.
 
     In 1998, the NAIC adopted codified statutory accounting principles
("Codification"). Codification will likely change, to some extent, prescribed
statutory accounting practices and may result in changes to the accounting
practices that the Company's subsidiaries use to prepare their statutory
financial statements. Codification will require adoption by the various states
before it becomes the prescribed statutory basis of accounting for insurance
companies domesticated within those states. Accordingly, before Codification
becomes effective for the Company's subsidiaries, the State of Georgia must
adopt Codification as the prescribed statutory basis of accounting on which
domestic insurers must report their statutory-basis results to the Insurance
Department. At this time it is unclear whether Georgia will adopt codification.
However, based on current guidance, management believes that the impact of
Codification will not be material to the statutory-basis financial statements of
the Company's subsidiaries. The Company's insurance subsidiaries do not have
permitted practices which would require authorization by the Georgia Insurance
Department.
 
     The minimum amount of statutory capital and surplus necessary to satisfy
regulatory requirements of the Georgia Insurance Department is $1,000,000 for
BCBSGA and $3,000,000 each for HMO Georgia, Inc. and Greater Georgia Life
Insurance Company. The Company's insurance subsidiaries may distribute dividends
only out of realized profits (undistributed, accumulated, net earnings since
organization). The amount of dividends distributable each year is limited to the
greater of the prior year's net income determined on a statutory basis or 10% of
prior year statutory surplus. In addition, dividends distributable by BCBSGA are
further limited by the Conversion order (approved by the Georgia Commissioner of
Insurance on December 27, 1995 related to BCBSGA's conversion to a for-profit
corporation). Dividend distributions by BCBSGA, HMO Georgia, Inc. and Greater
Georgia Life Insurance Company above these defined limits require special
approval by the State of Georgia Insurance Commissioner.
 
                                      F-24
<PAGE>   83
                            CERULEAN COMPANIES, INC.
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
16. STATUTORY FINANCIAL INFORMATION AND ACCOUNTING PRACTICES -- (CONTINUED)
     The following table presents the amount of statutory capital and surplus
for the Company's insurance subsidiaries:
 
<TABLE>
<CAPTION>
                                                                   DECEMBER 31,
                                                            ---------------------------
                                                                1998           1997
                                                            ------------   ------------
<S>                                                         <C>            <C>
Blue Cross and Blue Shield of Georgia, Inc................  $155,671,616   $142,465,848
HMO Georgia, Inc..........................................    26,017,636     14,136,223
Greater Georgia Life Insurance Company....................    24,971,305     21,804,867
</TABLE>
 
     The following table presents the amount of statutory net income for the
Company's insurance subsidiaries:
 
<TABLE>
<CAPTION>
                                                           YEAR ENDED DECEMBER 31,
                                                    -------------------------------------
                                                       1998          1997         1996
                                                    -----------   ----------   ----------
<S>                                                 <C>           <C>          <C>
Blue Cross and Blue Shield of Georgia, Inc........  $15,131,962   $1,936,150   $7,079,305
HMO Georgia, Inc..................................   11,399,608    8,250,726    6,295,782
Greater Georgia Life Insurance Company............    2,569,111    3,173,718    1,801,316
</TABLE>
 
                                      F-25