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United States
Securities and Exchange Commission
Washington, D.C. 20549

FORM 10-Q

Quarterly Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934

For the Period Ended June 30, 2002

Commission File Number 1-14177

COBALT CORPORATION
(Exact name of registrant as specified in its charter)

(414) 226-6900
(Registrant's telephone number, including area code)

        Indicate by check mark whether registrant (1) has filed all documents and reports required to be filed by Section 13, or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes ý    No o

        Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practical date:

        Common stock outstanding as of July 31, 2002 was 41,106,890

COBALT CORPORATION

INDEX TO
QUARTERLY REPORT ON FORM 10-Q

For the Period Ended June 30, 2002

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PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

COBALT CORPORATION
CONSOLIDATED BALANCE SHEETS

See Notes to Interim Consolidated Financial Statements.

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COBALT CORPORATION
CONSOLIDATED BALANCE SHEETS

See Notes to Interim Consolidated Financial Statements.

4

COBALT CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)

See Notes to Interim Consolidated Financial Statements.

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COBALT CORPORATION
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY AND COMPREHENSIVE INCOME (LOSS)
(UNAUDITED)

See Notes to Interim Consolidated Financial Statements.

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COBALT CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)

See Notes to Interim Consolidated Financial Statements.

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COBALT CORPORATION
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

June 30, 2002

Note A. Basis of Presentation

        The accompanying unaudited interim consolidated financial statements have been prepared in accordance with accounting principles generally accepted for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States ("GAAP") for complete financial statements. In the opinion of management, all adjustments considered necessary for a fair presentation have been included. Operating results for the three and six months ended June 30, 2002 are not necessarily indicative of the results that may be expected for the year ending December 31, 2002. These interim consolidated financial statements should be read in conjunction with the audited consolidated financial statements for the year ended December 31, 2001 and footnotes thereto included in the Cobalt Corporation ("Cobalt" or the "Company") Annual Report on Form 10-K for the year ended December 31, 2001, as filed with the Securities and Exchange Commission ("SEC").

        Cobalt (formerly known as United Wisconsin Services, Inc. ("UWS")) was created as a result of the combination of UWS and Blue Cross & Blue Shield United of Wisconsin ("BCBSUW") on March 23, 2001 (the "Combination"). On that date, BCBSUW converted from a service insurance corporation to a stockholder owned corporation. Upon conversion, BCBSUW became a wholly-owned subsidiary of UWS through the combination of the two companies. At the time of conversion and the Combination, BCBSUW owned approximately 46.6% of UWS' outstanding common stock. In exchange for the ownership of BCBSUW, Cobalt issued 31,313,390 shares of newly issued Company common stock to Wisconsin United for Health Foundation, Inc. (the "Foundation"). The Foundation was established for the sole purpose of benefiting public health in Wisconsin from its earnings in the investment in Cobalt.

        The Combination was accounted for as a purchase by BCBSUW of the remaining 9,096,303 shares of UWS that it did not already own at a market price of $6.15 per share on the closing date. In accordance with GAAP, goodwill was recorded representing the excess of the market price over the adjusted book value of UWS for the 53.4% of UWS that BCBSUW did not already own. For reporting purposes, the Combination is treated as a reverse purchase transaction, whereby BCBSUW becomes the acquirer and reporting entity for public company reporting. The consolidated statements of operations, cash flows, and changes in shareholders' equity and comprehensive income (loss) for the three and six month periods ended June 30, 2002 reflect the operations of the combined UWS and BCBSUW entities. Results for the three month period ended March 31, 2001, which are reflected in the consolidated financial statements for the six months ended June 30, 2001, include only the operations of BCBSUW and its wholly-owned subsidiary, United Government Services, LLC ("UGS") and minority interest in UWS and American Medical Security Group, Inc. ("AMSG"). Results for the three month period ended June 30, 2001, included in the consolidated financial statements for the six months ended June 30, 2001, reflect the operations of the combined UWS and BCBSUW entities. For purposes of calculating earnings per common share ("EPS") of the Company, the 7,949,904 shares of Cobalt common stock owned by BCBSUW are accounted for as treasury stock. The pro forma statement of operations for the six months ended June 30, 2001 for Cobalt presented in Note E, includes the operations of the former UWS and BCBSUW with elimination of intracompany transactions, the recording of purchase accounting adjustments and the amortization of goodwill calculated as if the transaction was completed at the beginning of the reporting period.

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        Continuing operations in the consolidated financial statements subsequent to the Combination include the accounts of the Company's majority owned insurance subsidiaries (BCBSUW, Compcare Health Services Insurance Corporation ("CompcareBlue"), Unity Health Plans Insurance Corporation ("Unity"), Valley Health Plan, Inc. ("Valley"), United Wisconsin Insurance Company ("UWIC"), and United Heartland Life Insurance Company ("UHLIC")) and other non-insurance subsidiaries (UGS, Meridian Resource Company, LLC ("MRC"), Comprehensive Receivables Group, Inc. ("CRG"), United Wisconsin Proservices, Inc. ("Proservices"), United Heartland, Inc. ("UHI") and C.C. Holdings, LLC ("CC Holdings")). All intracompany transactions after March 31, 2001 have been eliminated in consolidation.

Note B. Discontinued Operations

        On March 29, 2002, Cobalt and certain affiliates sold 100% of the membership interest of its subsidiary, Innovative Resource Group, LLC ("IRG"), for $27.0 million ($17.0 million in cash and $10.0 million in a three-year note). IRG was one of Cobalt's specialty companies, which provided behavioral health and medical management services. Accordingly, IRG is accounted for as a discontinued operation for all periods presented. The purchase agreement also provides for certain bonuses/penalties to be received/paid between IRG and Cobalt based on revenues generated from Cobalt and affiliated entities in future years. In addition, the agreement requires certain subsidiaries of Cobalt to enter into seven-year service agreements for the provision of services by IRG.

        The net gain on disposition of discontinued operations was $9.1 million, which includes a realized gain on the sale of $9.6 million, offset by a $0.5 million loss on IRG's operations for the six months ended June 30, 2002. During the second quarter of 2002, additional expenses of $0.3 million, related to the sale, were recorded adjusting the original gain down to $9.6 million from $9.9 million. The net gain on the sale could be adjusted further, based on any payments made in future periods in accordance with the purchase and sale agreement. Income from discontinued operations amounted to $0.1 million for the three and six month periods ended June 30, 2001. This reflects activity for the second quarter of 2001 only, since IRG was not considered part of Cobalt for financial reporting purposes prior to the Combination.

Note C. Net Income (Loss) Per Share

        Basic EPS excludes dilution and is computed by dividing net income (loss) by the weighted average number of common shares outstanding for the period. Diluted EPS is computed by dividing net income

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by the weighted average number of common shares outstanding, adjusted for the effect of dilutive securities for stock options where the exercise price was less than the average market price of the outstanding common shares for the period. When Cobalt reports a net loss, potentially dilutive securities are not included in the calculation of EPS because their inclusion would have an antidilutive effect. EPS for the six months ended June 30, 2001 was calculated based on 36,341,914 shares outstanding, which assumes that the 31,313,390 newly issued shares to the Foundation were outstanding for the entire three months ended March 31, 2001.

Note D. Management's Plan

        In order to assure the Company's regulated insurance subsidiaries continue to satisfy minimum capital and liquidity requirements, the Office of the Commissioner of Insurance of the State of Wisconsin ("OCI") requested, management developed and the Cobalt Board of Directors approved a capital plan at the end of 2001 to improve the Company's position relative to minimum capital and liquidity requirements. See "Management's Discussion and Analysis of Financial Condition and Results of Operations" for further discussion on the capital plan.

Note E. Pro Forma Financial Information (Unaudited)

        The June 30, 2001 pro forma statement of operations for Cobalt includes the operations of UWS and BCBSUW with elimination of intracompany transactions, the recording of purchase accounting adjustments and the amortization of goodwill calculated as if the Combination was completed at the beginning of the reporting period.

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PRO FORMA COBALT STATEMENT OF OPERATIONS

Note F. Investment in AMSG Affiliate

        On June 4, 2002, BCBSUW sold 3,001,500 shares of common stock of AMSG in an underwritten public offering, realizing net proceeds of $50.3 million. This sale followed the March 22, 2002 repurchase by AMSG from BCBSUW of 1,400,000 shares of AMSG common stock, for which net proceeds amounted to $18.1 million. As a result of these divestitures, during 2002 BCBSUW's ownership in AMSG has been reduced from 45.1% as of December 31, 2001 to 14.9% as of June 30, 2002. As a result of the ownership percentage going below 20%, AMSG results subsequent to May 31, 2002 will no longer be reported under the equity method in Cobalt's statement of operations. Effective with the June 30, 2002 balance sheet, AMSG common stock is classified as available-for-sale and is reported at the fair market value of $45.7 million as of June 30, 2002. The unrealized investment gain on AMSG common stock of $20.4 million at June 30, 2002 is included in accumulated other comprehensive income in shareholders' equity.

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        As reported in the Condensed Consolidated Statements of Operations (Unaudited) accompanying the AMSG (NYSE: AMZ) press release dated July 24, 2002:

(1)

Net income for the two months ended May 31, 2002 amounted to $3.7 million.

(2)

Net income for the five months ended May 31, 2002 amounted to $9.1 million.

        As of June 30, 2002 and 2001, Cobalt owned 14.9% and 45.1%, respectively, of the outstanding shares of common stock of AMSG.

Note G. Comprehensive Income (Loss)

        A reconciliation from net income (loss) reported in the Consolidated Statements of Operations to comprehensive income (loss) is stated below:

        Comprehensive income (loss) is defined as all changes in equity during the period except those resulting from shareholder equity contributions and distributions.

Note H. Shareholders' Equity

        The common stock of Cobalt has no par or stated value. The authorized, issued and outstanding shares of common stock are as follows:

        In addition, the Company has authorized 1,000,000 shares of no par value preferred stock, although no shares have been issued to date.

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Note I. Segment Reporting

        The Company has four reportable business segments: insured medical products, specialty managed care products and services (previously reported as two separate segments, specialty risk and specialty service), government services and self-funded products. Insured medical products include: full coverage, copayment, preferred provider organization, Medicare supplement, interim coverage, health maintenance organization ("HMO") and point of service products sold primarily in Wisconsin. The specialty managed care products and services segment includes dental, life, disability and workers' compensation products, along with electronic claim submission services, subrogation and hospital bill audit services and receivables management services. The specialty managed care products and services are sold throughout the United States. The self-funded products consist of administrative services and access to Cobalt's extensive provider networks. Government services include processing services for Medicare providers throughout the United States and for Medicaid in the State of Wisconsin.

        "Other continuing operations" include activities not directly related to the business segments, unallocated corporate items (i.e. gain (loss) from investment in affiliates, amortization of goodwill for periods prior to January 1, 2002 and unallocated overhead expenses) and intracompany eliminations. The Company evaluates segment performance based on profit or loss from operations before income taxes. The accounting policies of the reportable segments are the same as those described in the Company's December 31, 2001 audited financial statements in the summary of significant accounting policies.

        Financial data from continuing operations by segment is as follows:

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        Total assets (excluding government services assets and investment in affiliates) are allocated by segment based on the percentage of revenue for the six months ended June 30, 2002 and pro forma revenues for the year ended December 31, 2001. Investment in affiliates is classified in other operations. Reclassifications have been made to the previously disclosed information to conform with the reporting of discontinued operations.

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        Transactions with other operating segments are as follows:

Note J. Recent Accounting Pronouncements

        On January 1, 2002, the Company adopted the Statement of Financial Accounting Standards Board ("FASB") No. 142, "Goodwill and Other Intangible Assets". Under the new statement, goodwill is no longer amortized but is subject to annual impairment tests in accordance with the standard. As of June 30, 2002, management has completed the Company's initial annual impairment test in accordance with FASB No. 142 and determined that no impairment of goodwill exists. In addition, due to the Company's reduction of its investment in AMSG (see Note F) below 20%, no additional writedowns related to impairment charges recorded by AMSG are required. Total goodwill amortization on continuing operations for 2001 was $5.1 million, of which $1.7 million was recorded for the six months ended June 30, 2001. On a pro forma basis (as if the Combination occurred at the beginning of the reporting period), goodwill amortization for 2001 would have been $6.5 million, of which $3.0 million would have been recorded for the six months ended June 30, 2001.

        The following unaudited table illustrates net income (loss) and net income (loss) per share adjusted to exclude the effects of adopting FASB No. 142:

        On January 1, 2002, the Company also adopted FASB No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets". This statement modifies existing guidance governing the accounting for dispositions of company assets as discontinued operations in the accompanying consolidated financial statements. Refer to Note B for Discontinued Operations of the Company.

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Note K. Commitments and Contingencies

        On May 29, 2002, Thomas R. Hefty, Chairman and CEO, announced his plans to retire from Cobalt. In anticipation of this announcement, the Management Review Committee of the board of directors approved the vesting of all of Mr. Hefty's unvested stock options upon his retirement. This is consistent with the Management Review Committee's past practice of approving the vesting of options of long tenured employees as they retire. Mr. Hefty has not yet determined the date of his retirement. However, depending upon the date of his retirement, Cobalt will be required to record an expense equal to the number of shares of Cobalt common stock for which discretionary vesting of options was granted multiplied by the excess of the per share market value of Cobalt common stock on the retirement date over the per share exercise price of the applicable options. The options that may be subject to expense treatment are:

        On June 20, 2002, the Company filed a registration statement with the SEC covering the potential sale of 2.5 million newly issued shares of Cobalt common stock by the Company and 5.0 million issued and outstanding shares of Cobalt common stock by the Foundation. The Company filed an amendment to the registration statement on July 9, 2002. In conjunction with this offering, the Company is responsible for legal and accounting fees, printing and other out of pocket costs for all shares offered. Costs have been capitalized as incurred. Capitalized costs would be offset against offering proceeds.

        On August 8, 2002, the Company withdrew its offering due to unfavorable market conditions. Depending upon ongoing market conditions, the Company may re-file and complete a stock offering during 2002. If the Company is unable to complete the offering during 2002, it will be required to expense offering costs incurred.

Note L. Reclassifications

        Certain reclassifications have been made to the interim consolidated financial statements for 2001 to conform with the 2002 presentation, specifically regarding discontinued operations.

Note M. Subsequent Events

        On August 7, 2002, Cobalt entered into a three-year revolving credit arrangement with M&I Marshall & Ilsley Bank ("M&I"). This agreement provides up to $30.0 million of available credit to Cobalt with the availability declining by $5.0 million after one year and an additional $10.0 million after two years. The revolving credit facility bears interest at a rate of LIBOR plus 1.50% to 2.50% depending upon the timing and amount of borrowings. The Company has not yet drawn funds under this agreement. Funds are available to re-pay intracompany balances, re-pay the Cobalt term note and for general corporate purposes.

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COBALT CORPORATION MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Overview

        Cobalt Corporation ("Cobalt" or the "Company") (formerly known as United Wisconsin Services, Inc. ("UWS")) was created as a result of the combination of UWS and Blue Cross & Blue Shield United of Wisconsin ("BCBSUW") on March 23, 2001 (the "Combination"). See Note A, Basis of Presentation, for further discussion on the Combination.

        Cobalt is the leading managed care company in Wisconsin, offering a broad portfolio of managed care and insurance products to employers, individuals and government entities. Cobalt has an exclusive license to utilize the Blue Cross and Blue Shield service marks in Wisconsin, giving Cobalt a unique position in that market. As of June 30, 2002, Cobalt serviced 590,645 lives in the health insurance operations and 340,758 lives in the dental insurance programs.

        BCBSUW provides underwritten products, including preferred provider organizations ("PPO") and indemnity options, as well as self-funded, administrative services only programs. Compcare Health Services Insurance Corporation ("CompcareBlue") operates the oldest health maintenance organization ("HMO") in Wisconsin.

        Cobalt offers one of the largest provider networks in Wisconsin. All of Cobalt's customers, including HMO members, have the ability to access the leading physicians and hospitals in their respective service areas, including Mayo Health Systems, University Health Care and Aurora Health Care. Cobalt believes that its ability to offer a full spectrum of products and a broad provider network to meet the needs and objectives of a wide range of customers provides Cobalt with a competitive advantage.

        Cobalt offers a variety of specialty managed care products, including dental, life and disability insurance. Cobalt is one of the largest providers of dental HMO and dental indemnity coverage in Wisconsin. Cobalt also offers workers' compensation insurance and a variety of specialty managed care services, including cost containment, health care electronic data interchange and receivables management services. These specialty products and services are designed to complement Cobalt's customers' employee benefit packages. Cobalt also processes Medicare claims as a Medicare Part A fiscal intermediary and a Regional Home Health intermediary for providers in numerous states and several U.S. territories and as a national intermediary for the Federally Qualified Health Centers in all 50 states.

        Cobalt markets its medical and dental products through a salaried sales force located throughout Wisconsin, as well as through independent agents and brokers, and directly to customers via the internet. By integrating the marketing of Cobalt's medical products, Cobalt is able to offer a broad range of product choices to health care consumers. Cobalt sells its specialty managed care products and services through a variety of distribution channels to employer groups and providers, principally in Wisconsin.

        In the discussion to follow, the number of "members" is equivalent to the number of persons covered by contracts in force as of the indicated date.

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Summary of Membership and Ratios

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Summary of Operating Results and Ratios