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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 September 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 October 31, 2002 was 41,522,369

COBALT CORPORATION

INDEX TO
QUARTERLY REPORT ON FORM 10-Q

For the Period Ended September 30, 2002

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PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

COBALT CORPORATION
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)

See Notes to Interim Consolidated Financial Statements.

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COBALT CORPORATION
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)

See Notes to Interim Consolidated Financial Statements.

4

COBALT CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)

See Notes to Interim Consolidated Financial Statements.

5

COBALT CORPORATION
CONSOLIDATED STATEMENTS 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.

7

COBALT CORPORATION
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

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 nine months ended September 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 and 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 nine month periods ended September 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 nine months ended September 30, 2001, include only the operations of BCBSUW and its wholly-owned subsidiary, Government Health Services, LLC ("GHS") and minority interest in UWS and American Medical Security Group, Inc. ("AMSG"). GHS is a holding company that was recently formed to hold United Government Services, LLC ("UGS") and Trust Solutions, LLC ("TS"). TS provides program integrity, consulting and safeguard services in connection with publicly funded health programs. Results for the six month period ended September 30, 2001, included in the consolidated financial statements for the nine months ended September 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 nine months ended September 30, 2001 for Cobalt presented in Note E includes the operations of the former UWS and BCBSUW with elimination of intracompany transactions, the

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recording of purchase accounting adjustments and the amortization of goodwill calculated as if the transaction was completed at the beginning of the reporting period.

        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 (GHS, 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. 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. In October 2002, the Company received approval from the OCI and satisfied the $70.0 million obligation due BCBSUW from Cobalt. The debt obligation under the note was satisfied in full through the transfer of all of the common stock of CompcareBlue. With this transaction, the Company has substantially completed all aspects of the capital plan. See "Management's Discussion and Analysis of Financial Condition and Results of Operations" for further discussion on the capital plan.

Note C. Discontinued Operations

        On March 29, 2002, Cobalt sold 100% of the membership interest of its subsidiary, Innovative Resource Group, LLC ("IRG") to APS Healthcare Bethesda, Inc. ("APS"), for $27.0 million ($17.0 million in cash and $10.0 million in a three-year note. The $10.0 million note was discounted to $8.5 million to yield 16% per year). 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. Under the agreement, certain subsidiaries of Cobalt entered into seven-year service agreements for the provision of services by IRG.

        The net gain on disposition of discontinued operations was $8.9 million, which includes a realized gain on the sale of $9.6 million, offset by a $0.7 million loss on IRG's operations for the nine months ended September 30, 2002. The realized gain on the sale as of September 30, 2002 reflects additional tax expense of $0.2 million recorded during the third quarter of 2002. 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 $0.4 million and $0.5 million for the three and nine month periods ended September 30, 2001, respectively. This reflects activity for the second and third quarters of 2001 only, since IRG was not considered part of Cobalt for financial reporting purposes prior to the Combination.

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Note D. 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 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 nine months ended September 30, 2001 was calculated based on 37,722,313 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 E. Pro Forma Financial Information

        The following September 30, 2001 pro forma statement of operations for Cobalt includes the operations of UWS and BCBSUW with elimination of intracompany transactions, the recording of

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purchase accounting adjustments and the amortization of goodwill calculated as if the Combination had been completed at the beginning of the reporting period.

PRO FORMA COBALT STATEMENT OF OPERATIONS

Note F. Investments

        Investments classified as available-for-sale at September 30, 2002 include convertible debentures and convertible preferred stock with a cost of approximately $12.4 million. No convertible securities were held at December 31, 2001. The convertible securities are considered hybrid instruments, and the Company separately accounts for the derivatives embedded therein. In accordance with Statement of Financial Accounting Standards ("SFAS") No. 133, "Accounting for Derivatives and Hedging Activities," the embedded derivatives are reflected in the balance sheet at fair value, and changes in fair value are recognized currently in investment results. The fair value of the embedded derivatives was approximately $1.3 million at September 30, 2002. Investment results for both the three and nine months ended September 30, 2002 includes a gain of approximately $0.2 million from the fair value adjustment relating to the embedded derivatives.

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        Investment results for both the three and nine months ended September 30, 2002 includes realized losses of approximately $0.9 million representing declines in the market value of certain corporate debentures that management determined to be other than temporary.

Note G. Investment in AMSG

        During the third quarter of 2002, the Company sold 207,900 shares of common stock of AMSG, realizing net proceeds of $3.1 million. On June 4, 2002, the Company sold 3,001,500 shares of common stock of AMSG in an underwritten public offering, realizing net proceeds of $50.3 million. These sales followed a March 22, 2002 repurchase by AMSG from the Company of 1,400,000 shares of AMSG common stock, for which net proceeds amounted to $18.1 million. As a result of these transactions, the Company's ownership in AMSG decreased from 45.1% as of December 31, 2001 to 13.2% as of September 30, 2002. Because the ownership percentage decreased below 20% and the Company no longer has the ability to exercise significant influence over AMSG, the AMSG results subsequent to May 31, 2002 are no longer reported under the equity method of accounting in the Company's statement of operations and the investment in AMSG common stock has been reclassified from investment in affiliates to investments available-for-sale at fair value in the Company's consolidated balance sheets subsequent to that date. The remaining shares of AMSG common stock have a fair market value of $24.0 million ($14.14 per share) as of September 30, 2002, and the unrealized investment gain of $1.5 million at that date is included, net of tax, in accumulated other comprehensive income in shareholders' equity.

        The following information was extracted from the unaudited condensed consolidated statements of operations accompanying the AMSG (NYSE: AMZ) press release dated October 30, 2002. The periods presented include the periods during which Cobalt recorded its investment in AMSG under the equity method of accounting.

(1)

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

Note H. Property and Equipment

        During the third quarter of 2002, the Company recorded a non-cash pre-tax charge of $0.6 million to reduce the carrying amount of certain computer software costs. This charge is included in selling, general, administrative and other expense in the accompanying consolidated statements of operations and is recorded in the insured and specialty products and services segments. These costs were associated with certain capitalized software written off by the Company where the carrying value exceeded the value of the functionality.

Note I. Debt

        On August 7, 2002, Cobalt entered into a three-year revolving credit arrangement with M&I Marshall & Ilsley Bank ("M&I revolver"). This arrangement provides for borrowings up to $30.0 million by Cobalt with the availability declining to $25.0 million after one year and to

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$15.0 million after two years. The M&I revolver is collateralized by the common stock of BCBSUW. The M&I revolver bears interest at a rate of LIBOR plus 1.5% to 2.5% depending upon the timing and amount of borrowings. A commitment fee of ³/8% annually is payable quarterly on the unused portion of the M&I revolver.

        As of September 30, 2002, the outstanding balance on the M&I revolver is $28.0 million at an interest rate of 4.3%. Funds drawn during the third quarter of 2002 were used by Cobalt to repay certain intracompany balances and to repay the $6.0 million remaining balance on a term business note ("term note") with a commercial bank.

        Debt covenants under the M&I revolver include compliance with a minimum tangible net worth, minimum debt-service/liquidity ratio and risk-based capital requirements on a quarterly basis. As of September 30, 2002, Cobalt is in compliance with all of the covenants included in the M&I revolver.

Note J. Comprehensive Income (Loss)

        A reconciliation from net income (loss) reported in the consolidated statements of operations to comprehensive income (loss) is stated below:

Note K. 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 1,000,000 authorized shares of no par value preferred stock, although no shares have been issued to date.

Note L. 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

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access to Cobalt's extensive provider networks and the BlueCard program. 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 nine months ended September 30, 2002 and pro forma revenues for the year ended December 31, 2001. Investment in affiliates, which are accounted for using the equity method, are classified in other continuing operations. The decrease in other continuing operations assets since December 31, 2001 is due to the reduction in the investment in AMSG (see Note G). Reclassifications have been made to the previously disclosed information to conform with the reporting of discontinued operations.

        Transactions with other operating segments are as follows:

Note M. Recent Accounting Pronouncements

        On January 1, 2002, the Company adopted SFAS 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 completed the Company's initial annual impairment test in accordance with SFAS No. 142 and determined that no impairment of goodwill existed at that date. In addition, due to the Company's reduction of its investment in AMSG (see Note G) below 20%, no additional writedowns related to impairment charges recorded by AMSG were required. Total goodwill amortization on continuing operations was $3.2 million for the nine months ended September 30, 2001. On a pro forma basis (as if the Combination occurred at the beginning of the reporting period), goodwill amortization of $4.6 million would have been recorded for the nine months ended September 30, 2001.

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

        On January 1, 2002, the Company also adopted SFAS 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 C for Discontinued Operations of the Company.

        In June of 2002, the Financial Accounting Standards Board approved the issuance of SFAS No. 146, "Accounting for Costs Associated with Exit or Disposal Activities". This statement addresses financial accounting and reporting for costs associated with exit or disposal activities. The Company intends to adopt the provisions of SFAS No. 146 for all exit or disposal activities that are initiated after December 31, 2002 in accordance with this statement.

Note N. Commitments and Contingencies

        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. If the Company is unable to complete an offering of primary shares during 2002, it will be required to expense offering costs of approximately $1.0 million.

        In 2001, Cobalt entered into an engagement letter with an investment bank to provide advisory services in connection with potential financial transactions. This agreement was terminated in March 2002. The engagement letter provided that Cobalt pay a fee in respect of a transaction effected within twelve months of termination equal to $3.5 million or a percentage of the transaction value (as defined). This fee obligation could be claimed to extend to one of more of our asset dispositions effected in 2002, a stock offering and to subsequent transactions. No such claim has been made, and the Company would dispute any claim, should one be made.

        The Health Insurance Portability and Accountability Act of 1996 ("HIPAA") includes administrative provisions imposing significant new requirements relating to maintaining the privacy of medical information ("Privacy"), establishing uniform health care provider and employer identifiers, requiring use of standardized transaction formats ("Transactions") and seeking protections for confidentiality and security of patient data ("Security"). While the implementation deadlines for Privacy and Transactions will occur in 2003, there is no implementation deadline for Security at this time because there have been no final Security regulations issued. The law is far-reaching and complex, and

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proper interpretation and practice under the law continue to evolve. Consequently, our efforts to measure, monitor and adjust our business practices to comply with HIPAA are ongoing. Compliance with HIPAA could require us to make significant changes to our operations and failure to comply could subject us to civil and criminal penalties. The costs of complying with HIPAA are likely to be substantial.

Note O. 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 P. Subsequent Events

        On October 28, 2002, Cobalt announced that it intends to assist the Foundation in satisfying its contractual divestiture obligations by filing a shelf registration statement with the SEC covering 6.5 million shares of Company stock owned by the Foundation as soon as practicable. In addition, the Company announced plans to include 0.5 million primary shares of Cobalt common stock in the shelf registration. A shelf registration will permit the Foundation to sell its Cobalt shares from time to time through underwritten offerings, negotiated block transactions or other means. The Foundation has advised the Company that it has no specific immediate plans to sell its shares, but that it intends to monitor market conditions after the effectiveness of the registration statement and to sell stock opportunistically.

        On October 28, 2002, the Company announced that Thomas R. Hefty will step down as Chairman and CEO on December 1, 2002, and will retire two months thereafter. Consistent with past practices in similar situations, the Management Review Committee of the Board of Directors approved the accelerated vesting of Mr. Hefty's stock options upon his retirement. As a result, Cobalt will record an expense for the accelerated vesting in accordance with Accounting Principles Board Opinion No. 25 in the amount of 36,875 option shares multiplied by the difference between quoted market value and the exercise price of $4.31 per share.

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Item 2. 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 September 30, 2002, Cobalt serviced 596,139 lives in the health insurance operations and 338,825 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 managed care 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 to employer groups and providers, principally in Wisconsin, through a variety of distribution channels.

        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

(1)

Does not include member equivalents relating to individuals who access medical care under the BlueCard program.

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Summary of Operating Results and Ratios