<PAGE> 1
As filed with the Securities and Exchange Commission on August 7, 2000
Registration Statement No. 333-37410
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
AMENDMENT NO. 4 TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------
AMERIGROUP CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
<TABLE>
<S> <C> <C>
DELAWARE 6324 54-1739323
(STATE OR OTHER JURISDICTION OF (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) CLASSIFICATION CODE NUMBER) IDENTIFICATION NUMBER)
</TABLE>
------------------------
4425 CORPORATION LANE
VIRGINIA BEACH, VIRGINIA 23462
(757) 490-6900
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER
INCLUDING AREA CODE, OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
------------------------
JEFFREY L. MCWATERS
PRESIDENT AND CHIEF EXECUTIVE OFFICER
4425 CORPORATION LANE
VIRGINIA BEACH, VIRGINIA 23462
(757) 490-6900
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER
INCLUDING AREA CODE, OF AGENT FOR SERVICE)
------------------------
COPIES TO:
<TABLE>
<S> <C>
STACY J. KANTER, ESQ. WILLIAM J. GRANT, JR., ESQ.
SKADDEN, ARPS, SLATE, MEAGHER & FLOM LLP WILLKIE FARR & GALLAGHER
FOUR TIMES SQUARE 787 SEVENTH AVENUE
NEW YORK, NEW YORK 10036-6522 NEW YORK, NEW YORK 10019
(212) 735-3000 (212) 728-8000
</TABLE>
------------------------
Approximate date of commencement of proposed sale to the public: As soon as
practicable after the effective date of this Registration Statement.
If any of the securities being registered on this form are to be offered on
a delayed or continuous basis pursuant to Rule 415 of the Securities Act of
1933, check the following box. [ ]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
---------------------------------------------------------------------------------------------------------------------------
---------------------------------------------------------------------------------------------------------------------------
PROPOSED
TITLE OF EACH CLASS OF MAXIMUM AGGREGATE AMOUNT OF
SECURITIES TO BE REGISTERED OFFERING PRICE(1) REGISTRATION FEE
---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Common Stock, par value $0.01........................... $94,690,000(2) $24,998(3)
---------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Estimated solely for the purpose of calculating the registration fee
pursuant to Rule 457(o) of the Securities Act of 1933, as amended.
(2) Relates to shares of common stock offered in the initial public offering and
600,000 shares of common stock registered in connection with the Company's
Employee Stock Purchase Plan. The maximum aggregate offering price with
respect to the shares of common stock for the Employee Stock Purchase Plan
was calculated using 85% of the high end of the range for the initial public
offering. See "Explanatory Note."
(3) Previously paid.
------------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE AN AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT
SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF THE
SECURITIES ACT OF 1933 OR UNTIL THIS REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a),
MAY DETERMINE.
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
<PAGE> 2
EXPLANATORY NOTE
This registration statement contains two separate prospectuses. The first
prospectus relates to a public offering of shares of common stock of AMERIGROUP
Corporation underwritten by the underwriters named in that prospectus. The
second prospectus relates to AMERIGROUP's Employee Stock Purchase Plan. The sale
of shares under the Employee Stock Purchase Plan will not be underwritten. The
prospectuses will be identical in all respects, other than the front and back
cover pages, the section entitled "The Offering," the section entitled "Use of
Proceeds," the section entitled "Underwriting," which in the employee offering
will be replaced with a section entitled "Plan of Distribution," "Legal Matters"
and the inclusion in the employee prospectus of a section entitled "Detailed
Description of the Employee Stock Purchase Plan." The alternate pages for the
Employee Stock Purchase Plan prospectus appear in this registration statement
immediately following the complete prospectus for the initial public offering.
<PAGE> 3
THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED.
WE MAY NOT SELL THESE SECURITIES UNTIL THE REGISTRATION STATEMENT FILED
WITH THE SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS
PROSPECTUS IS NOT AN OFFER TO SELL THESE SECURITIES AND IT IS NOT
SOLICITING AN OFFER TO BUY THESE SECURITIES IN ANY STATE WHERE THE OFFER
OR SALE IS NOT PERMITTED.
SUBJECT TO COMPLETION, DATED AUGUST 7, 2000
[AMERIGROUP CORPORATION LOGO]
4,400,000 SHARES
COMMON STOCK
This is the initial public offering of AMERIGROUP Corporation, and we are
offering 4,400,000 shares of our common stock. We anticipate that the initial
public offering price will be between $15 and $17 per share.
We have applied to list our common stock on the Nasdaq National Market under the
symbol "AMGP."
INVESTING IN OUR COMMON STOCK INVOLVES RISKS. SEE "RISK FACTORS" BEGINNING ON
PAGE 7.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR DETERMINED OR
PASSED UPON THE ADEQUACY OR ACCURACY OF THIS PROSPECTUS. ANY REPRESENTATION TO
THE CONTRARY IS A CRIMINAL OFFENSE.
<TABLE>
<CAPTION>
UNDERWRITING
PRICE TO DISCOUNTS AND PROCEEDS TO
PUBLIC COMMISSIONS AMERIGROUP
<S> <C> <C> <C>
Per Share $ $ $
Total $ $ $
</TABLE>
We and Jeffrey L. McWaters, the selling stockholder, have granted the
underwriters the right to purchase up to 660,000 additional shares to cover
over-allotments. We will not receive any of the proceeds from the sale of 75,000
shares by Mr. McWaters.
DEUTSCHE BANC ALEX. BROWN
BANC OF AMERICA SECURITIES LLC
UBS WARBURG LLC
THE DATE OF THIS PROSPECTUS IS , 2000.
<PAGE> 4
[LEFT BLANK FOR INSIDE COVER]
[DESCRIPTION OF COVER ART: COMPANY AND PRODUCT LOGOS.]
<PAGE> 5
PROSPECTUS SUMMARY
This summary highlights the information contained elsewhere in this
prospectus. You should read the entire prospectus carefully before buying shares
in this offering.
OUR BUSINESS
We are a multi-state managed healthcare company focused on providing
healthcare services to people eligible to receive Medicaid and Children's Health
Insurance Program, or CHIP, benefits. CHIP programs provide healthcare coverage
to children not otherwise covered by Medicaid or other insurance programs.
Unlike many managed care organizations that attempt to serve the general
population, as well as Medicare and Medicaid populations, we are focused
exclusively on the Medicaid and CHIP populations. We do not offer Medicare or
commercial products. In general, as compared to commercial or Medicare
populations, our target population is younger, accesses healthcare in an
inefficient manner, and has a greater percentage of medical expenses related to
obstetrics, diabetes and respiratory conditions. We believe that we are better
qualified and positioned than our competitors to meet the unique needs of our
target populations because of our single focus on providing managed care to
these populations, our strong government relationships, our medical management
programs and our community-based education and outreach programs. We design our
programs to address the particular needs of our members, and combine medical,
social and behavioral health services to help our members obtain quality
healthcare. Our success in establishing and maintaining strong relationships
with state governments, providers, and members has enabled us to win new
contracts and to establish a leading market position in many of the markets we
serve. We provide an array of products to members in Texas, New Jersey,
Maryland, the District of Columbia and Illinois. As of March 31, 2000, we had
approximately 277,000 members.
OUR OPPORTUNITY
Healthcare in the United States has grown from a $27 billion industry in
1960 to a highly-regulated market of approximately $1 trillion in 1998,
according to the federal government's Health Care Financing Administration. In
response to the dramatic increases in healthcare-related costs in the late
1960s, Congress enacted the Federal Health Maintenance Organization Act of 1973,
a statute designed to encourage the establishment and expansion of care and cost
management. Since the establishment of health maintenance organizations, or
HMOs, enrollment has increased more than thirteen-fold from 6 million in 1976 to
nearly 79 million in 1998. In 1998, there were approximately 40.6 million
Medicaid recipients, and all but two states had some form of Medicaid managed
care program. Additionally, many states are implementing other programs, such as
CHIP, to serve low-income uninsured populations. Despite these efforts to
organize care delivery, the costs associated with medical care have continued to
increase. As a result, it has become increasingly important for HMOs to know the
populations they serve in order to develop an infrastructure and programs
tailored to the medical and social profiles of their members.
OUR STRATEGY
Our objective is to become the leading managed care organization in the
United States focused on Medicaid, CHIP and uninsured populations. To achieve
this objective we intend to:
- Focus on our "medical home" concept to coordinate and administer the
provision of quality, cost-effective healthcare.
- Identify new markets for our services through acquisitions and
development of new operations.
- Increase our membership in existing markets through acquisitions and
internal growth.
- Capitalize on our experience working with state governments.
3
<PAGE> 6
OUR PRODUCTS
We have developed a range of products through which we offer comprehensive
healthcare services. These products are community-based and seek to address the
social and economic issues faced by the population we serve. Additionally, we
seek to establish strategic relationships with prestigious medical centers,
children's hospitals and federally qualified health centers to assist us in
implementing our products and medical management programs.
AMERICAID is our family-focused Medicaid managed healthcare product. This
product is designed for the Temporary Assistance to Needy Families, or TANF,
population that consists primarily of low-income children and their mothers.
AMERIKIDS is our managed healthcare product for uninsured children not
eligible for Medicaid. This product is designed for the CHIP initiative.
AMERIPLUS is our managed healthcare product designed for Supplemental
Security Income, or SSI, recipients. This population consists of the low-income
aged, blind and disabled.
AMERIFAM is our newly developed managed healthcare product focused on
uninsured parents of CHIP or Medicaid-eligible children.
We earn revenue primarily through premiums that are paid to us by the
states in which we operate. Our expenses include costs related to health
benefits. Our costs related to health benefits are principally fees paid to
physicians, hospitals and providers of ancillary medical services, medical
administration expenses, and include estimates of medical expenses incurred but
not yet reported. Fees to providers are generally negotiated. However, in some
states, the amounts reimbursed to hospitals are established by the state.
RECENT DEVELOPMENTS
On August 7, 2000, we announced preliminary results for the second quarter
ended June 30, 2000. We expect premium revenues to increase 104% to
approximately $157.5 million for the quarter ended June 30, 2000 from $77.1
million for the second quarter ended June 30, 1999. The expected $80.4 million
increase in premium revenues was principally due to growth in membership from
the acquisitions from Prudential Health Care ($40.2 million) and commencing
service in Dallas ($13.6 million) which occurred in the second and third
quarters of 1999, respectively, with the balance of the increase due to internal
growth. We expect net income for the second quarter of 2000 to increase to
approximately $5.8 million from $67,000 for the second quarter ended June 30,
1999. We expect diluted net income per share to be approximately $0.34 for the
quarter ended June 30, 2000, as compared to diluted net loss per share of $3.31
for the quarter ended June 30, 1999. Our membership as of June 30, 2000 was
approximately 291,000, an increase of over 47% from our membership at June 30,
1999.
OUR COMPANY
We were formed in 1994. Our principal executive offices are located at 4425
Corporation Lane, Virginia Beach, VA 23462, and our telephone number is (757)
490-6900. The address of our Web site is www.amerigroupcorp.com. The information
on our Web site is not part of this prospectus.
4
<PAGE> 7
THE OFFERING
<TABLE>
<CAPTION>
<S> <C>
Common stock offered by AMERIGROUP........ 4,400,000 shares
Over-allotment option:
Offered by AMERIGROUP................... 585,000 shares
Offered by Jeffrey L. McWaters.......... 75,000 shares
Common stock to be outstanding after this
offering................................ 18,939,086 shares
Use of proceeds........................... We intend to use the net proceeds of this offering:
- to redeem our Series E mandatorily redeemable
preferred stock,
- to repay our term loan facility, and
- for general corporate purposes, including potential
acquisitions.
Proposed Nasdaq National Market Symbol.... AMGP
</TABLE>
The number of shares of common stock to be outstanding after this offering
is based on our shares outstanding as of June 30, 2000. This information
excludes:
- 970,404 shares of common stock issuable upon the exercise of stock
options with a weighted average exercise price of $2.41 per share;
- 100,000 shares of common stock issuable upon the exercise of stock
options with an exercise price of $15.00 per share granted subsequent to
June 30, 2000;
- 25,000 shares of common stock issuable upon the exercise of outstanding
warrants with a weighted average exercise price of $3.00 per share; and
- shares of common stock reserved for issuance under our stock option
plans.
Except as otherwise indicated, the information in this prospectus assumes
the following:
- the conversion on closing of this offering of all outstanding shares of
convertible preferred stock into 12,607,887 shares of common stock;
- the exercise of warrants to purchase 1,125,000 shares of common stock by
the Series E preferred stockholders at an exercise price of $0.02 per
share;
- the redemption of each outstanding share of our Series E mandatorily
redeemable preferred stock; and
- no exercise of the underwriters' over-allotment option.
All share numbers in this prospectus have been adjusted to reflect a one-for-two
reverse stock split of our common stock to be effected just prior to
consummation of this offering.
5
<PAGE> 8
OUR SUMMARY CONSOLIDATED FINANCIAL DATA
(Dollars in thousands, except per share data)
The following table summarizes financial data for our business. You should
read the summary financial data set forth below together with "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
our financial statements and the notes to those financial statements included
elsewhere in this prospectus.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
---------------------------------------------------------- ----------------------
1995 1996 1997 1998 1999 1999 2000
--------- --------- --------- --------- ---------- --------- ----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENTS OF OPERATIONS DATA:
Revenues:
Premium.................................... $ -- $ 22,938 $ 64,878 $ 186,790 $ 392,296 $ 60,004 $ 147,654
Investment income.......................... 429 856 2,184 3,389 6,404 1,183 2,710
Total revenues............................. 429 23,794 67,062 190,179 398,700 61,187 150,364
Expenses:
Health benefits............................ -- 21,214 55,340 155,877 334,192 50,896 118,332
Selling, general and administrative........ 4,317 13,020 19,920 29,166 52,846 8,712 17,088
Income (loss) before income taxes.......... (3,988) (10,877) (8,850) 3,456 7,216 948 13,383
Net income (loss).......................... (3,988) (10,877) (8,850) 3,456 11,316 948 7,848
Diluted net income (loss) per share........ $ (11.30) $ (28.67) $ (28.29) $ (5.07) $ 0.66 $ (1.65) $ 0.48
Weighted average number of common shares
and potential dilutive common shares
outstanding.............................. 500,064 500,500 515,750 526,651 14,695,324 529,136 15,681,194
OPERATING STATISTICS:
Health benefits ratio(1)................... N/A 92.5% 85.3% 83.5% 85.2% 84.8% 80.1%
Selling, general and administrative
expenses ratio(2)........................ N/A 54.7% 29.7% 15.3% 13.3% 14.2% 11.4%
Members rounded to the nearest 1,000....... N/A 33,000 41,000 113,000 268,000 118,000 277,000
</TABLE>
------------
(1) Health benefits ratio is calculated as a percentage of premium revenue.
(2) Selling, general and administrative expenses ratio is calculated as a
percentage of total revenues.
<TABLE>
<CAPTION>
MARCH 31, 2000
-----------------------
ACTUAL AS ADJUSTED
-------- -----------
(UNAUDITED)
<S> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents and short-term investments....... $154,621 $198,525
Total assets............................................... 216,947 260,650
Long-term debt (including current portion)................. 7,677 --
Total liabilities.......................................... 152,805 145,128
Redeemable preferred stock................................. 72,726 --
Stockholders' equity (deficit)............................. (8,584) 115,522
</TABLE>
The as adjusted data give effect to:
- our receipt of the net proceeds from the sale of 4,400,000 shares of
common stock offered by us at an assumed initial public offering price of
$16.00 per share (the mid-point of the range);
- the use of those proceeds to repay debt and redeem our Series E
mandatorily redeemable preferred stock after deducting estimated
underwriting discounts and commissions and estimated offering expenses
payable by us for the issuance of common stock;
- the conversion on closing of the offering of all outstanding shares of
convertible preferred stock into 12,607,887 shares of common stock; and
- the exercise of warrants to purchase 1,125,000 shares of common stock by
the Series E preferred stockholders at an exercise price of $0.02 per
share.
6
<PAGE> 9
RISK FACTORS
An investment in our common stock involves a high degree of risk. You
should carefully consider the risks described below before deciding to invest in
shares of our common stock. The trading price of our common stock could decline
due to any of these risks, in which case you could lose all or part of your
investment. In assessing these risks, you should also refer to the other
information in this prospectus, including our financial statements and the
related notes.
RISKS RELATED TO BEING A REGULATED ENTITY
CHANGES IN GOVERNMENT REGULATIONS DESIGNED TO PROTECT PROVIDERS AND MEMBERS
RATHER THAN OUR STOCKHOLDERS COULD FORCE US TO CHANGE HOW WE OPERATE AND COULD
HARM OUR BUSINESS.
Our business is extensively regulated by the states in which we operate
and, to a lesser extent, by the federal government. These laws and regulations
are generally intended to benefit and protect providers and health plan members
rather than stockholders. Changes in existing laws and rules, the enactment of
new laws and rules and changing interpretations of these laws and rules could,
among other things:
- force us to change how we do business,
- restrict revenue and enrollment growth,
- increase our healthcare and administrative costs,
- impose additional capital requirements, and
- increase or change our liability.
IF STATE REGULATORS DO NOT APPROVE PAYMENTS OF DIVIDENDS AND DISTRIBUTIONS BY
OUR SUBSIDIARIES TO US, IT MAY NEGATIVELY AFFECT OUR BUSINESS STRATEGY.
We principally operate through our health plan subsidiaries. These
subsidiaries are subject to regulations that limit the amount of dividends and
distributions that can be paid to us without prior approval of, or notification
to, state regulators. If the regulators were to deny our subsidiaries' requests
to pay dividends to us, the funds available to our company as a whole would be
limited, which could harm our ability to implement our business strategy.
REGULATIONS MAY LIMIT THE EXTENT TO WHICH WE CAN INCREASE OUR PROFITS AS A
PERCENTAGE OF REVENUES.
Two of our subsidiaries are subject to minimum medical expense levels as a
percentage of premium revenue. Sanctions may be imposed and fines assessed if
these levels are not met. Our Texas plans are required to pay a rebate to the
state in the event profits exceed established levels. These regulatory
requirements, changes in these requirements and additional requirements by our
other regulators may limit our ability to increase our overall profits as a
percentage of revenues, which may harm our operating results.
OUR FAILURE TO COMPLY WITH GOVERNMENT REGULATIONS COULD SUBJECT US TO CIVIL AND
CRIMINAL PENALTIES AND LIMITATIONS ON OUR PROFITABILITY.
Violation of the laws or regulations governing our operations could result
in the imposition of sanctions, the cancellation of our contracts to provide
services, or in the extreme case, the suspension or revocation of our licenses.
For example, in two markets in which we operate, we
7
<PAGE> 10
are required to spend a minimum percentage of our premium revenue on medical
expenses. In one market, if we failed to comply with this requirement, we could
be required to pay monetary damages. Additionally, we could be required to file
a corrective plan of action with the state and we could be subject to further
fines and additional corrective measures if we did not comply with the
corrective plan of action. In the other market, our failure to comply could
affect future rate determinations. These regulations may limit the profits we
can obtain. In the past we have been subject to sanctions as a result of
violations of marketing regulations and timeliness of payment requirements.
While we do not believe that any of these fines or violations were material, we
cannot assure you that we will not become subject to material fines or other
sanctions in the future. If we became subject to material fines or if other
sanctions or other corrective actions were imposed upon us, our ability to
continue to operate our business could be materially and adversely affected.
The Health Insurance Portability and Accountability Act of 1996, or HIPAA,
broadened the scope of fraud and abuse laws applicable to healthcare companies.
HIPAA created civil penalties for, among other things, billing for medically
unnecessary goods or services. HIPAA establishes new enforcement mechanisms to
combat fraud and abuse, including a whistle blower program.
The federal government has enacted, and state governments are enacting,
other fraud and abuse laws as well. Our failure to comply with HIPAA or these
other laws could result in criminal or civil penalties and exclusion from
Medicaid or other governmental healthcare programs and could lead to the
revocation of our licenses. These penalties or exclusions, were they to occur,
would negatively impact our ability to operate our business.
CHANGES IN HEALTHCARE LAW MAY REDUCE OUR PROFITABILITY.
Numerous proposals relating to changes in healthcare law have been
introduced, and some have been passed, by Congress and the states in which we
operate or may operate in the future. Changes in applicable laws and regulations
are continually being considered and interpretations of existing laws and rules
may also change from time to time. We are unable to predict what regulatory
changes may occur or what effect any particular change may have on our business.
Although some of the recent changes in government regulations, such as the
removal of the requirements on the enrollment mix between commercial and public
sector membership, have encouraged managed care participation in public sector
programs, we are unable to predict whether new laws or proposals will continue
to favor or hinder the growth of managed healthcare.
A recent example is state and federal legislation which would enable
physicians to collectively bargain with managed healthcare organizations. The
federal legislation, as currently proposed, contains an exemption for public
sector managed healthcare organizations. If legislation of this type were passed
without this exemption, it would negatively impact our bargaining position with
many of our providers and might result in an increase in our cost of providing
medical benefits.
We cannot predict the outcome of these legislative or regulatory proposals,
nor the effect which they might have on us. Legislation or regulations which
require us to change our current manner of operation, provide additional
benefits or change our contract arrangements may seriously harm our operations
and financial results.
REDUCTIONS IN MEDICAID FUNDING BY THE STATES COULD SUBSTANTIALLY REDUCE OUR
PROFITABILITY.
Most of our revenues come from state government Medicaid premiums. The base
premium rate paid by each state differs, depending on a combination of various
factors such as defined
8
<PAGE> 11
upper payment limits, a member's health status, age, sex, county or region,
benefit mix and member eligibility categories. Future levels of Medicaid premium
rates may be affected by continued government efforts to contain medical costs
and may further be affected by state and federal budgetary constraints. Changes
to Medicaid programs could reduce the number of persons enrolled or eligible,
reduce the amount of reimbursement or payment levels, or increase our
administrative or healthcare costs under such programs. Congress has recently
indicated that growth in spending levels for the Medicare and Medicaid programs
may slow. States periodically consider reducing or reallocating the amount of
money they spend for Medicaid. We believe that additional reductions in Medicaid
payments could substantially reduce our profitability. Further, our contracts
with the states are subject to cancellation by the state in the event of
unavailability of state funds. In some jurisdictions, such cancellation may be
immediate and in other jurisdictions a notice period is required.
IF STATE GOVERNMENTS DO NOT RENEW OUR CONTRACTS WITH THEM, OUR BUSINESS WILL
SUFFER.
At June 30, 2000, we provide healthcare services to members through ten
contracts with the regulatory entities in the jurisdictions in which we operate.
At March 31, 2000, we had eight contracts, five of which accounted for 10% or
more of our revenues for the three months ended March 31, 2000, with the largest
of these contracts representing approximately 34% of our revenues. Some of our
contracts are subject to a re-bidding process. For example, we are subject to a
re-bidding process in each of our three Texas markets every six years. The first
re-bidding in our Texas markets is scheduled to occur in 2002. Also, the
District of Columbia has indicated that it may put its contracts out to bid. If
any of our contracts were not renewed, or were terminated for cause or if we
were to lose a contract in a re-bidding process, our business would suffer. Most
of our contracts expire in 2001 and have renewal provisions. Termination or
non-renewal of any one contract could materially impact our revenues and
operating results.
IF A STATE FAILED TO RENEW ITS FEDERAL WAIVER APPLICATION FOR MANDATED MEDICAID
ENROLLMENT INTO MANAGED CARE OR SUCH APPLICATION WERE DENIED, OUR MEMBERSHIP IN
THAT STATE WOULD LIKELY DECREASE.
States may only mandate Medicaid enrollment into managed care under federal
waivers or demonstrations. Waivers and programs under demonstrations are
approved for two year periods and can be renewed on an ongoing basis if the
state applies. We have no control over this renewal process. If a state does not
renew its mandated program or the federal government denies the state's
application for renewal, our business would suffer as a result of a likely
decrease in membership.
OUR INABILITY TO PARTICIPATE IN CHIP PROGRAMS MAY LIMIT OUR GROWTH RATE.
CHIP is a relatively new federal initiative designed to provide coverage
for low-income children not otherwise covered by Medicaid or other insurance
programs. Most states have adopted CHIP programs but are just beginning to
implement them. The programs vary significantly from state to state and it is
not clear how they will be implemented. Participation in CHIP programs is an
important part of our growth strategy. If states do not allow us to participate
or if we fail to win bids to participate, our growth strategy may be materially
and adversely affected.
RISKS RELATED TO OUR BUSINESS
RECEIPT OF INADEQUATE PREMIUMS WILL NEGATIVELY IMPACT OUR REVENUES AND
PROFITABILITY.
Most of our revenues are generated by premiums consisting of fixed monthly
payments per member. These premiums are fixed by contract, and we are obligated
during the contract period to provide healthcare services as established by the
state governments. We have less control
9
<PAGE> 12
over costs related to the provision of healthcare than we do over our selling,
general and administrative expenses. While our expenses related to health
benefits were 80.1% of our premium revenue in the first quarter of 2000, for
1999, these expenses were 85.2% of our premium revenue. Historically, our
expenses related to health benefits as a percentage of premium revenue have
fluctuated, and the percentage for the first quarter of this year may not be
indicative of full year or future results. If premiums are not increased and
expenses related to health benefits rise, our earnings could be impacted
negatively. In addition, our actual health benefits costs may exceed our
estimated costs. The premiums we receive under our current contracts may
therefore be inadequate to cover all claims, which may cause our profits to
decline.
Maryland sets the rates which must be paid to hospitals by all payors. It
is possible for the state to increase rates payable to the hospitals without
granting a corresponding increase in premiums to us. If this were to occur, or
if other states were to take similar actions, our profitability would be harmed.
OUR INABILITY TO MANAGE MEDICAL COSTS EFFECTIVELY WOULD REDUCE OUR
PROFITABILITY.
Our profitability depends, to a significant degree, on our ability to
predict and effectively manage medical costs. Changes in healthcare regulations
and practices, level of use of healthcare services, hospital costs,
pharmaceutical costs, major epidemics, new medical technologies, and other
external factors, including general economic conditions such as inflation
levels, are beyond our control and could reduce our ability to predict and
effectively control the costs of providing healthcare services. Although we have
been able to manage medical costs through a variety of techniques, including
various payment methods to primary care physicians and other providers, advance
approval for hospital services and referral requirements, medical management and
quality management programs, our information systems, and reinsurance
arrangements, we may not be able to continue to manage costs effectively in the
future. If our costs for medical services increase, our profits could be
reduced, or we may not remain profitable.
OUR LIMITED ABILITY TO PREDICT OUR INCURRED MEDICAL EXPENSES ACCURATELY COULD
NEGATIVELY IMPACT OUR REPORTED RESULTS.
Our medical expenses include estimates of medical expenses incurred but not
yet reported, or IBNR. We estimate our IBNR medical expenses based on a number
of factors, including prior claims experience, maturity of markets, complexity
of products and stability of provider networks. Adjustments, if necessary, are
made to medical expenses in the period during which the actual claim costs are
ultimately determined or when criteria used to estimate IBNR change. We utilize
the services of independent actuaries who are contracted on a regular basis to
calculate and review the adequacy of our medical liabilities, in addition to
using our internal resources. We cannot be sure that our IBNR estimates are
adequate or that adjustments to such IBNR estimates will not harm our results of
operations. Further, our inability to accurately estimate IBNR may also affect
our ability to take timely corrective actions, further exacerbating the extent
of the harm on our results.
We maintain reinsurance to protect us against severe or catastrophic
medical claims, but cannot assure you that such reinsurance coverage will be
adequate or available to us in the future or that the cost of such reinsurance
will not limit our ability to obtain it.
DIFFICULTIES IN EXECUTING OUR ACQUISITION STRATEGY COULD ADVERSELY AFFECT OUR
BUSINESS.
Historically, the acquisition of Medicaid contract rights and related
assets of other health plans both in our existing service areas and in new
markets has accounted for a significant amount of our growth. For example, of
the $87.7 million increase in our premium revenue from
10
<PAGE> 13
the first quarter of 1999 to the first quarter of 2000, approximately $55.4
million was attributable to our acquisition of contract rights and related
assets from Prudential Health Care. Although we cannot predict our rate of
growth as the result of acquisitions with any accuracy, we believe that
acquisitions similar in nature to those we have historically executed will be
important to our growth strategy. Many of the other potential purchasers of
these assets have greater financial resources than we have. In addition, many of
the sellers are interested in either (1) selling, along with their Medicaid
assets, other assets in which we do not have an interest; or (2) selling their
companies, including their liabilities, as opposed to just the assets of the
ongoing business. Therefore, we cannot be sure that we will be able to complete
acquisitions on terms favorable to us or that we can obtain the necessary
financing for these acquisitions.
We are currently evaluating proposals to acquire additional businesses.
These proposals are at various stages of consideration and we may enter into
letters of intent or other agreements relating to these proposals at any time.
However, we cannot predict when or whether we will actually acquire these
businesses.
We are generally required to obtain regulatory approval from one or more
state agencies when making acquisitions. In the case of an acquisition of a
business located in a state in which we do not currently operate, we would be
required to obtain the necessary licenses to operate in that state. In addition,
although we may already operate in a state in which we acquire a new business,
we will be required to obtain additional regulatory approval if, as a result of
the acquisition, we will operate in an area of the state in which we did not
operate previously. There can be no assurance that we would be able to comply
with these regulatory requirements for an acquisition in a timely manner, or at
all.
Under our credit facility, acquisitions require us to obtain the consent of
our lenders. We may not be able to obtain such consent.
In addition to the difficulties we may face in identifying and consummating
acquisitions, we will also be required to integrate our acquisitions with our
existing operations. This may include the integration of:
- additional employees who are not familiar with our operations,
- existing provider networks, which may operate on different terms than our
existing networks,
- existing members, who may decide to switch to another healthcare
provider, and
- disparate information and recordkeeping systems.
Accordingly, we may be unable to successfully identify, consummate and
integrate future acquisitions or operate acquired businesses profitably. We also
may be unable to obtain sufficient additional capital resources for future
acquisitions. If we are unable to effectively execute our acquisition strategy,
our future growth will suffer and our results of operations could be harmed.
FAILURE OF A NEW BUSINESS OF OURS WOULD NEGATIVELY IMPACT OUR RESULTS OF
OPERATIONS.
Start-up costs associated with a new business can be substantial. For
example, in order to obtain a certificate of authority in most jurisdictions, we
must first establish a provider network, have systems in place and demonstrate
our ability to be able to obtain a state contract and process claims. If we were
unsuccessful in obtaining the necessary license, winning the bid to provide
service or attracting members in numbers sufficient to cover our costs, the new
business would fail. We also could be obligated by the state to continue to
provide services for some period of time without sufficient revenue to cover our
ongoing costs or recover start-up
11
<PAGE> 14
costs. The loss of the costs associated with starting up the business could have
a significant impact on our results of operations.
INEFFECTIVE MANAGEMENT OF OUR GROWTH MAY NEGATIVELY AFFECT OUR RESULTS OF
OPERATIONS, FINANCIAL CONDITION AND BUSINESS.
We have experienced rapid growth. In 1996, our first full year of
operations, we had $22.9 million of premium revenue. In 1999, we had $392.3
million in premium revenue. This increase represents a compound annual growth
rate of 157.8%.
Depending on acquisition and other opportunities, we expect to continue to
grow rapidly. Continued growth could place a significant strain on our
management and on other resources. We anticipate that continued growth, if any,
will require us to continue to recruit, hire, train and retain a substantial
number of new and highly-skilled medical, administrative, information
technology, finance and support personnel. Our ability to compete effectively
depends upon our ability to implement and improve operational, financial and
management information systems on a timely basis and to expand, train, motivate
and manage our work force. If we continue to experience rapid growth, our
personnel, systems, procedures and controls may be inadequate to support our
operations, and our management may fail to anticipate adequately all demands
that growth will place on our resources. In addition, due to the initial costs
incurred upon the acquisition of new businesses, rapid growth could adversely
affect our short-term profitability. If we are unable to manage growth
effectively, our business, operating results and financial condition could
suffer.
WE ARE SUBJECT TO COMPETITION WHICH IMPACTS OUR ABILITY TO INCREASE OUR
PENETRATION OF THE MARKETS THAT WE SERVICE.
We compete for members principally on the basis of size and quality of
provider network, benefits provided and quality of service. We compete with
numerous types of competitors, including other health plans and traditional
state Medicaid programs that reimburse providers as care is provided. Some of
the health plans with which we compete have substantially larger enrollments,
greater financial and other resources and offer a broader scope of products than
we do.
While many states mandate health plan enrollment for Medicaid eligible
participants, the programs are voluntary in other states, such as Illinois.
Subject to limited exceptions by federally approved state applications, the
federal government requires that there be choice for Medicaid recipients among
managed care programs. Voluntary programs and mandated competition will impact
our ability to increase our market share.
In addition, in most states in which we operate, we are not allowed to
market directly to potential members, and therefore, we rely on creating name
brand recognition through our community-based programs. Where we have only
recently entered a market or compete with health plans much larger than we are,
we may be at a competitive disadvantage unless and until our community-based
programs and other promotional activities create brand awareness.
THE LOSS OF THE SERVICES OF OUR PRESIDENT AND CHIEF EXECUTIVE OFFICER WOULD HARM
OUR OPERATIONS.
We are highly dependent on the efforts of Mr. Jeffrey McWaters, our
President and Chief Executive Officer. Mr. McWaters, as our founder, has been
instrumental in developing our mission and forging our relationships with our
government client-customers and the communities we serve. We cannot assure you
that we will be able to retain Mr. McWaters or to attract a suitable replacement
or additional personnel if required. We have an employment agreement
12
<PAGE> 15
with Mr. McWaters that expires in October 2002. Pursuant to this agreement, if
Mr. McWaters were to voluntarily terminate his employment with us, he would lose
his entitlement to severance benefits. We cannot be sure that the employment
agreement creates sufficient incentives for Mr. McWaters to continue his
employment with us. While we believe that we could find a replacement for Mr.
McWaters if he were to leave, the loss of his services could harm our
operations.
OUR INABILITY TO MAINTAIN SATISFACTORY RELATIONSHIPS WITH OUR PROVIDER NETWORKS
WOULD HARM OUR PROFITABILITY.
Our profitability depends, in large part, upon our ability to contract
favorably with hospitals, physicians, and other healthcare providers. Our
provider arrangements with our primary care physicians and specialists usually
are for one to two year periods and automatically renew for successive one year
terms, subject to termination for cause by us based on provider conduct or other
appropriate reasons. The contracts generally may be cancelled by either party
upon 90 to 120 days' prior written notice. Our contracts with hospitals are
usually for one to two year periods and automatically renew for successive one
year periods, subject to termination for cause due to provider misconduct or
other appropriate reasons. Generally, our hospital contracts may be canceled by
either party without cause on 90 to 150 days' prior written notice. There can be
no assurance that we will be able to continue to renew such contracts or enter
into new contracts enabling us to service our members profitably. We will be
required to establish acceptable provider networks prior to entering new
markets. Although we have established long-term relationships with many of our
providers, we may be unable to enter into agreements with providers in new
markets on a timely basis or under favorable terms. If we are unable to retain
our current provider contracts or enter into new provider contracts timely or on
favorable terms, our profitability will be harmed.
WE ARE DEPENDENT ON OUR RELATIONSHIPS WITH TWO PROVIDERS. ANY MATERIAL
MODIFICATION OR DISCONTINUATION OF THESE RELATIONS COULD HARM OUR RESULTS OF
OPERATIONS.
Cook Children's Physician Network is our exclusive provider network for
pediatric services in Fort Worth, Texas, where we had approximately 35,000
members for March 2000. If the terms of our contract with Cook Children's were
to change significantly or Cook Children's were to terminate its agreement with
us, our costs to provide healthcare in this area could increase. We could lose
members if Cook Children's chose to associate with another HMO or if it obtained
its own contract with the state to provide healthcare services to Medicaid
recipients.
For March 2000, Johns Hopkins Medical Services Corporation provided
healthcare services to approximately 23,000 of our nearly 86,000 members in
Baltimore City, Maryland under a contract that expires in December 2001.
Termination or non-renewal of this contract could impact our health benefits
expense ratio and could result in a loss of all or some of these members. Either
of these occurrences could harm our results of operations.
NEGATIVE PUBLICITY REGARDING THE MANAGED CARE INDUSTRY MAY HARM OUR BUSINESS AND
OPERATING RESULTS.
Recently, the managed care industry has received negative publicity. This
publicity has led to increased legislation, regulation and review of industry
practices. These factors may adversely affect our ability to market our
services, require us to change our services, and increase the regulatory burdens
under which we operate, further increasing the costs of doing business and
adversely affecting our operating results.
13
<PAGE> 16
WE MAY BE SUBJECT TO CLAIMS RELATING TO MEDICAL MALPRACTICE, WHICH COULD CAUSE
US TO INCUR SIGNIFICANT EXPENSES.
Our providers and employees involved in medical care decisions may be
exposed to the risk of medical malpractice claims. In addition, states are
beginning to adopt legislation that permits managed care organizations to be
held liable for negligent treatment decisions or benefits coverage
determinations. Claims of this nature, if successful, could result in
substantial damage awards against us and our providers that could exceed the
limits of any applicable medical malpractice insurance coverage. Therefore,
successful malpractice or tort claims asserted against us, our providers or our
employees could adversely affect our financial condition and profitability.
In addition, we may be subject to other litigation that may adversely
affect our business or results of operations. We maintain errors and omissions
insurance and such other lines of coverage as we believe is reasonable in light
of our experience to date. However, this insurance may not be sufficient or
available at a reasonable cost to protect us from liabilities which might
adversely affect our business or results of operations. Even if any claims
brought against us were unsuccessful or without merit, we would still have to
defend ourselves against such claims. Any such defenses may be time-consuming
and costly, and may distract our management's attention. As a result, we may
incur significant expenses and may be unable to effectively operate our
business.
GROWTH IN THE NUMBER OF MEDICAID ELIGIBLES MAY BE COUNTERCYCLICAL, WHICH COULD
CAUSE OUR OPERATING RESULTS AND STOCK PRICE TO SUFFER WHEN GENERAL ECONOMIC
CONDITIONS ARE IMPROVING.
Historically, the number of persons eligible to receive Medicaid benefits
has increased more rapidly during periods of rising unemployment, corresponding
to less favorable general economic conditions. Conversely, this number may grow
more slowly or even decline if economic conditions improve. Therefore,
improvements in general economic conditions may cause our membership levels to
decrease, thereby causing our operating results to suffer, which could lead to
decreases in our stock price during periods in which stock prices in general are
increasing.
GROWTH IN THE NUMBER OF MEDICAID ELIGIBLES DURING ECONOMIC DOWNTURNS COULD CAUSE
OUR OPERATING RESULTS AND STOCK PRICES TO SUFFER IF STATE AND FEDERAL BUDGETS
DECREASE OR DO NOT INCREASE.
Less favorable economic conditions may cause our membership to increase as
more people become eligible to receive Medicaid benefits. However, during such
economic downturns, state and federal budgets could decrease, causing states to
attempt to cut healthcare programs, benefits and rates. If this were to happen
while our membership was increasing, our results of operations and stock price
could suffer.
OUR INABILITY TO INTEGRATE AND MANAGE OUR INFORMATION SYSTEMS EFFECTIVELY COULD
DISRUPT OUR OPERATIONS.
Our operations are significantly dependent on effective information
systems. The information gathered and processed by our information systems
assists us in, among other things, monitoring utilization and other cost
factors, processing provider claims and providing data to our regulators. Our
providers also depend upon our information systems for membership verifications,
claims status and other information. In March 2000, we experienced data
corruption in our data warehouse, which we use to assist us in building monthly
medical
14
<PAGE> 17
expense accruals, analyzing costs and generating state reports. We did not
experience any material misstatements in our financial statements in the first
quarter of 2000 due to the data corruption. If we have similar or additional
problems with our information systems, our operations and ability to produce
timely and accurate reports could be adversely impacted.
Our information systems and applications require continual maintenance,
upgrading and enhancement to meet our operational needs. Moreover, our
acquisition activity requires frequent transitions to or from, and the
integration of, various information systems. We are continually attempting to
upgrade and expand our information systems capabilities. We do not currently
maintain off-site data backup facilities. If we experience difficulties with the
transition to or from information systems or are unable to properly maintain or
expand our information systems, we could suffer, among other things, from
operational disruptions, loss of existing members and difficulty in attracting
new members, regulatory problems and increases in administrative expenses.
RISKS RELATING TO THIS OFFERING
YOU WILL EXPERIENCE IMMEDIATE AND SIGNIFICANT DILUTION IN THE BOOK VALUE PER
SHARE.
If you purchase our common stock in this offering, you will incur immediate
dilution, which means that
- you will pay a price per share that substantially exceeds the value of
our assets after subtracting our liabilities; and
- the purchasers in the offering will have contributed 46.7% of the total
amount to fund us but will own only 23.4% of our outstanding shares.
WE CANNOT GUARANTEE THAT A TRADING MARKET WILL DEVELOP OR BE MAINTAINED FOR OUR
COMMON STOCK.
Prior to this offering there has not been a public market for our common
stock. We cannot predict the extent to which a trading market will develop or
how liquid that market might become, or whether it will be maintained. The
initial public offering price will be determined by negotiation between the
representatives of the underwriters and us and may not be indicative of prices
that will prevail in the trading market. If an active trading market fails to
develop or be maintained, you may be unable to sell the shares of common stock
purchased in this offering at an acceptable price or at all.
VOLATILITY OF OUR STOCK PRICE COULD ADVERSELY AFFECT STOCKHOLDERS.
The market price of our common stock is likely to be highly volatile and
could be subject to wide fluctuations in response to factors such as:
- state and federal budget decreases,
- adverse publicity regarding HMOs,
- government action regarding Medicaid eligibility,
- changes in state mandatory Medicaid programs, and
- general economic conditions, including inflation and unemployment rates.
All of these factors are beyond our control and may cause the market price
of our common stock to decrease regardless of our performance.
15
<PAGE> 18
Investors may not be able to resell their shares of our common stock
following periods of volatility because of the market's adverse reaction to such
volatility. In addition, the stock market in general has been highly volatile
recently. During this period of market volatility, the stocks of healthcare
companies have also been highly volatile and have recorded lows well below their
historical highs. We cannot assure you that our stock will trade at the same
levels as the stock of other healthcare companies or that the market in general
will sustain its current prices.
WE MAY ALLOCATE THE NET PROCEEDS FROM THIS OFFERING IN WAYS WITH WHICH YOU MAY
NOT AGREE.
Our business plan is general in nature and is subject to change based upon
changing conditions and opportunities. Our management has significant
flexibility in applying $44.6 million of the total $64.1 million in net proceeds
we expect to receive in this offering. Because this portion of the net proceeds
is not required to be allocated to any specific investment or transaction, you
cannot determine at this time the value or propriety of our application of the
proceeds and you and other stockholders may not agree with our decisions. See
"Use of Proceeds" for a more detailed description of how management intends to
apply the proceeds from this offering.
THE SALE OR AVAILABILITY FOR SALE OF SUBSTANTIAL AMOUNTS OF OUR COMMON STOCK
COULD ADVERSELY AFFECT ITS MARKET PRICE.
In connection with this offering, we, our officers and directors and most
of our stockholders have agreed not to sell or transfer any shares of common
stock for 180 days after completion of this offering without the underwriters'
consent. However, the underwriters may release these shares from these
restrictions at any time. In evaluating whether to grant such a request, the
underwriters may consider a number of factors with a view toward maintaining an
orderly market for, and minimizing volatility in the market price of, our common
stock. These factors include, among others, the number of shares involved,
recent trading volume and prices of the stock, the length of time before the
lock-up expires and the reasons for, and the timing of, the request. We cannot
predict what effect, if any, market sales of shares held by any stockholder or
the availability of these shares for future sale will have on the market price
of our common stock.
Based on shares outstanding as of June 30, 2000, a total of 13,351,946
shares of common stock may be sold in the public market by existing stockholders
180 days after the date of this prospectus, subject to applicable volume and
other limitations imposed under federal securities laws. Sales of substantial
amounts of our common stock in the public market after the completion of this
offering, or the perception that such sales could occur, could adversely affect
the market price of our common stock and could materially impair our future
ability to raise capital through offerings of our common stock. See "Shares
Eligible for Future Sale" for a more detailed description of the restrictions on
selling shares of our common stock after this offering.
IT MAY BE DIFFICULT FOR A THIRD PARTY TO ACQUIRE OUR COMPANY, WHICH COULD
INHIBIT STOCKHOLDERS FROM REALIZING A PREMIUM ON THEIR STOCK PRICE.
Delaware corporate law, state laws to which we are subject and our amended
and restated certificate of incorporation and by-laws contain provisions that
could have the effect of delaying, deferring, or preventing a change in control
of AMERIGROUP that stockholders may consider favorable or beneficial. These
provisions could discourage proxy contests and make it more difficult for you
and other stockholders to elect directors and take other corporate actions.
16
<PAGE> 19
These provisions could also limit the price that investors might be willing to
pay in the future for shares of our common stock. These provisions include:
- a staggered board of directors, so that it would take three successive
annual meetings to replace all directors,
- prohibition of stockholder action by written consent,
- advance notice requirements for the submission by stockholders of
nominations for election to the board of directors and for proposing
matters that can be acted upon by stockholders at a meeting, and
- supermajority vote requirements in connection with business combination
transactions and amendments to some of the provisions of our charter.
In addition, changes of control, generally defined as the acquisition of
10% of our outstanding stock by a person, is often subject to state regulatory
notification, and in some cases, prior approval.
17
<PAGE> 20
FORWARD-LOOKING STATEMENTS
This prospectus contains forward-looking statements that involve risks and
uncertainties. These forward-looking statements are often accompanied by words
such as "believe," "anticipate," "plan," "expect," "estimate," "intend," "seek,"
"goal," "may," "will," and similar expressions. These statements include,
without limitation, statements about our market opportunity, our growth
strategy, competition, expected activities and future acquisitions and
investments and the adequacy of our available cash resources. These statements
may be found in the sections of this prospectus entitled "Prospectus Summary,"
"Risk Factors," "Use of Proceeds," "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and "Business." Investors are
cautioned that matters subject to forward-looking statements involve risks and
uncertainties, including economic, regulatory, competitive and other factors
that may affect our business. These statements are not guarantees of future
performance and are subject to risks, uncertainties and assumptions.
Actual results may differ from projections or estimates due to a variety of
important factors. Our results of operations and projections of future earnings
depend in large part on accurately predicting and effectively managing health
benefits and other operating expenses. A variety of factors, including
competition, changes in health care practices, changes in federal or state laws
and regulations or their interpretations, inflation, provider contract changes,
new technologies, government-imposed surcharges, taxes or assessments, reduction
in provider payments by governmental payors, major epidemics, disasters and
numerous other factors affecting the delivery and cost of healthcare, such as
major healthcare providers' inability to maintain their operations, may in the
future affect our ability to control our medical costs and other operating
expenses. Governmental action or business conditions could result in premium
revenues not increasing to offset any increase in medical costs and other
operating expenses. Once set, premiums are generally fixed for one year periods
and, accordingly, unanticipated costs during such periods cannot be recovered
through higher premiums. The expiration, cancellation or suspension of our HMO
contracts by the federal and state governments would also negatively impact us.
Due to these factors and risks, no assurance can be given with respect to our
future premium levels or our ability to control our future medical costs.
From time to time, legislative and regulatory proposals have been made at
the federal and state government levels related to the healthcare system,
including but not limited to limitations on managed care organizations
(including benefit mandates) and reform of Medicaid. Such legislative and
regulatory action could have the effect of reducing the premiums paid to us by
governmental programs or increasing our medical costs. We are unable to predict
the specific content of any future legislation, action or regulation that may be
enacted or when any such future legislation or regulation will be adopted.
Therefore, we cannot predict accurately the effect of such future legislation,
action or regulation on our business.
18
<PAGE> 21
USE OF PROCEEDS
We estimate that we will receive net proceeds from the sale of the shares
of common stock in this offering of $64.1 million, assuming an initial public
offering price of $16.00 per share and after deducting estimated underwriting
discounts and commissions and estimated offering expenses. If the underwriters
exercise their over-allotment option in full, we estimate that our net proceeds
will be $72.8 million.
The principal purposes of this offering are to obtain additional capital,
to create a public market for our common stock and to facilitate future access
to public debt and equity markets. As of the date of this prospectus, we have no
specific plans to use the net proceeds from this offering other than as set
forth below.
We intend to use the net proceeds of this offering as follows:
- approximately $12.5 million to redeem our Series E mandatorily redeemable
preferred stock,
- approximately $7.0 million to repay our term loan facility; as of March
31, 2000, $7.7 million was outstanding under the facility, and
- $44.6 million for general corporate purposes, including potential
acquisitions.
Our Series E mandatorily redeemable preferred stock is redeemable for $4.20
per share plus accrued but unpaid dividends at the time we complete our initial
public offering. Otherwise, the Series E mandatorily redeemable preferred stock
is redeemable on July 28, 2003. Dividends accrue on our Series E mandatorily
redeemable preferred stock whether or not declared. The proceeds from the
issuance of the Series E mandatorily redeemable preferred stock were used in
connection with the acquisition of the New Jersey Medicaid contract rights and
other related assets from Oxford Health Plans and for general corporate
purposes.
Our term loan facility that we are repaying with proceeds from the offering
accrues interest at a rate of prime plus 75 basis points per year and matures on
April 30, 2003. We borrowed the funds under this facility in November 1999 to
obtain a revolving credit facility in addition to a term loan and used the
borrowed funds to repay a May 1998 bank loan.
We have pursued a strategy of acquiring Medicaid and CHIP contract rights
and related assets to increase our membership and expand into new service areas.
We intend to continue this strategy, and are actively looking for opportunities
that will complement our current operations. However, we currently have no
commitments or agreements with respect to any such transactions. We also expect
a portion of the proceeds to fund working capital to be used to:
- increase market penetration within our current service areas,
- pursue opportunities for the development of new markets,
- expand services and products available to our members, and
- strengthen our capital base by increasing the statutory capital of our
health plan subsidiaries.
We have not determined the amount of net proceeds to be used specifically
for the foregoing purposes, other than for redemption of our Series E
mandatorily redeemable preferred stock and repayment of our term loan. Pending
any such uses, we intend to invest the net proceeds in interest bearing
securities.
19
<PAGE> 22
DIVIDEND POLICY
We have never declared or paid any cash dividends on our common stock. We
currently anticipate that we will retain any future earnings for the development
and operation of our business. Accordingly, we do not anticipate declaring or
paying any cash dividends in the foreseeable future.
In addition, our ability to pay dividends is dependent on cash dividends
from our subsidiaries. State insurance and Medicaid regulations limit the
ability of our subsidiaries to pay dividends to us. Also, as long as our credit
facility is outstanding, we are not able to pay dividends without the consent of
our lenders.
20
<PAGE> 23
CAPITALIZATION
The following table shows our cash, cash equivalents, short-term
investments and capitalization as of March 31, 2000:
- on an actual basis, and
- on an as adjusted basis to give effect to (1) the conversion of each
share of our outstanding convertible preferred stock into 0.5 shares of
common stock upon the completion of this offering, (2)the exercise of
warrants to purchase 1,125,000 shares of common stock by the Series E
preferred stockholder at an exercise price of $0.02 per share and (3) to
reflect the issue and sale of 4,400,000 shares of common stock by us in
this offering at an assumed initial public offering price of $16.00 per
share less estimated underwriting discounts and commissions and estimated
offering expenses payable by us and the use of those proceeds to repay
debt and redeem our Series E mandatorily redeemable preferred stock. The
amounts, as adjusted, also reflect $1.8 million of additional accretion
of the Series E preferred stock to the redemption amount and the
write-off of $0.2 million of deferred financing costs associated with the
repayment of our long-term debt.
You should read this table in conjunction with the financial statements and
the notes to those statements and the other financial information included in
this prospectus.
<TABLE>
<CAPTION>
AS OF MARCH 31, 2000
-----------------------
ACTUAL AS ADJUSTED
-------- -----------
(IN THOUSANDS)
-----------------------
<S> <C> <C>
Cash, cash equivalents and short-term investments........... $154,621 $198,525
======== ========
Long-term debt (including current portion).................. $ 7,677 $ --
-------- --------
Redeemable preferred stock:
Series E mandatorily redeemable preferred stock, $.01 par
value, 2,000,000 shares authorized and issued and
outstanding, actual; no shares authorized or issued and
outstanding, as adjusted............................... 10,716 --
Series A convertible preferred stock, $.01 par value,
8,000,000 shares authorized and issued and outstanding,
actual; no shares authorized or issued and outstanding,
as adjusted............................................ 14,511 --
Series B convertible preferred stock, $.01 par value,
7,025,000 shares authorized and issued and outstanding,
actual; no shares authorized or issued and outstanding,
as adjusted............................................ 23,710 --
Series C convertible preferred stock, $.01 par value,
6,480,000 shares authorized and issued and outstanding,
actual; no shares authorized or issued and outstanding,
as adjusted............................................ 23,789 --
-------- --------
Total redeemable preferred stock.................. 72,726 --
-------- --------
Stockholders' deficit:
Series D convertible preferred stock, $.01 par value,
10,000,000 authorized, 3,710,775 shares issued and
outstanding, actual; no shares authorized or issued and
outstanding, as adjusted............................... 37 --
Preferred stock, $.01 par value, no shares authorized or
issued and outstanding, actual; 10,000,000 authorized,
no shares issued and outstanding, as adjusted.......... -- --
Common stock, $.01 par value, 60,000,000 shares
authorized, 648,820 shares issued and outstanding,
actual; 100,000,000 shares authorized, 18,781,707
shares issued and outstanding, as adjusted............. 11 192
Additional paid-in capital.................................. 19,974 145,921
Retained earnings........................................... (27,216) (29,201)
Deferred compensation....................................... (1,390) (1,390)
-------- --------
Total stockholders' deficit....................... (8,584) 115,522
-------- --------
Total capitalization.............................. $ 71,819 $115,522
======== ========
</TABLE>
21
<PAGE> 24
DILUTION
If you invest in our common stock, your interest will be diluted to the
extent of the difference between the public offering price per share of our
common stock and the pro forma net tangible book value per share of common stock
after this offering.
Our pro forma net tangible book value as of March 31, 2000, after giving
effect to the conversion of all of our outstanding preferred stock into shares
of common stock and the exercise of warrants to purchase 1,125,000 shares of
common stock by the Series E preferred stockholders was $33.4 million or $2.32
per share of common stock. Pro forma net tangible book value per share
represents the amount of total tangible assets less total liabilities, divided
by the pro forma number of shares of common stock outstanding. Assuming the sale
by us of shares of common stock in this offering at an assumed initial public
offering price of $16.00 per share, our pro forma net tangible book value as of
March 31, 2000 would have been $95.7 million, or $5.09 per share of common
stock. This represents an immediate increase in pro forma net tangible book
value of $2.77 per share to our existing stockholders and an immediate dilution
in pro forma net tangible book value of $10.91 per share to new investors
purchasing shares in this offering.
"Dilution per share" represents the difference between the price per share
to be paid by new investors and the pro forma net tangible book value per share
immediately after this offering. The following table illustrates this dilution
on a per share basis:
<TABLE>
<S> <C> <C>
Assumed initial public offering price per share............. $16.00
Pro forma net tangible book value per share as of March 31,
2000...................................................... $2.32
Increase per share attributable to this offering............ 2.77
-----
Pro forma as adjusted net tangible book value per share
after this offering....................................... 5.09
------
Dilution per share to new investors......................... $10.91
======
</TABLE>
The following table summarizes on a pro forma basis as of March 31, 2000,
after giving effect to the conversion of all outstanding shares of convertible
preferred stock and the exercise of warrants to purchase 1,125,000 shares of
common stock by the Series E preferred stockholders on the closing of this
offering, the number of shares of stock purchased from us, the total
consideration paid to us and the average price per share paid by existing
stockholders and by new investors, based upon an assumed initial public offering
price of $16.00 per share for shares purchased in this offering, before
deducting the estimated underwriting discounts and commissions and estimated
offering expenses:
<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION
--------------------- ------------------- AVERAGE PRICE
AMOUNT PERCENT AMOUNT PERCENT PER SHARE
---------- ------- -------- ------- -------------
<S> <C> <C> <C> <C> <C>
Existing stockholders........ 14,381,707 76.6% $ 80,274 53.3% $ 5.58
New investors................ 4,400,000 23.4 70,400 46.7% 16.00
---------- ------- -------- -------
Total.............. 18,781,707 100.0% $150,674 100.0% $ 8.02
========== ======= ======== =======
</TABLE>
The above discussion and tables assume no exercise of stock options and
warrants, except as described above, after March 31, 2000 and give effect to the
conversion of all shares of our convertible preferred stock outstanding as of
that date into common stock and the exercise of warrants to purchase 1,125,000
shares of common stock by the Series E preferred stockholders upon completion of
this offering. As of March 31, 2000, we had outstanding options to purchase a
total of 966,581 shares of common stock at a weighted average exercise price of
$1.25 per share and warrants, except as described above, to purchase a total of
25,000 shares of common stock at a weighted average exercise price of $3.00 per
share.
22
<PAGE> 25
SELECTED CONSOLIDATED FINANCIAL DATA
The following selected consolidated financial data should be read in
connection with, and are qualified by reference to, the financial statements and
related notes and Management's Discussion and Analysis of Financial Condition
and Results of Operations appearing elsewhere in this prospectus. The
consolidated statements of operations data for the years ended December 31,
1995, 1996, 1997, 1998 and 1999, and the consolidated balance sheet data at
December 31, 1995, 1996, 1997, 1998 and 1999 are derived from our consolidated
financial statements, which have been audited by KPMG LLP, independent certified
public accountants. The consolidated statements of operations data for the three
months ended March 31, 1999 and March 31, 2000 and the consolidated balance
sheet data at March 31, 1999 and 2000 have been derived from our unaudited
financial statements. These unaudited financial statements have been prepared on
substantially the same bases as the audited financial statements and include
adjustments, consisting only of normal recurring adjustments, that we consider
necessary for a fair presentation of the financial position and results of
operations for these periods. Operating results for the three months ended March
31, 1999 and 2000 are not necessarily indicative of the results that may be
expected for the full year.
<TABLE>
<CAPTION>
Three months ended
Year ended December 31, March 31,
---------------------------------------------------------- ----------------------
1995 1996 1997 1998(a) 1999(b) 1999 2000
--------- --------- --------- --------- ---------- --------- ----------
(Dollars in thousands, except per share data)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENTS OF OPERATIONS DATA:
Revenues:
Premium................... $ -- $ 22,938 $ 64,878 $ 186,790 $ 392,296 $ 60,004 $ 147,654
Investment income......... 429 856 2,184 3,389 6,404 1,183 2,710
--------- --------- --------- --------- ---------- --------- ----------
Total revenues............ 429 23,794 67,062 190,179 398,700 61,187 150,364
--------- --------- --------- --------- ---------- --------- ----------
Expenses:
Health benefits........... -- 21,214 55,340 155,877 334,192 50,896 118,332
Selling, general and
administrative.......... 4,317 13,020 19,920 29,166 52,846 8,712 17,088
Depreciation and
amortization............ 100 437 652 1,197 3,635 420 1,360
Interest.................. -- -- -- 483 811 211 201
--------- --------- --------- --------- ---------- --------- ----------
Total expenses............ 4,417 34,671 75,912 186,723 391,484 60,239 136,981
--------- --------- --------- --------- ---------- --------- ----------
Income (loss) before
income taxes............ (3,988) (10,877) (8,850) 3,456 7,216 948 13,383
Income tax (benefit)
expense................. -- -- -- -- (4,100) -- 5,535
--------- --------- --------- --------- ---------- --------- ----------
Net income (loss)......... (3,988) (10,877) (8,850) 3,456 11,316 948 7,848
Accretion of redeemable
preferred stock
dividends............... 1,663 3,472 5,740 6,126 7,284 1,820 1,820
--------- --------- --------- --------- ---------- --------- ----------
Net income (loss)
attributable to common
shareholders............ $ (5,651) $ (14,349) $ (14,590) $ (2,670) $ 4,032 $ (872) $ 6,028
========= ========= ========= ========= ========== ========= ==========
Basic net income (loss)
per share............... $ (11.30) $ (28.67) $ (28.29) $ (5.07) $ 7.11 $ (1.65) $ 9.35
========= ========= ========= ========= ========== ========= ==========
Diluted net income (loss)
per share............... $ (11.30) $ (28.67) $ (28.29) $ (5.07) $ 0.66 $ (1.65) $ 0.48
========= ========= ========= ========= ========== ========= ==========
Weighted average number of
shares outstanding...... 500,064 500,500 515,750 526,651 567,146 529,136 644,786
========= ========= ========= ========= ========== ========= ==========
Weighted average number of
shares and potential
dilutive common shares
outstanding............. 500,064 500,500 515,750 526,651 14,695,324 529,136 15,681,194
========= ========= ========= ========= ========== ========= ==========
</TABLE>
23
<PAGE> 26
SELECTED CONSOLIDATED FINANCIAL DATA -- (CONTINUED)
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
--------------------------------------------------------- ---------
1995 1996 1997 1998(a) 1999(b) 2000
------- -------- -------- ---------- -------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents and
short-term investments........... $16,484 $ 34,064 $ 35,904 $ 86,987 $166,218 $154,621
Total assets....................... 18,893 37,171 40,498 89,779 222,321 216,947
Long-term debt (including current
portion)......................... -- -- -- 10,000 8,010 7,677
Total liabilities.................. 866 13,821 25,992 78,551 166,426 152,805
Redeemable preferred stock......... 23,684 43,356 49,096 59,422 70,906 72,726
Stockholders' deficit.............. (5,657) (20,006) (34,590) (36,604) (15,011) (8,584)
</TABLE>
---------------
(a) Membership increased from 41,000 at December 31, 1997 to 113,000 at December
31, 1998 primarily due to the purchase of the New Jersey Medicaid contract
rights and related assets from Oxford Health Plans (which was accounted for
as a purchase), adding approximately 27,000 members and an increase of
40,000 members in Houston due to the commencement of two new contracts.
(b) Membership increased from 113,000 at December 31, 1998 to 268,000 at
December 31, 1999 due to the purchase of the Maryland and the District of
Columbia Medicaid contract rights and related assets from Prudential Health
Care, adding approximately 91,000 members (which was accounted for as a
purchase) with the balance of the increase due to internal growth from
existing contracts.
24
<PAGE> 27
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion contains forward-looking statements based upon
current expectations and related to future events and our future financial
performance that involve risks and uncertainties. Our actual results and timing
of events could differ materially from those anticipated in these
forward-looking statements as a result of many factors, including those set
forth under "Risk Factors," "Forward-Looking Statements," "Business" and
elsewhere in this prospectus.
GENERAL
We were founded in December 1994. Our objective is to become the leading
managed care organization in the United States focused on Medicaid, CHIP and
uninsured populations.
- During 1994 and 1995, we were involved primarily in financial planning,
recruiting and training personnel, developing products and markets,
forming and licensing our subsidiaries to be HMOs, and negotiating
contracts with various state governments.
- During 1996, we began enrolling Medicaid members in our New Jersey and
Illinois health plans, and won a bid in Texas to enroll members in our
Forth Worth plan.
- In 1997 we won a bid to enroll members in our Houston plan.
- In 1998 we acquired the New Jersey Medicaid line of business from Oxford
Health Plan (NJ), significantly expanding our presence in that state.
- In June and August 1999, we began operations in Maryland and the District
of Columbia, respectively, as a result of our acquisition of Prudential
Health Care's Medicaid contract rights and other related assets.
- In July 1999 we also won a bid to enroll members in our Dallas plan.
The following table sets forth the approximate number of our members in
each of our service areas for the periods presented.
<TABLE>
<CAPTION>
DECEMBER
-------------------------------------- MARCH
MARKET 1996 1997 1998 1999 2000
------ ------ ------ ------- ------- -----------
<S> <C> <C> <C> <C> <C>
Fort Worth....................... 21,000 24,000 23,000 33,000 35,000
Houston.......................... -- 2,000 42,000 40,000 42,000
Dallas........................... -- -- -- 34,000 34,000
New Jersey....................... 10,000 10,000 38,000 46,000 48,000
Maryland......................... -- -- -- 83,000 86,000
District of Columbia............. -- -- -- 12,000 12,000
Illinois......................... 2,000 5,000 10,000 20,000 20,000
------ ------ ------- ------- -------
Total............................ 33,000 41,000 113,000 268,000 277,000
====== ====== ======= ======= =======
Percentage growth over prior
period......................... N/A 24.2% 175.6% 137.2%
</TABLE>
We generate revenues primarily from premiums we receive from the states in
which we operate to provide health benefits to our members. We also generate
revenues from investments. We generally receive a fixed premium per member per
month to provide healthcare benefits to our members pursuant to our contracts
with four states and the District of Columbia. We generally receive premiums in
advance of providing services, and recognize premium revenue during the period
in which we are obligated to provide services to our members.
Our operating expenses include expenses related to health benefits;
selling, general and administrative costs; interest; and depreciation and
amortization. Selling, general and administrative costs include direct and
indirect expenses. Direct expenses are those incurred to ensure delivery of
services to our members. Most of these services are typically replicable
processes
25
<PAGE> 28
that can be delivered to all of our health plans more efficiently and
effectively from our Virginia service center. The major centralized functions
that are considered to generate direct expenses are member and provider
services, claims processing and enrollment. Staffing in these areas is directly
related to the number of members we are managing. Direct costs are also incurred
in the field at the local health plan. Indirect expenses are generated by
corporate governance for strategic direction, quality assurance, medical
oversight, national branding, product development, mergers and acquisitions,
legal, regulatory compliance, human resources, information technology, finance,
and network development. These functions are located in Virginia and the costs
associated with them do not increase directly as membership increases.
Our results of operations depend on our ability to effectively manage
expenses related to health benefits and accurately predict costs incurred.
Expenses related to health benefits have two components: direct medical expenses
and medically related administrative costs. Direct medical expenses include fees
paid to hospitals, physicians and providers of ancillary medical services, such
as pharmacy, laboratory, radiology, dental and vision. Medically related
administrative costs include expenses related to services such as health
promotion, quality assurance, case management, disease management and 24 hour
on-call nurses. Direct medical expenses also include estimates of medical
expenses incurred but not yet reported, or IBNR. For the three months ended
March 31, 2000, approximately 76% of our direct medical payments related to fees
paid on a fee-for-service basis to our primary care physicians, specialist
physicians and ancillary providers. The balance related to fees paid on a
capitation, or fixed-fee, basis. Primary care and specialist physicians not paid
on a capitated basis are paid on a maximum allowable fee schedule set forth in
the contracts with our providers. We reimburse hospitals on a negotiated fixed
dollar amount per day or an agreed upon percent of their standard charges. In
Maryland, the state sets the amount reimbursed to hospitals.
Monthly, we estimate our IBNR based on a number of factors, including
authorization data and prior claims experience. Authorization data is
information captured in the Company's medical management system, which
identifies services requested by providers or members and approved by medical
management. The medical cost related to these authorizations is estimated by
pricing the approved services using contractual or historical amounts adjusted
for known variables such as historical claims trends. These estimated costs are
included as a component of IBNR. As part of this review, we also consider the
costs to process medical claims, and estimates of amounts to cover uncertainties
related to fluctuations in claims payment patterns, membership, products, and
authorization trends. These estimates are adjusted as more information becomes
available. We utilize the services of independent actuarial consultants who are
contracted to review our estimates quarterly. We believe that our process for
estimating IBNR is adequate. However, there can be no assurance that healthcare
claim costs will not exceed such estimates.
RECENT DEVELOPMENTS
On August 7, 2000, we announced preliminary results for the second quarter
ended June 30, 2000. We expect premium revenues to increase 104% to
approximately $157.5 million for the quarter ended June 30, 2000 from $77.1
million for the second quarter ended June 30, 1999. The expected $80.4 million
increase in premium revenues was principally due to growth in membership from
the acquisitions from Prudential Health Care ($40.2 million) and commencing
service in Dallas ($13.6 million) which occurred in the second and third
quarters of 1999, respectively, with the balance of the increase due to internal
growth. We expect net income for the second quarter of 2000 to increase to
approximately $5.8 million from $67,000 for the second quarter ended June 30,
1999. We expect diluted net income per share to be approximately $0.34 for the
quarter ended June 30, 2000, as compared to diluted net loss per share of $3.31
for the quarter ended June 30, 1999. Our membership as of June 30, 2000 was
approximately 291,000, an increase of over 47% from our membership at June 30,
1999.
26
<PAGE> 29
RESULTS OF OPERATIONS
The following table sets forth selected operating ratios. All ratios, with
the exception of the health benefits ratio, are shown as a percentage of total
revenues.
<TABLE>
<CAPTION>
THREE MONTHS
YEAR ENDED ENDED
DECEMBER 31, MARCH 31,
------------------------ --------------
1997 1998 1999 1999 2000
------ ----- ----- ----- -----
<S> <C> <C> <C> <C> <C>
Premium revenue............................. 96.7% 98.2% 98.4% 98.1% 98.2%
Investment income........................... 3.3 1.8 1.6 1.9 1.8
------ ----- ----- ----- -----
Total revenues.............................. 100.0 100.0 100.0 100.0 100.0
Health benefits(1).......................... 85.3 83.5 85.2 84.8 80.1
Selling, general and administrative
expenses.................................. 29.7 15.3 13.3 14.2 11.4
Income (loss) before income taxes........... (13.2) 1.8 1.8 1.5 8.9
Income tax benefit (expense)................ -- -- 1.0 -- (3.7)
Net income (loss)........................... (13.2) 1.8 2.8 1.5 5.2
</TABLE>
---------------
(1) The health benefits ratio is shown as a percentage of premium revenue
because there is a direct relationship between the premium received and the
health benefits provided.
THREE MONTHS ENDED MARCH 31, 2000 COMPARED TO THREE MONTHS ENDED MARCH 31, 1999
Revenues
Premium revenue for the three months ended March 31, 2000 increased 146.1%
to $147.7 million from $60.0 million for the three months ended March 31, 1999.
The $87.7 million increase was principally due to the growth in membership from
the acquisitions from Prudential Health Care ($55.4 million) and commencing
service in Dallas ($12.7 million) which occurred in the second and third
quarters of 1999, respectively, with the balance of the increase due to internal
growth. Total membership increased 134.7% to 277,000 as of March 31, 2000 from
118,000 as of March 31, 1999.
Investment income for the three months ended March 31, 2000 increased
129.1% to $2.7 million from $1.2 million for the three months ended March 31,
1999. The $1.5 million increase was due to an 87.4% increase in cash and
investments as of March 31, 2000 compared to March 31, 1999. The higher cash
levels resulted from increases in the amount of premiums received during 1999
versus the timing of the payment of the related health benefits.
Health benefits
Expenses relating to health benefits for the three months ended March 31,
2000 increased 132.5% to $118.3 million from $50.9 million for the three months
ended March 31, 1999. The $67.4 million increase was primarily due to the
increase in membership. The health benefits ratio, as a percentage of premium
revenue, for the three months ended March 31, 2000 was 80.1% compared to 84.8%
for the three months ended March 31, 1999. The three months ended March 31, 2000
reflect a $1.6 million decrease in expenses related to health benefits due to a
provider contract amendment. In 1998, we commenced the renegotiation of a risk
arrangement with a provider to, among other things, more equitably allocate the
risk among the parties. The contract amendment, which released us from a $1.6
million liability, was executed in March 2000 retroactive to September 1, 1998,
decreasing the recorded liability to $400,000.
The incidence of respiratory conditions and influenza reported in the first
quarter of 2000 was less than in the first quarter of 1999. This, among other
factors, contributed to the 4.7%
27
<PAGE> 30
improvement in our health benefits ratio for the first quarter of 2000 from the
first quarter of 1999.
Selling, general and administrative expenses
Selling, general and administrative expenses for the three months ended
March 31, 2000 increased 96.1% to $17.1 million from $8.7 million for the three
months ended March 31, 1999. The $8.4 million increase was primarily due to an
increase in wages and related expenses for additional staff ($3.9 million), and
fees for additional third-party contractors ($2.8 million) to support our
increased membership. The increase was also due in part to an increase in the
experience rebate expense ($1.2 million) where our profits exceeded specified
levels in Texas for the contract period commencing September 1, 1999. The
experience rebate payable is estimated and recorded monthly on a
contract-to-date basis. However, our selling, general and administrative
expenses ratio decreased to 11.1% for the three months ended March 31, 2000 from
14.2% for three months ended March 31, 1999 as a result of economies of scale
and our indirect costs being spread over a larger membership base.
Interest expense
Interest expense was $201,000 for the three months ended March 31, 2000
compared to $211,000 for the three months ended March 31, 1999 because we repaid
$2.0 million of our long-term debt. Our long-term debt, including the current
portion, was $9.7 million as of March 31, 1999 as compared to $7.7 million as of
March 31, 2000.
Provision for income taxes
In the first quarter of 2000 we recorded $5.5 million of income tax expense
as a result of an effective 40.2% tax rate. While we eventually recorded a tax
benefit for 1999, no income tax benefit was recorded in the first quarter of
1999 because we had not yet determined that it was more likely than not that the
benefits of our net operating losses could be realized.
YEAR ENDED DECEMBER 31, 1999 COMPARED TO YEAR ENDED DECEMBER 31, 1998
Revenues
Premium revenue for 1999 increased 110.0% to $392.3 million from $186.8
million for 1998. The $205.5 million increase was due to the 137.2% increase in
membership. Membership increased to 268,000 as of December 31, 1999 from 113,000
as of December 31, 1998. The increase in 1999 is due to the acquisition of the
Medicaid contracts and related assets from Prudential Health Care adding
approximately 79,000 members ($113.7 million of premium revenue) in Maryland on
June 1, 1999 and 12,000 members ($7.9 million of premium revenue) in the
District of Columbia on August 1, 1999, with the balance of the increase due to
internal growth.
Investment income increased 89.0% to $6.4 million for 1999 from $3.4
million for 1998. The $3.0 million increase was due to higher cash levels
available for investment and higher yields in 1999.
Health benefits
Expenses related to health benefits increased 114.4% to $334.2 million for
1999 from $155.9 million for 1998. The $178.3 million increase was primarily due
to the 137.2% increase in membership. The health benefits ratio for 1999
increased to 85.2% from 83.5% for 1998. The higher health benefits ratio in 1999
was due to higher initial health benefit costs related to the Medicaid contracts
and other assets acquired from Prudential Health Care in Maryland and the
District of Columbia. Excluding the health benefits ratio for Maryland and the
District of
28
<PAGE> 31
Columbia, our health benefits ratio would have been 77.1% for 1999. From the
date of acquisition to year end, the health benefits ratio for the Maryland
business acquired from Prudential Health Care was approximately 103.3%. When we
acquired the Medicaid contracts and other related assets in Maryland and the
District of Columbia, we began implementing initiatives to improve the health
benefits ratios of those businesses. We have a process for identifying,
evaluating and implementing initiatives that improve the health benefits ratio
for new and existing markets. These initiatives include adjusting fee schedules,
implementing medical management and case management activities related to
hospital utilization, utilization of a specialty contractor for neonatal medical
management of extremely ill newborns, entering into capitated arrangements for
ancillary services such as dental, substance abuse and vision and improving our
pharmacy services. These initiatives have been implemented or are in process and
are expected to be substantially completed before the end of 2000.
Selling, general and administrative expenses
Selling, general and administrative expenses for 1999 increased 81.2% to
$52.8 million from $29.2 million for 1998. The $23.6 million increase was
primarily due to an increase in wages and related expenses for additional staff,
and fees for additional third party contractors to support our increased
membership. The selling, general and administrative expenses ratio decreased to
13.3% for 1999 from 15.3% for 1998. This decrease is a result of spreading
indirect expenses over a larger membership base.
Interest expense
Interest expense increased 67.9% to $811,000 for 1999 from $483,000 for
1998. This $328,000 increase was due to our term loan in the original amount of
$10 million being outstanding for a full year in 1999 as opposed to being
outstanding for a part of 1998. We borrowed the funds under this facility in May
1998.
Provision for income taxes
Due to increased 1999 net income and sustained net income for 1999 and
1998, it became apparent that it was more likely than not that the benefits of
the net operating losses would be realized. Therefore, we reversed our valuation
allowance established against our deferred tax assets, which resulted in an
income tax benefit of $4.1 million.
YEAR ENDED DECEMBER 31, 1998 COMPARED TO YEAR ENDED DECEMBER 31, 1997
Revenues
Premium revenue for 1998 increased 187.9% to $186.8 million from $64.9
million for 1997. The $121.9 million increase was due to membership growth of
$73.2 million and increased average premium yield of $48.7 million. Total
membership increased 175.6% to approximately 113,000 as of December 31, 1998
from approximately 41,000 as of December 31, 1997.
Our primary increases in membership were in our New Jersey and Texas health
plans. Our New Jersey health plan grew as a result of the acquisition of the
Medicaid contracts and related assets from the Oxford Health Plans on July 1,
1998, adding approximately 27,000 members. The increase in Texas of
approximately 40,000 members was the result of the commencement of one Houston
contract in December 1997 and a second Houston contract in January 1998.
Investment income increased 55.2% to $3.4 million for 1998 from $2.2
million for 1997. The $1.2 million increase was primarily due to increased cash
available for investment.
29
<PAGE> 32
Health benefits
Expenses related to health benefits increased 181.7% to $155.9 million for
1998 from $55.3 million for 1997. The $100.6 million increase was primarily due
to the 175.6% increase in membership. The health benefits ratio for 1998
decreased to 83.5% from 85.3% for 1997. The health benefits ratio improvement
can be attributed to the favorable impact of medical cost management
initiatives. The types of medical cost initiatives that improved the health
benefits ratio from 1997 to 1998 included implementing disease management
programs, implementing medical management activities related to hospital
utilization, utilization of a specialty contractor for neonatal medical
management of extremely ill newborns, improving our pharmacy services and
contracting and recontracting with providers to improve our network. All of
these initiatives have been fully implemented.
Selling, general and administrative expenses
Selling, general and administrative expenses for 1998 increased 46.4% to
$29.2 million from $19.9 million for 1997. The $9.3 million increase was
primarily due to an increase in wages and related expenses for additional staff
to support our increased membership. The selling, general, and administrative
expenses ratio decreased to 15.3% for 1998 from 29.7% for 1997. Selling, general
and administrative expenses were spread over a larger membership and higher
premium levels. Furthermore, in 1997, we were putting in place infrastructure
for the anticipated growth of membership in advance of commencing operations.
Interest expense
In May 1998, we borrowed $10.0 million under a term loan facility. As a
result, interest expense was $483,000 for 1998 compared to zero for 1997.
Provision for income taxes
No income tax expense or benefit was recorded in 1998 and 1997. We recorded
a valuation allowance to defer recognition of the benefit until it was more
likely than not that the benefit would be realized.
SELECTED QUARTERLY OPERATING RESULTS
The following table sets forth unaudited quarterly results of our
operations for each of the quarters in the year ended December 31, 1999 and for
the quarter ended March 31, 2000. This information has been prepared on the same
basis as the consolidated financial statements and, in the opinion of our
management, reflects adjustments, consisting only of normal recurring
adjustments, necessary for a fair presentation of the information for the
periods presented. The unaudited quarterly operating results are not necessarily
indicative of future results of operation. This data should be read in
conjunction with our consolidated financial statements and related notes
included in this prospectus.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
----------------------------------------------------------------------------------------
MARCH 31, 1999 JUNE 30, 1999 SEPTEMBER 30, 1999 DECEMBER 31, 1999 MARCH 31, 2000
-------------- ------------- ------------------ ----------------- --------------
(IN THOUSANDS)(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Premium revenue........................ $60,004 $77,120 $118,706 $136,466 $147,654
Investment income...................... 1,183 1,252 1,695 2,274 2,710
Health benefits........................ 50,896 66,121 102,439 114,736 118,332
Selling, general and administrative
expenses............................. 8,712 11,291 13,029 19,814 17,088
Income before income taxes............. 948 67 3,540 2,661 13,383
</TABLE>
30
<PAGE> 33
LIQUIDITY AND CAPITAL RESOURCES
Since inception, we have principally financed our operations and growth
through private equity offerings and internally generated funds. We generate
cash from premium revenue derived from Medicaid contracts with the states and
investment income. Our primary uses of cash include the payment of expenses
related to health benefits and selling, general and administrative expenses. In
addition, we may need to raise capital from time to time to fund planned
geographic and product expansion, for computer system enhancements, for
necessary regulatory reserves and for acquisitions of healthcare businesses. We
receive premium revenue in advance of payment of claims for related healthcare
services.
Our investment policies are designed to provide liquidity, preserve capital
and maximize total return on invested assets. As of December 31, 1999 and March
31, 2000, our investment portfolio consisted primarily of fixed-income
securities. The average maturity is under six months. Cash is invested in
investment vehicles such as municipal bonds, commercial paper, U.S. government
backed agencies, and U.S. Treasury instruments. The states in which we operate
prescribe the types of instruments in which our subsidiaries may invest their
cash. The average portfolio yield as of March 31, 2000 was approximately 6.0%.
Net cash provided by operations increased from $3.4 million in 1997 to
$37.7 million in 1998 and to $95.2 million in 1999. The growth is primarily due
to membership growth, the receipt of premium revenue in advance of payment for
health benefits and improved profitability. Net cash used by operations for the
three months ended March 31, 2000 was $9.5 million, primarily due to the early
receipt of January premiums in December 1999 in anticipation by some of the
states in which we operate of potential year 2000 issues, which did not occur,
partially offset by an increase in claims payable.
Net cash flows used in investing activities were $1.6 million in 1997
compared to $9.9 million in 1998. The increase in 1998 was primarily due to the
purchase of the New Jersey Medicaid contracts and related assets from Oxford
Health Plans in July 1998 for $5.5 million and the $2.8 million purchase of
equipment and software. In 1999 net cash flows used for investing activities
were $77.5 million resulting from net purchase of investments of $64.6 million,
net purchase of investments on deposit for licensure of $7.3 million, and $5.6
million for the purchase of property, equipment, software, contract rights and
related assets. For the three months ended March 31, 2000, net cash used in
investing activities was $7.4 million. This was primarily due to the $1.5
million purchase of property, equipment and software and $5.9 million of
purchased investments and investments on deposits for licensure greater than the
proceeds from the sale of investments and investments on deposit for licensure.
From January 1997 through March 31, 2000, we invested approximately $10.4
million in property, equipment and software to service increasing membership.
Net cash flows provided by financing activities were $14.7 million in 1998
due to net term loan proceeds of $9.9 million and $4.8 million net proceeds from
the issuance of Series E mandatorily redeemable preferred stock and warrants. In
1999, net cash flows provided by financing activities were $2.9 million due to
proceeds of $5.0 million from the issuance of additional Series E mandatorily
redeemable preferred stock and warrants and proceeds of $8.1 million on a new
term loan offset by the debt repayment of our May 1998 term loan. For the three
months ended March 31, 2000, net cash used in financing activities was $325,000,
of which $333,000 was for debt repayment offset by proceeds of $8,000 received
from the exercise of stock options.
At March 31, 2000, we had working capital of $27.4 million as compared to
working capital of $19.6 million and $23.1 million at December 31, 1998 and
1999, respectively. We have been able to generate cash from operations since
1996 primarily due to receipt of premium revenue in advance of the payment of
claims for health benefits.
31
<PAGE> 34
At March 31, 2000, December 31, 1998, and December 31, 1999, cash and cash
equivalents were $81.7 million, $78.4 million, and $99.0 million, respectively.
On November 9, 1999, we entered into a loan and security agreement with two
banks to obtain a $16.5 million debt facility, consisting of a term loan of $9.0
million and a revolving loan commitment of $7.5 million. We used the funds
borrowed under the term loan to retire the term loan entered into in May 1998.
The term loan and revolver are secured by cash and cash equivalents, accounts
receivable, property and equipment, and other assets. The principal on the term
loan bears interest at a rate equal to the prime rate plus 0.75%. The effective
interest rate was 9.75% at March 31, 2000. Under the agreement, we must comply
with financial covenants relating to a fixed charge coverage ratio, consolidated
leverage ratio, debt to capitalization ratio, quick ratio and medical expense
ratio. As of March 31, 2000, we were in compliance with these covenants. As of
March 31, 2000, there was $7.7 million outstanding under the term loan portion
and there were no outstanding borrowings on the revolver portion of the
facility, of which $7.5 million remains available.
In July 1998, we issued 1,000,000 shares of our Series E mandatorily
redeemable preferred stock and warrants to purchase 562,500 shares of our common
stock for an aggregate $5.0 million. On January 20, 1999, we issued an
additional 1,000,000 shares of Series E mandatorily redeemable preferred stock
and warrants to purchase an additional 562,500 shares of our common stock for an
additional $5.0 million. We have accrued dividends on the redeemable preferred
stock but those dividends have not been paid. Any payment of dividends requires
approval by our lenders. The Series E mandatorily redeemable preferred stock is
mandatorily redeemable upon consummation of this offering for $12.5 million.
Our subsidiaries are required to maintain minimum capital requirements
prescribed by various state agencies, including the departments of insurance in
each of the states in which we operate. As of March 31, 2000, our subsidiaries
were in compliance with all minimum capital requirements. Barring any change in
regulatory requirements, we believe that we will continue to be in compliance
with these requirements at least through the end of this year.
We believe that internally generated funds and the proceeds from this
offering will be sufficient to fund continuing operations, capital expenditures,
and to increase our market penetration in our existing markets and expand into
new service areas for at least 12 months following this offering.
As of March 31, 2000, we had planned capital and software commitments of
$3.5 million for property and equipment. Our capital and software expenditure
plan for 2000 is $11.8 million, of which we had spent approximately $1.5 million
as of March 31, 2000.
REGULATORY CAPITAL AND DIVIDEND RESTRICTIONS
Our operations are conducted through our wholly-owned subsidiaries, which
include HMOs and one managed care organization, or MCO. HMOs and MCOs are
subject to state regulations that, among other things, may require the
maintenance of minimum levels of statutory capital, as defined by each state,
and restrict the timing, payment and amount of dividends and other distributions
that may be paid to their stockholders.
As of March 31, 2000, our subsidiaries had aggregate statutory capital and
surplus of approximately $26.8 million, compared with the required minimum
aggregate statutory capital and surplus requirements of approximately $10.6
million.
The National Association of Insurance Commissioners has adopted rules
which, to the extent that they are implemented by the states, will set new
minimum capitalization requirements for insurance companies, HMOs and other
entities bearing risk for healthcare coverage. The requirements take the form of
risk-based capital rules. The change in rules for insurance companies became
effective as of December 31, 1998. The new HMO rules, which
32
<PAGE> 35
may vary from state to state, are currently being considered for adoption.
Illinois and Texas adopted various forms of the rules as of December 31, 1999.
The HMO rules, if adopted by other states in their proposed form, may increase
the minimum capital required for our subsidiaries.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
As of March 31, 2000, we had short-term investments of $69.9 million. These
short-term investments consist of highly liquid investments with maturities
between three and twelve months. These investments are subject to interest rate
risk and will decrease in value if market rates increase. We have the ability to
hold these short-term investments to maturity, and as a result, we would not
expect the value of these investments to decline significantly as a result of a
sudden change in market interest rates. Declines in interest rates over time
will reduce our investment income.
INFLATION
Although the general rate of inflation has remained relatively stable and
healthcare cost inflation has stabilized in recent years, the national
healthcare cost inflation rate still exceeds the general inflation rate. We use
various strategies to mitigate the negative effects of healthcare cost
inflation. Specifically, our health plans try to control medical and hospital
costs through contracts with independent providers of healthcare services.
Through these contracted care providers, our health plans emphasize preventive
healthcare and appropriate use of specialty and hospital services.
While we currently believe our strategies to mitigate healthcare cost
inflation will continue to be successful, competitive pressures, new healthcare
and pharmaceutical product introductions, demands from healthcare providers and
customers, applicable regulations or other factors may affect our ability to
control the impact of healthcare cost increases.
33
<PAGE> 36
BUSINESS
OVERVIEW
We are a multi-state managed healthcare company focused on providing
healthcare services to people eligible to receive Medicaid and CHIP benefits.
Unlike many managed care organizations that attempt to serve the general
population, as well as Medicare and Medicaid populations, we are focused
exclusively on the Medicaid and CHIP populations. We do not offer Medicare or
commercial products. In general, as compared to commercial or Medicare
populations, our target population is younger, accesses healthcare in an
inefficient manner, and has a greater percentage of medical expenses related to
obstetrics, diabetes and respiratory conditions. We believe that we are better
qualified and positioned than many of our competitors to meet the unique needs
of our target populations because of our single focus on providing managed care
to these populations, our strong government relationships, medical management
programs, and our community-based education and outreach programs. We design our
programs to address the particular needs of our members, for whom we provide
Medicaid benefits pursuant to an agreement with the applicable regulatory
authority. We combine medical, social and behavioral health services to help our
members obtain quality healthcare. Our success in establishing and maintaining
strong relationships with state governments, providers, and members has enabled
us to win new contracts and to establish a leading market position in many of
the markets we serve. We provide an array of products to members in Texas, New
Jersey, Maryland, the District of Columbia and Illinois. As of March 31, 2000,
we had approximately 277,000 members.
Providers are hospitals, physicians and ancillary medical programs which
provide medical services to our members. Members are said to be "enrolled" with
our health plans to receive benefits. Accordingly, our total membership is
generally referred to as our enrollment.
We were incorporated in Delaware on December 9, 1994 as AMERICAID Community
Care by a team of experienced senior managers led by Jeffrey L. McWaters, our
Chairman and Chief Executive Officer. During 1994 through 1995, we were involved
primarily in financial planning, recruiting and training personnel, developing
products and markets, and negotiating contracts with various state governments.
During 1996, we began enrolling Medicaid members in our Texas, New Jersey and
Illinois HMOs and in 1997, we won a bid to enroll members in our Houston plan.
In 1998, we acquired the New Jersey Medicaid contract rights and other related
assets from Oxford Health Plans. In 1999, we began operating in Maryland and the
District of Columbia, and won a bid to enroll members in our Dallas plan. Our
operations in Maryland and the District of Columbia are the result of acquiring
contract rights from Prudential Health Care. The assets purchased consist of
Prudential's rights to provide managed care services to members in those two
jurisdictions and the assignment of Prudential's contracts with healthcare
providers.
MARKET OPPORTUNITY
EMERGENCE OF MANAGED CARE
Healthcare in the United States has grown from a $27 billion industry in
1960 to a highly-regulated market of approximately $1 trillion in 1998,
according to the federal government's Health Care Financing Administration, or
HCFA. In response to the dramatic increases in healthcare-related costs in the
late 1960s, Congress enacted the Federal Health Maintenance Organization Act of
1973, a statute designed to encourage the establishment and expansion of care
and cost management. The private sector responded to this legislation by forming
health maintenance organizations, or HMOs. These HMOs were intended to address
the needs of employers, insurers, government entities and healthcare providers
who sought a cost-effective alternative to traditional indemnity insurance.
Since the establishment of HMOs, enrollment has increased more than
thirteen-fold from 6 million in 1976 to nearly 79 million in 1998. Over that
34
<PAGE> 37
time, many HMOs have been formed to focus on a specific or specialty population
of healthcare such as commercial plans for employees, Medicare, Medicaid, dental
care, and behavioral healthcare. Additionally, HMOs have been formed in a
variety of sizes, from small community-based plans to multi-state organizations.
Despite these efforts to organize care delivery, the costs associated with
medical care have continued to increase. As a result, it has become increasingly
important for HMOs to know the populations they serve in order to develop an
infrastructure and programs tailored to the medical and social profiles of their
members.
MEDICAID AND CHIP PROGRAMS
Medicaid, a state administered program, was enacted in 1965 to make federal
matching funds available to all states for the delivery of healthcare benefits
to eligible individuals, principally those with incomes below specified levels
who meet other state specified requirements. The federal government funds at
least half of the costs of Medicaid in each state. However, it may fund more,
depending on the state's per capita income. By contrast, Medicare is a program
administered by the federal government and is made available to the aged and
disabled.
Most states determine threshold Medicaid eligibility by reference to other
federal financial assistance programs including:
- Temporary Assistance to Needy Families, or TANF, and
- Supplemental Security Income, or SSI.
TANF provides assistance to low-income families with children and was
adopted to replace the Aid to Families with Dependent Children program. SSI is a
federal program that provides assistance to low-income aged, blind or disabled
individuals. However, states can broaden eligibility criteria.
CHIP is a recently developed federal/state matching program which provides
healthcare coverage to children not otherwise covered by Medicaid or other
insurance programs. CHIP enables a segment of the large uninsured population in
the United States to receive healthcare benefits. States have the option of
administering CHIP through their Medicaid programs.
In 1998, according to information published by HCFA, Medicaid covered more
than 40.6 million individuals, as follows:
<TABLE>
<CAPTION>
FEDERAL-ASSISTANCE
NUMBER CATEGORY PROGRAM REFERENCE
------ -------------------- ------------------
<C> <S> <C>
19.0 million children TANF
7.9 million adults, mostly women TANF
6.6 million disabled SSI
4.0 million individuals over 64 SSI
3.2 million other N/A
</TABLE>
Nationally, approximately 59% of Medicaid spending is directed toward
hospital, physician and other acute care services, and the remaining
approximately 41% is for nursing home and other long-term care. In general,
inpatient and emergency room utilization tends to be higher within the Medicaid
population than among the general population because of the inability to afford
access to a primary care physician leading to the postponement of treatment
until acute care is required.
35
<PAGE> 38
The highest healthcare expenses for the Medicaid population include:
- obstetrics,
- respiratory illness,
- diabetes,
- neonatal care, and
- HIV/AIDS.
In 1997, the federal government spent $90.8 billion on Medicaid and states
spent an additional $70.4 billion. Over the six-year period from 1999 to 2004,
the Congressional Budget Office estimates that federal Medicaid spending will
grow at approximately 7.9% per year. Key factors driving Medicaid spending
include:
- number of eligible individuals who enroll,
- price of medical and long-term care services,
- use of covered services,
- state decisions regarding optional services and optional eligibility
groups, and
- effectiveness of programs to reduce costs of providing benefits,
including managed care.
In addition, we expect that spending for CHIP will increase as a result of
funds becoming available to the states from settlements of government litigation
with tobacco companies and the federal government's current initiative to
decrease the number of uninsured individuals. In the states in which we operate,
only Texas has made a final determination to use a portion of the funds from
tobacco litigation settlements for CHIP programs. In addition, based on a recent
press release issued by the Office of the Governor, we believe that New Jersey
will allocate a portion of the tobacco litigation settlement funds to a
state-sponsored healthcare coverage program for parents of CHIP eligible
children. We do not believe that the settlements entered into by the other
states in which we operate require the use of these funds for CHIP programs.
MEDICAID MANAGED CARE
Historically, the traditional Medicaid programs made payments directly to
providers after delivery of care. Under this approach, recipients received care
from disparate sources, as opposed to being cared for in a systematic way. As a
result, care for routine needs was often accessed through emergency rooms or not
at all. The delivery of episodic healthcare under the traditional Medicaid
program limited the ability of the states to provide quality care, implement
preventive measures and control healthcare costs. Federal Medicaid spending grew
at an average annual rate of 19.6% between 1988 and 1993, prior to the
widespread use of managed care for Medicaid benefits.
Over the past decade, in response to rising healthcare costs and in an
effort to ensure quality healthcare, the federal government has expanded the
ability of state Medicaid agencies to explore, and, in some cases, mandate the
use of managed care for Medicaid beneficiaries. If Medicaid managed care is not
mandatory, individuals entitled to Medicaid may choose either the traditional
Medicaid program or a managed care plan, if available. According to information
published by HCFA, from 1993 to 1998, managed care enrollment among Medicaid
beneficiaries increased more than three-fold. As of 1998, most states had
adopted some form of a mandatory Medicaid managed care program.
36
<PAGE> 39
THE AMERIGROUP APPROACH
Unlike many managed care organizations that attempt to serve the general
population, as well as Medicare and Medicaid populations, we are focused
exclusively on the Medicaid and CHIP populations and do not offer Medicare or
commercial products. Our success in establishing and maintaining strong
relationships with state governments, providers, and members has enabled us to
win new contracts and to establish a strong market position in the markets we
serve. We have been able to accomplish this by addressing the various needs of
these three constituent groups.
STATE GOVERNMENTS
We have been successful in bidding for contracts because of our ability to
provide quality healthcare services in a cost-effective manner. Our information
systems, our education and outreach programs, and our disease and medical
management programs benefit the communities we serve while providing the state
governments with predictability of cost. Our education and outreach programs are
designed to decrease the use of emergency care services as the primary access to
healthcare through the provision of programs like member health education
seminars and system-wide 24-hour on-call nurses. Our information systems are
designed to measure and track our performance enabling us to demonstrate the
effectiveness of our programs to the government. While we promote ourselves
directly in bidding for new contracts or seeking to add new benefit plans, such
as CHIP programs, we believe that our ability to win additional contracts and
expand our service areas within a state results primarily from our demonstrating
prior success in providing quality care while reducing and managing costs and
our customer-focused approach to working with state governments. We believe we
will also benefit from this experience when bidding for and acquiring contracts
in new state markets.
PROVIDERS
In each of the communities where we operate, we have established extensive
provider networks and have been successful in continuing to establish new
provider relationships. We have accomplished this by working closely with
physicians to help them operate efficiently by providing financial, statistical
and utilization information, physician and patient educational programs and
disease and medical management programs, as well as adhering to a prompt payment
policy. In addition, as we increase our market penetration, we provide our
physicians with a growing base of potential patients in the markets they serve.
This network of providers and relationships assists us in implementing
preventive care methods, managing costs and improving the overall quality of
care delivered to our members. We believe that our experience working and
contracting with Medicaid providers will give us a competitive advantage in
entering new markets. While we do not directly market to or through our
providers, they are also instrumental in helping us attract new members and
retain existing members.
MEMBERS
In both signing up new and retaining existing members, we focus on our
understanding of the unique needs of the Medicaid and CHIP populations. Many of
our employees, including the sales force and outreach staff, are a part of the
communities we serve. In addition, we have developed a system that provides our
members with easy access to appropriate care. We supplement this care with
community-based education and outreach programs designed to improve the
well-being of our members. We often provide the programs in our members' homes,
churches and community centers. These programs not only help our members control
and manage their medical care, but also have been proven to decrease the
incidence of emergency room care, which is traumatic for the individual and
expensive and inefficient for the healthcare system. Upon entering a new market,
we use these programs and other advertising
37
<PAGE> 40
to create brand awareness. As our presence in a market matures, these programs,
and other value added services, help us build and maintain membership levels.
STRATEGY
Our objective is to become the leading managed care organization in the
United States focused on Medicaid, CHIP and uninsured populations. To achieve
this objective we intend to:
Focus on our "medical home" concept to provide quality, cost-effective
healthcare. We believe that the care the Medicaid population has historically
received can be characterized as uncoordinated, episodic and short-term focused.
In the long term, this approach is less desirable for the patient and more
expensive for the state. Our approach to serving the Medicaid population is
based on offering a comprehensive range of medical and social services intended
to improve the well-being of the member while lowering the overall cost of
providing benefits. Unlike traditional Medicaid, each of our members has a
primary contact, usually a primary care physician, to coordinate and administer
the provision of care, as well as enhanced benefits, such as 24-hour on-call
nurses. We refer to this coordinated approach as a medical home. An integral
part of our medical home concept is continual quality management. To help the
physician improve the quality of care and improve the health status of our
members, we have developed a number of programs and procedures to address high
frequency, chronic or high-cost conditions, such as pregnancy, respiratory
conditions, diabetes and congestive heart failure. Our procedures include case
and disease management, pre-admission certification, concurrent review of
hospital admissions, discharge planning, retrospective review of claims, outcome
studies, and management of inpatient, ambulatory and alternative care. These
policies and programs are designed to consistently provide, high quality care
and cost-effective service to our members.
Identify new markets for our services through acquisitions and development
of new operations. Since 1996, we have developed markets in Texas, New Jersey
and Illinois and acquired businesses in New Jersey, Maryland and the District of
Columbia. We intend to evaluate potential new markets using our established
government relationships and our historical experience in managing Medicaid
populations. Our management team is experienced in identifying markets for
development of new operations, identifying and executing acquisitions and
integrating these businesses into our existing operations. Furthermore, our
information technology systems and processes are designed to be scalable and
replicable, which will enable us to access the critical information needed to
effectively manage a new market.
Increase our membership in existing markets through acquisitions and
internal growth. We intend to increase our membership in existing markets
through development and implementation of community-specific products, alliances
with key providers, sales and marketing efforts and acquisitions. We provide a
broad continuum of healthcare supported by numerous services such as neo-natal
intensive care and high-risk pregnancy programs. These products and services are
developed and administered by us but are also designed to attract and retain our
providers, who are critical to our overall success. Through strategic and
selective contracting with providers, we are able to customize our service
delivery systems to meet the unique clinical, cultural and socio-economic needs
of our members. Our providers often are located in the inner city neighborhoods
where our members live, thereby providing accessability to, and an understanding
of, the needs of the member. In our voluntary market we have a sales force to
recruit potential members who are currently in the traditional Medicaid system.
The overall effect of this comprehensive approach reinforces our broad
brand-name recognition as a leading provider of Medicaid managed care, while
complying with state mandated marketing guidelines. We may also choose to
increase membership by acquiring Medicaid contracts and other related assets
from competitors in our existing markets.
38
<PAGE> 41
Capitalize on our experience working with state governments. We
continually strive to be an industry-recognized leader in government relations
and an important resource to our state government customers. For example, we
have a dedicated legislative affairs team. We are, and intend to continue to be,
an active and leading participant in the formulation and development of new
Medicaid policies and programs. This also enables us to competitively bid to
expand our service areas and to implement new products. We collaborated with the
State of Texas to obtain supplemental payments for those women who enroll during
their third trimester of pregnancy and remain members through childbirth.
PRODUCTS
We have developed several products through which we offer a range of
healthcare services. These products are also community-based and seek to address
the social and economic issues faced by the populations we serve. Additionally,
we seek to establish strategic relationships with prestigious medical centers,
children's hospitals and federally qualified health centers to assist in
implementing our products and medical management programs within the communities
we serve. Our health plans cover various services that vary by state and may
include:
- primary and specialty physician care,
- inpatient and outpatient hospital care,
- emergency and urgent care,
- prenatal care,
- laboratory and x-ray services,
- home health and durable medical equipment,
- behavioral health services and substance abuse,
- long-term and nursing home care,
- 24-hour on-call nurses,
- vision care and exam allowances,
- dental care,
- prescriptions and limited over the counter drugs,
- assistance with obtaining transportation for office or health education
visits,
- memberships in the Boys' and Girls' Clubs, and
- welcome calls and health status calls to coordinate care.
Our products, which we may offer under different names in different
markets, focus on specific populations within the Medicaid and CHIP programs.
AMERICAID is our family-focused Medicaid managed healthcare product
designed for the TANF population that consists primarily of low-income children
and their mothers. Historically, most of our members used the AMERICAID product.
We currently offer our AMERICAID product in all markets we serve.
AMERIKIDS is our managed healthcare product for uninsured children not
eligible for Medicaid. This product is designed for children in the recently
developed CHIP initiative. As states fully implement their CHIP program, we
expect use of this product to increase. We began offering AMERIKIDS in Maryland
and Washington, D.C. when we acquired Prudential's contract
39
<PAGE> 42
rights and other related assets in those areas in 1999. We also recently began
offering AMERIKIDS in New Jersey and Texas.
AMERIPLUS is our managed healthcare product for Supplemental Security
Income, or SSI, recipients. This population consists of the low-income aged,
blind and disabled. We began offering this product in 1998 and currently offer
it in New Jersey, Maryland and Houston. We expect our AMERIPLUS membership to
grow as more states, such as New Jersey, include SSI benefits in mandatory
managed care programs.
AMERIFAM is our newly developed managed health care product designed for
uninsured segments of the population other than CHIP eligibles. AMERIFAM's
current focus is the families of our CHIP and Medicaid children. We offer this
product in the District of Columbia where the program covers parents of CHIP and
Medicaid children.
For March 2000, of our 277,000 members, 89.0% were enrolled in TANF and
CHIP programs. The remaining 11.0% were enrolled in SSI programs. Of these SSI
enrollees, 13.5% were members to whom we provided limited administrative
services but did not provide health benefits.
DISEASE AND MEDICAL MANAGEMENT PROGRAMS
We provide specific disease and medical management programs designed to
meet the special healthcare needs of our members with chronic illnesses, to
manage excessive costs and to improve the overall health of our members. We
currently offer disease and medical management programs in areas such as
high-risk pregnancy, respiratory conditions, congestive heart failure and
diabetes. These programs focus on preventing acute occurrences associated with
chronic conditions by identifying at risk members, monitoring their conditions
and pro-actively managing their care. We also employ tools such as utilization
review and pre-certification to reduce the excessive costs often associated with
uncoordinated healthcare programs.
MARKETING AND EDUCATIONAL PROGRAMS
An important aspect of our comprehensive approach to healthcare delivery is
our marketing and educational programs, which we administer system-wide for our
providers and members. We often provide these programs in members' homes,
churches and community centers. The programs we have developed are specifically
designed to increase awareness of various diseases, conditions and methods of
prevention in a manner that supports the providers, while meeting the unique
needs of our members. For example, we conduct health promotion events in
physicians' offices that target respiratory conditions, immunization and other
health issues. Direct provider marketing is supported by traditional marketing
venues such as direct mail, telemarketing, and television, radio and cooperative
advertising with participating medical groups.
We believe that we can also increase and retain membership through
marketing and education initiatives. We have a dedicated staff who actively
support and educate prospective and existing members and community
organizations. Through programs such as Safe Kids and our sponsorship of the
National Theatre for Children's production of 2Smart 2Smoke, we promote a
healthy lifestyle, safety and good nutrition to our youngest members. In
addition to these personal health-related programs, we remain committed to the
communities we serve. We have developed specific strategies for building
relationships with key community organizations, which helps enhance community
support for our products and improve service to members. We regularly
participate in local events and festivals and organize community health fairs to
promote healthy lifestyle practices. In several markets, we also provide free
memberships to the local Boys' and Girls' Clubs. We believe that our
comprehensive approach
40
<PAGE> 43
to healthcare positions us well to serve our members, their providers and the
communities in which they both live and work.
COMMUNITY PARTNERS
We believe community focus and understanding are important to attracting
and retaining members. To assist in establishing our community presence in a new
market, we seek to establish relationships with prestigious medical centers,
children's hospitals and federally qualified health centers to offer our
products and programs. We have strategic relationships with Cook Children's
Health Care System in Fort Worth, Texas and Memorial Hermann Healthcare System
in Houston, Texas granting us the right to actively market their names and logos
in advertising of our Medicaid products. A Cook Children's affiliate, the Cook
Children's Physician Network, is our exclusive provider of pediatric healthcare
services to members age 15 and under in this service delivery area. For March
2000, Johns Hopkins Health System provided healthcare services to approximately
23,000 of our 86,000 members in Baltimore City, Maryland.
PROVIDER NETWORK
We provide healthcare services to our members through mutually
non-exclusive contracts with primary care physicians, specialists, ancillary
providers and hospitals. Either prior to or concurrently with bidding for new
contracts, we establish a provider network in each of our service areas. The
following table shows the total approximate number of primary care physicians,
specialists and hospitals participating in our network for March 2000:
<TABLE>
<CAPTION>
SERVICE AREAS
----------------------------------------------------------------
MID-ATLANTIC
TEXAS NEW JERSEY (MARYLAND AND D.C.) ILLINOIS TOTAL
----- ---------- ------------------- -------- ------
<S> <C> <C> <C> <C> <C>
Primary care
physicians......... 1,300 1,800 1,700 400 5,200
Specialists.......... 4,400 4,500 5,800 400 15,100
Hospitals............ 100 100 50 20 270
Ancillary
providers.......... 800 1,000 500 400 2,700
</TABLE>
The primary care physician, or PCP, is a critical component in care
delivery, and also in the management of costs and the attraction and retention
of new members. PCPs include family and general practitioners, pediatricians,
internal medicine physicians and OB/GYNs. These physicians provide preventive
and routine healthcare services and are responsible for making referrals to
specialists, hospitals and other providers. Healthcare services provided
directly by primary care physicians include the treatment of illnesses not
requiring referrals, periodic physician examinations, routine immunizations,
well child care and other preventive healthcare services.
Specialists provide medical care to members generally upon referral by the
primary care physicians. However, we have identified specialists that are part
of the ongoing care of our members, such as allergists, oncologists and
surgeons, which our members may access directly without first obtaining a PCP
referral. Our contracts with both the primary care physicians and specialists
usually are for one to two year periods and automatically renew for successive
one year terms subject to termination for cause by us if necessary based on
provider conduct or other appropriate reasons. The contracts generally can be
cancelled by either party upon 90 to 120 days' prior written notice.
Our contracts with hospitals are usually for a one to two year period and
automatically renew for successive one-year periods. Generally, our hospital
contracts may be terminated by either party without cause with 90 to 150 days'
prior written notice. Pursuant to the contract, the hospital is paid for all
pre-authorized medically necessary inpatient and outpatient services
41
<PAGE> 44
and all covered emergency and medical screening services provided to members.
With the exception of emergency services, most inpatient hospital services
require advance approval from the member's primary care physician and our
medical department. We require hospitals to participate in utilization review
and quality assurance programs.
We have also contracted with other ancillary providers for physical
therapy, mental health and chemical dependency care, home healthcare, vision
care, diagnostic laboratory tests, x-ray examinations, ambulance services and
durable medical equipment. Additionally, we have contracted with dental vendors
that provide routine dental care in markets where routine dental care is a
covered benefit and with a national pharmacy vendor that provides a local
pharmacy network in our markets where pharmacy is a covered benefit.
In order to ensure the quality of our medical care providers, we credential
and re-credential our providers using standards that are supported by the
National Committee for Quality Assurance. Additionally, we provide feedback and
evaluations on quality and medical management to them in order to improve the
quality of care provided, increase their support of our programs and enhance our
ability to attract and retain providers.
PROVIDER PAYMENT METHODS
Fee-for-Service. This is a reimbursement mechanism which pays providers
based upon services performed. For the first quarter of 2000, 76% of our
payments for direct health benefits were on a fee-for-services reimbursement
basis. The primary fee-for-service arrangements are maximum allowable fee
schedule, per diem, percent of charges or any combination thereof. The following
is a description of each of these mechanisms:
Maximum Allowable Fee Schedule. Providers are paid the lesser of billed
charges or a specified fixed payment for a covered service. The maximum
allowable fee schedule is developed using, among other indicators, the
state fee-for-service Medicaid program fee schedule, Medicare fee
schedules, medical costs trends and market conditions. Adjustments to the
fee schedules are not mandated in the provider contracts, but adjusted at
our discretion, using the above indicators.
Per Diem and Case Rates. Hospital facility costs are typically reimbursed
at negotiated per diem or case rates, which vary by level of care within
the hospital setting. Lower rates are paid for lower intensity services,
such as a low birth weight newborn baby who stays in the hospital a few
days longer than the mother, compared to higher rates for a neo-natal
intensive care unit stay for a baby born with severe developmental
disabilities.
Percent of Charges. We contract with providers to pay them an agreed-upon
percent of their standard charges for covered services. This is typically
done where hospitals are reimbursed under the state fee-for-service
Medicaid program on a percent of charges basis.
Capitation. Some of our primary care physicians and specialists are paid
on a fixed-fee per member basis, also known as capitation. Our arrangements with
other providers for vision, dental, home health, laboratory, durable medical
equipment, mental health and chemical dependency services may also be capitated.
We review the fees paid to providers periodically and make adjustments as
necessary. Generally, the contracts with the providers do not allow for
automatic annual increases in payments. Among the factors generally considered
in adjustments are changes to state Medicaid fee schedules, competitive
environment, current market conditions, anticipated utilization patterns and
projected medical expenses. In order to enable us to better monitor quality and
meet our state contractual encounter reporting obligations, we are increasing
the number of providers we pay on a fee-for-service basis and reducing the
number of capitation
42
<PAGE> 45
contracts we have. States use the encounter data to monitor quality of care to
members and to set premium rates.
OUR HEALTH PLANS
We have four health plan subsidiaries offering healthcare services in
Texas, New Jersey, Maryland, the District of Columbia and Illinois.
TEXAS
Our Texas health plan, AMERICAID Texas, Inc., is licensed as an HMO and
became operational in September 1996. Our current service areas include the
cities of Fort Worth, Dallas and Houston and the surrounding counties. For March
2000, we had approximately 111,000 members in Texas, consisting of approximately
35,000 members in Fort Worth, approximately 42,000 members in Houston and
approximately 34,000 members in Dallas. We have the largest Medicaid membership
in each of our Fort Worth and Dallas markets and the second largest Medicaid
membership in Houston. We offer AMERICAID in each of our Texas markets and
AMERIPLUS in Houston. In May of this year we began offering AMERIKIDS in Dallas
and Houston.
NEW JERSEY
Our New Jersey health plan, AMERIGROUP New Jersey, Inc., is licensed as an
HMO and became operational in February 1996. Our current service areas include
13 of the 21 counties in New Jersey. However, we have applied to have our
certificate of authority and contract amended to add coverage of the remaining
eight counties. For March 2000, we had approximately 48,000 members in New
Jersey. We have the fourth largest Medicaid membership in New Jersey. We offer
AMERICAID, AMERIPLUS and AMERIKIDS in New Jersey. Our contract with New Jersey
expires on September 30, 2000. The State of New Jersey advised us on August 4,
2000 that we have satisfactorily demonstrated our readiness to enter into a new
contract and we anticipate entering into this contract as of October 1, 2000.
MARYLAND
AMERIGROUP Maryland, Inc. is licensed as a managed care organization in
Maryland and became operational in June 1999. Our current service areas include
Baltimore City and surrounding counties as a result of our acquisition of
Prudential Health Care Medicaid contracts and related assets, effective June 1,
1999. For March 2000, we had approximately 86,000 members in Maryland. We have
the second largest Medicaid membership in our Maryland markets. We offer
AMERICAID, AMERIPLUS and AMERIKIDS in Maryland.
DISTRICT OF COLUMBIA
AMERIGROUP Maryland, Inc. is also licensed as an HMO in the District of
Columbia and became operational there in August 1999 as a result of our
acquisition of Prudential's Medicaid line of business. For March 2000, we had
approximately 12,000 members in the District of Columbia. We have the third
largest Medicaid membership in the District of Columbia. We offer AMERICAID,
AMERIKIDS and AMERIFAM in the District of Columbia.
ILLINOIS
Our Illinois health plan, AMERICAID Illinois, Inc., is licensed as an HMO
and became operational in April 1996. Our current service area includes the
counties of Cook and DuPage in the Chicago area. In Illinois, enrollment in a
Medicaid managed care plan is voluntary. For March
43
<PAGE> 46
2000, we had approximately 20,000 members in Illinois. We have the fourth
largest Medicaid health plan membership in Cook County. We offer AMERICAID in
the Chicago area.
QUALITY MANAGEMENT
We have a comprehensive quality management plan designed to improve access
to cost-effective quality care. We have developed policies and procedures to
ensure that the healthcare services provided by our health plans meet the
professional standards of care established by the industry and the medical
community. These procedures include:
- Analysis of healthcare utilization data. To avoid duplication of
services or medications, in conjunction with the primary care physicians,
healthcare utilization data is analyzed and, through comparative provider
data and periodic meetings with physicians, we identify areas in which a
physician's utilization rate differs significantly from the rates of
other physicians. On the basis of this analysis, we suggest opportunities
for improvement and following up with the primary care physician to
monitor utilization.
- Medical care satisfaction studies. We evaluate the quality and
appropriateness of care provided to our health plan members by reviewing
healthcare utilization data and responses to member and physician
questionnaires and grievances.
- Clinical care oversight. Each of our health plans has a medical advisory
committee comprised of physician representatives and chaired by the
plan's medical director. This committee reviews credentialing, approves
clinical protocols and practice guidelines and evaluates new physician
group candidates. Based on regular reviews, the medical directors who
head these committees develop recommendations for improvements in the
delivery of medical care.
- Quality improvement plan. A quality improvement plan is implemented in
each of our health plans and is governed by a quality management
committee. The quality management committee is comprised of senior
management at our health plans, who review and evaluate the quality of
our health services and are responsible for the development of quality
improvement plans spanning both clinical quality and customer service
quality. These plans are developed from provider and membership feedback,
satisfaction surveys and results of action plans. Our corporate quality
improvement council oversees and meets regularly with our health plan
quality management committees to help ensure that we have a coordinated,
quality-focused approach relating to our members, providers and state
governments.
MANAGEMENT INFORMATION SYSTEMS
The ability to access data and translate it into meaningful information is
essential to our being able to operate across a multi-state service area in a
cost effective manner. Our centralized computer-based information systems
support our core processing functions under a set of integrated databases and
are designed to be both replicable and scalable to accommodate internal growth
and growth from acquisitions. This integrated approach helps to assure that
consistent sources of claim and member information are provided across all of
our health plans. We use these systems for billing, claims processing,
utilization management, marketing and sales tracking, financial and management
accounting, reporting, medical cost trending, planning and analysis. The systems
also support our internal member and provider service functions, including
on-line access to member eligibility verification, primary care physician
membership roster and claims status.
In March 2000, we experienced data corruption in our data warehouse, which
we use to assist us in estimating monthly medical expense accruals, analyzing
costs and generating state reports. We believe that we have been able to recover
all of the corrupted data. We engaged consultants to examine the problem and
assist us in establishing processes and controls
44
<PAGE> 47
intended to more rapidly detect similar problems in the future and improve
operations relating to these systems. We did not experience any material
misstatements in our financial statements in the first quarter of 2000 due to
the data corruption. If we have similar or additional problems with our
information systems, our operations and ability to produce timely and accurate
reports could be adversely impacted.
COMPETITION
In the Medicaid business, our principal competitors for state contracts,
members and providers consist of the following types of organizations:
- Primary Care Case Management Programs, or PCCMs -- Programs established
by the states through contracts with primary care providers to provide
primary care services to the Medicaid recipient, as well as, provide
limited oversight over other services.
- Commercial HMOs -- National and regional commercial managed care
organizations that have Medicaid and Medicare members in addition to
members in private commercial plans.
- Medicaid HMOs -- Managed care organizations that focus solely on
providing healthcare services to Medicaid recipients.
We will continue to face varying levels of competition as we expand in our
existing service areas or enter new markets. In those of our markets in which
enrollment in a managed care plan is voluntary, we also compete for members with
the traditional means for accessing care, including hospitals and other
healthcare providers. Healthcare reform proposals may cause a number of
commercial managed care organizations already in our service areas to decide to
enter or exit the Medicaid market. However, the licensing requirements and
bidding and contracting procedures in some states present barriers to entry into
the Medicaid managed healthcare industry. The table below sets forth the markets
we serve and describes the competition we face in those markets.
We have two competitors in Fort Worth, six competitors in Houston and two
competitors in Dallas. In each of our Fort Worth and Dallas markets, we have the
largest Medicaid membership. In Houston, we have the second largest market
share. We have five competitors and the fourth largest Medicaid membership in
New Jersey. We have seven competitors and the second largest Medicaid membership
in Maryland. We have six competitors and the third largest Medicaid membership
in the District of Columbia. We have seven competitors and the fourth largest
Medicaid membership in Cook County.
We compete with other managed care organizations for state contracts, as
well as to attract new members and retain existing members. States generally use
either a formal proposal process reviewing many bidders or award individual
contracts to qualified applicants that apply for entry to the program. In order
to win a bid for or be awarded a state contract, state governments consider many
factors, which include providing quality care, satisfying financial
requirements, demonstrating an ability to deliver services, and establishing
networks and infrastructure. People who wish to enroll in a managed healthcare
plan or to change healthcare plans typically choose a plan based on the quality
of care and service offered, ease of access to services, a specific provider
being part of the network and the availability of supplemental benefits.
In addition to competing for members, we compete with other managed care
organizations to enter into contracts with independent physicians, physician
groups and other providers. We believe the factors that providers consider in
deciding whether to contract with us include potential member volume,
reimbursement rates, our medical management programs, timeliness of
reimbursement and administrative service capabilities.
45
<PAGE> 48
REGULATION
Our healthcare operations are regulated at both state and federal levels.
Government regulation of the provision of healthcare products and services is a
changing area of law that varies from jurisdiction to jurisdiction. Regulatory
agencies generally have discretion to issue regulations and interpret and
enforce laws and rules. Changes in applicable laws and rules also may occur
periodically.
HMOS AND MANAGED CARE ORGANIZATIONS
Our four health plan subsidiaries are licensed to operate as an HMO in each
of Texas, New Jersey, the District of Columbia and Illinois, and as a managed
care organization, or MCO, in Maryland. In each of the jurisdictions in which we
operate, we are regulated by the relevant insurance department and health
department that oversees the state's Medicaid program.
The process for obtaining the certificate of authority or license to
operate as an HMO or MCO is a very lengthy and involved process and requires
demonstration to the regulators of the adequacy of the health plan's
organizational structure, financial resources, utilization review, quality
assurance programs and complaint procedures. Both under state HMO statutes and
state insurance laws, our health plan subsidiaries must comply with minimum net
worth requirements and other financial requirements, such as minimum capital,
deposit and reserve requirements. Insurance regulations may also require the
prior state approval of acquisitions of other managed care organizations'
businesses and the payment of dividends, as well as notice requirements for
loans or the transfer of funds. Each of our subsidiaries is also subject to
periodic reporting requirements. In addition, each health plan must meet
numerous state licensing criteria to secure the approval of state licensing
authorities before implementing operational changes, including the development
of new product offerings and, in some states, the expansion of service areas.
MEDICAID
Medicaid was established under the U.S. Social Security Act. It is
state-operated and implemented. Each state:
- establishes its own eligibility standards,
- determines the type, amount, duration and scope of services,
- sets the rate of payment for services, and
- administers its own program.
Medicaid policies for eligibility, services, rates and payment are complex, and
vary considerably among states, and the state policies change from time to time.
States are also permitted by the federal government to seek waivers from
requirements of the Social Security Act. The waivers most relevant to us are the
Section 1915(b) freedom of choice waivers that enable:
- mandating Medicaid enrollment into managed care,
- the utilization of a central broker for enrollment into plans,
- the use of cost savings to provide additional services and
- limiting the number of providers for additional services.
Waivers are approved for two year periods and can be renewed on an ongoing
basis if the state applies. A 1915(b) waiver cannot negatively impact
beneficiary access or quality of care and must be cost-effective. Managed care
initiatives may be state-wide and required for all classes of Medicaid eligible
recipients, or can be limited to service areas and classes of
46
<PAGE> 49
recipients. All jurisdictions in which we operate, except Illinois, have some
sort of mandatory Medicaid program. However, under the waivers pursuant to which
the mandatory programs have been implemented, there must be at least two managed
care plans operating from which Medicaid eligible recipients may choose.
Many states, including Maryland, operate under a Section 1115 demonstration
rather than a 1915(b) waiver. This is a more expansive form of waiver that
enables the state to have a Medicaid program that is more expansive than
otherwise typically permitted under the Social Security Act. For example,
Maryland's 1115 waiver allows it to include more individuals in its managed care
program than typically allowed under Medicaid.
In all the states in which we operate, in order to be a Medicaid managed
care organization, we must enter into a contract with the state's Medicaid
regulator. States generally use either a formal proposal process, reviewing many
bidders, or award individual contracts to qualified applicants that apply for
entry to the program. Although other states have done so in the past and may do
so in the future, currently Texas and the District of Columbia are the only
jurisdictions in which we operate that use competitive bidding processes.
The contractual relationship with the state is generally for a period of
one to two years and renewable on an annual or bi-annual basis. The contracts
with the states and regulatory provisions applicable to us generally set forth
in great detail the requirements for operating in the Medicaid sector including
provisions relating to:
- eligibility, enrollment and disenrollment processes,
- covered services,
- eligible providers,
- subcontractors,
- record-keeping and record retention,
- periodic financial and informational reporting,
- quality assurance,
- marketing,
- financial standards,
- timeliness of claims' payment,
- health education and wellness and prevention programs,
- safeguarding of member information,
- fraud and abuse detection and reporting,
- grievance procedures, and
- organization and administrative systems.
A health plan's compliance with these requirements is subject to monitoring by
the state regulator and by HCFA. A health plan is subject to periodic
comprehensive quality assurance evaluation by a third party reviewing
organization and generally by the insurance department of the jurisdiction that
licenses the health plan. A health plan must also submit quarterly and annual
statutory financial statements and utilization reports, as well as many other
reports.
47
<PAGE> 50
FEDERAL REGULATION
HIPAA
In 1996, Congress enacted the Health Insurance Portability and
Accountability Act of 1996, or HIPAA. The Act is designed to improve the
portability and continuity of health insurance coverage and simplify the
administration of health insurance. One of the main requirements of HIPAA is the
implementation of security standards for the procedures and privacy of
individually identifiable health information.
In 1998, the Secretary of Health and Human Services, or HHS, proposed new
standards for protecting individual health information that is maintained or
transmitted electronically. The new security standards were designed to protect
electronic health information from improper access or alteration and to protect
against loss of records. In general, healthcare organizations will be required
to comply with the new standards 24 months after publication of the final
standard, which is expected to occur in the summer of 2000. In addition to the
security regulation for electronic information, HHS is expected to propose
security regulations for non-electronic information during 2000.
HHS also published the Proposed Standard for Privacy of Individually
Identifiable Health Information in 1999. This proposed standard is the result of
the HIPAA mandate requiring that the Secretary of HHS adopt standards for
privacy in the event Congress fails to pass any further legislation on the
subject. Public comment on the proposed rule ended February 17, 2000. The
proposed standard addresses issues such as patient consent for release of
information, marketing activities and the conduct and relationships between
covered entities and their business partners that handle individually
identifiable health information.
We are planning for the adoption of the HIPAA security and privacy
standards to ensure proper and timely compliance. We are assessing the impact of
the new standards on our operations, making an initial assessment of our
compliance requirements and intend to develop a compliance plan.
OTHER FRAUD AND ABUSE LAWS
Investigating and prosecuting healthcare fraud and abuse has become a top
priority for law enforcement entities. The funding of such law enforcement
efforts has increased in the past few years and is expected to continue. The
focus of these efforts has been directed at participants in public government
healthcare programs such as Medicaid. These regulations and contractual
requirements applicable to participants in these programs are complex and
changing. We have re-emphasized our regulatory compliance efforts for these
programs, but ongoing vigorous law enforcement and the highly technical
regulatory scheme mean that compliance efforts in this area will continue to
require substantial resources.
PROPERTIES
We do not own any real property. We lease office space in Virginia Beach,
Virginia, where our headquarters are located, as well as in each of the health
plan locations. We are obligated by various insurance and Medicaid regulatory
authorities to have offices in the service areas where we provide Medicaid
benefits.
EMPLOYEES
As of March 31, 2000, we had approximately 860 employees. Our employees are
not represented by a union. We believe our relationships with our employees are
good.
LEGAL PROCEEDINGS
In the normal course of our business, we may be a party to legal
proceedings. However, we are not currently a party to any material legal
proceedings nor, to our knowledge, is any material legal proceeding threatened
against us.
48
<PAGE> 51
MANAGEMENT
Our executive officers, key employees and directors, and their ages and
positions as of June 30, 2000, are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
Jeffrey L. McWaters....................... 43 President, Chief Executive Officer and Chairman
of the Board of Directors
Theodore M. Wille, Jr. ................... 52 Senior Vice President and Chief Operating Officer
Lorenzo Childress, Jr., M.D. ............. 54 Senior Vice President and Chief Medical Officer
Sherri E. Lee............................. 49 Senior Vice President, Chief Financial Officer
and Treasurer
Stanley F. Baldwin........................ 51 Senior Vice President, General Counsel and
Secretary
James E. Hargroves........................ 57 Senior Vice President, Corporate Development
Carolyn D. McPherson...................... 51 Senior Vice President, Planning and Business
Development
Herman Wright............................. 46 Senior Vice President and Chief Marketing Officer
Catherine S. Callahan..................... 42 Senior Vice President, Administrative Services
Kathleen K. Toth.......................... 39 Senior Vice President and Chief Accounting
Officer
Scott S. Pickens.......................... 46 Senior Vice President and Chief Information
Officer
C. Sage Givens............................ 43 Director
Charles W. Newhall, III................... 55 Director
William J. McBride........................ 55 Director
Carlos A. Ferrer.......................... 46 Director
Kay Coles James........................... 51 Director
</TABLE>
JEFFREY L. MCWATERS has been our Chairman, President, Chief Executive
Officer and one of our directors since he founded our company in December 1994.
From 1991 to 1994, Mr. McWaters served as President and Chief Executive Officer
of Options Mental Health, a national managed behavioral healthcare company and
prior to that, in various senior operating positions with EQUICOR-Equitable HCA
Corporation and CIGNA Health Care. He has served as a director of American
Service Group since 1999. Mr. McWaters is a member of the Board of Visitors of
the College of William and Mary.
THEODORE M. WILLE, JR. has served as our Chief Operating Officer since
1996. Mr. Wille served as Chief Operating Officer for the managed care division
of Sentara Health System, a private managed care facility in Virginia, from 1991
until 1994 and President of Optima Health Plan from 1988 to 1996.
LORENZO CHILDRESS, JR., M.D. has served as our Chief Medical Officer since
1995. From 1992 to 1995, Dr. Childress was the Chief Operating Officer and
Medical Director of Metro Medical Group, an indirect wholly-owned subsidiary of
the Henry Ford Health System.
SHERRI E. LEE joined us in 1998 as our Chief Financial Officer and
Treasurer. Prior to that, Ms. Lee was an adjunct instructor with Front Range
Community College in Colorado from 1995 to 1998. Ms. Lee served as Executive
Vice President - Finance of Pharmacy Corporation of America from 1991 to 1995.
Prior to that, Ms. Lee was Senior Vice President and Controller for Beverly
Enterprises, Inc. Ms. Lee is a certified public accountant.
STANLEY F. BALDWIN has served as our General Counsel and Secretary since
1997. From 1994 to 1997, Mr. Baldwin was a Managing Director for Covington Group
L.C., a private company that provided legal, management and other consulting
services to indemnity insurance, managed care and healthcare provider clients.
Prior to that, Mr. Baldwin held senior officer and General Counsel positions
with EPIC Healthcare Group, Inc., EQUICOR-Equitable HCA Corporation and CIGNA
Health Plans, Inc.
49
<PAGE> 52
JAMES E. HARGROVES has served as our head of Corporate Development since
joining us in 1996. From 1994 to 1996, Mr. Hargroves was the President, founder
and principal of Waterline Advisory Group, Inc., a corporate intermediary firm
that provided merger and acquisition advisory services to health-related
businesses, insurers, physicians and others.
CAROLYN D. MCPHERSON has served as our head of Planning and Development
since 1996. Prior to joining us, from 1994 to 1996, Ms. McPherson was the
Assistant Vice President and HMO Product Manager for Aetna Health Plans in
Connecticut, a publicly traded company with a national health plan membership of
over 1.3 million.
HERMAN WRIGHT is our Chief Marketing Officer. Prior to joining us in 1998,
Mr. Wright served as the Vice President, Sales and Marketing for United
Healthcare, Central Region, from 1995 to 1998.
CATHERINE S. CALLAHAN joined us in 1999 and serves as our head of
Administrative Services. From 1991 to 1999, Ms. Callahan was Chief
Administrative Officer of FHC Health System.
KATHLEEN K. TOTH joined us in 1995 and serves as our Chief Accounting
Officer. Prior to joining us, Ms. Toth was the Vice President of Service
Operations at Options Mental Health from 1992 to 1995. Ms. Toth also worked for
CIGNA Healthplan of Texas, Inc. as Director of Financial Services and for
EQUICOR Health Plan of Florida as a Controller from 1987 to 1992. Ms. Toth is a
certified public accountant.
SCOTT S. PICKENS is our Chief Information Officer who joined us in June
2000. Prior to joining us, he served as Corporate Chief Information Officer of
Health Answers, Inc. from April 1999 to June 2000, and as Chief Operating
Officer for Consortium Health Plans from January 1995 to April 1999.
C. SAGE GIVENS has been one of our directors since our formation. She is a
founder and Managing General Partner of Acacia Venture Partners, a private
venture capital fund. From 1983 to 1995, Ms. Givens was a General Partner of
First Century Partners, also a private venture capital fund. Ms. Givens managed
this fund's healthcare investments. Ms. Givens also serves on the boards of
directors of PhyCor, Inc. and HEALTHSOUTH Corporation, and several privately
held healthcare companies.
CHARLES W. NEWHALL, III has been one of our directors since our formation
in December 1994. Mr. Newhall is a General Partner and founder of New Enterprise
Associates Limited Partnerships, Baltimore, Maryland, where he has been engaged
in the venture capital business since 1978. Mr. Newhall is also a director of
CaremarkRx, Inc. and HEALTHSOUTH Corporation.
WILLIAM J. MCBRIDE has been one of our directors since 1995. Mr. McBride
has been retired since 1995. Prior to that, Mr. McBride was President, Chief
Operating Officer and a director of Value Health, Inc. and President and Chief
Executive Officer of CIGNA Healthplans, Inc. Mr. McBride also serves on the
board of directors of a number of privately held companies.
CARLOS A. FERRER has been one of our directors since 1996. Mr. Ferrer is a
General Partner of Ferrer Freeman Thompson & Co. LLC, a private equity firm
founded in 1995 that manages funds dedicated to investing in the healthcare
industry. Mr. Ferrer serves on the board of directors of Sicor, Inc. and several
private companies. He also is Chairman of the Board of Trustees of the Cancer
Research Institute.
KAY COLES JAMES has been one of our directors since 1999. Ms. James is a
senior fellow for the Citizen Project of the Heritage Foundation. From 1996 to
1999, she was the Dean of Regent University, School of Government in Virginia
Beach, Virginia. Ms. James also served as Chairperson of the National Gambling
Impact Study Commission from 1997 to 1999. From January 1994 to 1996, Ms. James
served as Secretary of Health and Human Resources for the Commonwealth of
Virginia.
50
<PAGE> 53
BOARD COMMITTEES
We have established an audit committee and a compensation committee. The
audit committee reviews our internal accounting procedures and reports to the
board of directors with respect to other auditing and accounting matters,
including the selection of our independent auditors, the scope of annual audits,
fees to be paid to our independent auditors and the performance of our
independent auditors. The audit committee consists of C. Sage Givens, Charles W.
Newhall, III and William J. McBride. The compensation committee reviews and
recommends to the board of directors the salaries, benefits and stock option
grants for all employees, consultants, directors and other individuals
compensated by us. The compensation committee also administers our stock option
and other employee benefit plans. The compensation committee consists of C. Sage
Givens, Charles W. Newhall, III and William J. McBride.
CLASSES OF DIRECTORS
We have approved a provision in our certificate of incorporation which will
divide our board of directors into three classes, denominated as Class I, Class
II and Class III. Members of each class will hold office for staggered
three-year terms. At each of our annual meetings of stockholders commencing in
2001, the successors to the directors whose terms expire at that meeting, will
be elected to serve until the third annual meeting after their election or until
their successor has been elected and qualified. Ms. Givens and Mr. Newhall will
serve as Class I directors, whose terms expire at the 2001 annual meeting of
stockholders. Messrs. Ferrer and McBride will serve as Class II directors whose
terms expire at the 2002 annual meeting of stockholders. Mr. McWaters and Ms.
James will serve as Class III directors whose terms expire at the 2003 annual
meeting of stockholders. With respect to each class, directors' terms will be
subject to the election and qualification of their successors, or their earlier
death, resignation or removal. These provisions, when taken in conjunction with
other provisions of our amended and restated certificate of incorporation
authorizing the board of directors to fill vacant directorships, may delay a
stockholder from removing incumbent directors and simultaneously gaining control
of the board of directors by filling the vacancies with its own nominees.
AGREEMENTS WITH EMPLOYEES
Jeffrey L. McWaters. We employ Mr. McWaters as our Chairman, President and
Chief Executive Officer pursuant to an amended and restated employment agreement
dated October 28, 1999. The term of the agreement is three years, unless earlier
terminated. Pursuant to the agreement, as long as Mr. McWaters is employed with
us, our board of directors agrees to nominate Mr. McWaters as a director and
chairman of the board. The agreement relates primarily to termination provisions
and provides the following:
- Mr. McWaters may terminate his employment on 30 days' written notice to
us, and if termination is at his option, he is not entitled to severance
benefits.
- We may terminate Mr. McWaters for cause upon 30 days' written notice, in
which event Mr. McWaters would not be entitled to severance benefits.
- We may terminate Mr. McWaters without cause upon 30 days' written notice,
in which case Mr. McWaters would be entitled to (1) 12 months' of
severance payments based on his then current base salary, (2) a lump sum
payment equal to his highest annual bonus in the immediately preceding
three years and (3) medical and other health insurance benefits for 12
months.
- Upon a change of control, if Mr. McWaters' employment is not continued,
he would be entitled to be paid an amount equal to (1) his then current
gross annual base salary plus (2) the highest annual bonus paid to him in
the immediately preceding three years,
51
<PAGE> 54
reduced as necessary to avoid characterization as a "parachute payment"
within the meaning of the Internal Revenue Code of 1986.
Change of control for these purposes includes (1) the acquisition by a
person or group of 20% of the voting power of our outstanding securities, (2) a
change in the majority of our directors, (3) stockholder approval of a merger or
other business combination where our outstanding stock immediately prior to such
transaction does not continue to represent more than 50% of the surviving
entity, or (4) any other event that our board determines to affect the control
of our company.
We have also agreed to indemnify Mr. McWaters in his capacity as a director
or officer of the company.
On July 10, 2000, our board of directors approved the following changes to
Mr. McWaters employment agreement:
- the severance payment in the event of termination without cause will be
increased to 24 months of base salary plus an incentive payment equal to
twice the highest annual bonus in the preceding three years;
- an increase in his base annual salary to $425,000;
- an increase of the maximum incentive bonus to 150% his base salary; and
- a non-compete clause that provides that for 24 months following
termination, Mr. McWaters could not (1) engage in any business activity
similar to our business, including our planned and developed activities,
or (2) solicit, interfere with, influence or endeavor to entice any
employee, customer or any independent contractor of ours, or any
organization that is considered a prospect of ours by virtue of having
established contact for the purpose of doing business.
In addition, the board of directors granted options to purchase 100,000
shares of common stock at an exercise price of $15.00 per share under our 2000
Equity Incentive Plan to Mr. McWaters.
Lorenzo Childress, Jr., M.D. We employ Dr. Childress as our Chief Medical
Officer pursuant to a letter agreement dated March 17, 1995. The letter
agreement established Dr. Childress' initial salary, option bonus opportunity,
initial grant of options and reimbursement of relocation expenses. In addition,
we agreed to provide to Dr. Childress three months base salary as severance
payment in the event we were to terminate his employment without cause.
COMPENSATION OF DIRECTORS
We do not currently pay cash fees to our directors for attending board or
committee meetings, but we reimburse directors for their reasonable expenses
incurred in connection with attending these meetings. Following completion of
the offering we will pay each of our non-employee directors an annual salary of
$20,000.
In June 2000, we granted fully-vested options to purchase 12,500 shares of
common stock at an exercise price of $15.00 per share under our 1994 Stock Plan
to each of our five non-employee directors.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
No member of our compensation committee serves as a member of the board of
directors or compensation committee of any entity that has one or more executive
officers serving as a member of our board of directors or compensation
committee.
52
<PAGE> 55
EXECUTIVE COMPENSATION
The following summary compensation table sets forth information concerning
compensation earned in 1999, 1998 and 1997 by individuals who served as our
chief executive officer during 1999 and the remaining four most highly
compensated executive officers as of December 31, 1999.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
ANNUAL COMPENSATION
--------------------------------
OTHER ANNUAL ALL OTHER
NAME AND SALARY BONUS COMPENSATION COMPENSATION
PRINCIPAL POSITION YEAR ($) ($) ($) ($)
------------------ ---- ------- ------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Jeffrey L. McWaters,....................... 1999 321,234 200,000 2,937(1) 1,800
President and Chief Executive Officer 1998 298,431 225,000 56,741(1) --
1997 274,329 100,000 -- --
Theodore M. Wille, Jr.,.................... 1999 245,692 100,000 1,174(1) --
Senior Vice President and 1998 231,577 60,000 -- --
Chief Operating Officer 1997 225,000 28,250 -- --
Lorenzo Childress, Jr., M.D.,.............. 1999 245,773 100,000 1,062(1) --
Senior Vice President and 1998 228,619 50,000 -- --
Chief Medical Officer 1997 210,992 62,500 -- --
Sherri E. Lee,............................. 1999 250,000 100,000 166,683(2) --
Senior Vice President, 1998 183,274 25,000 16,091(3) --
Chief Financial Officer and Treasurer 1997 -- -- -- --
Stanley F. Baldwin,........................ 1999 211,554 65,000 1,084(1) --
Senior Vice President, 1998 192,115 34,625 103,682(4) --
General Counsel and Secretary 1997 82,308 23,500 -- --
</TABLE>
---------------
(1) Compensation for the payment of taxes.
(2) Compensation of $87,711 for relocation and $78,972 for payment of taxes.
(3) Compensation of $8,657 for relocation and $7,434 for payment of taxes.
(4) Compensation of $55,781 for relocation and $47,901 for payment of taxes.
The following table sets forth information concerning individual grants of
stock options made during 1999 to the executive officers named on the Summary
Compensation Table.
OPTION GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS POTENTIAL REALIZABLE
---------------------------------------------------------------- VALUE AT ASSUMED
NUMBER OF PERCENT OF TOTAL ANNUAL RATES OF STOCK
SECURITIES OPTIONS GRANTED TO EXERCISE PRICE APPRECIATION FOR
UNDERLYING OPTIONS EMPLOYEES IN PRICE EXPIRATION OPTION TERM(1)
NAME GRANTED FISCAL YEAR ($/SHARE) DATE 5%($) 10%($)
---- ------------------ ------------------ --------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Jeffrey L. McWaters......... 25,000 6.4% 3.00 3/2/09 251,556 637,496
Theodore M. Wille, Jr. ..... 12,500 3.2% 3.00 3/2/09 125,778 318,748
Lorenzo Childress, Jr.,
M.D. ..................... 27,504 7.1% 3.00 5/12/09 276,752 701,348
Sherri E. Lee............... 25,000 6.4% 3.00 3/2/09 251,556 637,496
Stanley F. Baldwin.......... 15,000 3.9% 3.00 5/12/09 150,934 382,498
</TABLE>
---------------
(1) Calculated based on an assumed initial public offering price of $16.00.
53
<PAGE> 56
The following table sets forth information concerning the exercise of stock
options during 1999 by the executive officers named in the Summary Compensation
Table. Value was calculated using the fair market value of $8.60 per share
determined by our compensation committee in connection with the granting of 1999
year-end options.
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR
AND FISCAL YEAR-END OPTION VALUES
<TABLE>
<CAPTION>
NUMBER OF SECURITIES
UNDERLYING UNEXERCISED VALUE OF UNEXERCISED
NUMBER OF SHARES OPTIONS AT IN-THE-MONEY OPTIONS AT
ACQUIRED ON VALUE FISCAL YEAR-END FISCAL YEAR-END($)
NAME EXERCISE REALIZED($) EXERCISABLE/ UNEXERCISABLE EXERCISABLE/ UNEXERCISABLE
---- ---------------- ----------- -------------------------- --------------------------
<S> <C> <C> <C> <C>
Jeffrey L. McWaters.......... 0 0 236,208/13,750 1,901,160/83,500
Theodore M. Wille, Jr........ 0 0 85,625/76,875 609,500/540,500
Lorenzo Childress, Jr.,
M.D........................ 0 0 76,998/35,502 630,030/225,960
Sherri E. Lee................ 0 0 43,750/81,250 301,000/559,000
Stanley F. Baldwin........... 21,500 152,400 2,750/40,750 19,400/272,200
</TABLE>
STOCK PLANS
1994 STOCK PLAN
In December 1994, we adopted, and our stockholders approved, our 1994 Stock
Plan.
GENERAL. We have reserved for issuance under the plan a maximum of
2,249,500 shares of common stock. If an award granted under the plan expires or
is terminated, the shares of common stock underlying the award will be available
for issuance under our 2000 Equity Incentive Plan.
TYPES OF AWARDS. The following awards may be granted under the plan,
- stock options, including incentive stock options and non-qualified stock
options,
- stock bonuses, and
- the opportunity to make direct purchases of stock.
ADMINISTRATION. The plan is administered by the compensation committee,
although it may be administered by either our full board of directors or any
other committee designated by the board. The committee may, subject to the
provisions of the plan, determine the persons to whom awards will be granted,
the type of award to be granted, the number of shares to be made subject to
awards, the exercise price and other terms and conditions of the awards, and
interpret the plan and prescribe, amend and rescind rules and regulations
relating to the plan.
ELIGIBILITY. Awards may be granted under the plan to our employees,
directors and consultants or any of our affiliates, as selected by the
compensation committee.
TERMS AND CONDITIONS OF OPTIONS. Stock options may be either "incentive
stock options," as that term is defined in Section 422 of the Internal Revenue
Code, or non-qualified stock options. The exercise price of a stock option
granted under the plan is determined by the compensation committee at the time
the option is granted, but the exercise price of an incentive stock option may
not be less than the market value per share of common stock on the date of
grant. Stock options are exercisable at the times and upon the conditions that
the compensation committee may determine, as reflected in the applicable option
agreement. The exercise period may not extend beyond ten years from the date of
grant. The compensation committee generally has the authority to accelerate the
time at which an option is exercisable.
54
<PAGE> 57
The option exercise price must be paid in full at the time of exercise, and
is payable by any one of the following methods or a combination thereof:
- in cash or cash equivalents or, at the discretion of the compensation
committee, by
- the surrender of previously acquired shares of common stock, provided
such shares have been held for at least six months,
- the delivery of the optionee's personal recourse note with interest
payable at the applicable federal rate or greater, or
- a "broker cashless exercise" procedure.
STOCK BONUSES. The plan provides that the compensation committee, in its
discretion, may award shares of common stock to plan participants.
PURCHASE OPPORTUNITY. The plan provides that the compensation committee,
in its discretion, may authorize plan participants to purchase shares of common
stock.
DIRECTOR AWARDS. The compensation committee, in its discretion, may grant
awards under the plan to directors (both employee and nonemployee directors).
The terms of the awards granted to directors are to be generally consistent with
the terms of awards granted to other participants under the plan.
TERMINATION OF EMPLOYMENT. Except with respect to incentive stock options,
the plan does not specify the effect of the termination of a participant's
employment or service on the exercisability of any award under the plan. The
effect of a termination of employment or service is instead specified in the
award agreement, as determined by the compensation committee in its discretion.
With respect to incentive stock options, unless otherwise specified in the award
agreement, if the participant's employment terminates other than because of
death or disability, all options that are exercisable at the time of termination
may be exercised by the participant for 90 days after the date of termination of
employment, and if the participant's employment terminates as a result of death
or disability, all options that are exercisable at the time of death or
disability may be exercised by the participant (or his or her estate,
beneficiaries, or personal representative, as applicable) for 180 days following
the termination of employment. However, in no case may an award be exercised
after it expires in accordance with its terms.
AMENDMENT AND TERMINATION OF PLAN. The board of directors may modify or
terminate the plan or any portion of the plan at any time, except that
shareholder approval is required for any amendment that would increase the total
number of shares reserved for issuance under the plan, materially increase the
plan benefits available to participants, materially modify the plan eligibility
requirements, extend the plan's expiration date, or otherwise as required to
comply with applicable law. No awards may be granted under the plan after the
day prior to the tenth anniversary of its adoption date.
Since the amount of benefits to be received by any participant is
determined by the compensation committee, the amount of future benefits
allocated to any employee or group of employees in any particular year is not
determinable.
2000 EQUITY INCENTIVE PLAN
On July 10, 2000, we adopted, and as of July 17, 2000, our stockholders
approved, a new equity incentive plan, the 2000 Equity Incentive Plan, with the
following terms. The purpose of the plan is to promote our long-term growth and
profitability by providing key people with incentives to improve stockholder
value.
GENERAL. We have reserved for issuance under the plan a maximum of
2,064,000 shares of common stock. In addition, shares remaining available for
issuance under the 1994 Stock Plan will be available for issuance under the 2000
Equity Incentive Plan. If an award granted
55
<PAGE> 58
under the plan expires or is terminated, the shares of common stock underlying
the award will again be available under the plan. No individual may be granted
awards under the plan in any year covering more than 1,000,000 shares.
TYPES OF AWARDS. The following awards may be granted under the plan:
- stock options, including incentive stock options and non-qualified stock
options,
- restricted stock,
- phantom stock,
- stock bonuses, and
- other stock-based awards.
ADMINISTRATION. The plan will be administered by the board of directors
upon the advice of the compensation committee, although it may be administered
by any committee designated by the board.
The administrator may, subject to the provisions of the plan, determine the
persons to whom awards will be granted, the type of award to be granted, the
number of shares to be made subject to awards, the exercise price and other
terms and conditions of the awards, and interpret the plan and prescribe, amend
and rescind rules and regulations relating to the plan. The administrator may
delegate to any of our senior management the authority to make grants of awards
to our employees who are not our executive officers or directors.
ELIGIBILITY. Awards may be granted under the plan to our employees,
directors, and consultants, as selected by the administrator.
TERMS AND CONDITIONS OF OPTIONS. Stock options may be either "incentive
stock options," as that term is defined in Section 422 of the Internal Revenue
Code, or non-qualified stock options. The exercise price of a stock option
granted under the plan is determined by the administrator at the time the option
is granted, but the exercise price of an incentive stock option may not be less
than the market value per share of common stock on the date of grant. Stock
options are exercisable at the times and upon the conditions that the
administrator may determine, as reflected in the applicable option agreement.
Generally, the administrator will determine the exercise period, which may not
exceed ten years from the date of grant.
The option exercise price must be paid in full at the time of exercise, and
is payable by any one of the following methods or a combination thereof:
- in cash or cash equivalents,
- the surrender of previously acquired shares of common stock that have
been held by the participant for at least six months prior to the date of
surrender,
- authorization for us to withhold a number of shares otherwise payable
pursuant to the exercise of an option, or
- through a "broker cashless exercise" procedure approved by us.
The administrator may, in its sole discretion, authorize AMERIGROUP to make
or guarantee loans to a participant to assist the participant in exercising
options.
At the time of grant of an option, the administrator may provide that the
participant may elect to exercise all or any part of the option before it
becomes vested and exercisable. If the participant elects to exercise all or
part of a non-vested option, the participant will be issued shares of restricted
stock which will vest in accordance with the vesting schedule set forth in the
original option agreement.
56
<PAGE> 59
OUTSIDE DIRECTOR OPTIONS. Non-employee directors who own less than one
percent of the voting power in our company or outside directors, will be
eligible for automatic grants of non-qualified options under the plan. Each such
outside director, as of the closing of this offering, will be granted an option
to purchase such number of shares of common stock as is determined by the
administrator in its discretion. Following this offering, each outside director
will be granted upon his or her first election or appointment to the board of
directors, an option to purchase such number of shares of common stock as is
determined by the administrator in its discretion. In addition, immediately
following each annual meeting of stockholders after the initial public offering,
each outside director (other than an outside director who is first elected at
that annual meeting) will be granted an option to purchase such number of shares
of common stock as is determined by the administrator in its discretion. The
exercise price of each option granted under the outside director plan will equal
the market value of the common stock on the date of grant and will become
exercisable as is determined by the administrator in its discretion. Each option
granted to an outside director will expire on the tenth anniversary of the date
of grant of such option. The other terms of the options granted to outside
directors will be consistent with the terms of non-qualified options granted to
employees.
RESTRICTED STOCK. The plan provides for awards of common stock that are
subject to restrictions on transferability and others imposed by the
administrator. Except as provided for under the award agreement relating to the
restricted stock, a participant granted restricted stock will have all of the
rights of a stockholder.
PHANTOM STOCK. The plan provides for awards of phantom stock which, upon
vesting, entitle the participant to receive an amount in cash or common stock
equal to the fair market value of the number of shares awarded. Vesting of all
or a portion of a phantom stock award may be subject to various conditions
established by the administrator.
STOCK BONUSES; OTHER AWARDS. The plan provides that the administrator, in
its discretion, may award shares of common stock to employees. In addition, the
administrator may grant other awards valued in whole or in part, by reference
to, or otherwise based on, common stock.
CHANGE IN CONTROL. The administrator in its discretion may provide that,
in the event of a change in control (whether alone or in combination with other
events), the vesting and exercisability restrictions on any outstanding award
that is not yet fully vested and exercisable will lapse in part or in full.
TERMINATION OF EMPLOYMENT. Unless otherwise determined by the
administrator, the termination of a participant's employment or service will
immediately cancel any unvested portion of awards granted under the plan. At the
time of grant, the administrator in its discretion may provide that, if a
participant's employment or service terminates other than because of cause,
death or disability, all options that are exercisable at the time of termination
may be exercised by the participant for no longer than 90 days after the date of
termination (or such other period as it determines). If a participant's
employment or service terminates for cause, all options held by the participant
will immediately terminate. The administrator may provide that, if a
participant's employment or service terminates as a result of death, all options
that are exercisable at the time of death may be exercised by the participant's
heirs or distributees for a period of six months (or such other period as it
determines). The administrator may provide that, if a participant's employment
or service terminates because of disability, all options that are exercisable at
the time of termination may be exercised for a period of six months (or such
other period as it determines). In no case may an option be exercised in
accordance with its terms after it expires.
AMENDMENT, TERMINATION OF PLAN. The board of directors may modify or
terminate the plan or any portion of the plan at any time, except that an
amendment that requires stockholder approval in order for the plan to continue
to comply with any law, regulation or stock exchange
57
<PAGE> 60
requirement will not be effective unless approved by the requisite vote of our
stockholders. No options may be granted under the plan after the day prior to
the tenth anniversary of its adoption date.
Since the amount of benefits to be received by any employee plan
participant or any of our affiliates is determined by the administrator, the
amount of future benefits allocated to any employee or group of employees in any
particular year is not determinable.
EMPLOYEE STOCK PURCHASE PLAN
On June 30, 2000, we adopted, and as of July 17, 2000, our stockholders
approved, an Employee Stock Purchase Plan with the following terms. The purpose
of the plan is to encourage the purchase by our employees of shares of our
common stock to better align their interests with those of stockholders.
GENERAL. The employee stock purchase plan is intended to comply with the
requirements of Section 423 of the Internal Revenue Code, and to assure the
participants of the tax advantages provided thereby. The employee stock purchase
plan will be administered by a committee established by the board of directors.
The committee may make such rules and regulations and establish such procedures
for the administration of the employee stock purchase plan as it deems
appropriate.
SHARES AVAILABLE. The committee has authorized for issuance under the plan
a total of 600,000 shares of common stock, in any case, subject to adjustment by
the committee in the event of a recapitalization, stock split, stock dividend or
similar corporate transaction.
ELIGIBILITY. Subject to certain procedural requirements, all of our
employees who have at least 90 days of service, work more than 20 hours per week
and customarily work more than 5 months per year will be eligible to participate
in the employee stock purchase plan, except for employees who own five percent
or more of our common stock and any of our subsidiaries.
STOCK PURCHASES. Each eligible employee will be permitted to purchase
shares of the common stock through regular payroll deductions in an amount equal
to between 2% and 10% of the employee's compensation for each payroll period.
The fair market value of common stock which may be purchased under this or any
other plan of ours intended to comply with Section 423 of the Internal Revenue
Code may not exceed $25,000 per employee during any calendar year.
The employee stock purchase plan will provide for offering periods that
will be 6 months long. Offering periods generally will run from January 1 to
June 30 and from July 1 to December 31.
During each offering period, participating employees will be able to
purchase shares of common stock with payroll deductions at a purchase price
equal to 85% of the fair market value at either the beginning or end of each
offering period, whichever price is lower.
The options granted to a participant under the employee stock purchase plan
are not transferable otherwise than by will or the laws of descent and
distribution, and are exercisable, during the participant's lifetime, only by
the participant.
AMENDMENT, TERMINATION OF PLAN. The plan and all offering periods under
the plan will automatically terminate on the tenth anniversary of this offering.
The board of directors may from time to time amend or terminate the employee
stock purchase plan; provided that no such amendment or termination may
adversely affect the rights of any participant without the consent of such
participant and, to the extent required by Section 423 of the Internal Revenue
Code or any other law, regulation or stock exchange rule, no such amendment will
be effective without the approval of stockholders entitled to vote thereon.
Additionally, the committee may
58
<PAGE> 61
make such amendments as it deems necessary to comply with applicable laws, rules
and regulations.
Since the amount of benefits to be received by each participant in the
employee stock purchase plan is determined by his or her elections and the
extent to which offerings are made available by the committee, the amount of
future benefits to be allocated to any employee or group of employees under the
plan in any particular year is not determinable.
2000 CASH INCENTIVE PLAN
On June 30, 2000, we adopted, and as of July 17, 2000, our stockholders
approved, a Cash Incentive Plan with the following terms. The purpose of the
plan is to promote our long-term growth and profitability by providing
management personnel with incentives to improve stockholder value.
The plan will be administered by the compensation committee, which will
have the authority to determine the plan's participants, as well as the terms
and conditions of incentive awards. The payment of bonuses under the plan will
be based upon the achievement of certain performance goals set by the
compensation committee, which may include any, all or none of the following:
- income before income taxes or net income,
- earnings or book value per share,
- sales or revenue,
- operating expenses,
- increases in the market price of common stock,
- implementation or completion of critical projects or processes,
- comparison of actual performance during a performance period against
budget for such period,
- growth of revenue,
- operating profit,
- return on equity, assets, capital or investments,
- reductions in expenses, or
- to the extent permitted by Section 162(m) of the Internal Revenue Code,
such offer criteria may be established by stockholders or the committee
before the commencement of the performance period.
The committee will specify with respect to a performance period (which may run
from one to three years in the committee's discretion) the performance goals
applicable to each award, the minimum, target and maximum levels applicable to
each performance goal, and the amounts payable upon attainment of thresholds
within such range. Minimum bonuses will be based on achievement of 80% of the
performance goals and maximum bonuses will be based on achievement of 120% of
the performance goals. A bonus will be paid only if the participant is employed
by us on the day the bonus is to be paid. In no event will payment to an
employee covered under Section 162(m) of the Internal Revenue Code exceed the
lesser of $1,500,000 multiplied by the number of years in the performance period
or 120% of the employee's base salary during the performance period.
59
<PAGE> 62
LIMITATION OF LIABILITY OF DIRECTORS AND INDEMNIFICATION OF DIRECTORS AND
OFFICERS
As permitted by the Delaware General Corporation Law, or DGCL, our amended
and restated certificate of incorporation provides that our directors shall not
be liable to us or our stockholders for monetary damages for breach of fiduciary
duty as a director to the fullest extent permitted by the DGCL as it now exists
or as it may be amended. As of the date of this prospectus, the DGCL permits
limitations of liability for a director's breach of fiduciary duty other than
liability (1) for any breach of the director's duty of loyalty to us or our
stockholders, (2) for acts or omissions not in good faith or which involve
intentional misconduct or a knowing violation of law, (3) under Section 174 of
the DGCL, or (4) for any transaction from which the director derived an improper
personal benefit. In addition, our bylaws provide that we shall indemnify all of
our directors, officers, employees and agents for acts performed on our behalf
in such capacity.
60
<PAGE> 63
RELATED PARTY TRANSACTIONS
INDEMNIFICATION AGREEMENT
We entered into an indemnification agreement with each of our directors and
officers in April 2000. The indemnification agreement provides that the director
or officer will be indemnified to the fullest extent not prohibited by law for
claims arising in such person's capacity as a director or officer no later than
30 days after written demand to us. The agreement further provides that in the
event of a change of control, we would seek legal advice from a special
independent counsel selected by the officer or director and approved by us, who
has not performed services for either party for 5 years, to determine the extent
to which the officer or director would be entitled to an indemnity under
applicable law. Also, in the event of a change of control or a potential change
of control we would, at the officer's or director's request, establish a trust
in an amount equal to all reasonable expenses anticipated in connection with
investigating, preparing for and defending any claim. We believe that these
agreements are necessary to attract and retain skilled management with
experience relevant to our industry.
INVESTOR RIGHTS AGREEMENT
Jeffrey L. McWaters and the holders of our convertible preferred stock and
Series E mandatorily redeemable preferred stock are parties to a Second Restated
Investor Rights Agreement, dated July 28, 1998. The agreement is described under
"Shares Eligible for Future Sale."
EMPLOYEE LOANS
In 1997 we loaned $75,000 to Jeffrey L. McWaters. In 1998, we forgave the
loan, reclassified it as a bonus, and grossed-up his salary by approximately
$57,000 for taxes related to this income.
61
<PAGE> 64
PRINCIPAL AND SELLING STOCKHOLDERS
The following table sets forth information regarding the beneficial
ownership of our common stock as of June 30, 2000 by:
- each person, entity or group known by us to own beneficially more than 5%
of our outstanding common stock,
- each of our named executive officers and directors, and
- all of our executive officers and directors as a group.
In addition, up to 75,000 shares of the common stock owned by Jeffrey L.
McWaters may be sold as part of the underwriters' over-allotment option. No
other stockholder is selling common stock as part of the offering.
Beneficial ownership is determined in accordance with the rules of the
Securities and Exchange Commission. These rules generally attribute beneficial
ownership of securities to persons who possess sole or shared voting power or
investment power with respect to those securities and include shares of common
stock issuable upon the exercise of stock options or warrants that are
immediately exercisable or exercisable within 60 days. Unless otherwise
indicated, the persons or entities identified in this table have sole voting and
investment power with respect to all shares shown as beneficially owned by them,
subject to applicable community property laws.
Percentage ownership calculations are based on 14,539,086 shares
outstanding as of June 30, 2000, which includes (1) shares of common stock that
will be issued on the conversion of outstanding shares of convertible preferred
stock on completion of this offering and (2) prior to the offering, 2,000,000
shares of Series E mandatorily redeemable preferred stock, based on each share
being entitled to common share equivalent voting rights on a 1 to 0.5625 basis.
The Series E mandatorily redeemable preferred stock will be redeemed upon
completion of the offering. Each holder of the Series E mandatorily preferred
stock owns warrants to purchase common stock. Each warrant may be exercised for
0.5625 shares of common stock. However, the holder may only exercise the
warrants if the same number of shares of Series E mandatorily redeemable
preferred stock are redeemed. Therefore, we have not included the shares
underlying these warrants in the following table in shares beneficially owned
prior to the offering. However, we have accelerated the exercise date for these
warrants to prior to the closing of this offering. Therefore, we have assumed
these warrants will be exercised and have included them in the percent owned
after the offering.
To the extent that any shares are exercised on exercise of options,
warrants or other rights to acquire shares of our capital stock that are
presently outstanding or granted in the future, there will be further dilution
to new public investors. The following table does not reflect the exercise of
the over-allotment option.
<TABLE>
<CAPTION>
SHARES BENEFICIALLY OWNED
PRIOR TO OFFERING
------------------------- PERCENT OWNED
NAME NUMBER PERCENT AFTER OFFERING
---- ------------ --------- --------------
<S> <C> <C> <C>
C. Sage Givens(1).................................. 2,641,884 18.2 13.9
Carlos A. Ferrer(2)................................ 2,476,410 17.0 13.1
Charles W. Newhall, III(3)......................... 2,095,888 14.4 11.1
Prudential Insurance Company of America(4)......... 1,855,387 12.8 9.8
Sutter Entities(5)................................. 1,357,929 9.3 7.2
Accel Entities(6).................................. 1,280,066 8.8 6.8
Nassau Entities(7)................................. 1,095,273 7.5 5.8
Jeffrey L. McWaters(8)(9).......................... 742,458 5.0 3.9
William J. McBride(10)............................. 48,500 * *
Kay Coles James(11)................................ 12,500 * *
Theodore M. Wille, Jr.(8)(12)...................... 112,750 * *
</TABLE>
62
<PAGE> 65
<TABLE>
<CAPTION>
SHARES BENEFICIALLY OWNED
PRIOR TO OFFERING
------------------------- PERCENT OWNED
NAME NUMBER PERCENT AFTER OFFERING
---- ------------ --------- --------------
<S> <C> <C> <C>
Lorenzo Childress, Jr., M.D.(8)(13)................ 96,623 * *
Sherri E. Lee(8)(12)............................... 63,750 * *
Stanley F. Baldwin(8)(14).......................... 38,000 * *
All executive officers and directors as a group (15
persons)......................................... 8,493,773 55.8 43.3
</TABLE>
------------
* Represents less than 1% of outstanding shares of common stock.
(1) Represents securities owned by Acacia Venture Partners, L.P. and
Southpointe Venture Partners, L.P. Ms. Givens is a general partner of
Acacia which is general partner of Southpointe Venture Partners, L.P. and
shares investment and voting power with respect to the securities
beneficially owned by these funds. Ms. Givens' address is c/o Acacia
Venture Partners, 101 California Street, #3160, San Francisco, CA 94111.
Includes options to purchase 12,500 shares of common stock granted to Ms.
Givens.
(2) Represents securities owned by FFT Partners I, L.P. and Executive Partners
I, L.P. Mr. Ferrer is a general partner of Ferrer, Freeman & Thompson & Co.
LLC, and shares investment and voting power in respect to the securities
beneficially owned by these funds. Includes options to purchase 12,500
shares of common stock granted to Mr. Ferrer. Mr. Ferrer's address is c/o
Ferrer, Freeman & Thompson & Co. LLC, 10 Glenville Street, Greenwich, CT
06831.
(3) Represents securities owned by NEA Ventures L.P. and NEA Partners VI,
Limited Partnership. Mr. Newhall is a general partner of New Enterprise
Associates Limited Partnerships, and shares investment and voting power in
respect to the securities beneficially owned by these funds. Includes
options to purchase 12,500 shares of common stock granted to Mr. Newhall.
Mr. Newhall's address is c/o New Enterprise Associates, 1119 St. Paul
Street, Baltimore, MD 21202.
(4) The address for Prudential Insurance Company of America is One Gateway
Center, 11th Floor, Newark, NJ 07102.
(5) Represents securities owned by Sutter Hill Ventures, a California Limited
Partnership, managing directors and a director of the general partner of
Sutter Hill, retirement trusts of some of such managing directors, family
partnerships associated with such managing directors, Sutter Hill
Entrepreneurs Fund (AI), L.P., Sutter Hill Entrepreneurs Fund (QP), L.P.
and other entities associated with Sutter Hill. The general partner of
Sutter Hill Ventures, Sutter Hill Ventures LLC, is also the general partner
of the Sutter Hill Entrepreneurs Funds. Each individual managing director
of the general partner disclaims beneficial interest in the stock held by
other individuals and by Sutter Hill except to their pecuniary interest in
the partnership. Messrs. David L. Anderson, G. Leonard Baker, Jr., William
H. Younger, Jr., Tench Coxe and Gregory P. Sands may be deemed to have
investment and voting power with respect to all or some of these shares.
The address for the Sutter Entities is c/o Sutter Hill Ventures, 755 Page
Mill Road, Suite A-200, Palo Alto, CA 94163.
(6) Represents securities owned by Accel IV L.P., Accel Investors 95 L.P.,
Accel Keiretsu L.P., and Ellmore C. Patterson Partners. Messrs. Arthur C.
Patterson, James R. Swartz, James W. Breyer, Eugene D. Hill, Paul H.
Klingenstein, Luke B. Evnin, and G. Carter Sednaoui may be deemed to have
investment and voting power with respect to all or some of these shares.
However, each individual disclaims beneficial interest in the stock held by
other individuals. The address for the Accel Entities is c/o Accel
Partners, 428 University Avenue, Palo Alto, CA 94301.
(7) Represents securities owned by Nassau Capital and NAS Partners I. The
voting and investment with respect to these securities is under common
control. Messrs. Randall Hack and John Quigley may be deemed to have
investment and voting power with respect to all or some of these shares.
However, each individual disclaims beneficial interest in the stock held by
other individuals. The address for the Nassau Entities is c/o Nassau
Capital Partners LP, 22 Chambers Street, 2nd Floor, Princeton, NJ 08542.
(8) The address for this person is c/o AMERIGROUP Corporation, 4425 Corporation
Lane, Suite 300, Virginia Beach, VA 23462.
(9) Includes options to purchase 242,458 shares of common stock. Mr. McWaters
has agreed to sell up to 75,000 shares of common stock in the event the
underwriters exercise their over-allotment option. If the over-allotment
option is exercised in full, Mr. McWater's percentage ownership will
decrease to 3.4%.
(10) Includes options only. Mr. McBride's address is 150 Golf House Road,
Haverford, PA 19041.
(11) Includes options only. Ms. James' address is c/o Heritage Foundation, 555
Main Street, Suite 800, Norfolk, VA 23510.
(12) Includes options only.
(13) Includes options to purchase 46,623 shares of common stock.
(14) Includes options to purchase 6,250 shares of common stock.
63
<PAGE> 66
DESCRIPTION OF CAPITAL STOCK
On the completion of this offering, we will be authorized to issue
100,000,000 shares of common stock and 10,000,000 shares of preferred stock.
Shares of each class have a par value of $0.01 per share. The following
description summarizes information about our capital stock. You can obtain more
comprehensive information about our capital stock by consulting our amended and
restated bylaws and certificate of incorporation, as well as the Delaware
General Corporation Law.
COMMON STOCK
As of June 30, 2000, there were 806,199 shares of common stock outstanding,
which were held of record by approximately 20 stockholders. An additional
13,732,887 shares of common stock will be issued to approximately 31
stockholders at the time this offering closes as the result of mandatory
conversion of our outstanding convertible preferred stock and exercise of our
Series E warrants.
Each share of our common stock entitles the holder to one vote on all
matters submitted to a vote of stockholders, including the election of
directors. Subject to any preference rights of holders of preferred stock, the
holders of common stock are entitled to receive dividends, if any, declared from
time to time by the directors out of legally available funds. In the event of
our liquidation, dissolution or winding up, the holders of common stock are
entitled to share ratably in all assets remaining after the payment of
liabilities, subject to any rights of holders of preferred stock to prior
distribution.
The common stock has no preemptive or conversion rights or other
subscription rights. There are no redemption or sinking fund provisions
applicable to the common stock. All outstanding shares of common stock are fully
paid and nonassessable and the shares of common stock to be issued on completion
of this offering will be fully paid and nonassessable.
PREFERRED STOCK
The board of directors has the authority, without action by the
stockholders, to designate and issue preferred stock and to designate the
rights, preferences and privileges of each series of preferred stock, which may
be greater than the rights attached to the common stock. It is not possible to
state the actual effect of the issuance of any shares of preferred stock on the
rights of holders of common stock until the board of directors determines the
specific rights attached to that preferred stock. The effects of issuing
preferred stock could include one or more of the following:
- restricting dividends on the common stock,
- diluting the voting power of the common stock,
- impairing the liquidation rights of the common stock, or
- delaying or preventing a change of control of AMERIGROUP.
There are currently 27,215,775 shares of preferred stock outstanding,
comprised of:
- 8,000,000 shares designated as Series A convertible preferred stock (with
one common share equivalent voting right for every two shares held),
- 7,025,000 shares designated as Series B convertible preferred stock (with
one common share equivalent voting right for every two shares held),
- 6,480,000 shares designated as Series C convertible preferred stock (with
one common share equivalent voting right for every two shares held),
64
<PAGE> 67
- 3,710,775 shares designated as Series D convertible preferred stock (with
one common share equivalent voting right for every two shares held), and
- 2,000,000 shares designated as Series E mandatorily redeemable preferred
stock (with 1 to 0.5625 common share equivalent voting rights).
On June 30, 2000, the preferred stock was held of record by approximately
31 holders. Each share of convertible preferred stock will automatically convert
into one-half share of common stock at the time we close this offering. The
Series E mandatorily redeemable preferred stock will be redeemed at the time we
close this offering. Following this, there will be no preferred stock
outstanding, and we have no current plans to issue any shares of preferred
stock.
WARRANTS
In connection with our July 1998 financing, we sold to the purchasers of
our Series E mandatorily redeemable preferred stock warrants to purchase an
aggregate of 1,125,000 shares of common stock at an exercise price of $.02 per
share, subject to adjustment. These warrants may be exercised at any time but
only as to 0.5625 shares of common stock for every one share of Series E
mandatorily redeemable preferred stock redeemed. We have exercised our right to
accelerate the exercise date for these warrants to immediately prior to the
closing of this offering. If all the holders of these warrants exercise them on
or prior to the closing of this offering, there will be an additional 1,125,000
shares of common stock outstanding. These warrants are subject to customary
anti-dilution protections and expire on July 28, 2005.
In May 1998, we issued a warrant to purchase 25,000 shares of common stock
that currently has an effective exercise price of $3.00 per share. This warrant
is exercisable at any time. This warrant is also subject to customary
anti-dilution protections and expires on May 15, 2003.
ANTI-TAKEOVER EFFECTS OF CERTAIN PROVISIONS OF DELAWARE LAW AND AMERIGROUP'S
AMENDED AND RESTATED CERTIFICATE OF INCORPORATION AND BY-LAWS
Some provisions of our amended and restated certificate of incorporation
and amended and restated by-laws, each of which will become effective upon
closing of this offering, may be deemed to have an anti-takeover effect and may
delay or prevent a tender offer or takeover attempt that a stockholder might
consider in its best interest, including those attempts that might result in a
premium over the market price for the shares held by stockholders.
CLASSIFIED BOARD OF DIRECTORS
Our board of directors will be divided into three classes of directors
serving staggered three-year terms. As a result, approximately one-third of the
board of directors will be elected each year. These provisions, when coupled
with the provision of our amended and restated certificate of incorporation
authorizing the board of directors to fill vacant directorships or increase the
size of the board of directors, may deter a stockholder from removing incumbent
directors and simultaneously gaining control of the board of directors by
filling the vacancies created by such removal with its own nominees.
CUMULATIVE VOTING
Our amended and restated certificate of incorporation will expressly deny
stockholders the right to cumulative voting in the election of directors.
65
<PAGE> 68
STOCKHOLDER ACTION; SPECIAL MEETING OF STOCKHOLDERS
Our amended and restated certificate of incorporation will eliminate the
ability of stockholders to act by written consent. It will further provide that
special meetings of our stockholders may be called only by the chairman of our
board of directors, our president or a majority of our directors.
ADVANCE NOTICE REQUIREMENTS FOR STOCKHOLDER PROPOSALS AND DIRECTORS NOMINATIONS
Our amended and restated by-laws will provide that stockholders seeking to
bring business before an annual meeting of stockholders, or to nominate
candidates for election as directors at an annual meeting of stockholders, must
provide timely notice in writing. To be timely, a stockholder's notice must be
delivered to or mailed and received at our principal executive offices not less
than 90 days prior to the anniversary date of the immediately preceding annual
meeting of stockholders. However, in the event that the annual meeting is called
for a date that is not within 30 days before or after such anniversary date,
notice by the stockholder in order to be timely must be received not later than
the close of business on the 10th day following the date on which notice of the
date of the annual meeting was mailed to stockholders or made public, whichever
first occurs. Our amended and restated by-laws will also specify requirements as
to the form and content of a stockholder's notice. These provisions may preclude
stockholders from bringing matters before an annual meeting of stockholders or
from making nominations for directors at an annual meeting of stockholders.
AUTHORIZED BUT UNISSUED SHARES
Our authorized but unissued shares of common stock and preferred stock will
be available for future issuance without stockholder approval. These additional
shares may be utilized for a variety of corporate purposes, including future
public offerings to raise additional capital, corporate acquisitions and
employee benefit plans. The existence of authorized but unissued shares of
common stock and preferred stock could render more difficult or discourage an
attempt to obtain control of AMERIGROUP by means of a proxy contest, tender
offer, merger or otherwise.
AMENDMENTS; SUPERMAJORITY VOTE REQUIREMENTS
The Delaware General Corporation Law provides generally that the
affirmative vote of a majority of the shares entitled to vote on any matter is
required to amend a corporation's certificate of incorporation or by-laws,
unless either a corporation's certificate of incorporation or bylaws require a
greater percentage. Our amended and restated certificate of incorporation will
impose supermajority vote requirements in connection with business combination
transactions and the amendment of provisions of our amended and restated
certificate of incorporation and amended and restated by-laws, including those
provisions relating to the classified board of directors, action by written
consent and the ability of stockholders to call special meetings.
TRANSFER AGENT REGISTRAR
The transfer agent and registrar for our common stock is American Stock
Transfer & Trust Company.
LISTING
We expect our common stock to be approved for quotation on the Nasdaq
National Market under the symbol "AMGP."
66
<PAGE> 69
SHARES ELIGIBLE FOR FUTURE SALE
Prior to this offering, there has been no market for our common stock. We
cannot assure you that a significant public market for our common stock will
develop or will be sustained after the offering.
Future sales in the public markets of substantial amounts of our common
stock (including shares issued on the exercise of outstanding options and
warrants) could adversely affect the market prices prevailing from time to time
for the common stock. It could also impair our ability to raise capital through
future sales of equity securities.
After completion of this offering, we will have 18,939,086 shares of common
stock outstanding (assuming no exercise of the underwriters' over-allotment
option and no exercise of outstanding options). All of the 4,400,000 shares of
common stock sold in this offering will be freely transferable without
restriction or further registration under the Securities Act, except for any of
the shares that are acquired by "affiliates" as that term is defined in Rule 144
under the Securities Act.
Shares acquired by affiliates and the remaining shares held by existing
stockholders are "restricted securities" as that term is defined in Rule 144
under the Securities Act. Restricted securities may be sold in the public market
only if registered or if they qualify for an exemption from registration under
Rule 144, which is summarized below.
LOCK-UP
We have agreed that, without the prior written consent of Deutsche Bank, we
will not, directly or indirectly, offer, sell or otherwise dispose of any shares
of capital stock or any securities that may be converted into or exchanged for
shares of capital stock for a period of 180 days from the date of this
prospectus. Our officers and directors, and most of our stockholders, have also
entered into agreements to the same effect.
RULE 144
In general, Rule 144 has the effect that, beginning 90 days after the date
of this prospectus, a person who has beneficially owned our shares for at least
one year would be entitled to sell, within any three-month period, a number of
shares that does not exceed the greater of:
- 1% of the total number of shares of common stock then outstanding, or
- the average weekly trading volume of the common stock on the Nasdaq
National Market during the four calendar weeks preceding the filing of
notice on Form 144 with respect to the sale.
Sales under Rule 144 are also subject to certain manner of sale provisions
and notice requirements and to the availability of current public information
about us.
RULE 144(k)
Under Rule 144(k), a person who is not deemed to have been one of our
affiliates at any time during the 90 days preceding a sale, and who has
beneficially owned the shares proposed to be sold for at least two years
(including the holding period of any prior owner which was not an affiliate), is
entitled to sell the shares without complying with the manner of sale, public
information, volume limitation or notice provisions of Rule 144. Therefore,
unless otherwise restricted, "144(k)" shares may be sold immediately on
completion of this offering.
67
<PAGE> 70
RULE 701
In general, under Rule 701, any of our employees, directors, officers,
consultants or advisors who purchases ordinary shares from us in connection with
a compensatory stock or option plan or other written agreement before the
effective date of this prospectus is entitled to resell those shares 90 days
after the effective date of this prospectus in reliance on Rule 144, without
having to comply with certain restrictions (including the holding period)
contained in Rule 144.
Rule 701 permits affiliates to sell their Rule 701 shares under Rule 144
without complying with the holding period requirements of Rule 144. It permits
non-affiliates to sell their Rule 701 shares in reliance on Rule 144 without
having to comply with the holding period, public information, volume limitation
or notice provisions of Rule 144. All holders of Rule 701 shares are required to
wait until 90 days after the date of this prospectus before selling those
shares.
Shares eligible for sale in the public market based on shares outstanding
at the time we close this offering is as follows:
<TABLE>
<CAPTION>
NUMBER OF SHARES DATE
---------------- ----
<C> <S>
4,400,000 After the date of this prospectus. Freely tradeable shares
sold in this offering.
62,140 After the date of this prospectus or 90 days after the date
of this prospectus. Shares not locked up and eligible for
resale under Rule 144 or 701.
13,351,946 180 days after the date of this prospectus when the lock-up
expires. Shares eligible for resale under Rule 144, Rule
144(k) or Rule 701.
1,125,000 Various dates as these shares qualify for an exemption from
registration under Rule 144 or 701.
</TABLE>
REGISTRATION RIGHTS
Upon the expiration of the six months following the closing of this
offering, the holders of at least 40% of the common stock issued on conversion
of our Series A, B, and C preferred stock and exercise of warrants issued to our
Series E mandatorily redeemable preferred stockholders may require us on up to
three occasions to use our best efforts to file a registration statement
covering the public sale of part of that common stock having an aggregate
offering price of more that $5 million. We have the right to delay any
registration required by up to 90 days.
These holders also have piggy-back registration rights to include their
shares in any registration statement we file on our own behalf (other than for
employee benefit plan and business acquisitions or corporate restructurings) or
on behalf of other stockholders.
In addition, these holders have the right to request us to register their
securities on a short-form S-3 registration statement on up to three occasions.
Silicon Valley Bank, which owns warrants to purchase 25,000 shares of
common stock, has piggy-back registration rights until the first anniversary of
this offering and Prudential Insurance Company of America, which currently owns
3,710,775 shares of our Series D convertible preferred stock, convertible into
1,855,387 shares of common stock upon completion of this offering, has
piggy-back registration rights until the fifth anniversary of this offering.
68
<PAGE> 71
UNDERWRITING
Subject to the terms and conditions of the underwriting agreement, the
underwriters named below, through their representatives Deutsche Bank Securities
Inc., Banc of America Securities LLC and UBS Warburg LLC, have severally agreed
to purchase from us the following respective number of shares of common stock at
the public offering price less the underwriting discounts and commissions set
forth on the cover page of this prospectus:
<TABLE>
<CAPTION>
NUMBER OF
UNDERWRITER SHARES
----------- ---------
<S> <C>
Deutsche Bank Securities Inc. ..............................
Banc of America Securities LLC..............................
UBS Warburg LLC.............................................
-------
Total: ...........................................
=======
</TABLE>
The underwriting agreement provides that the obligations of the several
underwriters to purchase the shares of common stock offered hereby are subject
to certain conditions precedent and that the underwriters will purchase all
shares of the common stock offered hereby, other than those covered by the
over-allotment option described below, if any of these shares are purchased.
The underwriters propose to offer the shares of common stock to the public
at the public offering price set forth on the cover of this prospectus and to
dealers at a price that represents a concession not in excess of $ per share
under the public offering price. The underwriters may allow, and these dealers
may re-allow, a concession of not more than $ per share to other dealers.
After the initial public offering, representatives of the underwriters may
change the offering price and other selling terms.
We and Jeffrey L. McWaters, our President, Chief Executive Officer and
Chairman of our board of directors, have granted to the underwriters an option,
exercisable not later than 30 days after the date of this prospectus, to
purchase up to a total of additional 660,000 shares of common stock, of which up
to 75,000 would be sold by Mr. McWaters, at the public offering price less the
underwriting discounts and commissions set forth on the cover page of this
prospectus. The underwriters may exercise this option only to cover
over-allotments made in connection with the sale of the common stock offered
hereby. To the extent that the underwriters exercise this option, each of the
underwriters will become obligated, subject to certain conditions, to purchase
approximately the same percentage of additional shares of common stock as the
number of shares of common stock to be purchased by it in the above table bears
to the total number of shares of common stock offered hereby. We and Mr.
McWaters will be obligated, pursuant to this option, to sell these shares of
common stock to the underwriters to the extent the option is exercised. If any
additional shares of common stock are purchased, the underwriters will offer the
additional shares on the same terms as those on which the shares are being
offered.
The underwriting fee is equal to the public offering price per share of
common stock less the amount paid by the underwriters to us per share of common
stock. The underwriting fee is
69
<PAGE> 72
currently expected to be approximately % of the initial public offering price.
We have agreed to pay the underwriters the following fees, assuming either no
exercise or full exercise by the underwriters of the underwriters'
over-allotment option:
<TABLE>
<CAPTION>
TOTAL FEES
----------------------------------------------
WITHOUT EXERCISE OF WITH FULL EXERCISE OF
FEE PER SHARE OVER-ALLOTMENT OPTION OVER-ALLOTMENT OPTION
------------- --------------------- ---------------------
<S> <C> <C> <C>
Fees paid by AMERIGROUP........... $ $ $
Fees paid by Mr. McWaters......... --
</TABLE>
In addition, we estimate that our share of the total expenses of this
offering, excluding underwriting discounts and commissions, will be
approximately $ .
We have agreed to indemnify the underwriters against some specified types
of liabilities, including liabilities under the Securities Act of 1933, and to
contribute to payments the underwriters may be required to make in respect of
any of these liabilities.
Each of our officers and directors, most of our stockholders and selected
holders of options to purchase our stock have agreed not to offer, sell,
contract to sell or otherwise dispose of, or enter into any transaction that is
designed to, or could be expected to, result in the disposition of any shares of
our common stock or other securities convertible into or exchangeable or
exercisable for shares of our common stock or derivatives of our common stock
owned by these persons prior to this offering or common stock issuable upon
exercise of options held by these persons for a period of 180 days after the
effective date of the registration statement of which this prospectus is a part,
subject to limited exceptions, without the prior written consent of Deutsche
Bank Securities Inc. This consent may be given at any time without public
notice. We have entered into a similar agreement with the representatives of the
underwriters, except that we may grant options and sell shares pursuant to our
stock plans without such consent. There are no agreements between the
representatives and any of our stockholders or affiliates releasing them from
these lock-up agreements prior to the expiration of the 180-day period.
We expect our common stock to be approved for quotation on the Nasdaq
National Market under the symbol "AMGP."
The representatives of the underwriters have advised us that the
underwriters do not intend to confirm sales to any account over which they
exercise discretionary authority.
In order to facilitate the offering of our common stock, the underwriters
may engage in transactions that stabilize, maintain or otherwise affect the
market price of our common stock. Specifically, the underwriters may over-allot
shares of our common stock in connection with this offering, thus creating a
short position in our common stock for their own account. A short position
results when an underwriter sells more shares of common stock than that
underwriter is committed to purchase. Additionally, to cover these
over-allotments or to stabilize the market price of our common stock, the
underwriters may bid for, and purchase, shares of our common stock in the open
market. Finally, the representatives, on behalf of the underwriters, may also
reclaim selling concessions allowed to an underwriter or dealer if the
underwriting syndicate repurchases shares distributed by that underwriter or
dealer. Any of these activities may maintain the market price of our common
stock at a level above that which might otherwise prevail in the open market.
These transactions may be effected on the Nasdaq National Market or otherwise.
The underwriters are not required to engage in these activities and, if
commenced, may end any of these activities at any time.
At our request, the underwriters have reserved for sale, at the initial
public offering price, up to 220,000 shares for our employees, family members of
employees, business associates and other third parties. The number of shares of
our common stock available for sale to the general public will be reduced to the
extent these reserved shares are purchased. Any reserved
70
<PAGE> 73
shares that are not purchased by these persons will be offered by the
underwriters to the general public on the same basis as the other shares in this
offering.
PRICING OF THIS OFFERING
Prior to this offering, there has been no public market for our common
stock. Consequently, the initial public offering price for our common stock has
been determined by negotiation among us and the representatives of the
underwriters. Among the primary factors to be considered in determining the
public offering price will be:
- Prevailing market conditions,
- our results of operations in recent periods,
- the present stage of our development,
- the market capitalization and stage of development of other companies
that we and the representatives of the underwriters believe to be
comparable to our business, and
- estimates of our business potential.
The estimated initial public offering price range set forth on the cover of
this preliminary prospectus is subject to change as a result of market
conditions and other factors.
LEGAL MATTERS
The validity of the common stock offered by this prospectus will be passed
upon for us by Skadden, Arps, Slate, Meagher & Flom LLP, New York, New York.
Certain legal matters in connection with the offering will be passed upon for
the underwriters by Willkie Farr & Gallagher, New York, New York.
EXPERTS
The financial statements and schedule of AMERIGROUP Corporation as of
December 31, 1998 and 1999 and for the years ending December 31, 1997, 1998 and
1999 have been included herein and in the registration statement in reliance
upon the report of KPMG LLP, independent certified public accountants, appearing
elsewhere herein, and upon the authority of said firm as experts in accounting
and auditing.
The statements of revenues and expenses of contracts acquired of the
Medicaid business of Oxford Health Plans (NJ), Inc. for the six months ended
June 30, 1998 and for the year ended December 31, 1997, have been included
herein and in the registration statement in reliance upon the report of KPMG
LLP, independent certified public accountants, appearing elsewhere herein, and
upon the authority of said firm as experts in accounting and auditing.
71
<PAGE> 74
WHERE YOU CAN FIND MORE INFORMATION
This prospectus constitutes a part of a registration statement on Form S-1
(together with all amendments, supplements, schedules and exhibits to the
registration statement, referred to as the registration statement) which we have
filed with the Commission under the Securities Act, with respect to the common
stock offered in this prospectus. This prospectus does not contain all the
information which is in the registration statement. Certain parts of the
registration statement are omitted as allowed by the rules and regulations of
the Commission. We refer you to the registration statement for further
information about our company and the securities offered in this prospectus.
Statements contained in this prospectus concerning the provisions of documents
filed as exhibits are not necessarily complete, and reference is made to the
copy so filed, each such statement being qualified in all respects by such
reference. You can inspect and copy the registration statement and the reports
and other information we file with the Commission at Room 1024, Judiciary Plaza,
450 Fifth Street, N.W., Washington, D.C. 20549. You can obtain information on
the operation of the public reference room by calling the Commission at
1-800-SEC-0330. The same information will be available for inspection and
copying at the regional offices of the Commission located at 7 World Trade
Center, 13th Floor, New York, N.Y. 10048 and at Citicorp Center, 500 West
Madison Street, Suite 1400, Chicago, Illinois 60661. You can also obtain copies
of this material from the public reference room of the Commission at 450 Fifth
Street, N.W., Washington, D.C. 20549, at prescribed rates. The Commission also
maintains a Web site which provides on-line access to reports, proxy and
information statements and other information regarding registrants that file
electronically with the Commission at the address http://www.sec.gov.
Upon the effectiveness of the registration statement, we will become
subject to the information requirements of the Exchange Act. We will then file
reports, proxy statements and other information under the Exchange Act with the
Commission. You can inspect and copy these reports and other information of our
company at the locations set forth above or download these reports from the
Commission's Web site.
We have applied to have our common stock approved for quotation on the
Nasdaq National Market.
72
<PAGE> 75
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
AMERIGROUP CORPORATION:
Independent Auditors' Report................................ F-2
Consolidated Balance Sheets................................. F-3
Consolidated Statements of Operations....................... F-4
Consolidated Statements of Stockholders' Deficit............ F-6
Consolidated Statements of Cash Flows....................... F-7
Notes to Consolidated Financial Statements.................. F-9
OXFORD HEALTH PLANS (NJ), INC.:
Independent Auditors' Report................................ F-28
Statements of Revenues and Expenses of Contracts Acquired... F-29
Notes to Statements of Revenues and Expenses of Contracts
Acquired.................................................. F-30
</TABLE>
F-1
<PAGE> 76
INDEPENDENT AUDITORS' REPORT
The Board of Directors
AMERIGROUP Corporation:
We have audited the accompanying consolidated balance sheets of AMERIGROUP
Corporation and subsidiaries as of December 31, 1998 and 1999, and the related
consolidated statements of operations, stockholders' deficit and cash flows for
each of the years in the three-year period ended December 31, 1999. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements 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 consolidated financial statements referred to above
present fairly, in all material respects, the financial position of AMERIGROUP
Corporation and subsidiaries as of December 31, 1998 and 1999, and the results
of their operations and their cash flows for each of the years in the three-year
period ended December 31, 1999 in conformity with generally accepted accounting
principles.
February 25, 2000, except as to Note 14, which
is as of July 10, 2000
Norfolk, Virginia
/s/ KPMG LLP
F-2
<PAGE> 77
AMERIGROUP CORPORATION
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS, EXCEPT FOR PER SHARE DATA)
<TABLE>
<CAPTION>
PRO FORMA
HISTORICAL (NOTE 15)
--------------------------------- -----------
DECEMBER 31,
------------------- MARCH 31, MARCH 31,
1998 1999 2000 2000
-------- -------- ----------- -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
ASSETS (NOTE 7)
Current assets:
Cash and cash equivalents................................. $ 85,732 $100,379 $ 84,759
Short-term investments (note 3)........................... 1,255 65,839 69,862
Premium receivables....................................... -- 6,695 10,250
Deferred income taxes (note 6)............................ 242 4,943 2,293
Prepaid expenses and other current assets (note 3)........ 2,550 4,054 5,914
-------- -------- --------
Total current assets.................................... 89,779 181,910 173,078
Property, equipment and software, net (note 4).............. 4,335 7,714 8,672
Goodwill, net of accumulated amortization of $160, $2,048
and $2,806 at December 31, 1998 and 1999 and March 31,
2000, respectively (note 5)............................... 5,341 20,615 19,854
Other assets................................................ 247 2,739 4,167
Investments on deposit for licensure (note 3)............... 1,667 8,992 10,808
Deferred income taxes (note 6).............................. -- 351 368
-------- -------- --------
$101,369 $222,321 $216,947
======== ======== ========
LIABILITIES, REDEEMABLE PREFERRED STOCK AND STOCKHOLDERS'
EQUITY (DEFICIT)
Current liabilities:
Bank overdrafts........................................... $ 7,313 $ 1,413 $ 3,016
Current portion of long-term debt (note 7)................ 1,833 1,833 2,000
Accounts payable.......................................... 822 1,767 1,892
Accrued payroll........................................... 1,761 3,497 1,200
Experience rebate payable................................. 1,386 3,123 4,140
Income taxes payable...................................... -- 287 2,611
Accrued expenses.......................................... 2,633 4,547 7,112
Unearned revenue.......................................... -- 27,960 --
Claims payable............................................ 54,394 114,372 123,707
-------- -------- --------
Total current liabilities............................... 70,142 158,799 145,678
Long-term debt (note 7)..................................... 8,167 6,177 5,677
Other liabilities........................................... -- 1,450 1,450
Deferred income taxes (note 6).............................. 242 -- --
-------- -------- --------
Total liabilities....................................... 78,551 166,426 152,805
-------- -------- --------
Redeemable preferred stock (note 8):
Series E mandatorily redeemable preferred stock, $0.01 par
value. Authorized 2,000,000 shares; issued and
outstanding 1,000,000 shares at December 31, 1998,
2,000,000 shares at December 31, 1999 and March 31, 2000
historical and no shares at March 31, 2000 pro forma.... 4,586 10,330 10,716 $ 10,716
Series A convertible preferred stock, $.01 par value.
Authorized 8,000,000 shares; issued and outstanding
8,000,000 shares historical and no shares pro forma..... 12,924 14,194 14,511 --
Series B convertible preferred stock, $.01 par value.
Authorized 7,025,000 shares; issued and outstanding
7,025,000 shares historical and no shares pro forma..... 21,022 23,173 23,710 --
Series C convertible preferred stock, $.01 par value.
Authorized 6,480,000 shares; issued and outstanding
6,480,000 shares historical and no shares pro forma..... 20,890 23,209 23,789 --
-------- -------- -------- --------
Total redeemable preferred stock........................ 59,422 70,906 72,726 10,716
-------- -------- -------- --------
Stockholders' equity (deficit) (notes 8, 9 and 14):
Series D convertible preferred stock, $0.01 par value.
Authorized 10,000,000 shares; issued and outstanding
3,710,775 shares at December 31, 1999 and March 31, 2000
historical and no shares at March 31, 2000 pro forma.... -- 37 37 --
Common stock, $.01 par value. Authorized 60,000,000 shares
historical and 100,000,000 pro forma; issued and
outstanding 529,136, 640,632, and 648,820 at December
31, 1998 and 1999, and March 31, 2000 historical,
respectively, and 13,256,707 shares at March 31, 2000
pro forma............................................... 10 11 11 137
Additional paid-in capital.................................. 662 18,185 19,974 81,895
Accumulated deficit......................................... (37,276) (33,244) (27,216) (27,216)
Deferred compensation (note 9).............................. -- -- (1,390) (1,390)
-------- -------- -------- --------
Total stockholders' equity (deficit).................... (36,604) (15,011) (8,584) $ 53,426
========
Commitments and contingencies (note 12)
-------- -------- --------
$101,369 $222,321 $216,947
======== ======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
F-3
<PAGE> 78
AMERIGROUP CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(DOLLARS IN THOUSANDS, EXCEPT FOR PER SHARE DATA)
<TABLE>
<CAPTION>
THREE MONTHS
YEARS ENDED DECEMBER 31, ENDED MARCH 31,
--------------------------------- ----------------------
1997 1998 1999 1999 2000
-------- -------- ----------- -------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Revenues:
Premium............................ $ 64,878 $186,790 $ 392,296 $ 60,004 $ 147,654
Investment income.................. 2,184 3,389 6,404 1,183 2,710
-------- -------- ----------- -------- -----------
Total revenues................... 67,062 190,179 398,700 61,187 150,364
-------- -------- ----------- -------- -----------
Expenses:
Health benefits.................... 55,340 155,877 334,192 50,896 118,332
Selling, general and
administrative................... 19,920 29,166 52,846 8,712 17,088
Depreciation and amortization...... 652 1,197 3,635 420 1,360
Interest........................... -- 483 811 211 201
-------- -------- ----------- -------- -----------
Total expenses................... 75,912 186,723 391,484 60,239 136,981
-------- -------- ----------- -------- -----------
Income (loss) before income
taxes.......................... (8,850) 3,456 7,216 948 13,383
Income tax benefit (expense) (note
6)................................. -- -- 4,100 -- (5,535)
-------- -------- ----------- -------- -----------
Net income (loss)................ (8,850) 3,456 11,316 948 7,848
Accretion of redeemable preferred
stock dividends (note 8)........... (5,740) (6,126) (7,284) (1,820) (1,820)
-------- -------- ----------- -------- -----------
Net income (loss) attributable to
common stockholders............ $(14,590) $ (2,670) $ 4,032 $ (872) $ 6,028
======== ======== =========== ======== ===========
Net income (loss) per share (note
10):
Basic net income (loss) per
share............................ $ (28.29) $ (5.07) $ 7.11 $ (1.65) $ 9.35
======== ======== =========== ======== ===========
Weighted average number of common
shares outstanding............... 515,750 526,651 567,146 529,136 644,786
======== ======== =========== ======== ===========
Diluted net income (loss) per
share............................ $ (28.29) $ (5.07) $ 0.66 $ (1.65) $ 0.48
======== ======== =========== ======== ===========
Weighted average number of common
shares and potential dilutive
common shares outstanding........ 515,750 526,651 14,695,324 529,136 15,681,194
======== ======== =========== ======== ===========
</TABLE>
F-4
<PAGE> 79
AMERIGROUP CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS -- (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT FOR PER SHARE DATA)
<TABLE>
<CAPTION>
YEAR THREE MONTHS
ENDED ENDED
DECEMBER 31, MARCH 31,
1999 2000
------------ ------------
<S> <C> <C>
Pro forma net income per common share information
(unaudited) (note 15):
Historical net income attributable to common
stockholders............................................ $ 4,032 $ 6,028
Pro forma adjustment to eliminate preferred dividends..... 7,284 1,820
----------- -----------
Pro forma net income............................... $ 11,316 $ 7,848
=========== ===========
Basic pro forma net income per common share............... $ 0.86 $ 0.59
=========== ===========
Pro forma weighted average number of common shares
outstanding............................................. 13,175,033 13,252,673
=========== ===========
Diluted pro forma net income per common share............. $ 0.74 $ 0.50
=========== ===========
Pro forma weighted average number of common shares and
potential dilutive common shares outstanding............ 15,358,762 15,681,194
=========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
<PAGE> 80
AMERIGROUP CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' DEFICIT
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
SERIES D
COMMON STOCK PREFERRED STOCK ADDITIONAL TOTAL
------------------ ------------------ PAID-IN ACCUMULATED DEFERRED STOCKHOLDERS'
SHARES AMOUNT SHARES AMOUNT CAPITAL DEFICIT COMPENSATION DEFICIT
--------- ------ --------- ------ ---------- ----------- ------------ -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balances at December 31,
1996........................ 500,500 $10 -- $-- $ -- $(20,016) -- $(20,006)
Common stock issued upon
exercise of stock options... 20,474 -- -- -- 6 -- -- 6
Accreted dividends on
redeemable preferred
stock....................... -- -- -- -- -- (5,740) -- (5,740)
Net loss...................... -- -- -- -- -- (8,850) -- (8,850)
--------- --- --------- --- ------- -------- -------- --------
Balances at December 31,
1997........................ 520,974 10 -- -- 6 (34,606) -- (34,590)
Warrants issued in conjunction
with Series E mandatorily
redeemable preferred stock
(note 8).................... -- -- -- -- 650 -- -- 650
Common stock issued upon
exercise of stock options... 8,162 -- -- -- 6 -- -- 6
Accreted dividends on
redeemable preferred stock.. -- -- -- -- -- (6,126) -- (6,126)
Net income.................... -- -- -- -- -- 3,456 -- 3,456
--------- --- --------- --- ------- -------- -------- --------
Balances at December 31,
1998........................ 529,136 10 -- -- 662 (37,276) -- (36,604)
Warrants issued in conjunction
with Series E mandatorily
redeemable preferred stock
(note 8).................... -- -- -- -- 800 -- -- 800
Common stock issued upon
exercise of stock options... 111,496 1 -- -- 99 -- -- 100
Series D convertible preferred
stock issued in conjunction
with acquisition (notes 5
and 8)...................... -- -- 3,710,775 37 16,624 -- -- 16,661
Accreted dividends on
redeemable preferred
stock....................... -- -- -- -- -- (7,284) -- (7,284)
Net income.................... -- -- -- -- -- 11,316 -- 11,316
--------- --- --------- --- ------- -------- -------- --------
Balances at December 31,
1999........................ 640,632 11 3,710,775 37 18,185 (33,244) -- (15,011)
Common stock issued upon
exercise of stock options
(unaudited)................. 8,188 -- -- -- 8 -- -- 8
Accreted dividends on
redeemable preferred stock
(unaudited)................. -- -- -- -- -- (1,820) -- (1,820)
Issuance of common stock
options at below market
value (note 9)
(unaudited)................. -- -- -- -- 1,781 -- (1,781) --
Amortization of deferred
compensation (note 9)
(unaudited)................. -- -- -- -- -- -- 391 391
Net income (unaudited)........ -- -- -- -- -- 7,848 -- 7,848
--------- --- --------- --- ------- -------- -------- --------
Balances at March 31, 2000
(unaudited)................. 648,820 $11 3,710,775 $37 $19,974 $(27,216) (1,390) $ (8,584)
========= === ========= === ======= ======== ======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
F-6
<PAGE> 81
AMERIGROUP CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
THREE MONTHS
YEARS ENDED DECEMBER 31, ENDED MARCH 31,
----------------------------- -------------------
1997 1998 1999 1999 2000
------- ------- --------- -------- --------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Cash flows from operating
activities:
Net income (loss).............. $(8,850) $ 3,456 $ 11,316 $ 948 $ 7,848
------- ------- --------- -------- --------
Adjustments to reconcile net
income (loss) to net cash
provided by (used in)
operating activities:
Depreciation and
amortization.............. 652 1,197 3,635 420 1,360
Deferred tax expense
(benefit)................. -- -- (5,294) -- 2,633
Amortization of deferred
compensation.............. -- -- -- -- 391
Changes in assets and
liabilities increasing
(decreasing) cash flows
from operations:
Premium receivables....... -- -- (6,695) (264) (3,555)
Prepaid expenses and other
current assets......... (542) (1,924) (1,504) 804 (1,860)
Other assets.............. (31) (82) (2,315) (25) (1,444)
Accounts payable, accrued
payroll, experience
rebate payable, income
taxes payable and
accrued expenses....... 3,080 1,439 6,619 209 3,734
Unearned revenue.......... 184 (184) 27,960 -- (27,960)
Claims payable............ 8,908 33,748 59,978 506 9,335
Other long-term
liabilities............ -- -- 1,450 -- --
------- ------- --------- -------- --------
Net cash provided by
(used in) operating
activities........... 3,401 37,650 95,150 2,598 (9,518)
------- ------- --------- -------- --------
Cash flows from investing
activities:
Proceeds from redemption of
held-to-maturity
securities.................. -- 4,100 73,422 1,142 44,971
Purchase of held-to-maturity
investments................. -- (5,355) (138,008) (22,097) (48,994)
Purchase of property, equipment
and software................ (937) (2,805) (5,096) (829) (1,541)
Proceeds from sale of
investments on deposit for
licensure................... 636 937 1,677 117 5,223
Purchase of investments on
deposit for licensure....... (1,265) (1,250) (9,002) (1,888) (7,039)
Purchase of contract rights and
related assets.............. -- (5,501) (500) -- --
------- ------- --------- -------- --------
Net cash used in
investing
activities........... (1,566) (9,874) (77,507) (23,555) (7,380)
------- ------- --------- -------- --------
</TABLE>
F-7
<PAGE> 82
AMERIGROUP CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS -- (CONTINUED)
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
THREE MONTHS
YEARS ENDED DECEMBER 31, ENDED MARCH 31,
----------------------------- -------------------
1997 1998 1999 1999 2000
------- ------- --------- -------- --------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Cash flows from financing
activities:
Change in bank overdrafts...... -- 7,313 (5,900) 1,182 1,603
Proceeds from issuance of debt,
net of issuance costs....... $ -- $ 9,884 $ 8,137 $ -- $ --
Payment of debt................ -- -- (10,333) (333) (333)
Proceeds from exercise of
common stock options........ 5 5 100 -- 8
Proceeds from issuance of
Series E mandatorily
redeemable preferred stock
and related warrants, net of
issuance costs.............. -- 4,850 5,000 5,000 --
------- ------- --------- -------- --------
Net cash provided by
(used in) financing
activities........... 5 22,052 (2,996) 5,849 1,278
------- ------- --------- -------- --------
Net increase (decrease) in cash
and cash equivalents........... 1,840 49,828 14,647 (15,108) (15,620)
Cash and cash equivalents at
beginning of period............ 34,064 35,904 85,732 85,732 100,379
------- ------- --------- -------- --------
Cash and cash equivalents at end
of period...................... $35,904 $85,732 $ 100,379 $ 70,624 $ 84,759
======= ======= ========= ======== ========
Supplemental disclosures of cash
flow information:
Cash paid for interest......... $ -- $ 417 $ 878 $ 213 $ 133
======= ======= ========= ======== ========
Cash paid for income taxes..... $ -- $ 157 $ 751 $ -- $ 580
======= ======= ========= ======== ========
</TABLE>
In 1999, AMERIGROUP Corporation issued 3,710,775 shares of Series D
convertible preferred stock, valued at $16,661, to The Prudential Insurance
Company of America (Prudential) in exchange for certain assets of Prudential's
Medicaid line of business in the District of Columbia and the State of
Maryland (note 5).
See accompanying notes to consolidated financial statements.
F-8
<PAGE> 83
AMERIGROUP CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997, 1998 AND 1999
(DOLLARS IN THOUSANDS, EXCEPT FOR PER SHARE DATA)
(1) CORPORATE ORGANIZATION AND PRINCIPLES OF CONSOLIDATION
(a) Corporate Organization
AMERIGROUP Corporation (the Company), a Delaware corporation, was organized
to create a community-focused managed care company with an emphasis on providing
healthcare services to people eligible to receive Medicaid and Children's Health
Insurance Program benefits.
During 1995, the Company incorporated wholly-owned subsidiaries in New
Jersey, Illinois and Texas to develop, own and operate health maintenance
organizations (HMOs) in those states. During 1996, the Company began enrolling
Medicaid members in HMOs: AMERIGROUP New Jersey, Inc. (formerly known as
AMERICAID New Jersey, Inc.), AMERICAID Illinois, Inc. and AMERICAID Texas, Inc.
During 1999, the Company incorporated a wholly-owned subsidiary in Delaware,
AMERIGROUP Maryland, Inc., a Managed Care Organization, to develop, own and
operate a managed care organization in Maryland and an HMO in the District of
Columbia. This subsidiary purchased certain contracts and related assets from
The Prudential Insurance Company of America and the Prudential Health Care Plan,
Inc. (Prudential) relating to its Medicaid lines of business in the State of
Maryland and the District of Columbia during 1999 (note 5).
(b) Principles of Consolidation
The consolidated financial statements include the financial statements of
AMERIGROUP Corporation and its four wholly-owned subsidiaries: AMERIGROUP New
Jersey, Inc., AMERICAID Illinois, Inc., AMERICAID Texas, Inc. and AMERIGROUP
Maryland, Inc., a Managed Care Organization. All significant intercompany
balances and transactions have been eliminated in consolidation.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND PRACTICES
(a) Cash Equivalents
For purposes of the Consolidated Statements of Cash Flows, the Company
considers all highly liquid temporary investments with original maturities of
three months or less to be cash equivalents. The Company has cash equivalents of
$85,438 and $89,311 at December 31, 1998 and 1999, respectively, which consist
of money market funds, certificates of deposit and U.S. Treasury securities.
(b) Short-Term Investments and Investments on Deposit for Licensure
Short-term investments and investments on deposit for licensure at December
31, 1998 and 1999 consist of U.S. Treasury securities, asset-backed government
securities, debt securities of government sponsored entities and certificates of
deposit. The Company considers all investments with maturities greater than
three months but less than twelve months to be short-term investments. The
Company classifies its debt and equity securities in one of three categories:
trading, available-for-sale or held-to-maturity. Trading securities are bought
and held principally for the purpose of selling them in the near term.
Held-to-maturity securities are those securities in which the Company has the
ability and intent to hold the security until maturity. All other securities not
included in trading or held-to-maturity are classified as available-for-sale. At
December 31, 1998 and 1999, all of the Company's securities are classified as
held-to-maturity.
F-9
<PAGE> 84
AMERIGROUP CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Held-to-maturity securities are recorded at amortized cost, adjusted for
the amortization or accretion of premiums or discounts. A decline in the market
value of any held-to-maturity security below cost that is deemed other than
temporary results in a reduction in carrying amount to fair value. The
impairment is charged to earnings and a new cost basis for the security is
established. Premiums and discounts are amortized or accreted over the life of
the related held-to-maturity security as an adjustment to yield using the
effective-interest method. Dividend and interest income are recognized when
earned.
(c) Property, Equipment and Software
Property, equipment and software are stated at cost. Depreciation on
property, equipment and software is calculated on the straight-line method over
the estimated useful lives of the assets. Property and equipment held under
leasehold improvements are amortized on the straight-line method over the
shorter of the lease term or estimated useful life of the asset. The estimated
useful lives are as follows:
<TABLE>
<CAPTION>
<S> <C>
Leasehold improvements................................... 3-7 years
Furniture and fixtures................................... 5-7 years
Equipment................................................ 3-5 years
Software................................................. 3-5 years
</TABLE>
(d) Goodwill
Goodwill, which represents the excess of aggregate purchase price over the
estimated fair value of net assets acquired, is amortized on a straight-line
basis over 18 months to 20 years, the expected periods to be benefited. The
Company assesses the recoverability of goodwill by determining whether the
amortization of the goodwill balance over its remaining life can be recovered
through undiscounted future operating cash flows of the acquired operation. The
amount of goodwill impairment, if any, is measured based on projected discounted
future operating cash flows using a discount rate reflecting the Company's
average cost of funds. The assessment of the recoverability of goodwill will be
impacted if estimated future operating cash flows are not achieved.
(e) Other Assets
Other assets include software development costs in progress, deposits,
restricted cash (see note 3) and debt issuance costs which are being amortized
over the term of the outstanding debt.
(f) Income Taxes
Income taxes are accounted for under the asset and liability method.
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases and operating loss and tax credit carryforwards. Deferred tax assets and
liabilities are measured using enacted tax rates expected to apply to taxable
income in the years in which those temporary differences are expected to be
recovered or settled. The effect on deferred tax assets and liabilities of a
change in tax rates is recognized in income in the period that includes the
enactment date.
F-10
<PAGE> 85
AMERIGROUP CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(g) Stock-Based Compensation
As permitted under Statement of Financial Accounting Standards No. 123,
Accounting for Stock-Based Compensation (SFAS No. 123), the Company has chosen
to account for stock-based compensation using the intrinsic value method
prescribed in Accounting Principles Board Opinion No. 25, Accounting for Stock
Issued to Employees (APB Opinion No. 25), and related interpretations.
Accordingly, compensation cost for stock options is measured as the excess, if
any, of the estimated fair value of the Company's stock at the date of grant
over the amount an employee must pay to acquire the stock.
(h) Premium Revenue
The Company records premium revenue based on membership and premium
information from each state. Premiums are due monthly and are recognized as
revenue during the period in which the Company is obligated to provide service
to members. Unearned revenue at December 31, 1999 consists of advance premiums
paid by the States of Maryland and Texas, primarily due to Year 2000 issues,
which did not occur.
(i) Experience Rebate Payable
Experience rebate payable includes estimates of amounts due under contracts
with a state government. These amounts are computed monthly based on a
percentage of the contract profits as defined, of each contract with the state.
The profitability computation includes premium revenue received from the state
less actual medical and administrative costs incurred and paid and less
estimated unpaid claims payable for the applicable membership. The unpaid claims
payable estimates are based on historical payment patterns using actuarial
techniques. The contract periods end on August 31 and the experience rebate
payable for each period is recalculated and adjusted each month, if required. A
final settlement is made 334 days after the contract period ends using paid
claims data. Any adjustment made to the experience rebate payable as a result of
final settlement is included in current operations.
(j) Claims Payable
Accrued medical expenses for inpatient, outpatient surgery, emergency room,
specialist, pharmacy and ancillary medical claims include amounts billed and not
paid and an estimate of cost incurred for unbilled services provided. These
liabilities are principally based on historical payment patterns using actuarial
techniques. In addition, claims processing costs are accrued based on an
estimate of the costs necessary to process unpaid claims. Claims payable are
reviewed and adjusted periodically and, as adjustments are made, differences are
included in current operations. Claims payable also includes estimates of
amounts due to or from contracted providers under risk-sharing arrangements. The
arrangements are based upon quality measures as well as medical results.
Estimates relating to risk-sharing arrangements are calculated as a percentage,
typically 25% to 50%, of the differences between actual results and specified
targets of medical expense as well as a sharing of profits in excess of the
targeted medical and administrative expenses, typically 7% to 10% of total
premiums covered under the contract.
(k) Stop-loss Coverage
Stop-loss premiums, net of recoveries, are included in health benefits
expense in the accompanying Consolidated Statements of Operations.
F-11
<PAGE> 86
AMERIGROUP CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(l) Impairment of Long-Lived Assets
The Company reviews long-lived assets and certain identifiable intangibles
for impairment whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable. Recoverability of assets to
be held and used is measured by a comparison of the carrying amount of an asset
to future undiscounted net cash flows expected to be generated by the asset. If
such assets are considered to be impaired, the impairment to be recognized is
measured by the amount by which the carrying amount of the assets exceed the
fair value of the assets, determined based upon discounted future cash flows or
if available, other readily determinable evidence of fair value. Assets to be
disposed of are reported at the lower of the carrying amount or fair value less
costs to sell. No impairment of long-lived assets was recorded in 1997, 1998 or
1999.
(m) Net Income Attributable to Common Stockholders Per Share
Basic net income attributable to common stockholders per share has been
computed by dividing net income attributable to common stockholders by the
weighted average number of common shares outstanding. Diluted net income
attributable to common stockholders per share reflects the potential dilution
that could occur assuming the inclusion of dilutive potential common shares and
has been computed by dividing net income attributable to common stockholders by
the weighted average number of common shares and dilutive potential common
shares outstanding. Dilutive potential common shares include all outstanding
stock options and warrants after applying the treasury stock method and
convertible redeemable preferred stock to the extent it is dilutive.
On June 30, 2000, the Company's Board of Directors and the Company's
stockholders approved a one-for-two reverse stock split of the Company's common
stock (note 15). All agreements concerning stock options and warrants to
purchase common stock provide for adjustments in the number of options or
warrants and the related exercise price in the event of the declaration of a
reverse stock split. All references to number of shares, except shares
authorized, to common stock per share information, except par value per share
and to stock options and warrants to purchase common stock in the consolidated
financial statements have been restated to reflect the stock split on a
retroactive basis.
(n) Use of Estimates
Management of the Company has made a number of estimates and assumptions
relating to the reporting of assets and liabilities and the disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period to
prepare these financial statements in conformity with generally accepted
accounting principles. Actual results could differ from those estimates.
(o) Risks and Uncertainties
The Company's profitability depends in large part on accurately predicting
and effectively managing health care costs. The Company continually reviews its
premium and benefit structure to reflect its underlying claims experience and
revised actuarial data; however, several factors could adversely affect the
medical loss ratios. Certain of these factors, which include changes in health
care practices, inflation, new technologies, major epidemics, natural disasters
and malpractice litigation, are beyond any health plan's control and could
adversely affect the Company's ability to accurately predict and effectively
control health care costs. Costs in excess of those anticipated could have a
material adverse effect on the Company's results of operations.
F-12
<PAGE> 87
AMERIGROUP CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(p) Interim Financial Statements
The financial statements of the Company for the interim periods presented
are unaudited, but, in the opinion of the Company's management, reflect
adjustments (consisting only of normal recurring adjustments), which the Company
considers necessary for the fair presentation of the financial position and
results of operations and cash flows for the interim periods presented. The
interim financial statements included herein have been prepared in accordance
with generally accepted accounting principles and the instructions to Rule 10-01
of Regulation S-X. Accordingly, certain information and footnote disclosures
normally included in financial statements prepared in accordance with generally
accepted accounting principles have been condensed or omitted. Results for the
interim periods presented are not necessarily indicative of results that may be
expected for the entire year or any other interim period.
(3) RESTRICTED CASH, SHORT-TERM INVESTMENTS AND INVESTMENTS ON DEPOSIT FOR
LICENSURE
As a condition of the Company's Loan and Security Agreement (note 7), the
Company is required to maintain cash in an account maintained with the Lender
equal to at least 25% of the total debt outstanding under the agreement. The
restricted cash on deposit is subject to a lien in favor of the Lender. At
December 31, 1999, the Company maintained $2,100 in an account with the Lender's
Agent, with $1,544 of the amount included in prepaid expenses and other current
assets and $526 included in other assets, net in the accompanying 1999
Consolidated Balance Sheet. The short-term and long-term portions are determined
based on the related debt balances to which the restriction is related.
The amortized cost, gross unrealized holding gains, gross unrealized
holding losses and fair value for held-to-maturity short-term investments are as
follows at December 31, 1998 and 1999:
<TABLE>
<CAPTION>
GROSS GROSS
UNREALIZED UNREALIZED
AMORTIZED HOLDING HOLDING
COST GAINS LOSSES FAIR VALUE
--------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
1998:
Government securities.............. $ 999 $20 $-- $ 1,019
Certificate of deposit............. 256 -- -- 256
------- --- --- -------
Total........................... $ 1,255 $20 $-- $ 1,275
======= === === =======
1999:
Money market funds................. $21,101 $33 $-- $21,134
U.S. Treasury securities........... 1,140 -- -- 1,140
Certificate of deposit............. 99 -- 4 95
Asset-backed government
securities...................... 33,360 4 -- 33,364
Debt securities of government
sponsored entities.............. 10,139 -- 8 10,131
------- --- --- -------
Total........................... $65,839 $37 $12 $65,864
======= === === =======
</TABLE>
As a condition for licensure by various state governments to operate HMOs,
the Company is required to maintain certain funds on deposit with or under the
control of the various departments of insurance. Accordingly, at December 31,
1998 and 1999, the amortized cost,
F-13
<PAGE> 88
AMERIGROUP CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
gross unrealized holding gains, gross unrealized holding losses and fair value
for these held-to-maturity U.S. Treasury securities are as follows:
<TABLE>
<CAPTION>
GROSS GROSS
UNREALIZED UNREALIZED
AMORTIZED HOLDING HOLDING
COST GAINS LOSSES FAIR VALUE
--------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
1998:
U.S. Treasury securities, $1,354
matures within one year, $313
matures within one to five
years........................... $1,667 $12 $-- $1,679
====== === === ======
1999:
U.S. Treasury securities, matures
within one year................. $3,628 $-- $26 $3,602
Federal Home Loan Bank discount
notes, mature within one year... 4,477 88 -- 4,565
Escrow account..................... 692 -- -- 692
Accrued interest................... 195 -- -- 195
------ --- --- ------
Total........................... $8,992 $88 $26 $9,054
====== === === ======
</TABLE>
The state governments in which the Company operates require the Company to
maintain investments on deposit in specific dollar amounts based on either
formulas or set amounts as determined by state regulations. The Company
purchases interest-based investments with a fair value equal to or greater than
the required dollar amount. The interest that accrues on these investments is
not restricted and is available for withdrawal by the Company.
(4) PROPERTY, EQUIPMENT AND SOFTWARE, NET
Property, equipment and software, net at December 31, 1998 and 1999 is
summarized as follows:
<TABLE>
<CAPTION>
1998 1999
------- ------
<S> <C> <C>
Leasehold improvements...................................... $ 837 $1,501
Furniture and fixtures...................................... 1,428 2,354
Equipment................................................... 3,189 6,130
Software.................................................... 984 1,484
------- ------
6,438 11,469
Less accumulated depreciation and amortization.............. 2,103 3,755
------- ------
$ 4,335 $7,714
======= ======
</TABLE>
(5) CONTRACTS PURCHASED
(a) Prudential
Effective June 1, 1999, the Company purchased certain assets and provider
contracts of Prudential's Medicaid line of business in Maryland. Additionally,
effective August 1, 1999, the Company purchased certain assets and provider
contracts of Prudential's Medicaid line of business in the District of Columbia.
The assets purchased consist of Prudential's rights to provide managed care
services to its Maryland and District of Columbia HMO members and the assignment
of Prudential's contracts with healthcare providers. The Company utilized the
purchase method of accounting. For consideration of these assets received, the
Company
F-14
<PAGE> 89
AMERIGROUP CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
issued 3,710,775 shares of Series D two-to-one convertible preferred stock at a
fair value of $16,661. The Company recorded goodwill of $17,161 based on the
fair value of the assets received and the transaction costs of $500 related to
the acquisition. Prudential's provider contracts were assigned to the Company
for a maximum of one year, during which time the Company actively re-contracted
with the providers. Although acquiring the Prudential provider contracts was
necessary to meet certain Maryland and District of Columbia network
requirements, the Company kept the Prudential provider contracts in place for a
maximum period of one year, therefore, no value was assigned to the acquired
provider contracts. The goodwill is amortized on a straight-line basis over 20
years, except for $3,021 of goodwill related to a component of the Medicaid line
of business in Maryland which is amortized over 18 months. The Maryland Medicaid
contract rights and other related assets acquired from Prudential on June 1,
1999 consisted of two components. One component relates to members served by a
major provider subject to an 18-month contract. The Company believes that
provider has the ability to control the enrollment related to this component.
This ability to control membership is a function of the close geographic
proximity of the membership to the provider's facilities, recognition of the
provider as a highly regarded, significant provider of medical care,
completeness of the provider's medical care capabilities, membership loyalty,
and contractual obligations related to membership re-enrollment in the event of
termination of the contract with this provider. As a result, the Company
assigned an 18-month life to the component related to the members controlled by
that provider. Contingent upon the operating results of the Company, an
additional 1,000,000 shares of Series D stock may be issued in consideration of
the assets received. The number of contingent shares that may ultimately be
issued will be calculated based on the operating results of the Company for any
12-month period ending no later than May 31, 2001. The Company selects the
12-month period to be used in the calculation. The portion of the 1,000,000
contingent shares issued is equal to the excess of the stipulated baseline
earnings as defined in the agreement, if any, over actual earnings, divided by
baseline earnings. However, no contingent shares will be issued if, during the
referenced time period, the Company files a registration statement with the
Securities and Exchange Commission to offer its common stock at a price at or
above $15.00 per share or if the Company's stock is listed on a national stock
exchange and the price closes at or above $15.00 for a period of ten consecutive
days. On June 30, 2000 the Company notified Prudential that the Company's
results had exceeded the stipulated baseline earnings for a twelve month period
and that no contingent shares are due.
(b) Oxford
Effective July 1, 1998, the Company purchased certain assets and assumed
certain provider contracts of Oxford New Jersey's (Oxford's) Medicaid line of
business. The assets purchased consisted of Oxford's rights to provide managed
care services to its Medicaid members and assignment of its contracts with
healthcare providers. The Company utilized the purchase method of accounting.
The Company paid $5,501 in cash including transaction costs, resulting in
goodwill of the same amount. Oxford's provider contracts were assigned to the
Company for a maximum of one year, during which time the Company actively
re-contracted with the providers. The Company already operated as an HMO in New
Jersey, and in some cases its existing provider contracts had rates more
favorable to the Company than those of Oxford. Although acquiring the Oxford
provider contracts was necessary to meet certain state network requirements, the
Company kept the Oxford provider contracts in place for a maximum of one year,
and therefore no value was assigned to the acquired provider contracts. The
goodwill is amortized on a straight-line basis over 20 years, the expected
period to be benefited.
F-15
<PAGE> 90
AMERIGROUP CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(c) Pro Forma Results of Operations
The following unaudited pro forma summary information presents the
consolidated income statement information as if both of the aforementioned
transactions had been consummated on January 1, 1998, and do not purport to be
indicative of what would have occurred had the acquisitions been made at that
date or of the results which may occur in the future.
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------
1998 1999
---------- ----------
<S> <C> <C>
Premium revenue........................................... $435,764 $479,545
======== ========
Net income (loss)......................................... $ (2,907) $ 7,008
======== ========
Diluted net income (loss) per share....................... $ (17.16) $ 0.36
======== ========
</TABLE>
The unaudited pro forma summary information reflects adjustments made to
the Company's historical statements by including the applicable results of
operations of Prudential's Medicaid lines of business in Maryland and the
District of Columbia and of Oxford's Medicaid line of business in New Jersey
prior to their respective acquisitions.
(6) INCOME TAXES
Income tax expense (benefit) for the years ended December 31, 1997, 1998
and 1999 and the three months ended March 31, 2000 (unaudited) consists of the
following:
<TABLE>
<CAPTION>
CURRENT BENEFIT OF
NET OPERATING LOSS
CURRENT CARRYFORWARDS DEFERRED TOTAL
------- ------------------ -------- -------
<S> <C> <C> <C> <C>
Year ended December 31, 1997:
U.S. federal.................. $ -- $ -- $ -- $ --
State and local............... -- -- -- --
------ ------- ------- -------
$ -- $ -- $ -- $ --
====== ======= ======= =======
Year ended December 31, 1998:
U.S. federal.................. $1,043 $(1,043) $ -- $ --
State and local............... 161 (161) -- --
------ ------- ------- -------
$1,204 $(1,204) $ -- $ --
====== ======= ======= =======
Year ended December 31, 1999:
U.S. federal.................. $5,972 $(4,939) $(4,584) $(3,551)
State and local............... 925 (764) (710) (549)
------ ------- ------- -------
$6,897 $(5,703) $(5,294) $(4,100)
====== ======= ======= =======
Three months ended March 31,
2000 (unaudited):
U.S. federal.................. $2,512 $ -- $ 2,281 $ 4,793
State and local............... 390 -- 352 742
------ ------- ------- -------
$2,902 $ -- $ 2,633 $ 5,535
====== ======= ======= =======
</TABLE>
F-16
<PAGE> 91
AMERIGROUP CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
There was no income tax benefit for the years ended December 31, 1997 and
1998. Income tax expense (benefit) was ($4,100) for the year ended December 31,
1999 and $5,535 for the three months ended March 31, 2000 (unaudited). These
amounts differed from the amounts computed by applying the U.S. Federal income
tax rate of 34% to income (loss) before income taxes as a result of the
following:
<TABLE>
<CAPTION>
THREE MONTHS
YEAR ENDED YEAR ENDED YEAR ENDED ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31, MARCH 31,
1997 1998 1999 2000
------------ ------------ ------------ ------------
(UNAUDITED)
<S> <C> <C> <C> <C>
Computed "expected" tax
expense (benefit)..... $(3,009) $ 1,175 $ 2,453 $4,550
Increase (reduction) in
income taxes resulting
from:
Change in the
beginning of the
year balance of the
valuation allowance
for deferred tax
assets allocated to
federal income tax
expense............ 2,975 (1,228) (6,764) --
State and local income
taxes, net of
federal income tax
effect............. -- -- (362) 490
Effect of intra-period
tax allocation..... -- -- -- 440
Effect of
nondeductible
expenses........... 34 53 573 55
------- ------- ------- ------
Total income tax
expense
(benefit)........ $ -- $ -- $(4,100) $5,535
======= ======= ======= ======
</TABLE>
F-17
<PAGE> 92
AMERIGROUP CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities at December 31,
1998 and 1999 and at March 31, 2000 (unaudited) are presented below:
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31, MARCH 31,
1998 1999 2000
------------ ------------ -----------
(UNAUDITED)
<S> <C> <C> <C>
Deferred tax assets:
Estimated claims incurred but not
reported, deductible as paid for tax
purposes............................ $ 1,000 $ 1,284 $ 1,388
Vacation and bonus accruals, deductible
as paid for tax purposes............ 190 453 437
Contractual allowances, deductible as
written off for tax purposes........ -- 551 191
Other accruals, deductible as paid for
tax purposes........................ 221 1,110 1,134
Goodwill, due to timing differences in
amortization between book and tax... -- 280 417
Organizational costs, due to timing
differences in amortization between
book and tax........................ 514 249 186
Unearned revenue, included in income as
received for tax purposes........... -- 2,086 --
Net operating loss carryforwards....... 5,703 -- --
------------ ------------ -----------
Total deferred tax assets........... 7,628 6,013 3,753
Less valuation allowance................. 7,368 -- --
------------ ------------ -----------
Net deferred tax assets............. 260 6,013 3,753
Deferred tax liabilities:
Property and equipment, due to
differences in book and tax
depreciation methods................ (236) (345) (371)
Intra-period tax allocation............ -- -- (316)
Other.................................. (24) (374) (405)
------------ ------------ -----------
Total deferred tax liabilities...... (260) (719) (1,092)
------------ ------------ -----------
Net deferred tax assets and
liabilities....................... $ -- $ 5,294 $ 2,661
============ ============ ===========
</TABLE>
A valuation allowance is provided when it is more likely than not that some
portion of the deferred tax asset will not be realized. Due to historic losses
and the uncertainty of future income as of December 31, 1998, the Company had
recorded a valuation allowance to defer recognition of the income tax benefit
until it was deemed more likely than not the benefit would be realized. During
1999, the Company removed the valuation allowance as it deemed that the benefits
of the deferred tax assets would more likely than not be realized. The changes
in the valuation allowance for deferred tax assets during 1997, 1998 and 1999,
respectively, were decreases (increases) of $(3,267), $1,342, and $7,368 and
were reflected as decreases (increases) to deferred income tax expense.
F-18
<PAGE> 93
AMERIGROUP CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(7) LONG-TERM DEBT
During 1998, the Company entered into a Loan and Security Agreement with a
bank to obtain debt financing of $10,000. At December 31, 1998, a total of
$10,000 was outstanding, of which $1,833 was current. As part of the Loan and
Security Agreement, the Company issued warrants at fair value to the bank to
purchase 25,000 shares of common stock. The exercise price of the warrants was
equal to the fair value of the common stock on the date of grant. Because the
fair value of the warrants was immaterial, no original issue discount was
recorded. These warrants are currently exercisable at a price per share of $3.00
and expire May 15, 2003. During 1999, the Company repaid this long-term debt
financing in its entirety.
Concurrent with the repayment of the original long-term debt during 1999,
the Company entered into a second Loan and Security Agreement with two banks to
obtain debt financing of $16,500, consisting of a term loan of $9,000 and a
revolver commitment of $7,500. The term loan and revolver are secured by cash
and cash equivalents, accounts receivable, property and equipment, certain other
assets of the Company and by the common stock of its wholly owned subsidiaries.
The principal on the term loan bears interest at a rate equal to the prime rate
plus 0.75%, which was 9.0% at December 31, 1999. Interest on the term loan is
payable monthly on the first day of the month. Principal of $167 is paid on the
term loan each month beginning December 1, 1999 through April 1, 2003. The
remaining principal balance is due April 30, 2003. Scheduled principal payments
on the outstanding term loan are as follows:
<TABLE>
<S> <C>
2000....................................................... $1,833
2001....................................................... 2,000
2002....................................................... 2,000
2003....................................................... 2,177
------
$8,010
======
</TABLE>
At December 31, 1999, no amounts were outstanding under the revolver
commitment. The revolver commitment bears interest at a rate equal to the Prime
Rate plus 0.75%, which was 9.0% at December 31, 1999. The Company also pays a
rate of 0.5% as a commitment fee on the unused portion of the revolver
commitment. Interest on the revolver commitment is payable monthly on the first
day of the month. Any principal balance on the revolver loan is due April 30,
2003.
Pursuant to the Loan and Security Agreement, the Company must meet certain
financial covenants. At December 31, 1999, the Company is in compliance with
such covenants. These financial covenants include meeting certain financial
ratios, a minimum net worth requirement and a restricted cash requirement.
F-19
<PAGE> 94
AMERIGROUP CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(8) REDEEMABLE PREFERRED STOCK
Redeemable preferred stock is summarized as follows:
<TABLE>
<CAPTION>
SERIES E SERIES A SERIES B SERIES C
------------------- ------------------- ------------------- -------------------
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT
--------- ------- --------- ------- --------- ------- --------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balances at
December 31, 1996..... -- $ -- 8,000,000 $10,384 7,025,000 $16,720 6,480,000 $16,252
Accreted dividends...... -- -- -- 1,270 -- 2,151 -- 2,319
--------- ------- --------- ------- --------- ------- --------- -------
Balances at
December 31, 1997..... -- -- 8,000,000 11,654 7,025,000 18,871 6,480,000 18,571
Issuance of Series E
mandatorily redeemable
preferred stock....... 1,000,000 4,200 -- -- -- -- -- --
Accreted dividends...... -- 386 -- 1,270 -- 2,151 -- 2,319
--------- ------- --------- ------- --------- ------- --------- -------
Balances at
December 31, 1998..... 1,000,000 4,586 8,000,000 12,924 7,025,000 21,022 6,480,000 20,890
Issuance of Series E
mandatorily redeemable
preferred stock....... 1,000,000 4,200 -- -- -- -- -- --
Accreted dividends...... -- 1,544 -- 1,270 -- 2,151 -- 2,319
--------- ------- --------- ------- --------- ------- --------- -------
Balances at
December 31, 1999..... 2,000,000 10,330 8,000,000 14,194 7,025,000 23,173 6,480,000 23,209
Accreted dividends
(unaudited)........... -- 386 -- 317 -- 537 -- 580
--------- ------- --------- ------- --------- ------- --------- -------
Balances at
March 31, 2000
(unaudited)........... 2,000,000 $10,716 8,000,000 $14,511 7,025,000 $23,710 6,480,000 $23,789
========= ======= ========= ======= ========= ======= ========= =======
</TABLE>
<TABLE>
<CAPTION>
TOTAL
REDEEMABLE
PREFERRED
STOCK
----------
SHARES
----------
<S> <C>
Balances at December 31, 1996............................... 43,356
Accreted dividends.......................................... 5,740
------
Balances at December 31, 1997............................... 49,096
Issuance of Series E mandatorily redeemable preferred
stock..................................................... 4,200
Accreted dividends.......................................... 6,126
------
Balances at December 31, 1998............................... 59,422
Issuance of Series E mandatorily redeemable preferred
stock..................................................... 4,200
Accreted dividends.......................................... 7,284
------
Balances at December 31, 1999............................... 70,906
Accreted dividends (unaudited).............................. 1,820
------
Balances at March 31, 2000 (unaudited)...................... 72,726
======
</TABLE>
Series E
During July 1998, the Company issued 1,000,000 units of its Series E
Mandatorily Redeemable Preferred Stock and Warrants (Series E) at a price of
$5.00 per unit (the first tranche). During January 1999, the Company issued an
additional 1,000,000 units of the
F-20
<PAGE> 95
AMERIGROUP CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Series E at a price of $5.00 per unit (the second tranche). Each unit includes a
share of Series E preferred stock and an unattached warrant to purchase 0.5625
shares of common stock at a price of $0.02 per share. Of the gross proceeds of
$5.00, $0.80 has been allocated to the warrants issued based on fair value. The
fair value of the warrants sold was determined by the Company's Board of
Directors and was consistent with the exercise price of the stock options of the
Company at the time of issuance. The warrants are exercisable at any time and
expire on July 28, 2005 for the first tranche and January 28, 2006 for the
second tranche. The remaining amount of $4.20 is attributable to Series E stock.
The redeemable preferred stock is recorded at its original fair value of $4.20
per share, plus accreted dividends.
In accordance with the terms of the Series E mandatorily redeemable
preferred stock, dividends per share accrue as follows:
<TABLE>
<CAPTION>
FIRST TRANCHE SECOND TRANCHE
------------- --------------
<S> <C> <C>
September 30, 1998............................ $2.05 $ --
December 31, 1998............................. -- --
March 31, 1999................................ -- 2.05
June 30, 1999................................. -- --
September 30, 1999............................ -- --
December 31, 1999............................. -- --
March 31, 2000................................ -- --
June 30, 2000................................. -- --
September 30, 2000............................ -- --
December 31, 2000............................. 0.10 --
March 31, 2001................................ 0.15 --
June 30, 2001................................. 0.16 0.10
September 30, 2001............................ 0.16 0.15
December 31, 2001............................. 0.16 0.16
March 31, 2002................................ 0.17 0.16
June 30, 2002................................. 0.17 0.16
September 30, 2002............................ 0.18 0.17
December 31, 2002............................. 0.18 0.17
March 31, 2003................................ 0.19 0.18
June 30, 2003................................. 0.19 0.18
September 30, 2003............................ -- 0.19
December 31, 2003............................. -- 0.19
</TABLE>
The total of these dividends are charged to retained earnings on the
interest method over the five-year period each tranche is outstanding.
The Series E stock is mandatorily redeemable upon the sale of the Company,
an initial public offering, at the option of the Company or at July 28, 2003 for
the first tranche and January 28, 2004 for the second tranche. If the Series E
stock is redeemed prior to December 31, 2000 based upon the sale of the Company,
an initial public offering or at the option of the Company, then $12,500 will be
the redemption amount. However, if not redeemed prior to the mandatory dates,
the mandatory redemption requirements for Series E stock are $8,060 for each of
the years ended December 31, 2003 and 2004.
The Series E cumulative dividends are payable upon redemption, liquidation,
dissolution or winding up of the Company. The Series E redemption value has
liquidation preference over common stock and all other series of preferred
stock. Series E stockholders have the right to
F-21
<PAGE> 96
AMERIGROUP CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
vote with holders of Series A, B, C and D preferred stock and the holders of the
common stock on all matters coming before the Company's stockholders and is
entitled to cast a number of votes as if each share of Series E were 0.5625
shares of common stock.
The holders of the majority of the Series E shares, voting as a separate
class, shall be necessary to alter the specific terms, rights and privileges of
the Series E preferred stock.
Series A, B and C
The Series A, B and C preferred stock are convertible to common shares on a
two-for-one basis, subject to adjustment for stock splits, at the option of the
preferred stockholder and have one common share equivalent voting right for
every two shares held. The Series A, B and C preferred stock carry a
noncumulative 10% dividend payable upon approval by the Board of Directors.
These dividends, if declared but not paid, have liquidation preferences over
common stock with Series C dividends having preference over Series A and B
dividends. Series A, B, C and E have liquidation preferences over Series D.
Series D has liquidation preferences over common stock.
Also, beginning December 23, 2003, the Series A, B and C preferred
stockholders have the right to redeem each year a portion of their preferred
stock plus an amount per share equal to the original issue price plus an amount
equal to 10% of the original issue price compounded annually from the date of
the original sale to redemption. The preferred stock is fully redeemable by
December 23, 2005. The Company accretes dividends on Series A, B and C using the
interest method and adds the accrued dividends to the applicable redeemable
preferred stock issue balance.
The holders of a majority of the Series C shares, voting as a separate
class, shall be necessary to alter the specific terms, rights and privileges of
the Series C preferred stock.
The holders of a majority of Series A, B, C and E shares, voting together
as a separate class, are necessary to approve any amendment to the Certificate
of Incorporation or bylaws that adversely affects or limits any of their rights.
Series D
During 1999, the Company issued 3,710,775 shares of Series D convertible
preferred stock as consideration for purchasing the contracts and certain other
assets of Prudential's Medicaid line of business in the state of Maryland and
the District of Columbia (note 5). Contingent upon the operating results of the
Company, an additional 1,000,000 shares of Series D stock may be issued. The
Series D preferred stock is convertible to common shares on a two-for-one basis,
subject to adjustment for stock splits, at the option of the preferred
stockholder and has one common share equivalent voting right for every two
shares held. The Series D convertible preferred stock does not carry a stated
dividend.
(9) STOCK OPTION PLAN
In 1994, the Company established the 1994 Stock Plan which provides for the
granting of either stock incentive options or nonqualified options to purchase
shares of the Company's common stock by officers and other employees of the
Company for up to 2,099,500 shares of common stock as of December 31, 1999. On
February 9, 2000, the Company increased the number of options available for
grant to 2,249,500. Under the plan, an option's maximum term is ten years.
Twenty percent of the options vest upon grant date or at an employee's hiring
anniversary date, whichever is later, and five percent at the end of each
three-month period
F-22
<PAGE> 97
AMERIGROUP CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
thereafter. A summary of the 1994 Stock Plan at December 31, 1997, 1998, and
1999 and the changes during the years then ended follows:
<TABLE>
<CAPTION>
1997 1998 1999
--------------------- --------------------- ---------------------
WEIGHTED- WEIGHTED- WEIGHTED-
AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE
SHARES PRICE SHARES PRICE SHARES PRICE
--------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at
beginning of year.... 1,026,061 $0.54 1,305,842 $0.84 1,382,253 $0.88
Granted................ 415,751 1.40 271,250 1.40 389,595 3.65
Exercised.............. 20,474 0.29 8,162 0.72 111,496 0.89
Forfeited.............. 115,496 0.32 186,677 1.34 92,809 1.53
--------- ----- --------- ----- --------- -----
Outstanding at end of
year................. 1,305,842 $0.84 1,382,253 $0.88 1,567,543 $1.53
========= ===== ========= ===== ========= =====
</TABLE>
The following table summarizes information related to the stock options
outstanding at December 31, 1999:
<TABLE>
<CAPTION>
WEIGHTED-
AVERAGE
REMAINING
OPTIONS OPTIONS CONTRACTUAL
EXERCISE PRICE OUTSTANDING EXERCISABLE LIFE (YEARS)
-------------- ----------- ----------- ------------
<S> <C> <C> <C>
$0.20........................................ 185,750 172,175 5.50
$0.40........................................ 438,911 385,165 5.88
$1.40........................................ 564,077 243,690 7.62
$3.00........................................ 333,055 66,077 9.50
$8.60........................................ 45,750 -- 9.50
--------- ------- ----
1,567,543 867,107 7.33
========= ======= ====
</TABLE>
At December 31, 1999, the number of options exercisable was 867,107 and the
weighted-average exercise price of those options was $0.84.
On February 9, 2000, the Company granted an additional 267,451 options at
an exercise price of $8.60.
The Company applies APB Opinion No. 25 and related interpretations in
accounting for its plan. Accordingly, compensation cost related to stock options
issued to employees would be recorded on the date of grant only if the current
market price of the underlying stock exceeded the exercise price. During the
three months ended March 31, 2000, the Company recorded deferred charges of
$1,781, representing the difference between the exercise price and the deemed
fair value of the Company's common stock for the options granted in the three
months ended March 31, 2000 (unaudited). The deferred compensation will be
amortized to expense over the period the options vest, generally four to five
years. The Company recognized $391 in non-cash compensation expense related to
the amortization of deferred compensation during the three months ended March
31, 2000 (unaudited). Had compensation cost for the Company's stock-based
compensation plan been determined consistent with SFAS No. 123, the Company's
net loss would have been increased to $8,881 in 1997 and the Company's net
income would have been decreased to $3,400 and $11,219 in 1998 and 1999,
respectively. Diluted net income (loss) per share would have been $(28.34) in
1997, $(5.18) in 1998 and $0.66 in 1999.
F-23
<PAGE> 98
AMERIGROUP CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The fair value of each option grant is estimated on the date of grant using
an option pricing model with the following assumptions: no dividend yield, no
expected volatility, risk-free interest rate of 6.7% and expected life of seven
years.
(10) EARNINGS PER SHARE
The following table sets forth the calculation of basic and diluted net
income (loss) per share:
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED YEAR ENDED THREE MONTHS THREE MONTHS
DECEMBER 31, DECEMBER 31, DECEMBER 31, ENDED MARCH 31, ENDED MARCH 31,
1997 1998 1999 1999 2000
------------ ------------ ------------ --------------- ---------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Basic net income (loss) per
share:
Net income (loss)
attributable to common
stockholders............. $ (14,590) $ (2,670) $ 4,032 $ (872) $ 6,028
========== ========== =========== =========== ===========
Weighted average number of
common shares
outstanding.............. 515,750 526,651 567,146 529,136 644,786
Basic net income (loss)
per share.............. $ (28.29) $ (5.07) $ 7.11 $ (1.65) $ 9.35
========== ========== =========== =========== ===========
Diluted net income (loss) per
share:
Net income (loss)
attributable to common
stockholders............. $ (14,590) $ (2,670) $ 4,032 $ (872) $ 6,028
Plus: Accretion of
convertible preferred
stock dividends due to
assumed conversion....... -- -- 5,740 -- 1,434
---------- ---------- ----------- ----------- -----------
Diluted net income (loss)
attributable to common
stockholders............. $ (14,590) $ (2,670) $ 9,772 $ (872) $ 7,462
========== ========== =========== =========== ===========
Weighted average number of
common shares outstanding.. 515,750 526,651 567,146 529,136 644,786
Dilutive effect of stock
options and warrants (as
determined by applying the
treasury stock method) and
convertible preferred
stock...................... -- -- 14,128,178 -- 15,036,408
---------- ---------- ----------- ----------- -----------
Weighted average number of
common shares and potential
dilutive common shares
outstanding................ 515,750 526,651 14,695,324 529,136 15,681,194
========== ========== =========== =========== ===========
Diluted net income (loss) per
share...................... $ (28.29) $ (5.07) $ 0.66 $ (1.65) $ 0.48
========== ========== =========== =========== ===========
</TABLE>
F-24
<PAGE> 99
AMERIGROUP CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(11) FAIR VALUE OF FINANCIAL INSTRUMENTS
The fair value of a financial instrument is the amount at which the
instrument could be exchanged in a current transaction between willing parties.
The following methods and assumptions were used to estimate the fair value of
each class of financial instruments:
Cash and cash equivalents, short-term investments, premium receivables,
prepaid expenses and other current assets, accounts payable, accrued payroll,
experience rebate payable, accrued expenses and claims payable: The carrying
amounts approximate fair value because of the short maturity of these items.
Long-term debt: The carrying amounts approximate fair value since the
interest rate on long-term debt varies with the prime rate.
(12) COMMITMENTS
(a) Minimum Reserve Requirements
Regulations governing the Company's managed care operations in New Jersey,
Texas, Illinois, Maryland and the District of Columbia require the applicable
subsidiary to meet certain minimum net worth requirements. Each subsidiary was
in compliance with their requirements at December 31, 1999.
(b) Stop-loss Coverage
Each of the Company's subsidiaries carry stop-loss coverage for hospital
medical expense through an independent carrier. The policies limit stop-loss
coverage to certain maximum lifetime indemnity amounts per insured member,
subject to certain deductibles and certain loss percentages. This stop-loss
coverage does not relieve any of the Company's subsidiaries of their primary
obligation to the plan members.
(c) General Liability and Malpractice
The Company maintains a general liability policy through an independent
carrier subject to annual coverage limits and a separate claims-incurred
umbrella policy through an independent carrier subject to annual coverage limits
for amounts exceeding the general liability limits.
Additionally, the Company maintains professional liability coverage for
certain claims which is provided by an independent carrier and is subject to
annual coverage limits. Professional liability policies are on a claims-made
basis and must be renewed or replaced with equivalent insurance if claims
incurred during its term, but asserted after its expiration, are to be insured.
(d) Operating Lease Agreements
The Company leases office space and certain office equipment under
operating leases which expire at various dates through 2004. Future minimum
payments by year and in the
F-25
<PAGE> 100
AMERIGROUP CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
aggregate under all noncancelable operating leases consist of the following
approximate amounts at December 31, 1999:
<TABLE>
<S> <C>
2000....................................................... $2,218
2001....................................................... 2,128
2002....................................................... 1,843
2003....................................................... 1,475
2004....................................................... 795
------
$8,459
======
</TABLE>
Total rent expense for all office space and office equipment under
noncancelable operating leases was approximately $982, $1,130 and $1,900 in
1997, 1998 and 1999, respectively, and is included in selling, general and
administrative expenses in the accompanying Consolidated Statements of
Operations.
(13) DEFERRED COMPENSATION SAVINGS PLAN
The Company's employees have the option to participate in a deferred
compensation plan sponsored by the Company. All full-time employees of
AMERIGROUP Corporation and subsidiaries may elect to participate in this plan.
This plan is exempt from income taxes under Section 401(k) of the Internal
Revenue Code. Participants may contribute a certain percentage of their
compensation subject to maximum federal and plan limits. The Company may elect
to match a certain percentage of each employee's contributions up to specified
limits. For the years ended December 31, 1997, 1998 and 1999, there were no
matching contributions made by the Company.
(14) AUTHORIZATION FOR INITIAL PUBLIC OFFERING, REVERSE STOCK SPLIT, EMPLOYEE
STOCK PURCHASE PLAN, STOCK OPTION GRANTS AND EQUITY INCENTIVE PLAN
On May 10, 2000, the Board of Directors authorized the Company to file a
registration statement with the U.S. Securities and Exchange Commission for an
initial public offering of its common stock. Additionally, on June 30, 2000, the
Board of Directors and the Company's stockholders approved a one-for-two reverse
stock split of the Company's common stock. The Company intends to file the
necessary documents with the State of Delaware. The Board of Directors also
approved amendments to the Company's Articles of Incorporation increasing the
authorized number of shares of common stock to 100,000,000 and authorizing
10,000,000 shares of preferred stock to be issued. The Board of Directors also
authorized the Company to exercise its right to accelerate the exercise date of
the warrants to purchase 1,125,000 shares of common stock by the Series E
preferred stockholders to immediately prior to the closing of the planned
initial public offering.
The Company adopted an Employee Stock Purchase Plan on June 30, 2000, under
which employees who have at least six months of service, work more than twenty
hours per week and who are not "highly compensated employees" within the meaning
of Section 414(q) of the Internal Revenue Code are eligible to participate,
except for employees who own five percent or more of the common stock of the
Company and any subsidiary of the Company. The Company has reserved for issuance
600,000 shares of common stock under the Employee Stock Purchase Plan.
On June 30, 2000, the Company granted an additional 62,500 fully vested,
exercisable stock options to the external directors of the Company at an
exercise price of $15.00. The
F-26
<PAGE> 101
AMERIGROUP CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Company also granted 86,500 unvested options at an exercise price of $15.00 to
certain employees of the Company on June 30, 2000. On July 10, 2000, the Company
granted 100,000 options to the President of the Company at an exercise price of
$15.00.
On July 10, 2000 the Company adopted the 2000 Equity Incentive Plan (Plan).
The Plan provides that employees, directors and consultants, as selected by the
Board of Directors, may be granted awards of stock options, restricted stock,
phantom stock and stock bonuses. The Company has reserved for issuance a maximum
of 2,064,000 shares of common stock under the Plan. In addition, shares
remaining available for issuance under the 1994 Stock Plan will be available for
issuance under the Plan. Generally, the Board of Directors will determine the
exercise period, which may not exceed ten years from the date of the grant.
(15) UNAUDITED PRO FORMA INFORMATION
The unaudited March 31, 2000 pro forma consolidated stockholders' equity
and pro forma net income per common share information for the year ended
December 31, 1999 and the three months ended March 31, 2000 give effect to the
conversion of all of our outstanding convertible preferred stock into 12,607,887
shares of common stock upon the completion of the proposed offering described in
note 14. For purposes of the unaudited pro forma stockholders' equity the
transactions have been assumed to have occurred on March 31, 2000. For purposes
of the unaudited pro forma net income per common share information, the
transactions were assumed to have occurred as of January 1, 1999. The unaudited
pro forma information presented does not purport to represent the financial
position or net income per common share of the Company if such transactions had
occurred on such dates or to project the Company's financial position or net
income per common share as of any future date or for any future period.
The table below provides supporting calculations for the unaudited pro
forma net income per common share.
<TABLE>
<CAPTION>
YEAR THREE MONTHS
ENDED ENDED
DECEMBER 31, MARCH 31,
1999 2000
------------ ------------
<S> <C> <C>
Computation of pro forma weighted average number of common
shares outstanding:
Historical................................................ 567,146 644,786
Common shares issued on conversion of convertible
preferred stock......................................... 12,607,887 12,607,887
----------- -----------
13,175,033 13,252,673
=========== ===========
Computation of pro forma weighted average number of common
shares and potentially dilutive common shares outstanding:
Historical................................................ 14,695,324 15,681,194
Common shares issued on conversion of convertible
preferred stock......................................... 12,607,887 12,607,887
Elimination of effect of convertible preferred shares and
warrants in historical amount........................... (11,944,449) (12,607,887)
----------- -----------
15,358,762 15,681,194
=========== ===========
</TABLE>
F-27
<PAGE> 102
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Oxford Health Plans (NJ), Inc.
The Board of Directors
AMERICAID New Jersey, Inc:
We have audited the accompanying statements of revenues and expenses of
contracts acquired of the Medicaid business of Oxford Health Plans (NJ), Inc.
(the Company) for the six months ended June 30, 1998, and the year ended
December 31, 1997. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the statements of revenues and expenses are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the statements of revenues
and expenses. An audit also includes assessing the accounting principles used
and significant estimates made by management, as well as evaluating the overall
statement of revenues and expenses presentation. We believe that our audits of
the statements of revenues and expenses provide a reasonable basis for our
opinion.
The accompanying statements of revenues and expenses were prepared to
present the revenues and expenses of contracts acquired of the Medicaid Business
of Oxford Health Plans (NJ), Inc. pursuant to the purchase agreement between
Oxford Health Plans (NJ), Inc. and AMERICAID New Jersey, Inc., a wholly owned
subsidiary of AMERIGROUP Corporation.
In our opinion, the statements of revenues and expenses of contracts
acquired referred to above present fairly, in all material respects, the results
of operations of the Medicaid Business of Oxford Health Plans (NJ), Inc. for the
six months ended June 30, 1998, and the year ended December 31, 1997, pursuant
to the purchase agreement referred to in note 1, in conformity with generally
accepted accounting principles.
November 16, 1998
Norfolk, Virginia
/s/ KPMG LLP
F-28
<PAGE> 103
MEDICAID BUSINESS OF OXFORD HEALTH PLANS (NJ), INC.
STATEMENTS OF REVENUES AND EXPENSES OF CONTRACTS ACQUIRED
FOR THE SIX MONTHS ENDED JUNE 30, 1998, AND THE YEAR ENDED DECEMBER 31, 1997
<TABLE>
<CAPTION>
1998 1997
----------- -----------
<S> <C> <C>
Premium revenues............................................ $34,068,852 $82,857,422
----------- -----------
Expenses:
Medical expenses, net:
Inpatient hospital..................................... 11,863,228 29,234,788
Physician services..................................... 12,571,746 27,825,067
Pharmacy............................................... 3,502,771 8,461,476
Other medical services................................. 5,271,426 10,583,125
----------- -----------
Total medical expenses, net.......................... 33,209,171 76,104,456
----------- -----------
Management fees (note 3).................................. 3,767,696 14,948,081
----------- -----------
Total expenses....................................... 36,976,867 91,052,537
----------- -----------
Loss before income taxes............................. (2,908,015) (8,195,115)
Income tax benefit (note 4)................................. (1,017,805) (2,899,863)
----------- -----------
Net loss............................................. $(1,890,210) $(5,295,252)
=========== ===========
</TABLE>
See accompanying notes to statements of revenues and expenses of contracts
acquired.
F-29
<PAGE> 104
MEDICAID BUSINESS OF OXFORD HEALTH PLANS (NJ), INC.
NOTES TO STATEMENTS OF REVENUES AND EXPENSES
OF CONTRACTS ACQUIRED
FOR THE SIX MONTHS ENDED JUNE 30, 1998, AND THE YEAR ENDED DECEMBER 31, 1997
(1) ORGANIZATION AND PRINCIPLES OF CONSOLIDATION
(a) Organization
Oxford New Jersey Medicaid (the Business) operated as a division of Oxford
Health Plan (NJ), Inc. (Oxford-NJ), serving the Medicaid population in New
Jersey. Oxford-NJ is a wholly owned subsidiary of Oxford Health Plans, Inc.
(Oxford), a Delaware Corporation. The Business has been granted authority to
operate as a New Jersey health maintenance organization (HMO) by the Department
of Health of the State of New Jersey. The Business is a federally qualified
competitive medical plan.
Effective July 1, 1998, AMERICAID New Jersey, Inc., a wholly owned
subsidiary of AMERIGROUP Corporation, purchased certain assets of the Business
pursuant to an asset purchase agreement. The assets purchased consisted of the
contracts of the Business with members of the HMO, the contracts of the Business
with healthcare providers, and the State of New Jersey Medicaid contract of the
Business. AMERICAID New Jersey, Inc. did not purchase any tangible assets nor
did it assume any liabilities of the Business, therefore, no balance sheets are
presented in these special purpose financial statements.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND PRACTICES
(a) Income Taxes
The Business's operating results were included in Oxford's consolidated
federal income tax return. In accordance with the tax sharing arrangement with
Oxford, Oxford-NJ calculates its federal income tax as though it filed a
separate federal return. The Business's operating results were included in
Oxford-NJ's state income tax return.
(b) Premium Revenues
Premiums are due monthly and are recognized as revenue during the period in
which the Business is obligated to provide services to members, and are net of
amounts established for termination of members.
(c) Stop-Loss Coverage
Stop-loss premiums, net of recoveries, are included in other medical
expenses in the accompanying statements of revenues and expenses.
(d) Management Fee
The Business is charged a management fee by Oxford for all administrative,
selling, general, and financial advisory services performed on its behalf. This
fee includes charges for lease expenses incurred by Oxford-NJ on behalf of the
Business. The allocation method used to calculate management fees for the
Business was consistent with the method used by Oxford for all of these types of
intercompany allocations. The method used reasonably estimates all costs related
to the contract rights and other assets sold to AMERICAID New Jersey, Inc.
(e) Medical Expenses
The Business contracts with various healthcare providers for the provision
of certain medical care services to its members and generally compensates these
providers on a fee-for-services basis.
Medical expenses are estimated by management based on evaluations of
providers' claims submitted and provisions for incurred but not reported (IBNR)
claims. Oxford-NJ estimates the
F-30
<PAGE> 105
MEDICAID BUSINESS OF OXFORD HEALTH PLANS (NJ), INC.
NOTES TO STATEMENTS OF REVENUES AND EXPENSES
OF CONTRACTS ACQUIRED -- (CONTINUED)
amount of the provision for IBNR using standard actuarial methodologies based
upon historical data including the average interval between the date services
are rendered and the date claims are paid, expected medical cost inflation,
seasonality patterns and increases or decreases in membership. The estimates for
submitted claims and IBNR claims are made on an accrual basis and adjusted in
future periods as required.
(f) Use of Estimates
Management of the Business has made a number of estimates and assumptions
relating to these financial statements in conformity with generally accepted
accounting principles. Actual results could differ from those estimates.
(3) TRANSACTIONS WITH RELATED PARTIES
Certain members of the Board of Directors of Oxford-NJ are also members of
the Boards of Directors of Oxford, Oxford Health Plans (NY) Inc., and its
wholly-owned subsidiary Oxford Health Insurance, Inc. (Oxford-NY); Oxford Health
Plans (CT) Inc. (Oxford-CT); Oxford Health Plans (NH), Inc. (Oxford-NH); Oxford
Health Plans (PA), Inc. (Oxford-PA); Oxford Health Plan (FL), Inc. (Oxford-FL);
and Oxford Health Plans (IL), Inc. (Oxford-IL). Oxford-NJ, Oxford-NY, Oxford-CT,
Oxford-NH, Oxford-PA, Oxford-FL, and Oxford-IL are all wholly-owned subsidiaries
of Oxford.
In consideration for services provided during the six months ended June 30,
1998 and for the year ended December 31, 1997, the Business paid management fees
to Oxford calculated as a percentage of the Business's gross margin (premium
revenues less total medical expenses, net) but not less than a minimum amount
calculated as 9 percent of the Business's premium revenues. These calculations
are performed on a quarterly basis.
(4) INCOME TAXES
Income tax expense (benefit) for the six months ended June 30, 1998 and the
year ended December 31, 1997 differs from the amounts computed by applying the
U.S. federal income tax rate of 34 percent to income (loss) before income taxes
primarily due to state income taxes.
(5) STOP-LOSS COVERAGE
Oxford-NJ maintains stop-loss coverage with a major insurance company to
limit its medical expense exposure. The policy held by Oxford-NJ covers the
Business. Under the terms of this agreement the insurance company will reimburse
Oxford-NJ for 50 percent to 90 percent of the cost of each member's annual
medical services, excluding prescription drugs, in excess of a $150,000
deductible, up to a lifetime limitation of $2,000,000 per member. Stop-loss
premiums charged to other medical expenses in the accompanying financial
statements amounted to $8,912 during the first six months of 1998 and $16,412 in
1997. There were no reinsurance recoveries during any of these periods.
(6) CONCENTRATION OF CREDIT RISK
All of the Business's premium revenue is earned from the Medicaid contract
with the State of New Jersey. Since all revenue is earned from this single
contract, significant concentration of credit risk exists.
F-31
<PAGE> 106
MEDICAID BUSINESS OF OXFORD HEALTH PLANS (NJ), INC.
NOTES TO STATEMENTS OF REVENUES AND EXPENSES
OF CONTRACTS ACQUIRED -- (CONTINUED)
(7) CONTINGENCIES
Oxford is a defendant in a large number of purported securities class
action lawsuits and shareholder derivative lawsuits which have been filed after
the substantial decline in the price of Oxford's common stock on October 27,
1997. The costs of defending such lawsuits and management's time commitments in
defending such lawsuits and their financial disposition may adversely affect
Oxford's results of operations and financial condition. Although the outcome of
these actions cannot be predicted at this time, Oxford believes that the
defendants have substantial defenses to the claims asserted in the complaints
and intends to defend the actions vigorously. Oxford's HMO and insurance
subsidiaries, including Oxford-NJ, are not defendants in these lawsuits. Oxford,
including its subsidiaries, is also the subject of examinations, investigations
and inquiries by several governmental agencies, including various insurance
departments and state departments of health, the New York State Attorney
General, the Federal Health Care Financing Administration and the Securities and
Exchange Commission.
Oxford-NJ is involved in other legal actions in the normal course of
business, some of which seek monetary damages, including claims for punitive
damages which are not covered by insurance. Oxford-NJ believes any ultimate
liability associated with these contingencies would not have a material adverse
effect on Oxford-NJ's financial position or results of operations.
F-32
<PAGE> 107
YOU SHOULD RELY ONLY ON THE INFORMATION CONTAINED IN THIS PROSPECTUS. WE ARE
SEEKING TO SELL, AND SEEKING OFFERS TO BUY, SHARES OF COMMON STOCK ONLY IN
JURISDICTIONS WHERE OFFERS AND SALES ARE PERMITTED. THE INFORMATION CONTAINED IN
THIS PROSPECTUS IS ACCURATE ONLY AS OF THE DATE OF THIS PROSPECTUS, REGARDLESS
OF THE TIME OF DELIVERY OF THIS PROSPECTUS OR OF ANY SALE OF OUR COMMON STOCK.
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary.................... 3
Risk Factors.......................... 7
Forward-Looking Statements............ 18
Use of Proceeds....................... 19
Dividend Policy....................... 20
Capitalization........................ 21
Dilution.............................. 22
Selected Consolidated Financial
Data................................ 23
Management's Discussion and Analysis
of Financial Condition and Results
of Operations....................... 25
Business.............................. 34
Management............................ 49
Related Party Transactions............ 61
Principal and Selling Stockholders.... 62
Description of Capital Stock.......... 64
Shares Eligible for Future Sale....... 67
Underwriting.......................... 69
Legal Matters......................... 71
Experts............................... 71
Where You Can Find More Information... 72
Index to Financial Statements......... F-1
</TABLE>
UNTIL , 2000 (25 DAYS AFTER THE DATE OF THIS PROSPECTUS), ALL
DEALERS THAT BUY, SELL OR TRADE IN THESE SECURITIES, WHETHER OR NOT
PARTICIPATING IN THIS OFFERING, MAY BE REQUIRED TO DELIVER A PROSPECTUS. DEALERS
ARE ALSO OBLIGATED TO DELIVER A PROSPECTUS WHEN ACTING AS UNDERWRITERS AND WITH
RESPECT TO THEIR UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.
[AMERIGROUP CORPORATION LOGO]
4,400,000 SHARES
COMMON STOCK
DEUTSCHE BANC ALEX. BROWN
BANC OF AMERICA SECURITIES LLC
UBS WARBURG LLC
PROSPECTUS
, 2000
<PAGE> 108
PART II
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The following table indicates the expenses to be incurred in connection
with the offering described in this Registration Statement, other than
underwriting discounts and commissions, all of which will be paid by the
Company. All amounts are estimates, other than the registration fee and the NASD
fee.
<TABLE>
<S> <C>
Registration fee............................................ $ 24,045
NASD fee.................................................... 9,608
Nasdaq National Market application and listing fee.......... 80,000
Accounting fees and expenses................................ 350,000
Legal fees and expenses..................................... 500,000
Printing and engraving...................................... 350,000
Transfer Agent fees and expenses............................ 10,000
Blue sky fees and expenses.................................. 5,000
Miscellaneous expenses...................................... 85,000
-----------
Total............................................. $ 1,413,653
===========
</TABLE>
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Section 102 of the Delaware General Corporation Law ("DGCL") as amended
allows a corporation to eliminate the personal liability of directors of a
corporation to the corporation or its stockholders for monetary damages for
breach of fiduciary duty as a director, except where the director breached his
duty of loyalty, failed to act in good faith, engaged in intentional misconduct
or knowingly violated a law, authorized the payment of a dividend or approved a
stock repurchase in violation of Delaware corporate law or obtained an improper
personal benefit.
Section 145 of the DGCL provides, among other things, that we may indemnify
any person who was or is a party or is threatened to be made a party to any
threatened, pending or completed action, suit or proceeding (other than an
action by or in the right of AMERIGROUP) by reason of the fact that the person
is or was a director, officer, agent or employee of the AMERIGROUP or is or was
serving at our request as a director, officer, agent, or employee of another
corporation, partnership, joint venture, trust or other enterprise against
expenses, including attorneys' fees, judgment, fines and amounts paid in
settlement actually and reasonably incurred by the person in connection with
such action, suit or proceeding. The power to indemnify applies (a) if such
person is successful on the merits or otherwise in defense of any action, suit
or proceeding, or (b) if such person acted in good faith and in a manner he
reasonably believed to be in the best interest, or not opposed to the best
interest, of AMERIGROUP, and with respect to any criminal action or proceeding
had no reasonable cause to believe his conduct was unlawful. The power to
indemnify applies to actions brought by or in the right of the AMERIGROUP as
well but only to the extent of defense expenses (including attorneys' fees but
excluding amounts paid in settlement) actually and reasonably incurred and not
to any satisfaction of judgment or settlement of the claim itself, and with the
further limitation that in such actions no indemnification shall be made in the
event of any adjudication of negligence or misconduct in the performance of his
duties to AMERIGROUP, unless the court believes that in light of all the
circumstances indemnification should apply.
Section 174 of the DGCL provides, among other things, that a director, who
willfully or negligently approves of an unlawful payment of dividends or an
unlawful stock purchase or redemption, may be held liable for such actions. A
director who was either absent when the unlawful actions were approved or
dissented at the time, may avoid liability by causing his or
II-1
<PAGE> 109
her dissent to such actions to be entered in the books containing the minutes of
the meetings of the board of directors at the time such action occurred or
immediately after such absent director receives notice of the unlawful acts.
Our Amended and Restated Certificate of Incorporation includes a provision
that eliminates the personal liability of its directors for monetary damages for
breach of fiduciary duty as a director, except for liability:
- for any breach of the director's duty of loyalty to AMERIGROUP or its
stockholders;
- for acts or omissions not in good faith or that involve intentional
misconduct or a knowing violation of law;
- under section 174 of the Delaware General Corporation Law regarding
unlawful dividends and stock purchases; or
- for any transaction from which the director derived an improper personal
benefit.
These provisions are permitted under Delaware law.
Our Amended and Restated Bylaws provide that:
- we must indemnify our directors and officers to the fullest extent
permitted by Delaware law;
- we may indemnify our other employees and agents to the same extent that
we indemnified our officers and directors, unless otherwise determined by
our Board of Directors; and
- we must advance expenses, as incurred, to our directors and executive
officers in connection with a legal proceeding to the fullest extent
permitted by Delaware law.
The indemnification provisions contained in our Amended and Restated
Certificate of Incorporation and Amended and Restate By-laws are not exclusive
of any other rights to which a person may be entitled by law, agreement, vote of
stockholders or disinterested directors or otherwise. In addition, we maintain
insurance on behalf of its directors and executive officers insuring them
against any liability asserted against them in their capacities as directors or
officers or arising out of such status.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES.
In the past three years, AMERIGROUP Corporation has issued and sold the
following securities:
- 2,000,000 shares of Series E Redeemable Preferred Stock and warrants to
purchase 1,125,000 shares of common stock to 25 investors of the
registrant consisting of 3 natural persons, 4 trusts and 18 venture
capital entities, in two tranches, the first of which was in July 1998
and the second of which was in January 1999 for a total consideration of
$10 million, in reliance on Regulation D under the Securities Act.
- warrants to purchase 25,000 shares of common stock to Silicon Valley
Bank, a large institution, in connection with securing a $10 million Loan
and Security Agreement in May 1998, in reliance on Section 4(2) of the
Securities Act, as a transaction not involving a public offering.
- 4,500,000 shares of Series D Convertible Preferred Stock issued in escrow
in connection with the purchase by AMERIGROUP of the businesses of
Prudential Health Care in 1999; in connection with this transaction,
pursuant to the acquisition agreement 3,710,775 shares of Series D
Convertible Preferred Stock were released from the escrow in May 2000
(these shares of Series D Convertible Preferred Stock convert into
1,855,387 shares of common stock), in reliance on Section 4(2) of the
Securities Act, as a transaction not involving a public offering.
II-2
<PAGE> 110
- options to purchase 415,751 shares of common stock issued to employees in
1997; options to purchase 271,250 shares of common stock issued to
employees in 1998; options to purchase 389,595 shares of common stock
issued to employees in 1999; and options to purchase 528,976 shares of
common stock issued to employees in 2000. All of these options were
granted under AMERIGROUP's 1994 Stock Plan, except options to purchase
100,000 shares of common stock granted under AMERIGROUP's 2000 Equity
Incentive Plan, and were issued in reliance on Rule 701 under the
Securities Act.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
a. Exhibits
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<S> <C>
1.0 Form of Underwriting Agreement.+
3.1 Form of Amended and Restated Certificate of Incorporation of
the Company.+
3.2 Form of By-Laws of the Company.+
3.3 Form of share certificate for common stock.+
3.4 AMERIGROUP Corporation Second Restated Investor Rights
Agreement, dated July 28, 1998.+
3.5 Silicon Valley Registration Rights Agreement, entered into
as of May 15, 1998.+
3.6 Stock Restriction and Registration Rights Agreement, between
AMERIGROUP Corporation and Prudential Health Care Plan,
Inc.+
3.7 Form of warrant issued in connection with the sale of Series
E Redeemable Preferred Stock.+
3.8 Common Stock Purchase Warrant Issued to Silicon Valley Bank,
dated May 15, 1998.+
5.1 Opinion of Skadden, Arps, Slate, Meagher & Flom LLP, related
to the shares of common stock being sold in the initial
public offering.+
5.2 Opinion of Skadden, Arps, Slate, Meagher & Flom LLP, related
to the shares of common stock being offered under the
Company's Employee Stock Purchase Plan.+
10.1 1999 Contract for Services between the Texas Department of
Health ("TDH") and HMO (Harris Service Area), dated August
9, 1999.+
10.2 1999 Contract For Services between the TDH and HMO (Tarrant
Service Area), dated August 9, 1999.+
10.3 1999 Contract for Services between TDH and HMO (Harris
County Service Area, STAR+PLUS Contract).+
10.4 1999 Contract For Services between TDH and HMO (Dallas
Service Area).+
10.5 Children's Health Insurance Program Agreement for the
Provision of Health Care Services between the Texas
Department of Health and Human Services Commission and
AMERICAID Texas, Inc., d/b/a Amerikids, dated January 19,
2000.+
10.6 Contract between State of New Jersey, Department of Human
Services, Division of Medical Assistance and Health Services
and [Americaid New Jersey, Inc.], Contractor, (expiring,
October 2000), as amended.+
10.7 State of Illinois, Department of Public Aid Contract for
Furnishing Health Services by a Health Maintenance
Organization, dated April 1, 2000.+
10.8 Managed Care Organization HealthChoice Provider Agreement,
dated as of January 1, 2000.+
</TABLE>
II-3
<PAGE> 111
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<S> <C>
10.9 District of Columbia Medicaid Managed Care Program,
Department of Health, Prepaid, Capital Risk Contract.+
10.10 1994 Stock Plan.+
10.11 Form of 2000 Equity Incentive Plan.*
10.12 Form of Employee Stock Purchase Plan.+
10.13 Form of 2000 Cash Incentive Plan.+
10.14 Employment Agreement of Jeffrey L. McWaters.+
10.15 Employment Agreement of Lorenzo Childress, Jr., M.D.+
10.16 Form of Officer and Director Indemnification Agreement.+
10.17 CCPN and HMO Medicaid Agreement By and Between Americaid
Texas Inc., d/b/a Americaid Community Care, and Cook
Children's Physician Network, A Texas 5.01 Non-profit
Corporation, dated as of October 9, 1997, as amended.+
10.18 Third Medical Assistance Medical Services Agreement between
Prudential Health Care Plan, Inc. and Johns Hopkins Medical
Services Corporation, dated August 2, 1996, assigned to the
Company pursuant to the Amendment and Assignment of Third
Medical Assistance Medical Service Agreement, as of April
30, 1999.+
10.19 Loan and Security Agreement, between AMERIGROUP Corporation,
as borrower, and the Financial Institutions Party Thereto
From Time to Time, as Lender and Fleet Capital Corporation,
as Agent, dated November 9, 1999.+
21.1 List of Subsidiaries.+
23.1 Consent of KPMG LLP with respect to the financial statements
of the registrant.
23.2 Consent of KPMG LLP with respect to the Medicaid Business of
Oxford Health Plans (N.J.), Inc.
23.3 Consent of Skadden, Arps, Slate, Meagher & Flom LLP
(contained in Exhibits 5.1 and 5.2).+
24.1 Power of Attorney (included on signature page of the
Registration Statement).+
27 Financial Data Schedule.+
</TABLE>
---------------
* Refiled herewith.
+ Previously filed.
b. Financial Statement Schedule
Independent Auditors' Report and Schedule of Valuation and Qualifying
Accounts
ITEM 17. UNDERTAKINGS.
The undersigned registrants hereby undertake to provide to the underwriters
at the closing certificates in such denominations and registered in such names
as required by the underwriters to permit prompt delivery to each purchaser.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers, and controlling persons of the
registrants pursuant to the provisions described in Item 14, or otherwise, the
registrants have been informed that in the opinion of the Securities and
Exchange Commission such indemnification is against public policy as expressed
in the Securities Act and is therefore unenforceable. In the event that a claim
for indemnification by the registrants against such liabilities (other than the
payment by the registrant of expenses incurred or paid by a director, officer,
or controlling person of the registrant in the successful defense of any action,
suit, or proceeding) is asserted by such
II-4
<PAGE> 112
director, officer, or controlling person in connection with the securities being
registered, the registrants will, unless in the opinion of its counsel the
matter has been settled by controlling precedent, submit to a court of
appropriate jurisdiction the question whether such indemnification by it is
against public policy as expressed in the Securities Act and will be governed by
the final adjudication of such issue.
The undersigned registrants hereby undertake that:
(1) For purposes of determining any liability under the Securities Act
of 1933, the information omitted from the form of prospectus filed as part
of this registration statement in reliance upon Rule 430A and contained in
a form of prospectus filed by the registrant pursuant to Rule 424(b) (1) or
(4) or 497 (h) under the Securities Act shall be deemed to be part of this
registration statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities
Act of 1933, each post-effective amendment that contains a form of
prospectus shall be deemed to be a new registration statement relating to
the securities offered therein, and the offering of such securities at that
time shall be deemed to be the initial bona fide offering thereof.
II-5
<PAGE> 113
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant
has duly caused this amendment to the registration statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in the City of New York,
State of New York, on August 7, 2000.
AMERIGROUP CORPORATION
By: /s/ SHERRI E. LEE
------------------------------------
Name: Sherri E. Lee
Title: Chief Financial Officer
Pursuant to the requirements of the Securities Act of 1933, this
registration statement has been signed by the following persons in the
capacities and on the dates indicated.
<TABLE>
<CAPTION>
TITLE DATE
----- ----
<C> <S> <C>
* Chairman, Chief Executive August 7, 2000
--------------------------------------------------- Officer and President
Jeffrey L. McWaters
/s/ SHERRI E. LEE Chief Financial Officer August 7, 2000
---------------------------------------------------
Sherri E. Lee
* Chief Accounting Officer August 7, 2000
---------------------------------------------------
Kathleen K. Toth
* Director August 7, 2000
---------------------------------------------------
C. Sage Givens
* Director August 7, 2000
---------------------------------------------------
William J. McBride
* Director August 7, 2000
---------------------------------------------------
Carlos A. Ferrer
* Director August 7, 2000
---------------------------------------------------
Kay Coles James
* Director August 7, 2000
---------------------------------------------------
Charles W. Newhall III
*By: /s/ SHERRI E. LEE Attorney-in-Fact August 7, 2000
--------------------------------------------
Sherri E. Lee
</TABLE>
II-6
<PAGE> 114
INDEPENDENT AUDITORS' REPORT
The Board of Directors
AMERIGROUP Corporation
Under date of February 25, 2000, except as to Note 14, which is as of July
10, 2000, we reported on the consolidated balance sheets of AMERIGROUP
Corporation and subsidiaries as of December 31, 1998 and 1999, and the related
consolidated statements of operations, stockholders' deficit and cash flows for
each of the years in the three-year period ended December 31, 1999, which are
included in the prospectus. In connection with our audits of the aforementioned
consolidated financial statements, we also audited the related consolidated
financial statement schedule, Schedule II -- Schedule of Valuation and
Qualifying Accounts, in the registration statement. This financial statement
schedule is the responsibility of the Company's management. Our responsibility
is to express an opinion on the financial statement schedule based on our
audits.
In our opinion, the financial statement schedule, Schedule II -- Schedule
of Valuation and Qualifying Accounts, when considered in relation to the basic
consolidated financial statements taken as a whole, present fairly, in all
material respects, the information set forth therein.
/s/ KPMG LLP
February 25, 2000
Norfolk, Virginia
II-7
<PAGE> 115
SCHEDULE II
AMERIGROUP CORPORATION
SCHEDULE OF VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
ADDITIONS -- DEDUCTIONS --
BALANCE AMOUNTS AMOUNTS
BEGINNING CHARGED TO CREDITED TO BALANCE,
OF YEAR EXPENSE EXPENSE END OF YEAR
--------- ------------ ------------- -----------
<S> <C> <C> <C> <C>
Valuation Allowance on Deferred Tax
Assets
Year Ended December 31, 1997.......... $5,443 $3,276 $ -- $8,710
Year Ended December 31, 1998.......... $8,710 $ -- $(1,342) $7,368
Year Ended December 31, 1999.......... $7,368 $ -- $(7,368) $ --
</TABLE>
II-8
<PAGE> 116
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
1.0 Form of Underwriting Agreement.+
3.1 Form of Amended and Restated Certificate of Incorporation of
the Company.+
3.2 Form of By-Laws of the Company.+
3.3 Form of share certificate for common stock.+
3.4 AMERIGROUP Corporation Second Restated Investor Rights
Agreement, dated July 28, 1998.+
3.5 Silicon Valley Registration Rights Agreement, entered into
as of May 15, 1998.+
3.6 Stock Restriction and Registration Rights Agreement, between
AMERIGROUP Corporation and Prudential Health Care Plan,
Inc.+
3.7 Form of warrant issued in connection with the sale of Series
E Redeemable Preferred Stock.+
3.8 Common Stock Purchase Warrant Issued to Silicon Valley Bank,
dated May 15, 1998.+
5.1 Opinion of Skadden, Arps, Slate, Meagher & Flom LLP, related
to the shares of common stock being sold in the initial
public offering.+
5.2 Opinion of Skadden, Arps, Slate, Meagher & Flom LLP related
to the shares of common stock being offered under the
Company's Employee Stock Purchase Plan.+
10.1 1999 Contract for Services between the Texas Department of
Health ("TDH") and HMO (Harris Service Area), dated August
9, 1999.+
10.2 1999 Contract For Services between the TDH and HMO (Tarrant
Service Area), dated August 9, 1999.+
10.3 1999 Contract for Services between TDH and HMO (Harris
County Service Area, STAR+PLUS Contract).+
10.4 1999 Contract For Services between TDH and HMO (Dallas
Service Area).+
10.5 Children's Health Insurance Program Agreement for the
Provision of Health Care Services between the Texas
Department of Health and Human Services Commission and
AMERICAID Texas, Inc., d/b/a Amerikids, dated January 19,
2000.+
10.6 Contract between State of New Jersey, Department of Human
Services, Division of Medical Assistance and Health Services
and [Americaid New Jersey, Inc.], Contractor, (expiring,
October 2000), as amended.+
10.7 State of Illinois, Department of Public Aid Contract for
Furnishing Health Services by a Health Maintenance
Organization, dated April 1, 2000.+
10.8 Managed Care Organization HealthChoice Provider Agreement,
date as of January 1, 2000.+
10.9 District of Columbia Medicaid Managed Care Program,
Department of Health, Prepaid, Capital Risk Contract.+
10.10 1994 Stock Plan.+
10.11 Form of 2000 Equity Incentive Plan.*
10.12 Form of Employee Stock Purchase Plan.+
10.13 Form of 2000 Cash Incentive Plan.+
10.14 Employment Agreement of Jeffrey L. McWaters.+
10.15 Employment Agreement of Lorenzo Childress, Jr., M.D.+
</TABLE>
<PAGE> 117
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
10.16 Form of Officer and Director Indemnification Agreement.+
10.17 CCPN and HMO Medicaid Agreement By and Between Americaid
Texas Inc., d/b/a Americaid Community Care, and Cook
Children's Physician Network, A Texas 5.01 Non-profit
Corporation, dated as of October 9, 1997, as amended.+
10.18 Third Medical Assistance Medical Services Agreement between
Prudential Health Care Plan, Inc. and Johns Hopkins Medical
Services Corporation, dated August 2, 1996, assigned to the
Company pursuant to the Amendment and Assignment of Third
Medical Assistance Medical Service Agreement as of April 30,
1999.+
10.19 Loan and Security Agreement, between AMERIGROUP Corporation,
as borrower, and The Financial Institutions Party Thereto
From Time to Time, as Lender and Fleet Capital Corporation,
as Agent, dated November 9, 1999.+
21.1 List of Subsidiaries.+
23.1 Consent of KPMG LLP with respect to the financial statements
of the registrant.
23.2 Consent of KPMG LLP with respect to the Medicaid Business of
Oxford Health Plans (N.J.), Inc.
23.3 Consent of Skadden, Arps, Slate, Meagher & Flom LLP
(contained in Exhibits 5.1 and 5.2).+
24.1 Power of Attorney (included on signature page of the
Registration Statement).+
27 Financial Data Schedule.+
</TABLE>
---------------
* Refiled herewith.
+ Previously filed.
<PAGE> 118
THE FOLLOWING PAGES ARE ALTERNATE PAGES FOR THE EMPLOYEE STOCK PURCHASE PLAN
PROSPECTUS.
<PAGE> 119
THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED.
WE MAY NOT SELL THESE SECURITIES UNTIL THE REGISTRATION STATEMENT FILED
WITH THE SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS
PROSPECTUS IS NOT AN OFFER TO SELL THESE SECURITIES AND IT IS NOT
SOLICITING AN OFFER TO BUY THESE SECURITIES IN ANY STATE WHERE THE OFFER
OR SALE IS NOT PERMITTED.
[ALTERNATE PAGE]
SUBJECT TO COMPLETION, DATED JULY 24, 2000
[AMERIGROUP CORPORATION LOGO]
600,000 SHARES
COMMON STOCK
We are registering 600,000 shares of our common stock for issuance to our
employees under our Employee Stock Purchase Plan. The shares under the plan will
be issued at a price equal to 85% of the lower of our initial public offering
price and the market price of our common stock at the end of the initial
offering period if purchased in the initial offering period under our Employee
Stock Purchase Plan. Otherwise, the shares under the plan will be issued at a
price equal to 85% of the lower of the market prices of our common stock on the
first and last trading days of the applicable offering period. We anticipate
that the initial public offering price will be between $15 and $17 per share.
We have applied to list our common stock on the Nasdaq National Market under the
symbol "AMGP."
INVESTING IN OUR COMMON STOCK INVOLVES RISKS. SEE "RISK FACTORS" BEGINNING ON
PAGE 7.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR DETERMINED OR
PASSED UPON THE ADEQUACY OR ACCURACY OF THIS PROSPECTUS. ANY REPRESENTATION TO
THE CONTRARY IS A CRIMINAL OFFENSE.
<TABLE>
<CAPTION>
PRICE TO PROCEEDS TO
EMPLOYEE AMERIGROUP
<S> <C> <C>
Per Share $ $
Total $ $
</TABLE>
The price to employee in the above table was calculated assuming that the shares
under the plan are issued at a price equal to 85% of the initial public offering
price. Salary deductions to pay for shares under the Employee Stock Purchase
Plan will not be made until we complete our initial public offering.
The date of this prospectus is , 2000.
<PAGE> 120
[ALTERNATE PAGE]
EMPLOYEE STOCK PURCHASE PLAN SHARES
<TABLE>
<CAPTION>
<S> <C>
Common stock available under the Employee
Stock Purchase Plan..................... 600,000 shares
Common stock to be outstanding after
completion of our initial public
offering................................ 18,939,086 shares
Use of proceeds........................... We intend to use the net proceeds from issuing shares
under the Employee Stock Purchase Plan for general
corporate purposes, including potential acquisitions.
Proposed Nasdaq National Market Symbol.... AMGP
</TABLE>
The number of shares of common stock to be outstanding after the initial
public offering is based on our shares outstanding as of June 30, 2000 and the
sale of 4,400,000 shares of common stock in the initial public offering. We have
not included the shares offered in the employee offering, because we are unsure
as to how many of, and when, these shares may be purchased. In addition, this
information excludes:
- 970,404 shares of common stock issuable upon the exercise of stock
options with a weighted average exercise price of $2.41 per share;
- 100,000 shares of common stock issuable upon the exercise of stock
options with an exercise price of $15.00 per share granted subsequent to
June 30, 2000;
- 25,000 shares of common stock issuable upon the exercise of outstanding
warrants with a weighted average exercise price of $3.00 per share; and
- shares of common stock reserved for issuance under our stock option
plans.
Except as otherwise indicated, the information in this prospectus assumes
the following:
- the conversion on closing of this offering of each outstanding share of
convertible preferred stock into 12,607,887 shares of common stock;
- the exercise of warrants to purchase 1,125,000 shares of common stock by
the Series E preferred stockholders;
- the redemption of each outstanding share of our Series E mandatorily
redeemable preferred stock; and
- no exercise of the underwriters' over-allotment option to purchase
585,000 shares of common stock from us and 75,000 shares of common stock
from Jeffrey L. McWaters in connection with our initial public offering.
All share numbers in this prospectus have been adjusted to reflect a one-for-two
reverse stock split of our common stock to be effected just prior to
consummation of this offering.
References in this prospectus to this "offering" are to our initial public
offering.
5
<PAGE> 121
[ALTERNATE PAGE]
USE OF PROCEEDS
We estimate that we will receive net proceeds from the sale of the shares
of common stock in our initial public offering of $64.1 million, assuming an
initial public offering price of $16.00 per share and after deducting estimated
underwriting discounts and commissions and estimated offering expenses. If the
underwriters exercise their over-allotment option in full, we estimate that our
net proceeds will be $72.8 million.
We intend to use the net proceeds of the initial public offering as
follows:
- approximately $12.5 million to redeem our Series E mandatorily redeemable
preferred stock,
- approximately $7.0 million to repay our term loan facility; as of March
31, 2000, $7.7 million was outstanding under the facility, and
- $44.6 million for general corporate purposes, including potential
acquisitions.
Employees that purchase shares under the Employee Stock Purchase Plan will
make payments through salary deductions. We intend to use the net proceeds from
issuing shares under the Employee Stock Purchase Plan for general corporate
purposes, including potential acquisitions.
Our Series E mandatorily redeemable preferred stock is redeemable for $4.20
per share plus accrued but unpaid dividends at the time we complete our initial
public offering. Otherwise, the Series E mandatorily redeemable preferred stock
is redeemable on July 28, 2003. Dividends accrue on our Series E mandatorily
redeemable preferred stock whether or not declared. The proceeds from the
issuance of the Series E mandatorily redeemable preferred stock were used in
connection with the acquisition of the New Jersey Medicaid contract rights and
other related assets from Oxford Health Plans and for general corporate
purposes.
Our term loan facility that we are repaying with proceeds from the offering
accrues interest at a rate of prime plus 75 basis points per year and matures on
April 30, 2003. We borrowed the funds under this facility in November 1999 to
obtain a revolving credit facility in addition to a term loan and used the
borrowed funds to repay a May 1998 bank loan.
We have pursued a strategy of acquiring Medicaid and CHIP contract rights
and related assets to increase our membership and expand into new service areas.
We intend to continue this strategy, and are actively looking for opportunities
that will complement our current operations. However, we currently have no
commitments or agreements with respect to any such transactions. We also expect
a portion of the proceeds to fund working capital to be used to:
- increase market penetration within our current service areas,
- pursue opportunities for the development of new markets,
- expand services and products available to our members, and
- strengthen our capital base by increasing the statutory capital of our
health plan subsidiaries.
We have not determined the amount of net proceeds to be used specifically
for the foregoing purposes, other than for redemption of our Series E
mandatorily redeemable preferred stock and repayment of our term loan. Pending
any such uses, we intend to invest the net proceeds in interest bearing
securities.
19
<PAGE> 122
[ALTERNATE PAGE]
PLAN OF DISTRIBUTION
We are registering 600,000 shares of common stock for issuance to our
employees under our Employee Stock Purchase Plan. The shares under the plan will
be issued at a price equal to 85% of the lower of our initial public offering
price and the market price of our common stock at the end of the initial
offering period under our Employee Stock Purchase Plan. Otherwise, the shares
under the plan will be issued at a price equal to 85% of the lower of the market
prices of our common stock on the first and last trading days of the applicable
offering period. Salary deductions to pay for shares under the Employee Stock
Purchase Plan will not be made until completion of our initial public offering,
as more fully described under "Detailed Description of the Employee Stock
Purchase Plan." Since we will issue shares under the Employee Stock Purchase
Plan directly to employees and not through underwriters, no underwriting
discount will be paid to underwriters.
Each of our officers and directors, most of our stockholders and selected
holders of options to purchase our stock have agreed not to offer, sell,
contract to sell or otherwise dispose of, or enter into any transaction that is
designed to, or could be expected to, result in the disposition of any shares of
our common stock or other securities convertible into or exchangeable or
exercisable for shares of our common stock or derivatives of our common stock
owned by these persons prior to this offering or common stock issuable upon
exercise of options held by these persons for a period of 180 days after the
effective date of the registration statement related to our initial public
offering, subject to limited exceptions, without the prior written consent of
Deutsche Bank Securities Inc. This consent may be given at any time without
public notice. We have entered into a similar agreement with the representatives
of the underwriters for our initial public offering, except that we may grant
options and sell shares pursuant to our stock plans without such consent. There
are no agreements between the representatives and any of our stockholders or
affiliates releasing them from these lock-up agreements prior to the expiration
of the 180-day period.
At our request, the underwriters for our initial public offering have
reserved for sale, at the initial public offering price, up to 220,000 shares
for our employees, family members of employees, business associates and other
third parties. The number of shares of our common stock available for sale to
the general public will be reduced to the extent these reserved shares are
purchased. Any reserved shares that are not purchased by these persons will be
offered by the underwriters to the general public on the same basis as the other
shares in our initial public offering.
PRICING OF THE INITIAL PUBLIC OFFERING
Prior to this offering, there has been no public market for our common
stock. Consequently, the initial public offering price for our common stock will
be determined by negotiation among us and the representatives of the
underwriters for our initial public offering. Among the primary factors to be
considered in determining the public offering price will be:
- Prevailing market conditions,
- our results of operations in recent periods,
- the present stage of our development,
- the market capitalization and stage of development of other companies
that we and the representatives of the underwriters believe to be
comparable to our business, and
- estimates of our business potential.
The estimated initial public offering price range is subject to change as a
result of market conditions and other factors.
69
<PAGE> 123
[ALTERNATE PAGE]
LEGAL MATTERS
The validity of the common stock offered by this prospectus will be passed
upon for us by Skadden, Arps, Slate, Meagher & Flom LLP, New York, New York.
EXPERTS
The financial statements and schedule of AMERIGROUP Corporation as of
December 31, 1998 and 1999 and for the years ending December 31, 1997, 1998 and
1999 have been included herein and in the registration statement in reliance
upon the report of KPMG LLP, independent certified public accountants, appearing
elsewhere herein, and upon the authority of said firm as experts in accounting
and auditing.
The statements of revenues and expenses of contracts acquired of the
Medicaid business of Oxford Health Plans (NJ), Inc. for the six months ended
June 30, 1998 and for the year ended December 31, 1997, have been included
herein and in the registration statement in reliance upon the report of KPMG
LLP, independent certified public accountants, appearing elsewhere herein, and
upon the authority of said firm as experts in accounting and auditing.
WHERE YOU CAN FIND MORE INFORMATION
This prospectus constitutes a part of a registration statement on Form S-1
(together with all amendments, supplements, schedules and exhibits to the
registration statement, referred to as the registration statement) which we have
filed with the Commission under the Securities Act, with respect to the common
stock offered in this prospectus. This prospectus does not contain all the
information which is in the registration statement. Certain parts of the
registration statement are omitted as allowed by the rules and regulations of
the Commission. We refer you to the registration statement for further
information about our company and the securities offered in this prospectus.
Statements contained in this prospectus concerning the provisions of documents
filed as exhibits are not necessarily complete, and reference is made to the
copy so filed, each such statement being qualified in all respects by such
reference. You can inspect and copy the registration statement and the reports
and other information we file with the Commission at Room 1024, Judiciary Plaza,
450 Fifth Street, N.W., Washington, D.C. 20549. You can obtain information on
the operation of the public reference room by calling the Commission at
1-800-SEC-0330. The same information will be available for inspection and
copying at the regional offices of the Commission located at 7 World Trade
Center, 13th Floor, New York, N.Y. 10048 and at Citicorp Center, 500 West
Madison Street, Suite 1400, Chicago, Illinois 60661. You can also obtain copies
of this material from the public reference room of the Commission at 450 Fifth
Street, N.W., Washington, D.C. 20549, at prescribed rates. The Commission also
maintains a Web site which provides on-line access to reports, proxy and
information statements and other information regarding registrants that file
electronically with the Commission at the address http://www.sec.gov.
Upon the effectiveness of the registration statement, we will become
subject to the information requirements of the Exchange Act. We will then file
reports, proxy statements and other information under the Exchange Act with the
Commission. You can inspect and copy these reports and other information of our
company at the locations set forth above or download these reports from the
Commission's Web site.
We have applied to have our common stock approved for quotation on the
Nasdaq National Market.
70
<PAGE> 124
[ALTERNATE PAGE]
DETAILED DESCRIPTION OF THE
EMPLOYEE STOCK PURCHASE PLAN
ISSUER, DURATION AND PARTICIPATING EMPLOYEES
AMERIGROUP Corporation is the issuer of the securities made available under
the plan, which are 600,000 shares of our common stock. Our principal executive
offices are at 4425 Corporation Lane, Virginia Beach, VA 23462. The plan will
become effective at the time of the initial underwritten public offering of our
common stock and will terminate on the tenth anniversary of that public
offering, unless earlier terminated by us. Our eligible employees and eligible
employees of our designated subsidiaries may participate in the plan (see
"Eligibility," below).
THE PLAN
The purpose of the plan is to provide our eligible employees and eligible
employees of our designated subsidiaries with an opportunity to purchase our
common stock through accumulated payroll deductions.
The summary of the plan contained in this prospectus is subject in its
entirety to the actual terms of the plan. A copy of the plan is on file with the
Secretary of AMERIGROUP Corporation.
The plan is not subject to any provisions of the Employee Retirement Income
Security Act of 1974 nor is the plan a qualified plan within the meaning of
Section 401(a) of the Internal Revenue Code.
PLAN ADMINISTRATION
The plan will be administered by the compensation committee or any other
committee of members of the board appointed by our board of directors to
administer the plan. The committee may select administrator(s) to whom its
duties and responsibilities under the plan may be delegated. The committee will
have full power and authority, subject to the provisions of the plan, to
promulgate such rules and regulations as it deems necessary for the proper
administration of the plan, to interpret the provisions and supervise the
administration of the plan, and to take all action in connection therewith or in
relation thereto as it deems necessary or advisable. No member of the committee
will be personally liable for any action, determination, or interpretation made
in good faith with respect to the plan, and all members of the committee will be
fully indemnified by AMERIGROUP Corporation with respect to any such action,
determination or interpretation. All decisions, determinations and
interpretations of the committee will be final and binding on all persons,
including AMERIGROUP Corporation, the participant (or any person claiming any
rights under the plan from or through any participant) and any of our
shareholders. You can get additional information about the plan and its
administrators by calling or writing Catherine S. Callahan at our offices in
Virginia Beach.
SECURITIES SUBJECT TO THE PLAN
A maximum of 600,000 shares of our common stock may be purchased under the
plan. Shares of common stock reserved for the plan will be either authorized and
unissued shares or shares which have been reacquired by AMERIGROUP Corporation.
If the total number of shares that would otherwise be subject to purchase at the
beginning of an offering period exceeds the number of shares then available
under the plan, the committee will make a pro rata allocation of the shares
remaining available. In such event, the committee will give written notice to
each participant of the reduction in available shares and will reduce the rate
of payroll deductions as necessary.
71
<PAGE> 125
[ALTERNATE PAGE]
In the event the committee determines that any recapitalization, stock
split, dividend or other distribution, merger, spin-off, share exchange or other
similar corporate transaction or event affects the common stock such that an
adjustment is appropriate in order to prevent dilution or enlargement of the
rights of participants under the plan, the maximum number and kind of shares
reserved for issuance or with respect to which awards may be granted under the
plan will be adjusted to reflect such event, and the committee will make the
adjustments as it deems appropriate and equitable in the number, kind and price
of shares covered by outstanding awards and in any other matters which relate to
awards and which are affected by the changes in the common stock referred to
above. In the event of a change in control AMERIGROUP Corporation, the then
current offering period will terminate immediately prior to the consummation of
the transaction, unless otherwise provided by the committee.
OFFERING PERIOD; PURCHASE PERIOD
The plan will be implemented by a series of consecutive offering periods.
The first offering period will commence on the date of the initial underwritten
public offering of our common stock and end December 29, 2000. Unless otherwise
determined by the committee, each subsequent offering period will have a
duration of six months, commencing on or about each January 1 and July 1. An
"exercise date," the date on which shares will be purchased using a
participant's payroll deductions, will occur at the end of each offering period.
The committee will have the power to change the duration and/or the frequency of
offering periods with respect to future offerings. In no event will any offering
period continue for more than 27 months.
ELIGIBILITY
All of our employees, as well as employees of our designated subsidiaries,
who have at least 90 days of service, whose customary service is for at least 20
hours per week, and whose customary employment is for more than 5 months per
year will be eligible to participate in the plan. However, employees who own
five percent or more of our stock or any subsidiary of ours will not be eligible
to participate.
ENROLLMENT
Each eligible employee is entitled to participate in the first offering
period after the employee first becomes eligible to participate. To enroll in
the plan, an eligible employee must execute and deliver to us an agreement
authorizing us to make payroll deductions. The agreement must be delivered prior
to the beginning of the applicable offering period in which the employee wishes
to participate. In the case of the first offering period, that agreement will
not be effective until the registration statement of which this prospectus forms
a part, becomes effective. A participant will be automatically enrolled in
subsequent offering periods unless notice is given to the contrary prior to the
beginning of the offering period.
PAYROLL DEDUCTIONS
An eligible employee may authorize a payroll deduction of any whole
percentage from 2 percent to 10 percent of his or her compensation each pay
period; provided, however, that no more than $25,000 worth of shares (determined
at the commencement of the offering period) may be purchased in any one-year
period. For this purpose, "compensation" is the fixed salary, wages,
commissions, overtime pay and bonuses paid to a participant by us or any of our
subsidiaries.
A participant may increase or decrease his or her payroll deduction with
respect to an offering period by filing a new subscription agreement authorizing
a change in payroll deductions. The committee may limit the number of times that
such an increase or decrease
72
<PAGE> 126
[ALTERNATE PAGE]
may be authorized during an offering period. All payroll deductions made by a
participant will be credited to the participant's account under the plan.
PURCHASE OF STOCK
Unless a participant withdraws from the plan, the participant's election to
purchase shares will be exercised automatically on the exercise date of the
applicable offering period and the maximum number of shares will be purchased
for the participant at the applicable purchase price with the accumulated
payroll deductions in the participant's account.
PRICE OF STOCK
The purchase price per share of the common stock under the plan will be
equal to 85% of the fair market value of a share of common stock on the offering
date or on the exercise date, whichever is lower.
STOCK CERTIFICATES; SALE OF PURCHASED STOCK
Each participant's ownership of shares of common stock purchased under the
plan will be reflected in an account (see "Accounts; Reports," below).
Accordingly, unless a participant elects otherwise, the participant will not
receive a certificate representing the shares purchased by the participant.
Unless the committee determines otherwise, withdrawals of shares may be
requested by a participant only once each calendar year, unless there is a
change in control, in which case a participant may also request a withdrawal of
shares within 60 days of the change in control.
BENEFICIARY DESIGNATION
A participant may file, on forms supplied by us and delivered to us, a
written designation of a beneficiary who is to receive any shares and cash
remaining in such participant's account under the plan in the event of the
participant's death. A designation may be changed by the participant at any time
by written notice. If no such beneficiary is living at the time of a
participant's death, we will deliver the shares and/or cash to the executor or
administrator of the estate of the participant, or if no such executor or
administrator has been appointed (to our knowledge), we may, in our discretion,
deliver the shares and/or cash to the spouse or to any one or more dependents or
relatives of the participant, or if no spouse, dependent or relative is known to
us, then to such other person we may designate.
ACCOUNTS; REPORTS
Individual accounts will be maintained for each participant in the plan.
Statements of account will be given to participants promptly following each
offering period. These statements will set forth the amount of payroll
deductions, the per share purchase price, the number of shares purchased and the
remaining cash balance, if any.
WITHDRAWAL; TERMINATION OF EMPLOYMENT
A participant may withdraw all, but not less than all, the payroll
deductions credited to his or her account that have not been used to purchase
shares of common stock at any time by giving written notice to us. All payroll
deductions credited to the account will be paid to the participant promptly
after receipt of the participant's notice of withdrawal. In the event of such a
withdrawal, the participant's eligibility to participate in the plan for the
offering period in which the withdrawal occurs will be automatically terminated
and no further payroll deductions under the plan will be made for the
participant during such offering period. A participant's withdrawal during an
offering period will not have any effect upon such participant's eligibility to
participate in a succeeding offering period.
73
<PAGE> 127
[ALTERNATE PAGE]
Upon termination of a participant's employment with us or a designated
subsidiary during an offering period for any reason, including voluntary
termination, retirement or death, the payroll deductions credited to the
participant's account that have not been used to purchase shares of common stock
will be returned to the participant or, in the case of such participant's death,
to the person or persons entitled thereto. The participant's eligibility to
participate in the plan will be automatically terminated.
TRANSFERABILITY
Neither payroll deductions credited to a participant's account nor any
rights to purchase or to receive shares under the plan may be assigned,
transferred, pledged or otherwise disposed of by the participant of in any way,
other than by will or the laws of descent and distribution. Any such attempt at
assignment, transfer, pledge or other disposition will be without effect, except
that we may treat such act as an election to withdraw funds.
AMENDMENT; TERMINATION
Our board of directors may at any time and for any reason amend, suspend or
discontinue the plan. No amendment may be effective unless it receives the
requisite approval of the stockholders of the company if such stockholder
approval of such amendment is required to comply with Rule 16b-3 under the
Securities Exchange Act of 1934, Section 423 of the Internal Revenue Code or to
comply with any other applicable law, regulation, stock exchange or other
applicable securities market system rule.
RESTRICTIONS ON RESALE
This prospectus does not cover sales or other dispositions of common stock
received under the plan by any person who may be deemed to be an affiliated
person. Such sales or other dispositions may be made in compliance with the
registration requirements of the federal securities laws or the requirements of
Rule 144 promulgated thereunder, without being subject to the holding period
requirement of such Rule, or may be made pursuant to another exemption from such
registration. There will be no such restrictions upon sales or other
dispositions of common stock by recipients who are not affiliated persons. An
affiliated person, for purposes of the federal securities laws, generally means
a senior officer, director or other person who is deemed to control the company.
CERTAIN FEDERAL INCOME TAX EFFECTS
THE FOLLOWING DISCUSSION IS A SUMMARY OF THE PRINCIPAL FEDERAL INCOME TAX
CONSEQUENCES UNDER CURRENT FEDERAL INCOME TAX LAWS RELATING TO THE PLAN. THIS
SUMMARY IS NOT INTENDED TO BE EXHAUSTIVE AND, AMONG OTHER THINGS, DOES NOT
DESCRIBE STATE, LOCAL OR FOREIGN INCOME AND OTHER TAX CONSEQUENCES.
The plan is intended to qualify as an "employee stock purchase plan" under
Section 423 of the Internal Revenue Code. Certain federal income tax
consequences to participants from such status under present law are described
below.
Neither the grant of an option under the plan nor the purchase of shares of
common stock upon exercise of such option will result in an employee's
realization of taxable income, thus permitting employees to acquire common stock
under the plan without immediate tax consequences. An employee who does not
dispose of shares of common stock purchased under the plan until at least two
years after the date of grant of such employee's option and one year after the
date of exercise will also receive capital gain treatment for any appreciation
in the value of the shares over the lower of (1) the fair market value of such
shares at the time the option is granted or (2) the fair market value of such
shares at the time the option is
74
<PAGE> 128
[ALTERNATE PAGE]
exercised. Capital gain treatment is not, however, available for the discount at
which the shares of common stock are initially purchased under the plan, and an
employee who meets the holding requirements is required to include as ordinary
income at the time of his death or disposition of the shares the lesser of (1)
the excess of the fair market value of the shares over the option price at the
time of grant or (2) the excess of the fair market value of the shares over the
amount such employee paid for the shares. If an employee sells shares of common
stock under such circumstances for less than the employee paid for the shares,
there is no ordinary income and such employee will realize a capital loss of the
difference. Any ordinary income realized by the employee will increase the basis
of the employee's shares of common stock for purposes of determining the amount
of any gain or loss realized upon the subsequent disposition of the shares.
With limited exceptions, an employee who fails to retain shares of common
stock purchased under the plan until at least two years after the date the
option with respect to the shares is granted and one year after the date the
option is exercised is considered to have made a "disqualifying disposition" and
forfeits the special tax treatment extended under Section 423 of the Internal
Revenue Code. In that case, generally, the employee realizes ordinary income at
the time of the disposition equal to the excess of the fair market value of the
shares of common stock at the time of purchase over the price paid for the
shares. The fair market value is the employee's basis in the shares for
determining any additional gain or loss upon the disposition. In determining
whether that gain or loss is long-term or short-term, the holding period is
calculated from the date of purchase.
We are entitled to a deduction equal to the amount of ordinary income
realized by an employee who makes a disqualifying disposition. Otherwise, we are
not entitled to any deduction on account of the grant or exercise of options
granted under the plan or the subsequent sale by employees of shares of common
stock purchased pursuant to the plan.
75
<PAGE> 129
[ALTERNATE PAGE]
YOU SHOULD RELY ONLY ON THE INFORMATION CONTAINED IN THIS PROSPECTUS. WE ARE
SEEKING TO SELL, AND SEEKING OFFERS TO BUY, SHARES OF COMMON STOCK ONLY IN
JURISDICTIONS WHERE OFFERS AND SALES ARE PERMITTED. THE INFORMATION CONTAINED IN
THIS PROSPECTUS IS ACCURATE ONLY AS OF THE DATE OF THIS PROSPECTUS, REGARDLESS
OF THE TIME OF DELIVERY OF THIS PROSPECTUS OR OF ANY SALE OF OUR COMMON STOCK.
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary.................... 3
Risk Factors.......................... 7
Forward-Looking Statements............ 18
Use of Proceeds....................... 19
Dividend Policy....................... 20
Capitalization........................ 21
Dilution.............................. 22
Selected Consolidated Financial
Data................................ 23
Management's Discussion and Analysis
of Financial Condition and Results
of Operations....................... 25
Business.............................. 34
Management............................ 49
Related Party Transactions............ 61
Principal and Selling Stockholders.... 62
Description of Capital Stock.......... 64
Shares Eligible for Future Sale....... 67
Plan of Distribution.................. 69
Legal Matters......................... 70
Experts............................... 70
Where You Can Find More Information... 70
Detailed Description of the Employee
Stock Purchase Plan................. 71
Index to Financial Statements......... F-1
</TABLE>
[AMERIGROUP CORPORATION LOGO]
600,000 SHARES
COMMON STOCK
PROSPECTUS
, 2000
