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AMERIGROUP 10-Q 2007 Documents found in this filing:Table of Contents
UNITED STATES SECURITIES AND
EXCHANGE COMMISSION
Washington, D.C. 20549
Commission File Number
001-31574
Registrant’s telephone number, including area code:
(757) 490-6900
Indicate by check mark whether the registrant: (1) has
filed all reports required to be filed by Section 13 or
15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has
been subject to such filing requirements for the past
90 days. Yes þ No o
Indicate by check mark whether the registrant is a large
accelerated filer, an accelerated filer, or a non-accelerated
filer. See definition of “accelerated filer and large
accelerated filer” in
Rule 12b-2
of the Exchange Act. (Check one):
Large accelerated
filer þ Accelerated
filer o Non-accelerated
filer o
Indicate by check mark whether the registrant is a shell company
(as defined in
Rule 12b-2
of the Exchange
Act). Yes o No þ
As of October 29, 2007, there were 53,196,770 shares
outstanding of AMERIGROUP’s common stock, par value $0.01
per share.
AMERIGROUP
Corporation And Subsidiaries
Table of Contents
AMERIGROUP
Corporation And Subsidiaries
Condensed Consolidated Balance Sheets
(Dollars in thousands, except per share data)
(Unaudited)
See accompanying notes to condensed consolidated financial
statements.
Table of Contents
AMERIGROUP
Corporation And Subsidiaries
(Dollars in thousands, except per share data)
(Unaudited)
See accompanying notes to condensed consolidated financial
statements.
Table of Contents
AMERIGROUP
Corporation And Subsidiaries
Nine Months Ended
September 30, 2007
(Dollars in thousands)
(Unaudited)
See accompanying notes to condensed consolidated financial
statements
Table of Contents
AMERIGROUP
Corporation And
Subsidiaries
(Dollars in thousands)
(Unaudited)
See accompanying notes to condensed consolidated financial
statements.
Table of Contents
AMERIGROUP
Corporation And Subsidiaries
Notes
to Condensed Consolidated Financial Statements
(Dollars in thousands, except per share data) (Unaudited)
1. Basis of Presentation
The accompanying Condensed Consolidated Financial Statements as
of September 30, 2007 and for the three and nine months
ended September 30, 2007 and 2006 of AMERIGROUP Corporation
and subsidiaries (the Company), are unaudited and reflect all
adjustments, consisting only of normal recurring adjustments,
which are, in the opinion of management, necessary for a fair
presentation of the financial position at September 30,
2007 and operating results for the interim periods ended
September 30, 2007 and 2006. The December 31, 2006
condensed consolidated balance sheet information was derived
from the audited consolidated financial statements as of that
date.
The Condensed Consolidated Financial Statements should be read
in conjunction with the consolidated financial statements and
accompanying notes thereto and management’s discussion and
analysis of financial condition and results of operations for
the year ended December 31, 2006 contained in our Annual
Report on
Form 10-K
filed with the Securities and Exchange Commission (SEC) on
February 27, 2007. The results of operations for the three
and nine months ended September 30, 2007 are not
necessarily indicative of the results to be expected for the
entire year ending December 31, 2007.
2. Earnings per Share
Basic net income per common share is computed by dividing net
income by the weighted-average number of shares of common stock
outstanding. Diluted net income per common share is computed by
dividing net income by the weighted-average number of shares of
common stock outstanding plus other dilutive potential
securities. The following table sets forth the calculation of
basic and diluted net income per share:
Table of Contents
AMERIGROUP
Corporation And Subsidiaries
Notes
to Condensed Consolidated Financial
Statements — (Continued)
Potential common stock equivalents representing 1,981,446 and
1,941,446 shares with a weighted-average exercise price of
$37.25 and $37.43 for the three and nine months ended
September 30, 2007, respectively, were not included in the
computation of diluted net income per share because to do so
would have been anti-dilutive for the periods presented.
Potential common stock equivalents representing 1,633,333 and
1,691,979 shares with a weighted-average exercise price of
$39.84 and $39.43 for the three and nine months ended
September 30, 2006, respectively, were not included in the
computation of diluted net income per share because to do so
would have been anti-dilutive for the periods presented.
The Company’s 2.0% Convertible Senior Notes due
May 15, 2012 (See Note 5) issued effective
March 28, 2007 in an aggregate principle amount of
$260,000, were not included as dilutive securities because the
conversion price of $42.53 was greater than the average market
price of shares of the Company’s common stock; therefore,
to do so would have been anti-dilutive. The Company’s
warrants sold on March 28, 2007 and April 9, 2007 were
not included in the computation of diluted net income per share
because the warrants’ exercise price of $53.77 was greater
than the average market price of the Company’s common
shares; therefore, to do so would have been anti-dilutive.
3. Acquisition
On November 1, 2007, AMERIGROUP Corporation and AMERIGROUP
Tennessee, Inc. acquired substantially all of the assets of
Memphis Managed Care Corporation (MMCC) including
substantially all of the assets of TLC Family Care Health Plan
and substantially all of the assets of Midsouth Health
Solutions, Inc., a subsidiary of MMCC, for approximately
$12,000. An additional contingent payment of approximately
$18,250 will be payable at such time if and when the State of
Tennessee awards to AMERIGROUP Tennessee, Inc. a capitated
contract through the TennCare program to provide full-risk
managed care services to the Medicaid population in West
Tennessee. The initial $12,000 payment is subject to
post-closing adjustments based on the timing of the
implementation of the full-risk program in West Tennessee and
the $18,250 contingent payment is subject to adjustment based on
the number of full-risk members assigned to AMERIGROUP
Tennessee, Inc. should it bid successfully in West Tennessee.
The purchase price was financed through available unregulated
cash. We are in the process of finalizing the valuation of the
acquired intangible assets. As a result the amounts allocated to
goodwill and intangibles have not yet been determined.
Additionally, as a result of the contingent nature of any future
payments, purchase price adjustments may arise as those amounts
become known.
4. Recent Accounting Pronouncement
On July 13, 2006, the Financial Accounting Standards Board
(FASB) issued Interpretation No. 48 (FIN 48),
Accounting for Uncertainty in Income Taxes. FIN 48
clarifies the accounting for uncertainty in income taxes
recognized in the financial statements in accordance with FASB
Statement No. 109, Accounting for Income Taxes. This
interpretation provides guidance on the financial statement
recognition and measurement of a tax position taken or expected
to be taken in a tax return. For a tax benefit to be recognized,
a tax position must be more likely than not to be sustained upon
examination by applicable taxing authorities. The benefit
recognized is the amount that has a greater than 50% likelihood
of being realized upon final settlement of the tax position. We
adopted the provisions of FIN 48 on January 1, 2007.
As a result of the adoption of FIN 48, we recorded a $9,185
increase to retained earnings as of January 1, 2007. As of
the date of the adoption, the total gross amount of unrecognized
tax benefits was $298 excluding interest. The gross amount of
unrecognized tax benefits is $395 (excluding interest) as of
September 30, 2007. Of this total, $275 (net of the federal
benefit on state issues) represents the total amount of
unrecognized tax benefits that, if recognized, would impact the
effective rate.
We are subject to U.S. federal income tax, as well as,
income tax in multiple state jurisdictions. The Company has
substantially concluded all U.S. federal income tax matters
for years through 2003. Substantially all material state tax
matters have been concluded for years through 2002.
Table of Contents
AMERIGROUP
Corporation And Subsidiaries
Notes
to Condensed Consolidated Financial
Statements — (Continued)
Our continuing practice is to recognize interest
and/or
penalties related to income tax matters in income tax expense.
The gross amount of interest accrued for uncertain tax positions
is $41.
5. Long-Term Obligations
On March 26, 2007, we entered in to a Credit and Guaranty
Agreement (the Credit Agreement) which provides, among other
things, for commitments of up to $401,318 consisting of
(i) up to $351,318 of financing under a senior secured
synthetic letter of credit facility and (ii) up to $50,000
of financing under a senior secured revolving credit facility.
The Credit Agreement terminates on March 15, 2012. We
initially borrowed $351,318 under the senior secured synthetic
letter of credit facility of the Credit Agreement. Shortly
thereafter, we repaid $221,318 of such borrowings with the
proceeds from the issuance of the Notes (described below). As a
result, pursuant to the terms of the Credit Agreement, unless
later amended by the parties, the commitments under the senior
secured synthetic letter of credit facility were permanently
reduced to $130,000 and total commitments under the Credit
Agreement were permanently reduced to $180,000.
The proceeds of the Credit Agreement are available to
(i) facilitate an appeal, payment or settlement of the
judgment in the Qui Tam Litigation (as defined below),
(ii) repay in full certain existing indebtedness,
(iii) pay related transaction costs, fees, commissions and
expenses, and (iv) provide for ongoing working capital
requirements and general corporate purposes, including permitted
acquisitions. The borrowings under the Credit Agreement accrue
interest at our option at a percentage, per annum, equal to the
adjusted Eurodollar rate plus 2.0% or the base rate plus 1.0%.
We are required to make payments of interest in arrears on each
interest payment date (to be determined depending on interest
period elections made by the Company) and at maturity of the
loans, including final maturity thereof.
The Credit Agreement includes customary covenants and events of
default. If any event of default occurs and is continuing, the
Credit Agreement may be terminated and all amounts owing there
under may become immediately due and payable. The Credit
Agreement also includes the following financial covenants:
(i) maximum leverage ratios as of specified periods,
(ii) a minimum interest coverage ratio and (iii) a
minimum statutory net worth ratio.
Borrowings under the Credit Agreement are secured by
substantially all of our assets and the assets of our
wholly-owned subsidiary, PHP Holdings, Inc., including the stock
of each of our respective wholly-owned managed care
subsidiaries, in each case, subject to carve-outs.
As of September 30, 2007, we have $130,000 outstanding
under the senior secured synthetic letter of credit facility of
our Credit Agreement. These funds are held in restricted
investments as partial collateral for an irrevocable letter of
credit in the amount of $351,318, issued to the Clerk of Court
for the U.S. District Court for the Northern District of
Illinois, Eastern Division. The irrevocable letter of credit was
provided to the court for the purpose of staying the enforcement
of the judgment in the Qui Tam Litigation pending resolution of
our appeal. As of September 30, 2007, we have no
outstanding borrowings under the senior secured revolving credit
facility of our Credit Agreement. We incurred offering expenses
totaling $4,600 in connection with the Credit Agreement which
are included in other long-term assets in the accompanying
Condensed Consolidated Financial Statements and are being
amortized over the term of the Credit Agreement.
Effective March 28, 2007, we issued an aggregate of
$260,000 in principal amount of 2.0% Convertible Senior
Notes due May 15, 2012 (the Notes) in a private placement.
In May 2007, we filed an automatic shelf registration statement
on
Form S-3
with the SEC covering the resale of the Notes and common stock
issuable upon conversion of the Notes. The total proceeds from
the offering of the Notes, after deducting underwriting fees and
estimated offering expenses, were approximately $253,100. We
incurred offering expenses totaling $6,900 in connection with
the offering of the Notes which are included in other long-term
assets in the accompanying Condensed Consolidated
Table of Contents
AMERIGROUP
Corporation And Subsidiaries
Notes
to Condensed Consolidated Financial
Statements — (Continued)
Financial Statements and are being amortized over the term of
the Notes. As of September 30, 2007,
approximately $221,300 of these proceeds are held as
restricted investments as the balance of the collateral required
for the irrevocable letter of credit which totals $351,318, as
discussed above. The remainder of the proceeds of the notes were
used in connection with the purchased convertible note hedges
and sold warrants that occurred concurrent with the issuance of
the Notes as discussed below.
The Notes are governed by an Indenture dated as of
March 28, 2007 (the Indenture). The Notes are senior
unsecured obligations of the Company and will rank equally with
all of our existing and future senior debt and senior to all of
our subordinated debt. The Notes will be effectively
subordinated to all existing and future liabilities of our
subsidiaries and to any existing and future secured
indebtedness, including the obligations under our Credit
Agreement.
The Notes bear interest at a rate of 2.0% per year, payable
semiannually in arrears in cash on May 15 and November 15 of
each year, beginning on May 15, 2007. The Notes mature on
May 15, 2012, unless earlier repurchased or converted.
Holders may convert their Notes at their option on any day prior
to the close of business on the scheduled trading day
immediately preceding March 15, 2012, only under the
following circumstances: (1) during the five
business-day
period after any five consecutive
trading-day
period (the measurement period) in which the price per Note for
each day of that measurement period was less than
98 percent of the product of the last reported sale price
of our common stock and the conversion rate on each such day;
(2) during any calendar quarter after the calendar quarter
ending June 30, 2007, if the last reported sale price of
the common stock for 20 or more trading days in a period of 30
consecutive trading days ending on the last trading day of the
immediately preceding calendar quarter exceeds 130 percent
of the applicable conversion price in effect on the last trading
day of the immediately preceding calendar quarter; or
(3) upon the occurrence of specified corporate events. The
Notes will be convertible, regardless of the foregoing
circumstances, at any time on or after March 15, 2012
through the third scheduled trading day immediately preceding
the maturity date of the Notes, May 15, 2012.
Upon conversion of the Notes, we will pay cash up to the
principal amount of the Notes converted. With respect to any
conversion value in excess of the principal amount of the Notes
converted, we have the option to settle the excess with cash,
shares of our common stock, or a combination of cash and shares
of our common stock based on a daily conversion value as defined
in the indenture. If an “accounting event” (as defined
in the Indenture) occurs, we have the option to elect to settle
the converted notes exclusively in shares of our common stock.
The initial conversion rate for the Notes will be
23.5114 shares of common stock per one thousand dollars of
principal amount of Notes, which represents a 32.5 percent
conversion premium based on the closing price of $32.10 per
share of our common stock on March 22, 2007 and is
equivalent to a conversion price of approximately $42.53 per
share of common stock. The conversion rate is subject to
adjustment in some events but will not be adjusted for accrued
interest. In addition, if a “fundamental change” (as
defined in the Indenture) occurs prior to the maturity date, we
will in some cases increase the conversion rate for a holder of
Notes that elects to convert its Notes in connection with such
fundamental change.
Subject to certain exceptions, if we undergo a “designated
event” (as defined in the Indenture) holders of the Notes
will have the option to require us to repurchase all or any
portion of their Notes. The designated event repurchase price
will be 100% of the principal amount of the Notes to be
purchased plus any accrued and unpaid interest (including
special interest, if any) up to but excluding the designated
event repurchase date. We will pay cash for all Notes so
repurchased. We may not redeem the Notes prior to maturity.
Concurrent with the issuance of the Notes, we purchased
convertible note hedges covering, subject to customary
anti-dilution adjustments, 6,112,964 shares of our common
stock. The convertible note hedges allow us to receive shares of
our common stock
and/or cash
equal to the amounts of common stock
and/or cash
related to the excess conversion value that we would pay to the
holders of the Notes upon conversion. These convertible note
hedges will terminate at the earlier of the maturity dates of
the Notes or the first day on which none of the Notes remain
outstanding due to conversion or otherwise. The cost of the
convertible note hedges aggregated approximately $52,700.
Table of Contents
AMERIGROUP
Corporation And Subsidiaries
Notes
to Condensed Consolidated Financial
Statements — (Continued)
The convertible note hedges are expected to reduce the potential
dilution upon conversion of the Notes in the event that the
market value per share of our common stock, as measured under
the convertible note hedges, at the time of exercise is greater
than the strike price of the convertible note hedges, which
corresponds to the initial conversion price of the Notes and is
subject to certain customary adjustments. If, however, the
market value per share of our common stock exceeds the strike
price of the warrants (discussed below) when such warrants are
exercised, we will be required to issue common stock. Both the
convertible note hedges and warrants provide for net-share
settlement at the time of any exercise for the amount that the
market value of our common stock exceeds the applicable strike
price.
Also concurrent with the issuance of the Notes, we sold warrants
to acquire 6,112,964 shares of our common stock at an
exercise price of $53.77 per share in a private placement. If
the average price of our common stock during a defined period
ending on or about the settlement date exceeds the exercise
price of the warrants, the warrants will be settled, at our
option, in cash or shares of our common stock. Proceeds received
from the issuance of the warrants totaled approximately $25,700.
The convertible note hedges and sold warrants are separate
transactions which will not affect holders’ rights under
the Notes.
Because we have the choice of settling the convertible note
hedges and warrants in cash or shares of our common stock, and
these contracts meet all of the applicable criteria for equity
classification as outlined in EITF
No. 00-19,
Accounting for Derivative Financial Instruments Indexed to,
and Potentially Settled in, a Company’s Own Stock, the
cost of the convertible note hedges and net proceeds from the
sale of the warrants are classified in stockholders’
equity. In addition, because both of these contracts are
classified in stockholders’ equity and are indexed to our
own common stock, they are not accounted for as derivatives
under SFAS No. 133, Accounting for Derivative
Instruments and Hedging Activities.
6. Retirement and Consulting Agreement
On September 30, 2007, we entered into a Retirement and
Consulting Agreement with Jeffrey L. McWaters, the
Company’s Chairman of the Board and former Chief Executive
Officer. Under the terms of the agreement, certain equity grants
were modified to accelerate vesting and extend the exercise
period. As a result, additional compensation expense of
approximately $3,700 was recorded in the third quarter of 2007.
7. Contingencies
Legal
Proceedings
In 2002, Cleveland A. Tyson, a former employee of our former
Illinois subsidiary, AMERIGROUP Illinois, Inc., (the Relator)
filed a federal and state Qui Tam or whistleblower action
against our former Illinois subsidiary. The complaint was
captioned the United States of America and the State of
Illinois, ex rel., Cleveland A. Tyson v. AMERIGROUP
Illinois, Inc. (the Qui Tam Litigation). The complaint was filed
in the U.S. District Court for the Northern District of
Illinois, Eastern Division (the Court). It alleged that
AMERIGROUP Illinois, Inc. submitted false claims under the
Medicaid program by maintaining a scheme to discourage or avoid
the enrollment into the health plan of pregnant women and other
recipients with special needs.
In 2005, the Court allowed the State of Illinois and the United
States of America to intervene and the plaintiffs were allowed
to amend their complaint to add AMERIGROUP Corporation as a
party. In the third amended complaint, the plaintiffs alleged
that AMERIGROUP Corporation was liable as the alter-ego of
AMERIGROUP Illinois, Inc. and that AMERIGROUP Corporation was
liable for making false claims or causing false claims to be
made.
Table of Contents
AMERIGROUP
Corporation And Subsidiaries
Notes
to Condensed Consolidated Financial
Statements — (Continued)
The trial began on October 4, 2006, and the case was
submitted to the jury on October 27, 2006. On
October 30, 2006, the jury returned a verdict against us
and AMERIGROUP Illinois, Inc. in the amount of $48,000, which
under applicable law would be trebled to $144,000, plus
penalties, and attorney’s fees, costs and expenses. The
jury also found that there were 18,130 false claims. The
statutory penalties allowable under the False Claims Act range
between $5.5 and $11 per false claim. The statutory penalties
allowable under the Illinois Whistleblower Reward and Protection
Act, 740 ILC 175/3, range between $5 and $10 per false claim.
On November 22, 2006, the Court entered an initial judgment
in the amount of $48,000 and we subsequently filed motions for a
new trial and remittur and for judgment as a matter of law and
the plaintiffs filed motions to treble the civil judgment,
impose the maximum fines and penalties and to assess
attorney’s fees, costs and expenses against us.
On March 13, 2007, the Court entered a judgment against
AMERIGROUP Illinois, Inc., and AMERIGROUP Corporation in the
amount of approximately $334,000, which includes the trebling of
damages and false claim penalties. Under the Federal False
Claims Act, the counsel for the Relator is entitled to collect
their attorney’s fees, costs and expenses in the event the
Relator’s claim is successful. On April 3, 2007, we
delivered an irrevocable letter of credit in the amount of
$351,318, which includes estimated interest on the judgment for
one year, to the Clerk of Court for the U.S. District Court
for the Northern District of Illinois, Eastern District to stay
the enforcement of the judgment pending appeal. On May 11,
2007 we filed a notice of appeal with the United States Court of
Appeals for the Seventh Circuit. On September 6, 2007,
pursuant to a joint stipulation and order, we caused to be
posted with the Court a surety bond in the amount of $8,400 as
the attorney’s fees, costs and expenses that Relator’s
counsel would receive in the event the Plaintiffs prevail on the
appeal. On September 17, 2007 we filed our memorandum of
law in support of our appeal with the Court of Appeals.
Although it is possible that the ultimate outcome of the Qui Tam
Litigation judgment will not be favorable to us, the amount of
loss, if any, is uncertain. Accordingly, we have not recorded
any amounts in the Condensed Consolidated Financial Statements
for unfavorable outcomes, if any, as a result of the Qui Tam
Litigation judgment. There can be no assurances that the
ultimate outcome of this matter will not have a material adverse
effect on our financial position, results of operations or
liquidity.
As a result of the Qui Tam Litigation, it is possible that state
or federal governments will subject us to greater regulatory
scrutiny, investigation, action, or litigation. We have
proactively been in contact with all of the insurance and
Medicaid regulators in the states in which we operate as well as
the Office of the Inspector General of the Department of Health
and Human Services (OIG), with respect to the practices at issue
in the Qui Tam Litigation. In connection with our discussions
with the OIG, we entered into a tolling agreement with the OIG
which preserves the rights that the OIG had as of
October 30, 2006. Effective October 1, 2007, we
entered into an indefinite extension of the tolling agreement
which can be terminated by either party upon 90 days
written notice. In some circumstances, state or federal
governments may move to exclude a company from contracts as a
result of a civil verdict under the False Claims Act. We are
unable to predict at this time what, if any, further action any
state or federal regulators may take. Exclusion is a
discretionary step which we believe would not be commenced, if
at all, until all appeals had been exhausted. Further, prior to
any administrative action or exclusion taking effect, we believe
we would have an opportunity to advocate our position. While the
circumstances of this case do not appear to warrant such action,
exclusion from doing business with the federal or any state
governments could have a material adverse effect on our
financial position, results of operations or liquidity.
It is also possible that plaintiffs in other states could bring
similar litigation against us. While we believe that the
practices at issue in the Qui Tam Litigation have not occurred
outside of the operations of our former Illinois subsidiary,
AMERIGROUP Illinois, Inc., a verdict in favor of a plaintiff in
similar litigation in another state could have a material
adverse effect on our financial position, results of operations
or liquidity.
Table of Contents
AMERIGROUP
Corporation And Subsidiaries
Notes
to Condensed Consolidated Financial
Statements — (Continued)
Colleen Batty, a former employee of our former Illinois
subsidiary, AMERIGROUP Illinois, Inc., has filed a federal and
state Qui Tam or whistleblower action against us and our former
Illinois subsidiary AMERIGROUP Illinois, Inc. in District Court
in the Northern District of Illinois. The action is styled
United States of America ex. rel. Colleen Batty, State of
Illinois ex. rel. Colleen Batty and Colleen Batty,
individually v. AMERIGROUP Illinois, Inc. and AMERIGROUP
Corporation. Ms. Batty alleges, among other things, that
AMERIGROUP Illinois, Inc. submitted false claims under the
Medicaid program by underpaying certain hospitals in connection
with emergency services delivered in out-of-network settings.
The action was originally filed under seal in March 2005. Both
the federal government and the State of Illinois have declined
to intervene in the suit. Ms. Batty also alleges wrongful
discharge of her employment in violation of the Illinois
Whistleblower and Protection Act. The action seeks: (i) an
unspecified amount of compensatory damages under the False
Claims Act and Illinois Whistleblower and Protection Act, which
damages, if any, would be trebled under applicable law;
(ii) statutory penalties allowable under the False Claims
Act which range between $5.5 and $11 per false claim and
statutory penalties allowable under the Illinois Whistleblower
Reward and Protection Act, which range between $5 and $10 per
false claim; and (iii) reinstatement to her job and two
years’ back pay. On August 31, 2007 we filed a motion
with the Court to dismiss Ms. Batty’s claims. The
Court has stayed discovery pending disposition of the motion to
dismiss.
Other
Contingencies
Our Texas health plan is required to pay a rebate to the State
of Texas in the event profits exceed established levels. The
rebate calculation reports that we filed for the contract years
ended August 31, 2000 through 2005 have been audited by a
contracted auditing firm retained by the State. In their report,
the auditor has challenged inclusion in the rebate calculation
certain expenses incurred by the Company in providing services
to the health plan under our administrative services agreement
with AMERIGROUP Texas, Inc. The audit of the contract year ended
August 31, 2006 and interim review procedures for the
contract year ended August 31, 2007 commenced during the
third quarter of 2007. The Company’s filing practices have
not changed in response to the audit recommendations pending
final determination of these issues.
We are in discussions with the State of Texas regarding the
audit findings and we are working with the State to resolve
these issues identified by the audits. We continue to believe
that the rebate calculations were done appropriately in
accordance with the contract provisions and it is our intent to
vigorously pursue our position. If the State were ultimately to
disallow certain of these expenses in the rebate calculation, it
could result in the requirement that we pay the State of Texas
additional amounts for these prior periods and it could reduce
our profitability in future periods. Based upon our
understanding of the State’s positions on the various audit
issues, with which we do not agree, we believe it is reasonably
possible that the liability related to this issue as of
September 30, 2007 could range from zero to $27,000.
In the Fort Worth service area, AMERIGROUP Texas, Inc. had
an exclusive risk-sharing arrangement with Cook Children’s
Health Care Network (CCHCN) and Cook Children’s Physician
Network (CCPN), which includes Cook Children’s Medical
Center (CCMC) that was terminated as of August 31,
2005. Under the risk-sharing arrangement the parties have an
obligation to perform annual reconciliations and settlements of
the risk pool for each contract year. We have recorded a
receivable in the accompanying Condensed Consolidated Financial
Statements for the 2005 contract year, in the amount of $10,800,
as of September 30, 2007. The contract with CCHCN
prescribes reconciliation procedures which have been completed.
CCHCN subsequently engaged external auditors to review all
medical claims payments made for the 2005 contract year and has
provided the preliminary results to us. We are currently in
discussions with the parties regarding their preliminary audit
results. Although we continue to believe this to be a valid
receivable, if we are unable to resolve this matter resulting in
payment in full to
Table of Contents
AMERIGROUP
Corporation And Subsidiaries
Notes
to Condensed Consolidated Financial
Statements — (Continued)
us, our expenses attributable to these periods may be adversely
affected, and we may incur significant costs in our efforts to
reach a final resolution of this matter.
In December 2006, our New Jersey subsidiary received a notice of
deficiency for failure to meet provider network requirements in
several New Jersey counties as required by our Medicaid contract
with New Jersey. We submitted to the State of New Jersey a
corrective action plan and a request for a waiver of certain
contractual provisions in December 2006 and January 2007. The
State of New Jersey is considering our requests for waivers, and
we were granted an extension of time in which to correct the
network deficiencies through September 24, 2007. On
September 12, 2007, our New Jersey subsidiary received
notice that the September 24, 2007 submission of its
provider network data would be used for purposes of determining
provider network deficiencies, if any, and imposing fines and
penalties, if any. The notice also indicated that the State of
New Jersey would use revised standards to evaluate provider
network adequacy. If we are unable to materially satisfy the
provider network requirements, the State of New Jersey could
impose fines and penalties that could have a material impact on
our financial results.
8. Changes in Estimates — Revenue
During the nine months ended September 30, 2006, we
reversed approximately $6,300 of unearned revenue related to
reserves established during the year ended December 31,
2005. The reserves related to potential premium recoupments as a
result of enrollment eligibility issues in the States of Florida
and Texas. These reserves were reversed as a result of further
discussions with the States involved that eliminated the
potential premium recoupment. Net of the related tax effect, net
income increased approximately $3,800, or $0.07 per diluted
share for the nine months ended September 30, 2006 as a
result of the favorable resolution of these issues.
During the three months ended September 30, 2006, we
recorded a reserve of approximately $5,100 of unearned revenue
for a potential premium recoupment related to the provision of
comprehensive behavioral health care services in accordance with
the Florida Statute for the 2004, 2005 and 2006 contract years.
Net of the related tax effect, net income decreased
approximately $3,200 or $0.06 per diluted share for the three
months ended September 30, 2006 as a result of this
reserve. For the nine months ended September 30, 2006,
approximately $5,200 was recorded related to this issue for the
2004 and 2005 contract periods. Net of the related tax effect,
net income decreased by approximately $3,200 or $0.06 per
diluted share for the nine months ended September 30, 2006
as a result of this reserve.
9. Changes in Estimates — Health Benefits Expenses
During the nine months ended September 30, 2006, we
decreased our actuarial best estimates for health benefits
expenses by approximately $34,500 related to reserves
established during the year ended December 31, 2005. This
decrease was determined using actuarial analysis based upon the
additional claims paid during the first quarter of 2006. Net of
the related tax effect, net income increased approximately
$20,900, or $0.40 per diluted share for the nine months ended
September 30, 2006 as a result of this decrease in claims
estimates.
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This Quarterly Report on
Form 10-Q,
and other information we provide from time-to-time, contains
certain “forward-looking” statements as that term is
defined by Section 27A of the Securities Act of 1933 and
Section 21E of the Securities Exchange Act of 1934. All
statements regarding our expected future financial position,
membership, results of operations or cash flows, our continued
performance improvements, our ability to service our debt
obligations and refinance our debt obligations, our ability to
finance growth opportunities, our ability to respond to changes
in government regulations and similar statements including,
without limitation, those containing words such as
“believes,” “anticipates,”
“expects,” “may,” “will,”
“should,” “estimates,” “intends,”
“plans” and other similar expressions are
forward-looking statements.
Forward-looking statements involve known and unknown risks and
uncertainties that may cause our actual results in future
periods to differ materially from those projected or
contemplated in the forward-looking statements as a result of,
but not limited to, the following factors:
Investors should also refer to our Annual Report on
Form 10-K
for the year ended December 31, 2006, filed with the
Securities and Exchange Commission (SEC) on February 27,
2007, and Part II — Other
Information — Item 1A —
“Risk Factors”, as updated under Item 1A
of our Quarterly Report
Form 10-Q
for the quarterly period ended March 31, 2007 filed with
the SEC on May 3, 2007 for a discussion of risk factors.
Given these risks and uncertainties, we can give no assurances
that any forward-looking statements will, in fact, transpire,
and therefore caution investors not to place undue reliance on
them.
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We are a multi-state managed healthcare company focused on
serving people who receive healthcare benefits through publicly
sponsored programs, including Medicaid, State Children’s
Health Insurance Program (SCHIP), FamilyCare and Special Needs
Plans (SNP). We were founded in December 1994 with the objective
of becoming the leading managed care organization in the United
States focused on serving people who receive these types of
benefits. After more than a decade of operations, we continue to
believe that managed healthcare remains the only proven
mechanism that significantly reduces medical cost trends and
helps our government partners control their costs, and improves
health outcomes for those receiving these types of benefits.
Summary highlights of our third quarter of 2007 include:
During the third quarter of 2007, our revenue compared to the
third quarter of 2006 increased 45.6 percent. This increase
is due primarily to membership increases from our developing
markets and products (defined as Tennessee, Georgia, Ohio and
Texas AMERIPLUS products, as well as Maryland SNP as of
September 30, 2007). Additionally, our mature markets
(defined as Texas, Florida, Maryland, New York, New Jersey,
Ohio, District of Columbia and Virginia as of September 30,
2007) contributed further to revenue growth from premium
rate increases and yield increases resulting from changes in
membership mix. Effective April 1, 2007, AMERIGROUP
Tennessee, Inc. commenced operations in Tennessee. As of
September 30, 2007 AMERIGROUP Tennessee, Inc. had
approximately 185,000 members in Tennessee’s Middle-Grand
region including TANF and ABD populations. Additionally,
effective September 1, 2006, our Georgia subsidiary began
serving members in the East, North, and Southeast regions of
Georgia. This expansion in Georgia increased our membership by
approximately 85,000 members at inception and the membership of
the entire health plan has grown to over 218,000 members as of
September 30, 2007.
Operating
Costs
The HBR for the three months ended September 30, 2007 was
82.9% compared to 81.7% for the three months ended
September 30, 2006. This increase in HBR for the three
months ended September 30, 2007 over that for the three
months ended September 30, 2006 is a result of a higher
proportion of business in our developing markets which have a
higher HBR. This reflects the higher HBR in the Tennessee market
which we entered on April 1, 2007. For the three months
ended September 2007, our HBR excluding the effect of
$11.5 million of favorable prior period reserve development
was 84.1%. Excluding the prior period reserve development, the
HBR for our mature markets would have been approximately
80 percent and for our developing markets would have been
in the low 90 percent range.
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Selling, general and administrative expenses (SG&A) were
12.6% of total revenue for the three months ended
September 30, 2007 compared to 13.0% for the three months
ended September 30, 2006. Our SG&A ratio decreased in
the current period primarily as a result of leverage gained
through increased revenue. SG&A expenses increased from
$92.3 million to $129.9 million primarily from
(1) the growth in salaries and benefits expenses due to: a
17.4% increase in the number of employees and additional
compensation expense due to the accelerated vesting of stock
options and shares of restricted stock per the Retirement and
Consulting Agreement between the Company and Jeffrey L.
McWaters, the Company’s Chairman of the Board and former
Chief Executive Officer; (2) increased premium taxes from
revenue growth and entry into new markets; and (3) an
increase in experience rebate expense as a result of favorable
performance in Texas.
As previously announced, President and Chief Operating Officer
James G. Carlson became Chief Executive Officer, on
September 1, 2007 when Jeffrey L. McWaters retired as Chief
Executive Officer. In addition, on July 6, 2007,
Mr. Carlson was elected to the Company’s Board of
Directors. Mr. McWaters will continue to serve as Chairman
of the Company’s Board of Directors until the next annual
meeting of the Company’s stockholders, which is scheduled
to be held May 8, 2008. In connection with his retirement,
we entered into a Retirement and Consulting Agreement with
Mr. McWaters. Under the terms of the agreement, certain
equity grants were modified to amend the vesting and exercise
terms, the most significant of which accelerated the vesting of
applicable grants to September 30, 2007. As a result,
additional compensation expense of approximately
$3.7 million was recorded in the third quarter of 2007.
In September 2007, we received approval from CMS to offer both
Medicare Advantage Special Needs Plans and Medicare Advantage
health plans in the following states: Florida, Maryland, New
Jersey, New Mexico, New York, Tennessee and Texas, including
service area expansions in Maryland and Texas. We expect to
begin serving members in these new service areas in January 2008.
In August 2007, we concluded the contracting process with the
State of South Carolina to begin serving Medicaid enrollees
under the new South Carolina Healthy Connections Choices
Program. The program will be implemented by region, with the
Midlands Region or the Columbia area designated as the first
area of service. The State expects to begin enrollment in the
fourth quarter of 2007.
On April 1, 2007, AMERIGROUP Tennessee, Inc. began offering
healthcare coverage to Medicaid members in the State of
Tennessee for the Middle-Grand region. As of September 30,
2007, AMERIGROUP Tennessee, Inc. served approximately 185,000
members. On November 1, 2007, we acquired substantially all
of the assets of Memphis Managed Care Corporation (MMCC),
including substantially all of the assets of TLC Family Care
Health Plan in West Tennessee and substantially all of the
assets of Midsouth Health Solutions, Inc., a subsidiary of MMCC.
We believe this acquisition will strengthen our ability to
respond to the West Tennessee bid procurement that is expected
to be released later in 2007.
In March 2007, the District of Columbia released a request for
proposal (RFP) to provide managed care services to Medicaid and
D.C. Alliance members in the District. Our subsidiary,
AMERIGROUP Maryland, Inc., submitted a response to the RFP on
July 24, 2007. We anticipate that the District will award
the contracts to between two and four managed care
organizations, based upon a best-value evaluation which includes
premium rates, in late 2007. We anticipate an implementation
date of January 1, 2008. If we are not awarded a contract
through this process, we can make no assurance that our
business, results of operations and financial condition would
not be materially adversely affected.
We are in the process of establishing a contract with the State
of New Mexico to serve the long-term care segment of the
Medicaid population. We anticipate enrollment will begin in the
second half of 2008.
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Contingencies
Our Texas health plan is required to pay a rebate to the State
of Texas in the event profits exceed established levels. The
rebate calculation reports that we filed for the contract years
ended August 31, 2000 through 2005 have been audited by a
contracted auditing firm retained by the State. In their report,
the auditor has challenged inclusion in the rebate calculation
certain expenses incurred by the Company in providing services
to the health plan under our administrative services agreement
with AMERIGROUP Texas, Inc. The audit of the contract year ended
August 31, 2006 and interim review procedures for the
contract year ended August 31, 2007 commenced during the
third quarter of 2007. The Company’s filing practices have
not changed in response to the audit recommendations pending
final determination of these issues.
We are in discussions with the State of Texas regarding the
audit findings and we are working with the State to resolve
these issues identified by the audits. We continue to believe
that the rebate calculations were done appropriately in
accordance with the contract provisions and it is our intent to
vigorously pursue our position. If the State were ultimately to
disallow certain of these expenses in the rebate calculation, it
could result in the requirement that we pay the State of Texas
additional amounts for these prior periods and it could reduce
our profitability in future periods. Based upon our
understanding of the State’s positions on the various audit
issues, with which we do not agree, we believe it is reasonably
possible that the liability related to this issue as of
September 30, 2007 could range from zero to $27.0 million.
In the Fort Worth service area, AMERIGROUP Texas, Inc. had
an exclusive risk-sharing arrangement with Cook Children’s
Health Care Network (CCHCN) and Cook Children’s Physician
Network (CCPN), which includes Cook Children’s Medical
Center (CCMC) that was terminated as of August 31,
2005. Under the risk-sharing arrangement the parties have an
obligation to perform annual reconciliations and settlements of
the risk pool for each contract year. We have recorded a
receivable in the accompanying Condensed Consolidated Financial
Statements for the 2005 contract year, in the amount of
$10.8 million, as of September 30, 2007. The contract
with CCHCN prescribes reconciliation procedures which have been
completed. CCHCN subsequently engaged external auditors to
review all medical claims payments made for the 2005 contract
year and has provided the preliminary results to us. We are
currently in discussions with the parties regarding the
preliminary audit results. Although we continue to believe this
to be a valid receivable, if we are unable to resolve this
matter resulting in payment in full to us, our expenses
attributable to these periods may be adversely affected, and we
may incur significant costs in our efforts to reach a final
resolution of this matter.
In December 2006, our New Jersey subsidiary received a notice of
deficiency for failure to meet provider network requirements in
several New Jersey counties as required by our Medicaid contract
with New Jersey. We submitted to the State of New Jersey a
corrective action plan and a request for a waiver of certain
contractual provisions in December 2006 and January 2007. The
State of New Jersey is considering our requests for waivers, and
we were granted an extension of time in which to correct the
network deficiencies through September 24, 2007. On
September 12, 2007, our New Jersey subsidiary received
notice that the September 24, 2007 submission of its
provider network data would be used for purposes of determining
provider network deficiencies, if any, and imposing fines and
penalties, if any. The notice also indicated that the State of
New Jersey would use revised standards to evaluate provider
network adequacy. If we are unable to materially satisfy the
provider network requirements, the State of New Jersey could
impose fines and penalties that could have a material impact on
our financial results.
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The following table sets forth selected operating ratios. All
ratios, with the exception of the HBR, are shown as a percentage
of total revenues. We operate in one business segment with a
single line of business.
Three and
Nine months Ended September 30, 2007 Compared to Three and
Nine months Ended September 30, 2006
Summarized comparative financial information for the three and
nine months ended September 30, 2007 and September 30,
2006 are as follows ($ in millions, except per share data):
Premium revenue for the three months ended September 30,
2007 increased $315.1 million, or 45.1%, to
$1,013.6 million from $698.5 million for the three
months ended September 30, 2006. For the nine months ended
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September 30, 2007, premium revenue increased
$821.2 million, or 41.1%, to $2,819.2 million from
$1,998.0 million for the nine months ended
September 30, 2006. The increase in both periods was
primarily due to entry into Tennessee, expansion regions in
Georgia and AMERIPLUS expansion markets in San Antonio and
Austin, Texas and the Southwest Region of Ohio. Additionally,
our mature markets contributed further to revenue growth from
premium rate increases and yield increases resulting from
changes in membership mix. These increases were offset by our
exit from the Illinois market in July 2006. During the three and
nine months ended September 30, 2006, premium revenue was
negatively impacted by the reserve for potential premium
recoupments related to the Florida Behavioral Health Care
program of $5.1 million and $5.2 million,
respectively. Our premium revenue for the nine months ended
September 30, 2006 reflects a $6.3 million reversal of
potential premium recoupments related to enrollment errors by
the State of Florida and eligibility issues in the State of
Texas that were resolved favorably.
Investment income and other increased by $8.5 million to
$19.1 million for the three months ended September 30,
2007 from $10.6 million for the three months ended
September 30, 2006, and increased $22.2 million to
$49.6 million for the nine months ended September 30,
2007 from $27.4 million for the nine months ended
September 30, 2006. The increase in investment income and
other was primarily due to higher interest rates and an increase
in the average balance of invested assets over the prior year.
Additionally, both current year periods benefited from income
earned on restricted assets held as collateral of approximately
$4.7 million and $9.7 million, respectively. These
assets were established in March and April 2007 from proceeds
from borrowings under our Credit and Guaranty Agreement and
issuance of the 2.0% Convertible Senior Notes due
May 15, 2012, as discussed below.
The following table sets forth the approximate number of our
members we served in each state as of September 30, 2007
and 2006. Because we receive two premiums for members that are
in both the AMERIVANTAGE and AMERIPLUS products, these members
have been counted twice in the states of Maryland and Texas
where we offer SNP Plans.
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The following table sets forth the approximate number of our
members in each of our products as of September 30, 2007
and 2006. Because we receive two premiums for members that are
in both the AMERIVANTAGE and AMERIPLUS product, these members
have been counted in each product.
As of September 30, 2007, we served 1,528,000 members,
reflecting an increase of approximately 304,000 members compared
to September 30, 2006. The increase is primarily a result
of our entry into the East, North, and Southeast regions of
Georgia on September 1, 2006 with the entire health plan
providing services to 218,000 members as of September 30,
2007, and our entry into the Tennessee market in April 2007
resulting in approximately 185,000 members as of
September 30, 2007. Additionally, the AMERIPLUS expansion
markets in Texas and Ohio which began enrollment in February
2007 increased membership by approximately 30,000 members in
total as of September 30, 2007. Texas membership has
further increased as the State of Texas eliminated the primary
care case management program, which expanded participation in
health plans such as ours. Lastly, Ohio membership increased as
a result of expansion into Dayton and Cincinnati beginning
September 1, 2006. These increases were offset by the
contraction of the New York market whose membership decreased by
14,000 as of September 30, 2007 resulting from more
stringent guidelines for eligibility re-determination
implemented by the state in 2006 and a reduction in the size of
our New York sales force in response to limits imposed by the
State on marketing programs.
Expenses relating to health benefits for the three months ended
September 30, 2007 increased $269.8 million, or 47.3%,
to $840.7 million from $570.9 million for the three
months ended September 30, 2006. Our HBR was 82.9% for the
three months ended September 30, 2007 versus 81.7% in the
same period of the prior year. This increase in HBR for the
three months ended September 30, 2007 over that for the
three months ended September 30, 2006 is a result of a
higher proportion of business in our developing markets which
have a higher HBR. This reflects the higher HBR in the Tennessee
market which we entered on April 1, 2007. For the three
months ended September 2007, our HBR excluding the effect of
$11.5 million of favorable prior period development was
84.1%. Excluding the prior period reserve development, the HBR
for our mature markets would have been approximately
80 percent and in our developing markets would have been in
the low 90 percent range.
For the nine months ended September 30, 2007, expenses
related to health benefits increased $718.6 million, or
44.2%, to $2,342.9 million from $1,624.3 million for
the nine months ended September 30, 2006. For the nine
months ended September 30, 2007, and 2006, our HBR was
83.1% and 81.3%, respectively. The increase in HBR for the nine
months ended September 30, 2007 over that for the nine
months ended September 30, 2006 is a result of a change in
membership mix toward developing products and markets, such as
our AMERIPLUS product, and our Tennessee and Georgia markets
that are underwritten at a higher HBR.
SG&A for the three months ended September 30, 2007
increased $37.6 million, or 40.7%, to $129.9 million
from $92.3 million for the three months ended
September 30, 2006. For the nine months ended
September 30, 2007, SG&A increased
$102.4 million, or 40.1%, to $357.5 million from
$255.1 million for the nine months ended September 30,
2006.
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Our SG&A to total revenues ratio was 12.6% and 13.0% for
the three months ended September 30, 2007 and 2006,
respectively. The decrease in the ratio is primarily a result of
leverage gained through increased revenue. SG&A expenses
increased $37.6 million primarily from: (1) the growth
in salaries and benefits expenses due to: a 17.4% increase in
the number of employees and additional compensation expense due
to the accelerated vesting of stock options and shares of
restricted stock per the Retirement and Consulting Agreement
between the Company and Jeffrey L. McWaters, the Company’s
Chairman of the Board and former Chief Executive Officer;
(2) increased premium taxes from revenue growth and entry
into new markets; and (3) an increase in experience rebate
expense as a result of favorable performance in Texas.
Our SG&A to total revenues ratio was 12.5% and 12.6% for
the nine months ended September 30, 2007 and 2006,
respectively. Increases in SG&A expense resulted from
increases in premium taxes, salaries and benefits, and
experience rebate expense as noted above.
Premium taxes were $22.4 million and $12.7 million for
the three months ended September 30, 2007 and
September 30, 2006, respectively, and $62.6 million
and $29.6 million for the nine months ended
September 30, 2007 and September 30, 2006,
respectively.
Depreciation and amortization expense increased approximately
$1.6 million or 26.2% from $6.1 million for the three
months ended September 30, 2006 to $7.7 million for
the three months ended September 30, 2007. Depreciation and
amortization expense increased approximately $4.3 million
or 22.3% from $19.3 million for the nine months ended
September 30, 2006 to $23.6 million for the nine
months ended September 30, 2007. The increase in both
periods is a result of an increase in the depreciable asset base.
Interest expense was $4.0 million and $0.1 million for
the three months ended September 30, 2007 and
September 30, 2006, respectively, and $8.3 million and
$0.3 million for the nine months ended September 30,
2007 and September 30, 2006, respectively. The increase in
interest expense in both periods is a result of borrowings under
our Credit and Guaranty Agreement and the issuance of the
2.0% Convertible Senior Notes due May 15, 2012, as
discussed below.
Income tax expense for the three months ended September 30,
2007 was $19.1 million with an effective tax rate of 37.9%
compared to $15.1 million income tax expense with an
effective tax rate of 38.0% for the three months ended
September 30, 2006. Income tax expense for the nine months
ended September 30, 2007 and 2006 was $51.2 million
with an effective tax rate of 37.5% and $49.2 million with
an effective tax rate of 39.0%, respectively. The fluctuation in
the rates in both periods is primarily due to variations in the
proportion of taxable income across states with different state
income tax rates.
Our primary sources of liquidity are cash and cash equivalents,
short and long-term investments, cash flows from operations and
amounts available under our Credit and Guaranty Agreement (the
Credit Agreement). As of September 30, 2007, we had cash
and cash equivalents of $320.1 million, short and long-term
investments of $675.8 million, restricted investments held
as collateral of $351.3 million and restricted investments
on deposit for licensure of $83.9 million. A significant
portion of this cash and investments is regulated by state
capital requirements. Unregulated cash and investments as of
September 30, 2007 were approximately $549.9 million
which includes restricted investments held as collateral of
$351.3 million that are held to back an irrevocable letter
of credit issued in connection with the Qui Tam Litigation.
On March 26, 2007, we entered in to a Credit Agreement
which provides, among other things, for commitments of up to
$401.3 million consisting of (i) up to
$351.3 million of financing under a senior secured
synthetic letter of credit facility and (ii) up to
$50.0 million of financing under a senior secured revolving
credit facility. The
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Credit Agreement terminates on March 15, 2012. We initially
borrowed $351.3 million under the senior secured synthetic
letter of credit facility of the Credit Agreement. Shortly
thereafter, we repaid $221.3 million of such borrowings
with the proceeds from the issuance of the Notes (described
below). As a result, pursuant to the terms of the Credit
Agreement, unless later amended by the parties, the commitments
under the senior secured synthetic letter of credit facility
were permanently reduced to $130.0 million and total
commitments under the Credit Agreement were permanently reduced
to $180.0 million.
The proceeds of the Credit Agreement are available to
(i) facilitate an appeal, payment or settlement of the
judgment in the Qui Tam Litigation (as defined below),
(ii) repay in full certain existing indebtedness,
(iii) pay related transaction costs, fees, commissions and
expenses, and (iv) provide for the ongoing working capital
requirements and general corporate purposes, including permitted
acquisitions. The borrowings under the Credit Agreement accrue
interest at our option at a percentage, per annum, equal to the
adjusted Eurodollar rate plus 2.0% or the base rate plus 1.0%.
We are required to make payments of interest in arrears on each
interest payment date (to be determined depending on interest
period elections made by the Company) and at maturity of the
loans, including final maturity thereof.
The Credit Agreement includes customary covenants and events of
default. If any event of default occurs and is continuing, the
Credit Agreement may be terminated and all amounts owing there
under may become immediately due and payable. The Credit
Agreement also includes the following financial covenants:
(i) maximum leverage ratios as of specified periods,
(ii) a minimum interest coverage ratio and (iii) a
minimum statutory net worth ratio.
Borrowings under the Credit Agreement are secured by
substantially all of our assets and the assets of our
wholly-owned subsidiary, PHP Holdings, Inc., including the stock
of each of our respective wholly-owned managed care
subsidiaries, in each case, subject to carve-outs.
As of September 30, 2007, we have $130.0 million
outstanding under the senior secured synthetic letter of credit
facility of our Credit Agreement. These funds are held in
restricted investments as partial collateral for an irrevocable
letter of credit in the amount of $351.3 million, issued to
the Clerk of Court for the U.S. District Court for the
Northern District of Illinois, Eastern Division. The irrevocable
letter of credit was provided to the court for the purpose of
staying the enforcement of the judgment in the Qui Tam
Litigation pending resolution of our appeal. As of
September 30, 2007, we have no outstanding borrowings under
the senior secured revolving credit facility of our Credit
Agreement. We incurred offering expenses totaling
$4.6 million in connection with the Credit Agreement which
are included in other long-term assets in the Condensed
Consolidated Financial Statements and are being amortized over
the term of the Credit Agreement.
Effective March 28, 2007, we issued an aggregate of
$260.0 million in principal amount of 2.0% Convertible
Senior Notes due May 15, 2012 (the Notes). In May 2007, we
filed an automatic shelf registration statement on
Form S-3
with the SEC covering the resale of the Notes and common stock
issuable upon conversion of the Notes. The total proceeds from
the offering of the Notes, after deducting underwriting fees and
estimated offering expenses, were approximately
$253.1 million. We incurred offering expenses totaling
$6.9 million in connection with the offering of the Notes
which are included in other long-term assets in the accompanying
Condensed Consolidated Financial Statements and are being
amortized over the term of the Notes. As of September 30,
2007, approximately $221.3 million of these proceeds are
held as restricted investments as the balance of the collateral
required for the irrevocable letter of credit which totals
$351.3 million, as discussed above. The remainder of the
proceeds of the notes were used in connection with the purchased
convertible note hedges and sold warrants that occurred
concurrent with the issuance of the Notes as discussed below.
The Notes are governed by an Indenture dated as of
March 28, 2007 (the Indenture). The Notes are senior
unsecured obligations of the Company and will rank equally with
all of our existing and future senior debt and senior to all of
our subordinated debt. The Notes will be effectively
subordinated to all existing and future liabilities of our
subsidiaries and to any existing and future secured
indebtedness, including the obligations under our Credit
Agreement.
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The Notes bear interest at a rate of 2.0% per year, payable
semiannually in arrears in cash on May 15 and November 15 of
each year, beginning on May 15, 2007. The Notes mature on
May 15, 2012, unless earlier repurchased or converted.
Holders may convert their Notes at their option on any day prior
to the close of business on the scheduled trading day
immediately preceding March 15, 2012, only under the
following circumstances: (1) during the five
business-day
period after any five consecutive
trading-day
period (the measurement period) in which the price per Note for
each day of that measurement period was less than
98 percent of the product of the last reported sale price
of our common stock and the conversion rate on each such day;
(2) during any calendar quarter after the calendar quarter
ending June 30, 2007, if the last reported sale price of
our common stock for 20 or more trading days in a period of 30
consecutive trading days ending on the last trading day of our
immediately preceding calendar quarter exceeds 130 percent
of the applicable conversion price in effect on the last trading
day of the immediately preceding calendar quarter; or
(3) upon the occurrence of specified corporate events. The
Notes will be convertible, regardless of the foregoing
circumstances, at any time on or after March 15, 2012
through the third scheduled trading day immediately preceding
the maturity date of the Notes, May 15, 2012.
Upon conversion of the Notes, we will pay cash up to the
principal amount of the Notes converted. With respect to any
conversion value in excess of the principal amount of the Notes
converted, we have the option to settle the excess with cash,
shares of our common stock, or a combination of cash and shares
of our common stock based on a daily conversion value, as
defined in the Indenture. If an “accounting event” (as
defined in the Indenture) occurs, we have the option to elect to
settle the converted notes exclusively in shares of our common
stock. The initial conversion rate for the Notes will be
23.5114 shares of common stock per one thousand dollars of
principal amount of Notes, which represents a 32.5 percent
conversion premium based on the closing price of $32.10 per
share of our common stock on March 22, 2007 and is
equivalent to a conversion price of approximately $42.53 per
share of common stock. The conversion rate is subject to
adjustment in some events but will not be adjusted for accrued
interest. In addition, if a “fundamental change” (as
defined in the Indenture) occurs prior to the maturity date, we
will in some cases increase the conversion rate for a holder of
Notes that elects to convert its Notes in connection with such
fundamental change.
Subject to certain exceptions, if we undergo a “designated
event” (as defined in the Indenture) holders of the Notes
will have the option to require us to repurchase all or any
portion of their Notes. The designated event repurchase price
will be 100% of the principal amount of the Notes to be
purchased plus any accrued and unpaid interest (including
special interest, if any) up to but excluding the designated
event repurchase date. We will pay cash for all Notes so
repurchased. We may not redeem the Notes prior to maturity.
Concurrent with the issuance of the Notes, we purchased
convertible note hedges covering, subject to customary
anti-dilution adjustments, 6,112,964 shares of our common
stock. The convertible note hedges allow us to receive shares of
our common stock
and/or cash
equal to the amounts of common stock
and/or cash
related to the excess conversion value that we would pay to the
holders of the Notes upon conversion. These convertible note
hedges will terminate at the earlier of the maturity dates of
the Notes or the first day on which none of the Notes remain
outstanding due to conversion or otherwise. The cost of the
convertible note hedges aggregated approximately
$52.7 million.
The convertible note hedges are expected to reduce the potential
dilution upon conversion of the Notes in the event that the
market value per share of our common stock, as measured under
the convertible note hedges, at the time of exercise is greater
than the strike price of the convertible note hedges, which
corresponds to the initial conversion price of the Notes and is
subject to certain customary adjustments. If, however, the
market value per share of our common stock exceeds the strike
price of the warrants (discussed below) when such warrants are
exercised, we will be required to issue common stock. Both the
convertible note hedges and warrants provide for net-share
settlement at the time of any exercise for the amount that the
market value of our common stock exceeds the applicable strike
price.
Also concurrent with the issuance of the Notes, we sold warrants
to acquire 6,112,964 shares of our common stock at an
exercise price of $53.77 per share. If the average price of our
common stock during a defined period ending on or about the
settlement date exceeds the exercise price of the warrants, the
warrants will be settled, at our option, in cash or shares of
our common stock. Proceeds received from the issuance of the
warrants totaled approximately $25.7 million.
The convertible note hedges and sold warrants are separate
transactions which will not affect holders’ rights under
the Notes.
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On May 23, 2005, our shelf registration statement was
declared effective with the SEC covering the issuance of up to
$400.0 million of securities including common stock,
preferred stock and debt securities. No securities have been
issued under the shelf registration. Under this shelf
registration, we may publicly offer such registered securities
from time-to-time at prices and terms to be determined at the
time of the offering.
Cash provided by operating activities was $253.7 million
for the nine months ended September 30, 2007 compared to
$205.3 million for the nine months ended September 30,
2006. The increase in cash from operations of $48.4 million
was primarily due to the following:
Increase in cash flows due to:
Offset by a decrease in cash flows due to:
For the nine months ended September 30, 2007 and 2006, cash
used in investing activities was $498.4 million and
$246.4 million, respectively. This increase in cash used in
investing activities results primarily from net purchases of
restricted investments held as collateral of $351.3 million
to fund the irrevocable letter of credit required to stay the
execution of the judgment in the Qui Tam Litigation and net
purchases of hedge and warrant instruments of $27.0 million
offset by lower net investment purchases of $122.6 million.
We currently anticipate total capital expenditures for 2007 of
approximately $42.0 million related primarily to
information technology.
Our investment policies are designed to preserve capital,
provide liquidity and maximize total return on invested assets.
As of September 30, 2007, our investment portfolio
consisted primarily of fixed-income securities. The
weighted-average maturity is under twelve months. We utilize
investment vehicles such as commercial paper, money market
funds, municipal bonds, U.S. government agency securities,
auction-rate securities and U.S. Treasury instruments. The
states in which we operate prescribe the types of instruments in
which our subsidiaries may invest their funds. The
weighted-average taxable equivalent yield on consolidated
investments as of September 30, 2007 was approximately 5.3%.
Cash provided by financing activities was $388.0 million
for the nine months ended September 30, 2007, compared to
$5.4 million for the nine months ended September 30,
2006. The increase in cash provided by financing activities was
primarily related to proceeds received from the issuance of
$260.0 million in aggregate principal amount of
2.0% Convertible Senior Notes and borrowings under the
Credit Agreement of $351.3 million net of repayments of
outstanding amounts under the Credit Agreement of
$221.3 million and payment of debt issuance costs of
$11.5 million.
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On November 1, 2007, AMERIGROUP Corporation and AMERIGROUP
Tennessee, Inc. acquired substantially all of the assets of MMCC
including substantially all of the assets of TLC Family Care
Health Plan and substantially all of the assets of Midsouth
Health Solutions, Inc., a subsidiary of MMCC, for approximately
$12.0 million. An additional contingent payment of
approximately $18.25 million will be payable at such time
if and when the State of Tennessee awards to AMERIGROUP
Tennessee, Inc. a capitated contract through the TennCare
program to provide full-risk managed care services to the
Medicaid population in West Tennessee. The initial
$12.0 million payment is subject to post-closing
adjustments based on the timing of the implementation of the
full-risk program in West Tennessee and the $18.25 million
contingent payment is subject to adjustment based on the number
of full-risk members assigned to AMERIGROUP Tennessee, Inc.
should it bid successfully in West Tennessee. The purchase price
was financed through available unregulated cash.
We believe that existing cash and investment balances,
internally generated funds and available funds under our Credit
Agreement will be sufficient to support continuing operations,
capital expenditures and our growth strategy for at least
12 months. Our debt-to-total capital ratio at
September 30, 2007 was 30.8%. As a result of significant
borrowings under the Credit Agreement and the related debt
service and issuance of 2.0% Convertible Senior Notes, our
access to additional capital may be limited which could restrict
our ability to acquire new businesses or enter new markets and
could impact our ability to maintain statutory net worth
requirements in the states in which we do business.
Our operations are conducted through our wholly-owned
subsidiaries, which include health maintenance organizations
(HMOs) and one Prepaid Health Services Plan (PHSP). HMOs and
PHSPs are subject to state regulations that, among other things,
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. Additionally, certain state regulatory
agencies may require individual regulated entities to maintain
statutory capital levels higher than the state regulations. As
of September 30, 2007, we believe our subsidiaries are in
compliance with all minimum statutory capital requirements. We
anticipate the parent company may be required to fund minimum
net worth shortfalls for certain of our subsidiaries during the
remainder of 2007 using unregulated cash, cash equivalents and
investments. We believe that we will continue to be in
compliance with these requirements at least through the end of
2007.
On July 13, 2006, the Financial Accounting Standards Board
(FASB) issued Interpretation No. 48 (FIN 48),
Accounting for Uncertainty in Income Taxes. FIN 48
clarifies the accounting for uncertainty in income taxes
recognized in the financial statements in accordance with FASB
Statement No. 109, Accounting for Income Taxes. This
interpretation provides guidance on the financial statement
recognition and measurement of a tax position taken or expected
to be taken in a tax return. For a tax benefit to be recognized,
a tax position must be more likely than not to be sustained upon
examination by applicable taxing authorities. The benefit
recognized is the amount that has a greater than 50% likelihood
of being realized upon final settlement of the tax position. We
adopted the provisions of FIN 48 on January 1, 2007.
As a result of the adoption of FIN 48, we recorded a
$9.2 million increase to retained earnings as of
January 1, 2007. As of the date of the adoption, the total
gross amount of unrecognized tax benefits was $0.3 million
excluding interest. The gross amount of unrecognized tax
benefits is $0.4 million (excluding interest) as of
September 30, 2007. Of this total, $0.3 million (net
of the federal benefit on state issues) represents the total
amount of unrecognized tax benefits that, if recognized, would
impact the effective rate.
We are subject to U.S. federal income tax, as well as,
income tax in multiple state jurisdictions. The Company has
substantially concluded all U.S. federal income tax matters
for years through 2003. Substantially all material state tax
matters have been concluded for years through 2002.
Our continuing practice is to recognize interest
and/or
penalties related to income tax matters in income tax expense.
The gross amount of interest accrued for uncertain tax positions
is $41,000.
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In August 2007, the FASB proposed FASB Staff Position (FSP) APB
14-a,
Accounting for Convertible Debt Instruments That May Be
Settled in Cash upon Conversion (Including Partial Cash
Settlement). The proposed FSP would require the proceeds
from the issuance of such convertible debt instruments to be
allocated between a liability component and an equity component.
The resulting debt discount would be amortized over the period
the convertible debt is expected to be outstanding as additional
non-cash interest expense. The proposed change in accounting
treatment would be effective for fiscal years beginning after
December 15, 2007, and applied retrospectively to prior
periods. If adopted, this FSP would change the accounting
treatment for our $260.0 million 2.0% Convertible
Senior Notes due May 15, 2012, which were issued effective
March 28, 2007. If adopted in its current form, the impact
of this new accounting treatment could be significant to our
results of operations and result in an increase to non-cash
interest expense beginning in fiscal year 2008 for financial
statements covering past and future periods. We estimate
earnings per diluted share could decrease by approximately $0.11
to $0.12 annually as a result of the adoption of this FSP. As
the guidance is emerging and still under consideration regarding
its effective date and scope, we can make no assurances that the
actual impact upon adoption will not differ materially from our
estimates.
As of September 30, 2007, we had short-term investments of
$223.5 million, $351.3 million of restricted
investments held as collateral, long-term investments of
$452.3 million and investments on deposit for licensure of
$83.9 million. These investments consist primarily of
investments with maturities between three and twenty-four
months. These investments are subject to interest rate risk and
will decrease in value if market rates increase. Credit risk is
managed by investing in commercial paper, money market funds,
municipal bonds, U.S. government agency securities,
auction-rate securities and U.S. Treasury instruments. Our
investment policies are subject to revision based upon market
conditions and our cash flow and tax strategies, among other
factors. We have the ability to hold these investments to
maturity, and as a result, we would expect any decrease in the
value of these investments resulting from any decrease in
changes in market interest rates to be temporary. As of
September 30, 2007, a hypothetical 1% change in interest
rates would result in an approximate $11.1 million change
in our annual investment income or $0.13 per diluted share, net
of the related income tax effects.
We also have interest rate risk from changing interest rates
related to our outstanding debt under the Credit Agreement. As
of September 30, 2007, we had $130.0 million of
Eurodollar-based floating rate debt outstanding under the Credit
Agreement. A hypothetical 1% increase in interest rates would
increase our annual interest expense by $1.3 million or
$0.02 per diluted share net of the related income tax effect.
(a) Evaluation of Disclosure Controls and Procedures. Our
management, with the participation of our Chief Executive
Officer and Chief Financial Officer, has evaluated the
effectiveness of our disclosure controls and procedures (as such
term is defined in
Rules 13a-15(e)
and
15d-15(e)
under the Securities Exchange Act of 1934, as amended (Exchange
Act)) as of the end of the period covered by this report. Based
on such evaluation, our Chief Executive Officer and Chief
Financial Officer have concluded that, as of the end of such
period, our disclosure controls and procedures are effective in
recording, processing, summarizing and reporting, on a timely
basis, information required to be disclosed by us in the reports
that we file or submit under the Exchange Act and are effective
in ensuring that information required to be disclosed by us in
the reports that we file or submit under the Exchange Act is
accumulated and communicated to management, including our Chief
Executive Officer and Chief Financial Officer, as appropriate,
to allow timely decisions regarding required disclosure.
(b) Changes in Internal Controls over Financial Reporting.
During the third quarter of 2007, in connection with our
evaluation of internal control over financial reporting in
accordance with Section 404 of the Sarbanes-Oxley Act of
2002, we concluded there were no changes in our internal control
procedures that materially affected, or are reasonably likely to
materially affect, our internal control over financial reporting.
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In 2002, Cleveland A. Tyson, a former employee of our former
Illinois subsidiary, AMERIGROUP Illinois, Inc., (the Relator)
filed a federal and state Qui Tam or whistleblower action
against our former Illinois subsidiary. The complaint was
captioned the United States of America and the State of
Illinois, ex rel., Cleveland A. Tyson v. AMERIGROUP
Illinois, Inc. (the Qui Tam Litigation). The complaint was filed
in the U.S. District Court for the Northern District of
Illinois, Eastern Division (the Court). It alleged that
AMERIGROUP Illinois, Inc. submitted false claims under the
Medicaid program by maintaining a scheme to discourage or avoid
the enrollment into the health plan of pregnant women and other
recipients with special needs.
In 2005, the Court allowed the State of Illinois and the United
States of America to intervene and the plaintiffs were allowed
to amend their complaint to add AMERIGROUP Corporation as a
party. In the third amended complaint, the plaintiffs alleged
that AMERIGROUP Corporation was liable as the alter-ego of
AMERIGROUP Illinois, Inc. and that AMERIGROUP Corporation was
liable for making false claims or causing false claims to be
made.
The trial began on October 4, 2006, and the case was
submitted to the jury on October 27, 2006. On
October 30, 2006, the jury returned a verdict against us
and AMERIGROUP Illinois, Inc. in the amount of
$48.0 million, which under applicable law would be trebled
to $144.0 million, plus penalties, and attorney’s
fees, costs and expenses. The jury also found that there were
18,130 false claims. The statutory penalties allowable under the
False Claims Act range between $5,500 and $11,000 per false
claim. The statutory penalties allowable under the Illinois
Whistleblower Reward and Protection Act, 740 ILC 175/3, range
between $5,000 and $10,000 per false claim.
On November 22, 2006, the Court entered an initial judgment
in the amount of $48.0 million and we subsequently filed
motions for a new trial and remittur and for judgment as a
matter of law and the plaintiffs filed motions to treble the
civil judgment, impose the maximum fines and penalties and to
assess attorney’s fees, costs and expenses against us.
On March 13, 2007, the Court entered a judgment against
AMERIGROUP Illinois, Inc., and AMERIGROUP Corporation in the
amount of approximately $334.0 million, which includes the
trebling of damages and false claim penalties. Under the Federal
False Claims Act, the counsel for the Relator is entitled to
collect their attorney’s fees, costs and expenses in the
event the Relator’s claim is successful. On April 3,
2007, we delivered an irrevocable letter of credit in the amount
of $351.3 million, which includes estimated interest on the
judgment for one year, to the Clerk of Court for the
U.S. District Court for the Northern District of Illinois,
Eastern District to stay the enforcement of the judgment pending
appeal. On May 11, 2007 we filed a notice of appeal with
the United States Court of Appeals for the Seventh Circuit. On
September 6, 2007, pursuant to a joint stipulation and
order, we caused to be posted with the Court a surety bond in
the amount of $8.4 million as the attorney’s fees,
costs and expenses that Relator’s counsel would receive in
the event the Plaintiffs prevail on the appeal. On
September 17, 2007 we filed our memorandum of law in
support of our appeal with the Court of Appeals.
Although it is possible that the ultimate outcome of the Qui Tam
Litigation judgment will not be favorable to us, the amount of
loss, if any, is uncertain. Accordingly, we have not recorded
any amounts in the Condensed Consolidated Financial Statements
for unfavorable outcomes, if any, as a result of the Qui Tam
Litigation judgment. There can be no assurances that the
ultimate outcome of this matter will not have a material adverse
effect on our financial position, results of operations or
liquidity.
As a result of the Qui Tam Litigation, it is possible that state
or federal governments will subject us to greater regulatory
scrutiny, investigation, action, or litigation. We have
proactively been in contact with all of the insurance and
Medicaid regulators in the states in which we operate as well as
the Office of the Inspector General of the Department of Health
and Human Services (OIG), with respect to the practices at issue
in the Qui Tam Litigation. In connection with our discussions
with the OIG, we entered into a tolling agreement with the OIG
which preserves the rights that the OIG had as of
October 30, 2006. Effective October 1, 2007, we
entered into an indefinite extension of the tolling agreement
which can be terminated by either party upon 90 days
written notice. In some circumstances,
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state or federal governments may move to exclude a company from
contracts as a result of a civil verdict under the False Claims
Act. We are unable to predict at this time what, if any, further
action any state or federal regulators may take. Exclusion is a
discretionary step which we believe would not be commenced, if
at all, until all appeals had been exhausted. Further, prior to
any administrative action or exclusion taking effect, we believe
we would have an opportunity to advocate our position. While the
circumstances of this case do not appear to warrant such action,
exclusion from doing business with the federal or any state
governments could have a material adverse effect on our
financial position, results of operations or liquidity.
It is also possible that plaintiffs in other states could bring
similar litigation against us. While we believe that the
practices at issue in the Qui Tam Litigation have not occurred
outside of the operations of our former Illinois subsidiary,
AMERIGROUP Illinois, Inc., a verdict in favor of a plaintiff in
similar litigation in another state could have a material
adverse effect on our financial position, results of operations
or liquidity.
Colleen Batty, a former employee of our former Illinois
subsidiary, AMERIGROUP Illinois, Inc., has filed a federal and
state Qui Tam or whistleblower action against us and our former
Illinois subsidiary AMERIGROUP Illinois, Inc. in District Court
in the Northern District of Illinois. The action is styled
United States of America ex. rel. Colleen Batty, State of
Illinois ex. rel. Colleen Batty and Colleen Batty,
individually v. AMERIGROUP Illinois, Inc. and AMERIGROUP
Corporation. Ms. Batty alleges, among other things, that
AMERIGROUP Illinois, Inc. submitted false claims under the
Medicaid program by underpaying certain hospitals in connection
with emergency services delivered in out-of-network settings.
The action was originally filed under seal in March 2005. Both
the federal government and the State of Illinois have declined
to intervene in the suit. Ms. Batty also alleges wrongful
discharge of her employment in violation of the Illinois
Whistleblower and Protection Act. The action seeks: (i) an
unspecified amount of compensatory damages under the False
Claims Act and Illinois Whistleblower and Protection Act, which
damages, if any, would be trebled under applicable law;
(ii) statutory penalties allowable under the False Claims
Act which range between $5,500 and $11,000 per false claim and
statutory penalties allowable under the Illinois Whistleblower
Reward and Protection Act, which range between $5,000 and
$10,000 per false claim; and (iii) reinstatement to her job
and two years’ back pay. On August 31, 2007 we filed a
motion with the Court to dismiss Ms. Batty’s claims.
The Court has stayed discovery pending disposition of the motion
to dismiss.
There has been no material change in our risk factors as
previously disclosed in Part I, Item 1.A., Risk
Factors, of the Company’s Annual Report on
Form 10-K
for the year ended December 31, 2006 as filed with the
Securities and Exchange Commission (SEC) on February 27,
2007, as updated under Item 1A of our Quarterly Report on
Form 10-Q
for the quarterly period ended March 31, 2007 as filed with
the SEC on May 3, 2007.
(1) The 2005 Plan allows, upon approval by the plan
administrator, stock option recipients to deliver shares of
unrestricted Company common stock held by the participant as
payment of the exercise price and applicable withholding taxes
upon the exercise of stock options or vesting of restricted
stock. During the three months ended
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September 30, 2007, certain employees elected to tender
shares to the Company in payment of related withholding taxes
upon vesting of restricted stock.
None.
None.
The Company, through its subsidiary AMERIGROUP Texas, Inc.
entered into an amendment, effective September 1, 2007, to
its Health & Human Services Commission Agreement for
Health Services to the STAR, STAR+PLUS, CHIP, CHIP Perinate,
programs in the Bexar, Dallas, Harris, Nueces, Tarrant and
Travis Service Delivery Areas effective September 1, 2007.
On October 30, 2007, our Board of Directors approved
amendments to our Code of Business Conduct and Ethics (the
Code), which applies to all of our Directors, officers and
associates. The amendments, which arose from our annual review
of the Code, memorialize our zero-tolerance policy for
fraudulent or abusive activities and add a definition of
“abuse” to the Code and reflects that abuse is an
activity that is not consistent with generally accepted medical
or fiscal standard practices. The amendments also include
technical, administrative and other non-substantive changes. The
amended Code will be posted on the corporate governance page of
our website, www.amerigroupcorp.com.
On November 1, 2007, AMERIGROUP Corporation and its
subsidiary AMERIGROUP Tennessee, Inc. completed the acquisition
of substantially all of the assets of Memphis Managed Care
Corporation (MMCC) including substantially all of the
assets of TLC Family Care Health Plan and substantially all of
the assets of Midsouth Health Solutions, Inc., a subsidiary of
MMCC for approximately $12.0 million. An additional
contingent payment of approximately $18.25 million will be
payable at such time if and when the State of Tennessee awards
AMERIGROUP Tennessee, Inc. a capitated contract through the
TennCare program to provide full-risk managed care services to
the Medicaid population in West Tennessee.
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Pursuant to the requirements of the Securities Exchange Act
of 1934, the Registrant has duly caused this Report to be signed
on its behalf by the undersigned thereunto duly authorized.
AMERIGROUP Corporation
James G. Carlson
President and Chief
Executive Officer
Date: November 2, 2007
James W. Truess
Executive Vice President and
Chief Financial Officer
Date: November 2, 2007
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