In September 2005, we entered into a 15-year lease for an additional 106,000 square-foot building in Virginia Beach, Virginia to be constructed adjacent to our National Support Center that houses our primary call and data centers. The new building, which is expected to be completed in December 2006, is planned to house our claims processing operations.
We are a multi-state managed healthcare company focused on serving people who receive healthcare benefits through publicly sponsored programs, including Medicaid, SCHIP, FamilyCare and SNP. We were founded in December 1994 with the objective of becoming the leading managed care organization in the U.S. focused on serving people who receive these types of benefits. Having concluded over ten years of operation, we continue to believe that managed healthcare remains the only proven mechanism that significantly reduces medical cost trends and helps our state partners control their costs.
In 2005, we increased our total revenues by 27.8% over 2004. Total membership increased by 193,000 members, or 20.6%, to 1,129,000 members as of December 2005. Our 2005 revenue growth came from a number of factors including:
As of December 31, 2005, more than 44% of our current membership has resulted from ten acquisitions. We are also focused on growth opportunities in new markets and new products. We will continue to pursue opportunities that we believe meet our return metrics. We continue to believe acquisitions will be an important part of our long-term growth strategy.
Cash, cash equivalents and investments totaled $643.8 million at the end of 2005. A significant portion of our cash, cash equivalents and investments is regulated by state capital requirements. However, $157.9 million of our cash, cash equivalents and investments was unregulated and held at the parent level.
On July 2, 2004, the State of Texas released a Request for Proposal (RFP) to re-procure its current Medicaid managed care programs, as well as to expand the current programs. In July 2005, the State announced the results of this competitive-bidding process as it relates to the TANF (STAR) and SCHIP populations. AMERIGROUP’s wholly-owned subsidiary, AMERIGROUP Texas, Inc. was awarded STAR and SCHIP, or TexCare, contracts in its current service areas of Houston, Dallas and Fort Worth and contracts in two new service areas of Corpus
Christi and El Paso. AMERIGROUP Texas, Inc. was also granted a STAR contract for the Austin service area. AMERIGROUP Texas, Inc. will have one or more competitors in each of its new and current service areas for the STAR and TexCare programs. The combined eligibles for these expanded products and markets are approximately 1,100,000 as compared to the previously existing eligible population of 735,000. In September 2005, the Company notified the State of Texas that it had declined the contract award in El Paso. This decision was reached after the State of Texas announced the results of the bid, which included re-awarding contracts to the two existing managed care providers that currently serve approximately 73% of the eligibles in this market. This competitive environment would significantly limit market expansion opportunities. Implementation of the remaining contracts is expected to be in September 2006. These awards do not include the expansion of the STAR+PLUS program. The State announced expansion of STAR+PLUS into all remaining urban areas under a modified structure which will exclude risk on hospitalization costs to protect the upper payment limit. This may reduce premium levels compared to the current STAR+PLUS reimbursement, but will be offset by an accompanied reduction in medical risk. The revised program is expected to be finalized in 2006 and implemented by early 2007.
As a result of a competitive-bidding process, our Georgia subsidiary, AMGP Georgia Managed Care Company, Inc. (d/b/a AMERIGROUP Georgia), was chosen in July 2005 to offer healthcare coverage to low-income residents in four of six regions in the State of Georgia. Georgia will represent our entry into a tenth state. AMERIGROUP Georgia will have two competitors in the Atlanta Region and one competitor in each of the other regions. The total eligible members in all four regions are approximately 885,000, with 533,000 in the Atlanta Region. We anticipate that AMERIGROUP Georgia will commence enrollment of members in the Atlanta Region on June 1, 2006 based on the most recent communication from the State.
The Maryland Legislative Session ended on April 11, 2005 and it addressed the medical loss ratio assessment in the following manner. First, no budget action was taken to recoup premium relating to 2003 as it did in the 2004 legislative session. Second, the Maryland Legislature amended the existing statute to clarify the process and required that regulations be promulgated by the Department of Health and Mental Hygiene before an action could be taken to recoup premium based upon an MCO’s medical loss ratio. Based on this information, we reversed the reduction in premium that was previously recorded resulting in $6.1 million of additional premium revenue in the year ended December 31, 2005.
In the ordinary course of business, we make a number of estimates and assumptions relating to the reporting of results of operations and financial condition in the preparation of our financial statements in conformity with U.S. generally accepted accounting principles. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances. Actual results could differ from those estimates and the differences could be significant. We believe that the following discussion addresses our critical accounting policies, which are those that are most important to the portrayal of our financial condition and results of operations and require management’s most difficult, subjective and complex judgments, often as a result of the need to make estimates about the effect of matters that are inherently uncertain.
Our results of operations depend on our ability to effectively manage expenses related to health benefits, as well as our ability to accurately predict costs incurred in recording the amounts in our consolidated financial statements. 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 IBNR. For the year ended December 31, 2005, approximately 95% of our direct medical payments related to fees paid on a fee-for-service basis to hospitals, PCPs, specialist physicians and other providers, including fees paid to third-party vendors for ancillary services. The balance related to fees paid on a capitation, or per member, basis. Primary care and specialist physicians not paid on a capitation basis are paid on a maximum allowable fee schedule set forth in the contracts with our providers. We reimburse hospitals on a negotiated per diem, case rate or an agreed upon percent of their standard charges. In Maryland, the State sets the amount reimbursed to hospitals. Fees paid for services provided to our members by hospitals and providers with whom we have no contract are paid based upon our usual and customary fee schedules unless mandated at other levels by state regulation.
Monthly, we estimate our IBNR based on a number of factors, including prior claims experience, member mix changes, high dollar claims, and authorization data. Authorization data is information captured in our medical management system, which identifies services requested by providers or members. 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 in the more current months.
We enhanced our estimation processes in the fourth quarter of 2005 to reflect changes in claims payment patterns observed in 2005 and anticipated to continue in the future due to the conversion to the FACETS system. We considered the typical reduction in the rate of claims processing due to a decrease in payment efficiencies
associated with the installation of a new medical claims payment system. As we have discussed previously, we transitioned our Texas market, which represents 35% of our membership, to FACETS effective October 1, 2005. To quantify the potential impact of this conversion on our three claims payment systems, we reviewed claims payments per member per month, by product and by health plan, and observed lower than historical payment patterns, while at the same time we saw an increase in claims inventory levels for certain markets. Accordingly, we estimated the value of the increase related to claims on hand at the end of the period and added $15.4 million to our claims payable balance for this backlog in our IBNR estimate.
In the current year, we experienced a reduction in the favorable prior year development of approximately $10.7 million related to 2004 and prior which compares to a decrease of $22.8 million in the prior year related to 2003 and prior. The current year reduction was primarily the result of continued tightening of our claims estimates at December 31, 2004.
Changes in estimates are primarily the result of obtaining more complete claims information that directly correlates with the claims and provider reimbursement trends. Since our estimates are based upon the blended per member per month claims experience, changes cannot typically be explained by any single factor, but are the result of a number of interrelated variables, all influencing the resulting experience. These variables include fluctuations in claims payment patterns, changes in membership levels, number and mix of products, benefit structure, changes in provider networks or contract terms, severity of illness and utilization levels. We believe there will be less volatility as we increase in size and gain more maturity in our markets and successfully convert our remaining health plans to FACETS.
We believe that the amount of claims payable is adequate to cover our ultimate liability for unpaid claims as of December 31, 2005; however, actual claim payments and other items may differ from established estimates. Assuming a hypothetical 1% difference between our December 31, 2005 estimates of claims payable and actual claims payable, net income for the year ended December 31, 2005 would increase or decrease by approximately $3.5 million and diluted earnings per share would increase or decrease by approximately $0.04 per share.
On a quarterly basis, we estimate our required tax liability and assess the recoverability of our deferred tax assets. Our taxes payable are estimated based on enacted rates, including estimated tax rates in states where we do business, applied to the income expected to be taxed currently. Management assesses the realizability of our deferred tax assets based on the availability of carrybacks of future deductible amounts and management’s projections for future taxable income. We cannot guarantee that we will generate income in future years. Historically we have not experienced significant differences in our estimates of our tax accrual.
On December 16, 2004, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standard No. 123 (revised 2004) (SFAS No. 123(R)), Share-Based Payment, which is a revision of Statement of Financial Accounting Standards No. 123, Accounting for Stock-Based Compensation (SFAS No. 123). SFAS No. 123(R) supersedes Accounting Principles Board (APB) Opinion No. 25, Accounting
The following table sets forth selected operating ratios for the years ended December 31, 2005, 2004 and 2003. All ratios, with the exception of the health benefits ratio, are shown as a percentage of total revenues.
As of December 31, 2005, we served 1,129,000 members, which reflects an increase of 193,000 members compared to December 31, 2004. The CarePlus acquisition, effective January 1, 2005, added the New York market, which has grown to 138,000 members as of December 31, 2005. The remaining organic growth occurred in all of our other markets, except the District of Columbia and Florida, due to new product offerings, expansion into new service areas, successful marketing initiatives, and competitors leaving the market. Membership in the District of Columbia remains constant. The Florida market decrease of 10,000 members is primarily the result of a decrease in the SCHIP program, Florida Healthy Kids. This decrease is a direct result of changes made by the State of Florida during 2004 in the eligibility re-determination process and the frequency of member enrollment, both of which have negatively impacted the statewide membership in the Florida Healthy Kids program. The Florida Legislature enacted legislation in 2005 to address this problem, which was signed by the Governor, increasing the frequency of the enrollment period from semi-annual to monthly. The State of Florida is now in the process of implementing this enrollment change. Additionally, we have experienced a backlog in our Texas enrollment due to the implementation of a new enrollment broker. We anticipate, based on discussions with the State, that the issues that have caused this backlog will be corrected in 2006 and the enrollment backlog will be updated.
Premium revenue for the year ended December 31, 2005 increased $498.2 million, or 27.5%, to $2,311.6 million from $1,813.4 million in 2004. The increase was primarily due to internal growth in membership, growth through acquisition of CarePlus and premium rate increases. Total membership increased 20.6% to 1,129,000 as of December 31, 2005 from 936,000 as of December 31, 2004.
Expenses relating to health benefits for the year ended December 31, 2005 increased $488.1 million, or 33.2%, to $1,957.2 million from $1,469.1 million for the year ended December 31, 2004. The HBR for the year
ended December 31, 2005 was 84.7% compared to 81.0% in 2004. Our 2005 results have been impacted by an increase in membership, higher incidence of illness, an increase in obstetric services and related costs such as neonatal intensive care unit and other services, higher utilization and unit costs for network changes and provider contract rates and terms, as well as higher costs associated with entry into new markets. In addition, due to the impact of the installation of our new claims processing system, FACETS, on October 1, 2005 in our Texas market, we enhanced our medical claims estimation process during the fourth quarter of 2005 and added $15.4 million to compensate for the reduction in the rate of claims processing. We also added a separate factor for uncertainty of $5.8 million to cover the impact of adverse changes in the level and nature of claims inventory associated with the conversion.
SG&A increased $66.5 million to $258.4 million for the year ended December 31, 2005 compared to $191.9 million in 2004. Our SG&A ratio for the year ended December 31, 2005 was 11.1% compared to 10.5% in 2004. The increase in SG&A ratio was primarily due to:
an increase in legal expenses related to the Tyson litigation and the securities class action complaints; and
Income tax expense for 2005 was $33.1 million with an effective tax rate of 38.1% as compared to the $55.2 million for 2004 with an effective tax rate of 39.1%. The decrease in the effective tax rate is primarily attributable to a decrease in the blended state income tax rate reflecting the profitability by health plan.
SG&A increased $5.0 million to $191.9 million for the year ended December 31, 2004 compared to $186.9 million in 2003. The net increase in SG&A was primarily due to:
an increase in premium taxes that the States of Texas and New Jersey began assessing in September 2003 and July 2004, respectively;
Our SG&A ratio for the year ended December 31, 2004 was 10.5% compared to 11.5% in 2003. This improvement was achieved due to increased leverage of premium revenue from successful rate increases and increased membership levels.
Pursuant to the Credit Agreement we must meet certain financial covenants. These financial covenants include meeting certain financial ratios and a limit on capital expenditures and repurchase of our outstanding common stock.
Effective January 1, 2005, we completed our stock acquisition of CarePlus in New York City, pursuant to the terms of the merger agreement entered into on October 26, 2004 for $126.8 million in cash, including acquisition costs. On June 17, 2005, and December 8, 2005, additional consideration of $4.6 million and $4.0 million was paid in accordance with the terms of the merger agreement. This acquisition was funded with unregulated cash. Goodwill and other intangibles total $122.7 million, which includes $14.0 million of specifically identifiable intangibles allocated to the rights to membership, the provider network, non-compete agreements and trademarks.
an increase in claims payable primarily as a result of increased medical costs in 2005 and entry into new markets resulting in a net increase in cash flow of $78.3 million;
an increase in the effect of the change in premium receivables of approximately $20.4 million primarily due to the timing of payment in our new market, New York, where premium is billed by our New York subsidiary and collected approximately four weeks later; and
a decrease in the change in accounts payable, accrued expenses and other liabilities of $18.3 million primarily as a result of the decrease in the contingent liability accrued for the Maryland market which was accrued 2004 and released in 2005 ($12.2 million of the decrease); payment of 2004 incentive compensation in 2005, with a comparably lower corresponding accrual in the current period ($12.7 million of the decrease); payment of premium taxes net of accruals as a result of timing of payments ($13.6 million of the decrease); offset by decrease in the change in income taxes payable as a result of timing of payments ($7.0 million) and decrease in the change in accounts payable and experience rebate payable of ($5.8 million).
Cash used in investing activities was $73.9 million for the year ended December 31, 2005 compared to cash flows provided by investing activities of $37.9 million for the year ended December 31, 2004. The decrease in cash provided by investing activities was primarily due to cash used in the purchase of CarePlus and additional investments in new markets requiring purchase of investments on deposit to meet state regulatory requirements. We currently anticipate that our 2006 capital expenditures will be approximately $45.0 million related to the expansion of our operations center and technological infrastructure development.
Our investment policies are designed to provide liquidity, preserve capital and maximize total return on invested assets. As of December 31, 2005, our investment portfolio consisted primarily of fixed-income securities. The weighted average maturity is less than four months. We utilize investment vehicles such as money market funds, commercial paper, certificates of deposit, municipal bonds, debt securities of government sponsored entities, corporate 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 cash. The weighted average taxable equivalent yield on consolidated investments as of December 31, 2005 was approximately 3.89%.
We believe that 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.
The following table summarizes our material contractual obligations, including both on- and off-balance sheet arrangements, and our commitments at December 31, 2005 (in thousands):
As of December 31, 2005, the Company has a commitment under the provisions of its lease for the new operations center to cooperate jointly with the landlord of the property to qualify for certain grants by satisfying capital investment performance and employment opportunities criteria totaling $2.4 million. Upon qualifying for such grants, the Company is obligated to advance the funds to be received under the grant to the landlord, unless previously reimbursed by the Company.
AMERIGROUP Corporation (the Company), a Delaware corporation, is 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) and FamilyCare.
Included in short-term and long-term investments are auction rate securities totaling $94,105 and $187,157 at December 31, 2005 and 2004, respectively. Auction rate securities are securities with an underlying component of a long-term debt or an equity instrument. These auction rate securities trade or mature on a shorter term than the underlying instrument based on an auction bid that resets the interest rate of the security. The auction or reset dates occur at intervals that are typically less than three months providing high liquidity to otherwise longer term investments. The Company had previously classified its auction rate securities as held-to-maturity and as cash equivalents, short-term investments or long-term investments based on the period from the purchase date to the first reset date. In 2004, the Company reclassified auction rate securities from cash equivalents to short-term investments because the underlying instruments had maturity dates exceeding 3 months. Additionally, the Company reclassified these securities to available-for-sale as the securities are not held to the maturity date of the underlying security. Prior periods have been reclassified to provide consistent presentation.
Software is stated at cost less accumulated amortization in accordance with Statement of Position 98-1, Accounting for the Costs of Software Developed or Obtained for Internal Use. Software is amortized over its estimated useful life of three to ten years, using the straight-line method. Amortization expense on software was $5,477, $4,121 and $2,972 for the years ended December 31, 2005, 2004 and 2003, respectively.
Goodwill represents the excess of cost over fair value of businesses acquired. In accordance with Statement of Financial Accounting Standards No. 142, Goodwill and Other Intangible Assets (SFAS No. 142), goodwill and intangible assets acquired in a purchase business combination and determined to have an indefinite useful life are not amortized, but instead tested for impairment at least annually. SFAS No. 142 also requires that intangible assets with estimable useful lives be amortized over their respective estimated useful lives to their estimated residual values, and reviewed for impairment in accordance with Statement of Financial Accounting Standards No. 144, Accounting for Impairment or Disposal of Long-Lived Assets.
Taxes based on premium revenues are currently paid by our plans in the States of Texas, New Jersey, Maryland (beginning April 1, 2005) and Ohio (beginning December 1, 2005). Premium tax expense totaled $23,473, $14,066 and $3,913 in 2005, 2004 and 2003, respectively, and is included in selling, general and administrative expenses. Premium taxes range from 1% to 4.5% of premium revenues.
Experience rebate payable, included in accrued expenses, capital leases and other current liabilities, consists of estimates of amounts due under contracts with a state government. These amounts are computed based on a
Stop-loss premiums, net of recoveries, are included in health benefits expense in the accompanying consolidated income statements.
Long-lived assets, such as property and equipment and purchased intangibles subject to amortization, are reviewed 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 estimated undiscounted future cash flows expected to be generated by the asset. If the carrying amount of an asset exceeds its estimated future cash flows and the assets could not be used within the Company, an impairment charge is recognized by the amount by which the carrying amount of the asset exceeds the fair value of the asset. Assets to be disposed of would be separately presented in the consolidated balance sheet and reported at the lower of the carrying amount or fair value less costs to sell, and are no longer depreciated. The assets and liabilities of a group classified as held for sale would be presented separately in the appropriate asset and liability sections of the consolidated balance sheet. No impairment of long-lived assets was recorded in 2005, 2004 or 2003.
Basic net income per share has been computed by dividing net income by the weighted average number of common shares outstanding. Diluted net income 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 by the weighted average number of common shares and dilutive potential common shares outstanding. Dilutive potential
common shares include all outstanding stock options after applying the treasury stock method to the extent the options are dilutive.
On December 16, 2004, the Financial Accounting Standards Board (FASB) issued SFAS No. 123(R), which is a revision of SFAS No. 123. SFAS No. 123(R) supersedes APB Opinion No. 25, and SFAS No. 148 and amends SFAS No. 95, Statement of Cash Flows. Generally, the approach in SFAS No. 123(R) is similar to the approach described in SFAS No. 123. However, SFAS No. 123(R) requires all share-based payments to employees, including grants of employee stock options, to be recognized in the income statement based on their fair values. Proforma disclosure is no longer an alternative.
factors, which include changes in healthcare practices, cost trends, inflation, new technologies, major epidemics, natural disasters and malpractice litigation, are beyond any health plan’s control and could adversely affect our ability to accurately predict and effectively control healthcare costs. Costs in excess of those anticipated could have a material adverse effect on our results of operations.
At December 31, 2005, we served members who received healthcare benefits through 20 contracts with the regulatory entities in the jurisdictions in which we operate. Five of these contracts individually accounted for 10% or more of our revenues for the year ended December 31, 2005, with the largest of these contracts representing approximately 18% of our revenues. Our state contracts have terms that are generally one- to two-years in length, some of which contain optional renewal periods at the discretion of the individual state. Some contracts also contain a termination clause with notification periods ranging from 30 to 180 days. At the termination of these contracts, re-negotiation of terms or the requirement to enter into a re-bidding or re-procurement process is required to execute a new contract.
The following table shows the fair value of our held-to-maturity investments with unrealized losses that are not deemed to be other-than-temporarily impaired, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position, at December 31, 2004:
The temporary declines in value as of December 31, 2005 and 2004, are primarily due to fluctuations in short-term market interest rates.
As of December 31, 2004, CarePlus served approximately 115,000 New York State Medicaid, Child Health Plus and Family Health Plus members in New York City (Brooklyn, Manhattan, Queens and Staten Island) and Putnam County providing us with an entry into the New York market. CarePlus is also authorized to offer a managed long-term care program in New York City effective December 1, 2005.
This acquisition was funded with unregulated cash. Goodwill and other intangibles total $122,673, which includes $13,980 of specifically identifiable intangibles allocated to the rights to membership, the provider network, non-compete agreements and trademarks. Intangible assets related to the rights to membership are being amortized based on the timing of the related cash flows with an expected amortization of ten years. Intangible assets related to the provider network are being amortized over ten years on a straight-line basis. Intangible assets related to the trademarks and non-compete agreements are being amortized over 12 to 36 months on a straight-line basis. The merger agreement provides for purchase price adjustments related to the future settlement of certain assumed liabilities. Therefore, the purchase price is subject to adjustment.
The following table summarizes identifiable intangible assets resulting from the CarePlus transaction:
Effective January 1, 2003, we completed our acquisition of PHP pursuant to the terms of a merger agreement entered into on August 22, 2002 for $124,260, including acquisition costs of $1,260.
Goodwill and acquired intangible assets for the years ended December 31, 2005 and 2004 are as follows:
Amortization expense for the years ended December 31, 2005, 2004 and 2003 was $7,940, $3,504 and $5,849, respectively, and the estimated aggregate amortization expense for the five succeeding years is as follows:
Total income taxes for the years ended December 31, 2005, 2004 and 2003 were allocated as follows:
To assess the recoverability of deferred tax assets, we consider whether it is more likely than not that deferred tax assets will be realized. In making this determination, we take into account the scheduled reversal of deferred tax liabilities and whether projected future taxable income is sufficient to permit deduction of the deferred tax assets. Based on the level of historical taxable income and projections for future taxable income, we believe it is more likely than not that we will fully realize the benefits of the gross deferred tax assets of $19,072. State net operating loss carryforwards that expire in 2012 and 2023 through 2025 comprise $129 and $1,937, respectively, of the gross deferred tax assets.
Prepaid income tax was $3,719 and $2,287 at December 31, 2005 and December 31, 2004, respectively, and is included in prepaid expenses, provider receivables and other current assets.
On May 10, 2005, we entered into an amendment (Amendment) to our Amended and Restated Credit Agreement (as amended, the Credit Agreement), which, among other things, provides for an increase in the commitments under our Credit Agreement then in existence to $150,000 and a five-year extension of the term from the date of the Amendment. The Credit Agreement, contains a provision which allows us to obtain, subject to certain conditions, an increase in revolving commitments of up to an additional $50,000. The proceeds of the Credit Agreement are available for general corporate purposes, including, without limitation, permitted acquisitions of businesses, assets and technologies. The borrowings under the Credit Agreement will accrue interest at one of the following rates, at our option: Eurodollar plus the applicable margin or an alternate base rate plus the applicable margin. The applicable margin for Eurodollar borrowings is between 0.875% and 1.625% and the applicable margin for alternate base rate borrowings is between 0.00% and 0.75%. The applicable margin will vary depending on our leverage ratio. The Credit Agreement is secured by substantially all
Pursuant to the Credit Agreement, we must meet certain financial covenants. These financial covenants include meeting certain financial ratios and limits on capital expenditures and repurchase of our outstanding common stock.
The following table summarizes information related to the stock options outstanding at December 31, 2005:
Options to purchase 1,774,285, 185,000 and 501,000 shares of common stock were outstanding during the years ended December 31, 2005, 2004 and 2003, respectively, and were not included in the computation of diluted net income per share because the option exercise price was greater than the average market price; and therefore, including such shares would have been antidilutive.
Cash and cash equivalents, premium receivables, prepaid expenses, provider receivables and other current assets, deposits, accounts payable, unearned revenue, accrued payroll and related liabilities, accrued expenses and other current liabilities and claims payable: The carrying amounts approximate fair value because of the short maturity of these items.
Regulations governing our managed care operations in the District of Columbia, Florida, Georgia, Illinois, Maryland, New Jersey, New Mexico, New York, Ohio, Texas and Virginia require the applicable subsidiaries to meet certain minimum net worth requirements. Each subsidiary was in compliance with its requirements at December 31, 2005.
We are obligated under capital leases covering certain office equipment that expires at various dates during the next three years. At December 31, 2005 and 2004, the gross amount of office equipment and related accumulated amortization recorded under capital leases was as follows:
These leases have various escalations, abatements and tenant improvement allowances that have been included in the total cost of each lease and amortized on a straight-line basis. Total rent expense for all office space and office equipment under non-cancelable operating leases was $11,362, $8,704 and $8,187 in 2005, 2004 and 2003, respectively, and is included in selling, general and administrative expenses in the accompanying consolidated income statements.
As of December 31, 2005, the Company has a commitment under the provisions of its lease for a new operations center to cooperate jointly with the landlord of the property to qualify for certain grants by satisfying capital investment performance criteria and employment opportunities criteria totaling $2,360. Upon qualifying for such grants, the Company is obligated to advance the funds to be received under the grant to the landlord, unless previously reimbursed by the Company.
During 2003, we added a long-term cash incentive award designed to retain certain key executives. Each eligible participant is assigned a cash target, the payment of which is deferred for three years. The amount of the target is dependent upon the participant’s performance against individual major job objectives in the first year of the program. The target award amount is funded over the three-year period, with the funding being dependent upon the Company meeting its financial goals each year. An executive is eligible for payment of a long-term incentive earned in any one year only if the executive remains employed with the Company and is in good standing at the beginning of the third following year. The expense recorded for the long-term cash incentive awards was $1,754 and $1,326 in 2004 and 2003, respectively. No expense was recorded in 2005 as the Company did not meet its financial goals required for the long-term cash incentive award to be awarded for the current year. The related current portion of the liability of $1,742 at December 31, 2005 was included in accrued payroll and related liabilities. There was no current portion of the liability at December 31, 2004. The related long-term portion of the liability of $1,320 and $3,385 at December 31, 2005 and 2004, respectively, was included in other long-term liabilities.
The court denied AMERIGROUP Illinois, Inc.’s motion to dismiss Mr. Tyson’s second amended complaint on September 26, 2004. On February 15, 2005, we received a motion filed by the Office of the Attorney General for the State of Illinois on February 10, 2005, seeking court approval to intervene on behalf of the State of Illinois. On March 2, 2005, the Court granted that motion to intervene. On March 3, 2005, AMERIGROUP Illinois, Inc. filed a motion to dismiss for lack of subject matter jurisdiction, based upon a recent opinion of the United States Court of Appeals for the District of Columbia Circuit and additional cases that bar actions under the federal False Claims Act unless there is direct presentment of allegedly false claims to the federal government. Also on March 3, 2005, the Office of the Attorney General of the State of Illinois issued a subpoena to AMERIGROUP Corporation as part of an investigation pursuant to the Illinois Whistleblower Reward and Protection Act to determine whether a violation of the Act has occurred. AMERIGROUP Corporation filed a motion objecting to the subpoena on the grounds, among other things, that the subpoena is duplicative of one previously served on AMERIGROUP Corporation in the federal court Tyson litigation with which AMERIGROUP is complying. The Office of the Attorney General of the State of Illinois withdrew its state court subpoena in September 2005.
On May 6, 2005, Plaintiffs filed a joint motion for leave to amend their complaint. At a hearing on June 7, 2005, Judge David A. Coar indicated that he would grant the motion to amend. On June 22, 2005, Plaintiffs served AMERIGROUP Corporation and AMERIGROUP Illinois, Inc. with a third amended complaint, which includes allegations that AMERIGROUP Corporation is liable as the alter-ego of AMERIGROUP Illinois, Inc. and allegations that AMERIGROUP Corporation is liable for making false claims or causing false claims to be made. On July 7, 2005, AMERIGROUP Corporation and AMERIGROUP Illinois, Inc. filed a motion to dismiss the third amended complaint based on several independent grounds, including lack of subject matter jurisdiction, which also was raised in the prior motion to dismiss. In September 2005, Judge David A. Coar issued an order of recusal. Senior Judge Harry D. Leinenweber is now the judge for this case. On October 17, 2005, Judge Leinenweber denied the motion to dismiss for lack of subject matter jurisdiction. On November 8, 2005, Judge Leinenweber denied the motion to dismiss the third amended complaint. On November 23, 2005, AMERIGROUP Illinois, Inc. and AMERIGROUP Corporation filed their answer and affirmative defenses to the third amended complaint. The United States Attorneys’ Office filed a motion to intervene on behalf of the United States of America in August 2005. On October 17, 2005, Judge Leinenweber granted that motion to intervene. Fact discovery is currently scheduled to end March 31, 2006 and the court has assigned a trial date of October 4, 2006.
Beginning on October 3, 2005, five purported class action complaints (the Actions) were filed in the United States District Court for the Eastern District of Virginia on behalf of persons who acquired our common stock between April 27, 2005 and September 28, 2005. The Actions purported to allege claims against us and certain of our officers for alleged violations of Sections 10(b), 20(a), 20(A) and Rule 10b-5 of the Securities Exchange Act of 1934. On January 10, 2006, the Court issued an order (i) consolidating the Actions; (ii) settingIllinois State Board of Investment v. AMERIGROUP Corp., et al., Civil Action No. 2:05-cv-701 as lead case for purposes of trial and all pretrial proceedings; (iii) appointing Illinois State Board of Investment (ISBI) as Lead Plaintiff and its choice of counsel as Lead Counsel; and (iv) ordering that Lead Plaintiff file a Consolidated Amended Complaint (CAC) by February 24, 2006. On February 24, 2006, ISBI filed the CAC, which purports to allege claims on behalf of all persons or entities who purchased our common stock from February 16, 2005 through September 28, 2005. The CAC asserts claims for alleged violations of Sections 10(b), 20(a), 20(A) and Rule 10b-5 of the Securities Exchange Act of 1934 against defendants AMERIGROUP Corporation, Jeffrey L. McWaters, James G. Carlson, E. Paul Dunn, Jr. and Kathleen K. Toth. Lead Plaintiff alleges that defendants issued a series of materially false and misleading statements concerning our financial statements, business and prospects. Among other things, the CAC seeks compensatory damages and attorneys’ fee and costs. Although we intend to vigorously contest these allegations, there can be no assurance that the ultimate outcome of this litigation will not have a material adverse affect on our financial position, results of operations or liquidity.
In April 2004, the Maryland Legislature enacted a budget for the 2005 fiscal year beginning July 1, 2004 that included a provision to reduce the premium paid to managed care organizations that did not meet certain HEDIS scores and whose medical loss ratio was below 84% for the calendar year ended December 31, 2002. In May 2004, the Maryland Secretary of Health and Mental Hygiene, in consultation with Maryland’s legislative leadership, determined our premium recoupment to be $846. A liability for the recoupment was recorded with a
The Maryland Legislative Session ended on April 11, 2005 and it addressed the medical loss ratio assessment in the following manner. First, no budget action was taken to recoup premium relating to 2003 as it did in the 2004 legislative session. Second, the Legislature amended the existing statue to clarify the process and required that regulations be promulgated by the Department of Health and Mental Hygiene before an action could be taken to recoup premium based upon an MCO’s medical loss ratio. Based on this information, we reversed the reduction in premium that was previously recorded resulting in approximately $6,100 of additional premium revenue during the year ended December 31, 2005. net of the related tax effect, net income increased approximately $3,800 or $0.07 per share for the year ended December 31, 2005 as a result of this reversal.
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 2004 are currently being audited by a contracted auditing firm. In a preliminary report, the auditor has challenged inclusion in the rebate calculation certain expenses incurred by the Company in providing services to the health plan under the administrative services agreement. Although we believe that the rebate calculations were done appropriately, if the regulators 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.
On February 15, 2001, the Board of Directors approved and we adopted an Employee Stock Purchase Plan. All employees are eligible to participate except those employees who have been employed by us less than 90 days, whose customary employment is less than 20 hours per week or any employee who owns five percent or more of our common stock. Eligible employees may join the plan every six months. Purchases of common stock are priced at the lower of the stock price less 15% on the first day or the last day of the six-month period. We have reserved for issuance 1,200,000 shares of common stock. We issued 80,340 and 61,684 shares under the Employee Stock Purchase Plan in 2005 and 2004, respectively.
Under date of February 24, 2006, we reported on the consolidated balance sheets of AMERIGROUP Corporation and subsidiaries as of December 31, 2005 and 2004 and the related consolidated income statements and consolidated statements of stockholders’ equity and cash flows for each of the years in the three-year period ended December 31, 2005, which are included herein. In connection with our audits of the aforementioned consolidated financial statements, we also audited the related financial statement schedule, Schedule II - Schedule of Valuation and Qualifying Accounts, which is also included herein. 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.