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. After over a decade of operations, we continue to believe that managed healthcare remains the only proven mechanism that significantly reduces medical costs, helps our government partners control their costs, and improves health outcomes for those receiving these types of benefits.
We continued to increase our membership achieving total membership growth of 187,000 members or 16.6% to 1,316,000 members at December 31, 2006. Premium revenues increased approximately $484.2 million or 20.9%. Our largest single source of growth resulted from entry into the State of Georgia. Effective June 1, 2006, Georgia implemented a statewide Medicaid managed care program and AMERIGROUP through its subsidiary AMGP Georgia Managed Care Company, Inc., began serving four of the state’s six regions, including Atlanta. This represents approximately 43% of our premium revenue growth for the year ended December 31, 2006. Additionally, we began operating as a SNP in our Houston, Texas market on January 1, 2006, offering managed healthcare services to the dual eligible population. This represents approximately 20.0% of our revenue growth for the year ended December 31, 2006. Our remaining 37% of premium revenue growth is a result of organic growth in our existing markets as a result of premium rate increases which averaged approximately 5.9%. This growth was partially offset by our exit from the State of Illinois effective July 31, 2006, and declining enrollment in Florida and New York that we believe was caused by administrative or legislative issues that both states are attempting to address. Additionally, as a result of provider network changes our New Jersey enrollment has declined.
Other growth includes: In Texas, our largest state, we added operations in a fifth local market - Corpus Christi - to the STAR program, which serves Medicaid mothers and children. In the STAR+PLUS program, which serves people with long-term illnesses or disabilities, we secured two new local markets, Austin and San Antonio, which began operations in February 2007. We also began serving Medicaid mothers and children in Dayton, Ohio and anticipate that we will have the opportunity to serve people with long-term disabilities in Cincinnati in 2007. In Virginia, we expanded our service area for Medicaid mothers and children into the outer suburbs of Washington, D.C. In Florida, we were selected to participate in a state Medicaid reform program in Broward County.
We anticipate growth in 2007 as a result of several key drivers. In Maryland, we will begin operating our Company’s second SNP, effective January 1, 2007. In 2006, the State of Tennessee chose AMERIGROUP, through its subsidiary AMERIGROUP Tennessee, Inc., as one of two companies to participate in its restructured TennCare program. We anticipate that our operations in Tennessee will commence in mid-2007 with approximately 150,000 members.
We can make no assurance that these efforts will result in new business for us or if that new business will be favorable to our results of operations or financial condition.
As of December 31, 2006, approximately 38% of our current membership has resulted from ten acquisitions. We periodically evaluate acquisition opportunities to determine if they meet our return metrics. We continue to believe acquisitions will be an important part of our long-term growth strategy.
Although it is possible that the ultimate outcome of the Qui Tam litigation will not be favorable to us, the amount of a loss, if any, is uncertain. Accordingly, we have not recorded any amounts in the Consolidated Financial Statements for unfavorable outcomes, if any. It is possible that the ultimate outcome of this matter will have a material adverse effect on our financial position, results of operations or liquidity. If we were to incur significant losses in connection with the Qui Tam litigation, the Company could fail to meet certain financial covenants and/or other provisions under its Credit Agreement which would render the Company in default under the Credit Agreement, thereby causing, among other things, any amounts borrowed, or otherwise owed, under the Credit Agreement to become due and payable.
It is also possible that plaintiffs in other states could bring similar litigation against the Company. While we believe that the practices at issue in the Qui Tam litigation have not occurred outside of the operations of the Company’s Illinois subsidiary, a successful verdict in similar litigation in another state could have a material adverse effect on our financial position, results of operations or liquidity.
The following table reconciles the reported Health Benefits Ratio (HBR) to recast HBR, which reflects the impact of net out of period amounts including adjustments through December 31, 2006, relating to premium revenues and health benefits expenses for the years ended December 31, 2006 and 2005:
Selling, general and administrative expenses (SG&A) were 13.0% of total revenues for the year ended December 31, 2006 compared to 11.1% for the year ended December 31, 2005. SG&A expenses increased primarily as a result of (1) increases in salaries and benefits, including the impact of the adoption of Statement of Financial Accounting Standards No. 123(R) (SFAS No. 123(R)) and the accrual for expenses related to earnings-based compensation plans not provided for in the prior year; (2) operational and technology related initiatives; (3) increased premium taxes; and (4) increased legal expenses related to current litigation.
AMERIGROUP Ohio, Inc. received an HMO license in and signed a contract with the State of Ohio on July 25, 2005, and began enrolling members in September 2005. On March 17, 2006, AMERIGROUP Ohio, Inc. was awarded the regions of Dayton and Cincinnati, covering 15 counties, and began enrolling members on September 1, 2006. Additionally, on October 6, 2006, AMERIGROUP Ohio, Inc. won a preliminary endorsement from Ohio’s Department of Job and Family Services to serve 15,600 eligible residents enrolled in Medicaid’s ABD program in the Southwest Region of Ohio. The Southwest Region includes eight counties near Cincinnati. Enrollment of members under this program began in February 2007.
On September 23, 2005, CMS designated AMERIGROUP Texas, Inc., as a SNP. AMERIGROUP Texas, Inc. entered into a contract with CMS to offer Medicare benefits to dual eligibles that live in and surrounding Houston, Texas beginning January 1, 2006. AMERIGROUP Texas, Inc. already served these members through the Texas Medicaid STAR+PLUS program and offers them the Medicare and Part D drug benefit under this contract. On January 1, 2007, we began enrolling dual eligible members living in Maryland. AMERIGROUP Maryland, Inc. now offers these members the Medicare and Part D drug benefit under this new contract. Our participation in the Medicare Parts A & B and Part D programs is based upon assumptions regarding enrollment, utilization, physician, hospital and pharmaceutical costs and other factors. In the event any of these assumptions are materially incorrect, either as a result of unforeseen changes to Medicare Parts A & B and Part D or otherwise our business, results of operations and financial condition could be adversely affected.
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 believe that CCHCN owes us a substantial payment for the 2005 contract year, which we
AMERIGROUP Illinois, Inc. allowed its contract with the Illinois Department of Healthcare and Family Services to terminate July 31, 2006. We do not expect the termination of this contract to have a material impact on the financial position, results of operations or liquidity of the Company.
We continue to work with CMS and the states on implementing the Deficit Reduction Act of 2005. CMS issued guidelines to the states on June 9, 2006, requiring proof of citizenship for all new enrollees and for re-enrollments. The regulations that came out in early July 2006 further exempt SSI recipients and certain other groups and permit use of school records for children, where appropriate. At this point, we do not anticipate any significant impact on membership as a result of this provision, as most of the states have been trying to reduce the burden of these requirements of this provision for beneficiaries. Georgia and New York already required proof of citizenship and to date we have not been notified of any enrollment issues. Texas is using electronic records to assist beneficiaries and Virginia has retrained all of its enrollment officers to ensure a smooth transition. CMS is also planning a widespread outreach effort to help beneficiaries understand the Deficit Reduction Act of 2005. However, we can give no assurances that these guidelines will not impact our membership adversely, thereby negatively impacting our business, results of operations and financial condition.
period development related to this issue in any future periods, whether favorable or unfavorable, will not have a material effect on our business, results of operations or financial condition.
expected to commence in mid-2007. 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. At this time, we believe it is reasonably possible that the liability related to this issue could range from zero to $18.9 million.
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.
As part of our normal review, we consider the costs to process medical claims, and estimates of amounts to cover uncertainties related to fluctuations in claims payment patterns, membership, products and authorization trends. These estimates are adjusted as more information becomes available and any adjustments are included in current operations. Due to the uncertainty associated with payment rates and inventory levels, associated with the FACETS conversion, we established a separate estimate for this uncertainty to cover the possibility of adverse claims development. We will maintain this additional estimate as long as this uncertainty related to the systems conversion remains.
We utilize the services of independent actuarial consultants, to review our estimates on a quarterly basis, as well as the assumptions used in forming these estimates. Judgments are made based on knowledge and experience about past and current events. There is a likelihood that actual results could be materially different than reported if different assumptions or conditions prevail.
In the current year, we experienced an increase in the favorable prior year development of approximately $37.1 million related to 2005 and prior which compares to a decrease of $10.7 million in the prior year related to 2004 and prior. The current year increase in favorable prior period development was primarily due to realized health benefits expense trends that were less than previously estimated. The health benefits expenses incurred during the year related to prior years include favorable development related to the factor for uncertainty established in the prior year. This may be offset by the establishment of a factor for uncertainty for adverse claims development when estimating claims payable related to the current year.
The Company’s methodology includes adding a factor to compensate for normal claims uncertainty. The more precisely we have been able to predict claims patterns, the lower the required factor for uncertainty as a percentage of our medical liability. Due to the changing mix of members, products and markets, this factor is a necessary component of our medical liabilities. While our prior year development historically has been favorable, there is no guarantee this will continue. The factor for uncertainty mitigates the risk of emerging claims experience that is different from historical patterns. The health benefits expenses incurred during the period related to prior years relate almost entirely to revisions in estimates for the immediately preceding year. The application of our methodology has resulted in reversals of estimated incurred claims related to prior years in each of the years in the three-year period ended December 31, 2006. The resulting impact on operations is a function of the variation of the change in estimate from year-to-year. Our factor for uncertainty increased in 2006 and 2005 by $2.1 million, and $9.2 million, respectively. Our factor for uncertainty decreased by $1.5 million in 2004.
Management’s estimate of grant date fair value of the cost of employee services in share-based payment transactions are based on results of a Black-Scholes-Merton option pricing model adjusted for the unique characteristics of the Company’s share-based payment instruments.
iii. the risk-free interest rate is based on the implied yield currently available on U.S. Treasury zero coupon issues with a remaining term equal to the expected life.
On July 13, 2006, the Financial Accounting Standards Board (FASB) issued Interpretation No. 48 (FIN 48), Accounting for Uncertainty in Income Taxes, which is effective for the Company on January 1, 2007. 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. The cumulative effects of applying FIN 48 will be recorded as an adjustment to retained earnings as of the beginning of the period of adoption. Based on our evaluation as of December 31, 2006, it is estimated that the Company will record an adjustment to increase retained earnings by up to $8.1 million. This amount is subject to revision as management completes its analysis of the impact of FIN 48.
The following table sets forth selected operating ratios for the years ended December 31, 2006, 2005 and 2004. All ratios, with the exception of the health benefits ratio, are shown as a percentage of total revenues.
The health benefits ratio is shown as a percentage of premium revenue because there is a direct relationship between the premium received and the health benefits provided.
Premium revenue for the year ended December 31, 2006 increased $484.2 million, or 20.9%. The increase was primarily due to entry into the Georgia market, commencement of operations as a SNP and premium rate increases. Total membership increased 16.6% to 1,316,000 as of December 31, 2006 from 1,129,000 as of December 31, 2005. Additionally, the premium revenue for the year-ended December 31, 2006 was impacted by a net favorable prior period revenue adjustment totaling $1.7 million resulting from various premium recoupment issues in several of our markets. Net of the related income tax effect, net income increased approximately $1.0 million or $0.02 per diluted share for the year ended December 31, 2006 as a result of this net favorable prior period revenue adjustment.
Premium revenue for the year ended December 31, 2005 increased $498.2 million, or 27.5%. The increase was primarily due to internal growth in membership, growth through the 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.
As of December 31, 2006, we served approximately 1,316,000 members, which reflects an increase of approximately 187,000 members compared to December 31, 2005. The entry into our Georgia market increased our membership by approximately 227,000 members. Additionally, the expansion of our Ohio market into Dayton and Cincinnati increased our membership by approximately 24,000 members. These increases were offset primarily by our exit from our Illinois market causing a decrease in membership of approximately 41,000. Additionally, our Florida market continues to experience declines in membership totaling 17,000 members in the current year. This decline is a result of administrative and legislative changes related to the conversion to an automated enrollment process that have impacted state-wide enrollment. In our New York market, membership decreased by approximately 12,000 members as a result of more stringent guidelines for eligibility re-determination implemented by the state. In our New Jersey market, membership decreased by approximately 7,000 members as a result of provider network changes.
SG&A increased $111.5 million for the year ended December 31, 2006 compared to 2005. Our SG&A ratio for the year ended December 31, 2006 was 13.0% compared to 11.1% in 2005. The increase in SG&A ratio was primarily due to:
an increase in salaries and benefits as a result of a 30% increase in employees, stock compensation expense related to the adoption of SFAS No. 123(R) and earnings-based compensation not provided for in the preceding year;
Income tax expense for 2006 and 2005 was $66.0 million and $33.1 million, respectively, with an effective tax rate of 38.1% in both periods. Income tax expense for 2004 was $55.2 million with an effective tax rate of 39.1%. The effective tax rate remained unchanged between 2006 and 2005 as the increase in the blended state income tax rate was offset by increases in federal tax exempt interest income. The decrease in the effective tax rate between 2005 and 2004 is primarily attributable to a decrease in the blended state income tax rate reflecting the profitability by health plan.
Net income for 2006 was $107.1 million, or $2.02 per diluted share, compared to $53.7 million, or $1.02 per diluted share in 2005. Net income for 2004 was $86.0 million or $1.66 per diluted share. Net income increased from 2005 to 2006 as a result of actuarially sound premium rate increases in excess of medical trend, favorable prior period development, and commencement of operations as a SNP in Houston, Texas. Net income decreased from 2004 to 2005 as a result of increased medical trend greater than premium rate increases received in the period and entry into new markets.
Our primary sources of liquidity are cash and cash equivalents, short- and long-term investments, cash flows from operations and borrowings under our Credit Agreement. As of December 31, 2006, we had cash and cash equivalents of $176.7 million, short and long-term investments of $599.6 million and restricted investments on deposit for licensure of $68.5 million. Unregulated cash, cash equivalents, and investments totaled $153.6 million at December 31, 2006.
clerk of the United States District Court for the Northern District of, Illinois on behalf of the Company and AMERIGROUP Illinois, Inc. to stay the enforcement of a judgment in Qui Tam litigation in the United States District Court for the Northern District of Illinois pending the resolution of the post trial motions. See Item 3. Legal Proceedings. As of December 31, 2006, there were no borrowings outstanding under our Credit Agreement.
Should the Facilities be finalized, the primary purpose of the Synthetic LC Facility would be to collateralize an irrevocable letter of credit for the supersedeas bond in order to stay the enforcement of the judgment (the Judgment) against the Company and its Illinois subsidiary, AMERIGROUP Illinois, Inc., in Tyson v. Amerigroup Illinois, Inc., U.S. District Court for the Northern District of Illinois, Eastern Division, Case No. 02-C-6074, in the event the Court enters a final judgment in excess of the initial $48.0 million jury verdict. On February 20, 2007, the Court heard oral arguments on all post-trial motions. The Court has not yet ruled on the motions, but we expect that a ruling is imminent. The Revolver Facility would be expected to be available to refinance and supercede the Company’s existing credit facility, for ongoing working capital and general corporate purposes.
an increase in the change in unearned revenue of $32.9 million due to the timing of a premium receipts and increase in estimated premium recoupment balances.
a decrease in the change in deferred taxes of $11.0 million primarily related to the increase in unearned revenue and establishment of a deferred tax asset in connection with the adoption of SFAS No. 123(R); and
a decrease in the change in claims payable of $43.5 million related to efforts to resolve outstanding claims issues and reducing ending inventory levels.
Cash used in investing activities was $342.2 million for the year ended December 31, 2006 compared to cash used in investing activities of $73.9 million for the year ended December 31, 2005. The increase in cash used in investing activities was primarily due to net increase in purchase of investments offset by a decrease in cash flows used in acquisition activities. We currently anticipate total capital expenditures for 2007 of approximately $38.0 million to $40.0 million related to technological infrastructure development and the expansion of our medical management system.
On May 10, 2005, we entered into an amendment to our Credit Agreement, which, among other things, provides for commitments under our Credit Agreement of $150.0 million and terminates on May 10, 2010. The Credit Agreement was further amended on November 21, 2006. 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 $50.0 million. 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 of the assets of AMERIGROUP and its wholly-owned subsidiary, PHP Holdings, Inc., including the stock of their respective wholly-owned managed care subsidiaries. There is a commitment fee on the unused portion of the Credit Agreement that ranges from 0.20% to 0.325%, depending on our leverage ratio. During the year ended December 31, 2006, the Company obtained two separate letters of credit through the Credit Agreement. A letter of credit for $217,000 was obtained in connection with standard requirements of a lease for office space for its New York subsidiary, CarePlus. A letter of credit for $50.4 million was obtained in November 2006 to the benefit of the clerk of the United States District Court for the Northern District of Illinois on behalf of the Company and AMERIGROUP Illinois, Inc. to stay the enforcement of a judgment in Qui Tam litigation in the United States District Court for the Northern District of Illinois pending the resolution of the post trial motions. See Item 3. Legal Proceedings. As of December 31, 2006, there were no borrowings outstanding under our Credit Agreement.
The loan documents governing the Facilities are expected to contain representations and warranties, financial, affirmative and negative covenants and events of default as are usual and customary for financings of this kind. Our obligations under the Facilities will be secured by a first priority security interest in all assets of the Company and a pledge of 100% of the capital stock of each domestic subsidiary (other than immaterial subsidiaries) of the Company.
Our operations are conducted through our wholly-owned subsidiaries, which include HMOs and one 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 December 31, 2006, we believe our subsidiaries are in compliance with all minimum statutory capital requirements. We anticipate the parent company will be required to fund minimum net worth shortfalls during 2007 using unregulated cash, cash equivalents and investments. We believe as a result that we will continue to be in compliance with these requirements at least through the end of 2007.
Our off-balance sheet arrangements at December 31, 2006 include future minimum rental commitments of $92.6 million. We have no investments, loans or any other known contractual arrangements with special-purpose entities, variable interest entities or financial partnerships. During the year ended December 31 2006, the Company obtained two letters of credit through our Credit Agreement. A letter of credit for $217,000 was obtained in connection with standard requirements of a lease for office space for its New York subsidiary, Care Plus. A letter of credit for $50.4 million was obtained in November 2006 for the benefit of the clerk of the United States District Court for the Northern District of Illinois on behalf of the Company and AMERIGROUP Illinois, Inc. to stay the enforcement of a judgment in Qui Tam litigation in the United States District Court for the Northern District of Illinois pending the resolution of post trial motions. See Part I, Item 3, Legal Proceedings.
The company was incorporated in 1994 and began operations of its wholly owned subsidiaries to develop, own and operate as health maintenance organizations (HMOs). The Company’s wholly-owned subsidiaries as of December 31, 2006 are as follows:
The consolidated financial statements include the financial statements of AMERIGROUP Corporation and our sixteen wholly-owned subsidiaries. All significant intercompany balances and transactions have been eliminated in consolidation.
We consider all highly liquid temporary investments with original maturities of three months or less to be cash equivalents. We had cash equivalents of $142,291 and $190,398 at December 31, 2006 and 2005, respectively, which consist of commercial paper and municipal bonds.
Short and long-term investments and investments on deposit for licensure at December 31, 2006 and 2005 consist of certificates of deposit, commercial paper, money market funds, U.S. Treasury securities, corporate securities, debt securities of government sponsored entities, municipal bonds and auction rate securities. We consider all investments with original maturities greater than three months but less than or equal to twelve months to be short-term investments. We classify our debt and equity securities in one of three categories: trading, available-for-sale or held-to-maturity. Trading securities are bought and held principally for the purpose of selling them in the near term. Held-to-maturity securities are those securities in which we have the ability and intent to hold the security until maturity. All other securities not included in trading or held-to-maturity are classified as available-for-sale. At December 31, 2006 and 2005, our auction rate securities are classified as available-for-sale. All other securities are classified as held-to-maturity.
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.
Other assets include cash on deposit for payment of claims under administrative services only arrangements, deposits, debt issuance costs and cash surrender value of life insurance policies.
For the years ended December 31, 2005 and 2004, the Company accounted for stock based compensation plans under APB Opinion No. 25. Compensation cost related to stock options issued to employees was recorded only if the grant-date market price of the underlying stock exceeded the exercise price. The following table illustrates the effect on net income and earnings per share if the Company had applied fair value recognition.
During the year ended December 31, 2005, we reversed approximately $6,100 of unearned revenue related to reserves established during the year ended December 31, 2004. The reserves related to a potential premium recoupment in the State of Maryland to comply with minimum medical expenditure requirements as interpreted by the State at that time. These reserves were reversed as a result of further discussions with the State which determined
During the year ended December 31, 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 $3,900, or $0.07 per diluted share for the year ended December 31, 2006 as a result of the favorable resolution of these issues.
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 2006, 2005 or 2004.
Goodwill is tested annually for impairment, and is tested for impairment more frequently if events and circumstances indicate that the asset might be impaired. An impairment loss is recognized to the extent that the carrying amount exceeds the asset’s fair value. This determination is made at the reporting unit level and consists of two steps. First, we determine the fair value of a reporting unit and compare it to its carrying amount. Second, if the carrying amount of a reporting unit exceeds its fair value, an impairment loss is recognized for any excess of the carrying amount of the reporting unit’s goodwill over the implied fair value of that goodwill. The implied fair value of goodwill is determined by allocating the fair value of the reporting unit in a manner similar to a purchase price allocation, in accordance with SFAS No. 141, Business Combinations. The residual fair value after this allocation is the implied fair value of the reporting unit goodwill. No impairment of goodwill was recorded in 2006, 2005 or 2004.
At December 31, 2006, we served members who received healthcare benefits through 18 contracts with the regulatory entities in the jurisdictions in which we operate. Three of these contracts individually accounted for 10% or more of our revenues for the year ended December 31, 2006, with the largest of these contracts representing approximately 24% 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 carrying amount, gross unrealized holding gains, gross unrealized holding losses and fair value for available-for-sale and held-to-maturity short-term investments are as follows at December 31, 2006 and 2005:
The carrying amount, gross unrealized holding gains, gross unrealized holding losses and fair value for available-for-sale and held-to-maturity long-term investments are as follows at December 31, 2006 and 2005:
Property and equipment, net at December 31, 2006 and 2005 is summarized as follows:
Income tax expense (benefit) for the years ended December 31, 2006, 2005 and 2004 consists of the following:
In May 2005, our shareholders adopted and approved our 2005 Equity Incentive Plan (2005 Plan), which provides for the granting of stock options, restricted stock, restricted stock units, stock appreciation rights, stock bonuses and other stock-based awards to employees and directors. We reserved for issuance a maximum of 3,750,000 shares of common stock under the 2005 Plan. In addition, shares remaining available for issuance under our 2003 Stock Plan (described below), our 2000 Stock Plan (described below) and our 1994 Stock Plan (described below) will be available for issuance under the 2005 Plan. Under all plans, an option’s maximum term is ten years. As of December 31, 2006, we had a total 3,263,478 shares available for issuance under our 2005 Plan.
Stock option activity during the year ended December 31, 2006 was as follows:
The fair value of each option grant is estimated on the date of grant using the Black-Scholes-Merton option pricing model with the following weighted-average assumptions for the year ended December 31, 2006, 2005 and 2004:
For the year ended December 31, 2006, assumptions used in estimating the fair value at date of grant were based on the following:
the risk-free interest rate is based on the implied yield currently available on U.S. Treasury zero coupon issues with a remaining term equal to the expected life.
For the years December 31, 2005 and 2004, the Company used a projected life for each award granted based on weighted-average historical experience of employees’ exercise behavior. The methods for determining the expected volatility and risk-free interest rate assumptions were the same as those used for the year ended December 31, 2006.
Regulations governing our managed care operations in the District of Columbia, Florida, Georgia, Illinois, Maryland, New Jersey, New Mexico, Nevada, New York, Ohio, South Carolina, Tennessee, 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, 2006.
We are obligated under capital leases covering certain office equipment that expires at various dates during the next three years. At December 31, 2006 and 2005, the gross amount of office equipment and related accumulated amortization recorded under capital leases was as follows:
We also lease office space under operating leases which expire at various dates through 2019. Future minimum payments by year and in the aggregate under all non-cancelable leases are as follows at December 31, 2006:
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 $1,766 and $1,754 in 2006 and 2004, 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
Fact discovery concluded on August 17, 2006. 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 AMERIGROUP Corporation and AMERIGROUP Illinois, Inc. in the amount of $48,000, which under applicable law will be trebled to $144,000, plus penalties. 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.
All parties have filed post-trial motions. We filed motions for a new trial and remittitur 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.
All of the post-trial motions were timely filed by the parties in January and February 2007.
In order to stay the execution of the judgment of the Court during the pendency of our appeal, we may be required to establish a supersedeas bond equal to an amount set forth by the Court in its final judgment, plus one year of interest. We may raise the necessary financing to collateralize a letter of credit in favor of the Court through any combination of one or more of the following: (i) borrowing additional amounts under our Credit Agreement; (ii) using existing unregulated cash and investments; (iii) issuing debt, preferred stock and/or equity securities (including debt securities or preferred stock convertible into our common equity), under our shelf registration and/or in one or more public or Rule 144A offerings or privately negotiated transactions; and/or (iv) entering into additional credit arrangements. If we incur additional debt, it may limit our access to capital in the future which
Although it is possible that the ultimate outcome of the Qui Tam litigation will not be favorable to us, the amount of a loss, if any, is uncertain. Accordingly, we have not recorded any amounts in the Consolidated Financial Statements for unfavorable outcomes, if any. It is possible that the ultimate outcome of this matter will have a material adverse effect on our financial position, results of operations or liquidity. If we were to incur significant losses in connection with the Qui Tam litigation, the Company could fail to meet certain financial covenants and/or other provisions under its Credit Agreement which would render the Company in default under the Credit Agreement, thereby causing, among other things, any amounts borrowed, or otherwise owed under the Credit Agreement to become due and payable.
As a result of the Qui Tam litigation, it is possible that state or federal governments will subject the Company 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 until September 30, 2007. 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 of 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.
of counsel as Lead Counsel; and (iv) ordering that Lead Plaintiff file a Consolidated Amended Complaint (CAC) by February 24, 2006.
On October 25, 2006, the Company reached an agreement in principle to resolve the Actions by executing a memorandum of understanding (the MOU) with the Lead Plaintiff. Under the terms of the MOU, a settlement fund of $5,000 in cash was created by the Company’s insurance carrier to resolve all class claims against the Company. All claims asserted against the individuals named in the lawsuit have been dismissed. Accordingly, the Company is the only remaining defendant. On November 13, 2006, the Company and the Lead Plaintiff executed and filed the definitive settlement agreement with the Court. The definitive settlement agreement was approved by the Court on February 5, 2007.
A copy of the letter was forwarded to the Board of Directors for their review and action. The Board has retained independent counsel to review this matter. There can be no assurance that the purported shareholder will not further pursue his allegations or that any pursuit of any such allegations would not have a material adverse effect on the Company.
provided to our SNP members, necessitate re-adjudication of claims or result in a retroactive premium adjustment. We are continuing to evaluate the potential impact of these various factors.
Florida legislature, which was unsuccessful. AMERIGROUP Florida, Inc. believes that the implementation by AHCA of the restrictive definition of comprehensive behavioral healthcare services in the contract is impermissible and inconsistent with the statutory requirements for administrative rule making. In February 2007, the Company received a ruling indicating amounts owed to AHCA of $5,200 for the 2004 and 2005 contract years which has been recorded in the accompanying Consolidated Financial Statements as of December 31, 2006. The Company has the option to appeal this determination through arbitration and is currently considering this alternative. The Company has reserved approximately $7,900 as its best estimate of liability for all prior and current contract periods, which is included in unearned revenue in Condensed Consolidated Financial Statements as of December 31, 2006.
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 81,152, 80,340, and 61,684 shares under the Employee Stock Purchase Plan in 2006, 2005, and 2004, respectively. As of December 31, 2006 we had a total of 801,334 shares available for issuance under the Employee Stock Purchase Plan.