We generally lease space in the states where our health plans, specialty companies and claims processing facilities operate. We are required by various insurance and regulatory authorities to have offices in the service areas where we provide benefits. We believe our current facilities are adequate to meet our operational needs for the foreseeable future.
We are a multi-line healthcare enterprise operating in two segments: Medicaid Managed Care and Specialty Services. Our Medicaid Managed Care segment provides Medicaid and Medicaid-related health plan coverage to individuals through government subsidized programs, including Medicaid, the State Children’s Health Insurance Program, or CHIP, Foster Care, Medicare Special Needs Plans and the Supplemental Security Income Program, also known as the Aged, Blind or Disabled Program, or collectively ABD. Our health plans in Florida, Georgia, Indiana, Ohio, South Carolina, Texas and Wisconsin are included in the Medicaid Managed Care segment. Our Specialty Services segment provides specialty services, including behavioral health, individual health insurance, life and health management, long-term care programs, managed vision, telehealth services, and pharmacy benefits management to state programs, healthcare organizations, employer groups and other commercial organizations, as well as to our own subsidiaries. Our health plans in Arizona, which is operated by our long-term care company, and Massachusetts, which is operated by our individual health insurance provider, are included in the Specialty Services segment. Our Specialty Services segment also provides a full range of healthcare solutions for the rising number of uninsured Americans.
In October 2008, we began operating under our contract in Arizona to provide Acute Care services in Yavapai county.
We expect our revenue and membership base to continue to grow in 2010. The following factors contribute to our growth potential in 2010:
In February 2010, we announced a definitive agreement to acquire certain Medicaid assets in South Carolina. The transaction is expected to close in the third quarter of 2010 and add revenues of $55 to $65 million for 2010.
expansion into Massachusetts under the state Commonwealth Care Bridge and Commonwealth Care programs.
From December 31, 2007 to December 31, 2008 our membership increased as a result of:
expansion of our Arizona health plan into Yavapai county in October 2008; and
The following discussion and analysis is based on our consolidated statements of operations, which reflect our results of operations for the years ended December 31, 2009, 2008 and 2007, as prepared in accordance with generally accepted accounting principles in the United States, or GAAP.
Our specialty companies generate revenues under contracts with state programs, healthcare organizations, and other commercial organizations, as well as from our own subsidiaries. Revenues are recognized when the related services are provided or as ratably earned over the covered period of services.
In November 2007, we received a contract amendment from the State of Georgia providing for an effective premium rate increase in Georgia of approximately 3.8% effective July 1, 2007. We executed this amendment on November 16, 2007. The State of Georgia returned the fully executed contract in January 2008 and, accordingly, we recorded the additional revenue, retroactive to July 1, 2007, in the first quarter of 2008. The premium revenue, related to the period from July 1, 2007 to December 31, 2007, totals approximately $20.8 million.
a March 1, 2009 rate decrease for our CHIP/Perinate product in Texas which brought the HBR more in line with our normal range;
These factors were partially offset by reductions in the HBR for our ABD product, particularly due to provider network improvements and exiting certain markets in Ohio, and growth in our South Carolina ABD membership which operates at a lower HBR than our normal range. The decrease in our ABD HBR lowered our total HBR by 1.7% for the year ended December 31, 2009.
Other income (expense) consists principally of investment income from cash and investments, earnings in equity method investments, and interest expense on debt. Decreases in investment income in 2009 and 2008 reflect the decline in market interest rates. The 2008 results included a loss of $4.5 million related to our investment in the Reserve Primary money market fund whose Net Asset Value fell below $1.00 per share. As of December 31, 2009, the carrying amount of our investment in the Reserve Primary money market fund was $2.4 million. In January 2010, we received a distribution from the fund of $5.4 million and will record a gain of $3.0 million in the first quarter of 2010. Earnings from equity method investee decreased due to the inclusion of investment in Access as a consolidated subsidiary beginning in 2009. Interest expense was relatively stable reflecting modest increases in debt balances offset by the decline in market interest rates associated with variable rate debt.
The effective tax rate in 2009 was 35.5% compared to 38.4% in 2008 and 35.9% in 2007. The decrease in 2009 was primarily due to the effect of the inclusion of the noncontrolling interest in consolidated subsidiaries (for which we are not required to provide income taxes) and an increase in 2008 due to a change in the estimated benefit to be realized from New Jersey state net operating loss carryforwards. Excluding the effect of the noncontrolling interest, our effective tax rate would have been 36.2% in 2009. The increase in 2008 from 2007 was due to higher state taxes as a result of a change in the estimated benefit to be realized from New Jersey state net operating loss carryforwards.
In November 2008, we announced our intention to sell certain assets of UHP, our New Jersey health plan. Accordingly, the results of operations for UHP are reported as discontinued operations for all periods presented. We expect to complete the sale in the first quarter of 2010. UHP was previously reported in the Medicaid Managed Care segment.
Net earnings from discontinued operations in 2007 included tax benefits of $32.6 million, net of asset write-offs, associated with the abandonment of the stock of our FirstGuard health plans.
Premium and service revenues increased 15.8% in 2009 due to membership growth in our states, especially Florida, Indiana, South Carolina and Texas. Premium and service revenues increased 18.5% in 2008 over 2007 due primarily to higher membership in Texas from the Foster Care product, at-risk membership growth in South Carolina, and the effect of recording the Georgia premium rate increase of $20.8 million for the period July 1, 2007 to December 31, 2007 in 2008.
Earnings from operations decreased in 2009 from 2008 levels due to the aforementioned effect of the Georgia rate increase. Excluding the effects of recording this rate increase in 2008, earnings from operations increased 13.4% in 2009 over 2008 levels reflecting the overall growth in our membership and revenue base and improvements in our ABD product, especially in Ohio and South Carolina, offset by a rate decrease in Texas, higher medical costs related to the flu, and a higher HBR in Florida.
Premium and service revenues increased 28.5% in 2009 primarily due to a full year effect of the Celtic acquisition, the commencement of our new health plan in Massachusetts, and membership growth in our Medicaid segment and the associated specialty services provided to this increased membership. Premium and service revenues increased 25.2% in 2008 over 2007 due primarily to the acquisition of Celtic and higher membership in Texas from the Foster Care product of which behavioral health comprises a significant percentage of the overall premium for this product.
Shown below is a condensed schedule of cash flows for the years ended December 31, 2009, 2008 and 2007, that we use throughout our discussion of liquidity and capital resources ($ in millions).
We finance our activities primarily through operating cash flows and borrowings under our revolving credit facility. Our total operating activities provided cash of $248.2 million in 2009, $222.0 million in 2008 and $202.2 million in 2007. Cash flow from operations in 2009 reflects the receipt in December 2009 of premiums for the month of January 2010 for three of our health plans, increasing our unearned revenue at December 31, 2009 by $78.3 million as compared to the prior year end. Cash flow from operations also reflected an increase in medical claims liability primarily as a result of new business in Florida, Massachusetts and South Carolina. Cash flow from operations in 2008 reflected an increase in our Medical claims liability as a result of new business in Texas, South Carolina and Arizona. This was partially offset by a decrease in unearned revenue resulting from a timing difference with the receipt of our December revenue for our Ohio health plan.
Our investing activities used cash of $270.1 million in 2009, $153.9 million in 2008 and $225.5 million in 2007. Cash flows from investing activities in 2009 primarily consisted of additions to the investment portfolios of our regulated subsidiaries including transfers from cash and cash equivalents to long-term investments. Cash flows from investing activities also include the capital expenditures discussed below, membership conversion fees in Florida and acquisitions in Florida and South Carolina. Cash flows from investing activities in 2008 included the purchase price of Celtic, which we acquired on July 1, 2008, capital expenditures and our investment in the Reserve Primary fund. Our investing activities in 2007 consisted primarily of additions to the investment portfolios of our regulated subsidiaries including transfers from cash and cash equivalents to long-term investments.
Our investment policies are designed to provide liquidity, preserve capital and maximize total return on invested assets within our guidelines. Net cash provided by and used in investing activities will fluctuate from year to year due to the timing of investment purchases, sales and maturities. As of December 31, 2009, our investment portfolio consisted primarily of fixed-income securities with an average duration of 2.6 years. Cash is invested in investment vehicles such as municipal bonds, corporate bonds, instruments of the U.S. Treasury, insurance contracts, commercial paper, bank deposits, asset backed securities and equity securities. These securities generally are actively traded in secondary markets and the reported fair market value is determined based on recent trading activity, recent trading activity in similar securities and other observable inputs. Our investment guidelines are compliant with the regulatory restrictions enacted in each state.
The following table summarizes our cash and investment balances as of December 31, ($ in millions):
During the second quarter of 2009, we executed an agreement as a joint venture partner in an entity that will develop property adjoining our corporate office, which we believe is necessary to accommodate our growing business. For the year ended December 31, 2009 and 2008 we had capital expenditures of $59.5 million and $27.0 million, respectively, for costs associated with the real estate development. The development is expected to be substantially complete in 2010 and we anticipate spending approximately $100 million on capital expenditures related to the construction in 2010.
Our financing activities provided cash of $46.6 million in 2009, $42.4 million in 2008 and $20.8 million in 2007. During 2009, our financing activities primarily related to proceeds from borrowings under our $300 million credit facility and construction financing of the real estate development discussed above. During 2008, our financing activities primarily related to borrowings under our $300 million revolver and stock repurchases. During 2007, our financing activities primarily related to proceeds from issuance of $175 million in senior notes as discussed below.
At December 31, 2009, we had working capital, defined as current assets less current liabilities, of $(99.8) million, as compared to $25.4 million at December 31, 2008. We manage our short-term and long-term investments with the goal of ensuring that a sufficient portion is held in investments that are highly liquid and can be sold to fund short-term requirements as needed. Our working capital was negative at December 31, 2009, due to our efforts to increase investment returns through purchases of investments that have maturities of greater than one year and, therefore, are classified as long-term.
We have a $300 million revolving credit agreement. Borrowings under the agreement bear interest based upon LIBOR rates, the Federal Funds Rate or the Prime Rate. There is a commitment fee on the unused portion of the agreement that ranges from 0.15% to 0.275% depending on the total debt to EBITDA ratio. The agreement contains non-financial and financial covenants, including requirements of minimum fixed charge coverage ratios, maximum debt to EBITDA ratios and minimum net worth. The agreement will expire in September 2011. As of December 31, 2009, we had $84.0 million in borrowings outstanding under the agreement and $40.5 million in letters of credit outstanding, leaving availability of $175.5 million. As of December 31, 2009, we were in compliance with all covenants.
In 2007, we issued $175 million aggregate principal amount of our 7.25% Senior Notes due April 1, 2014, or the Notes. The Notes were registered under the Securities Act of 1933, pursuant to a registration rights agreement with the initial purchasers. The indenture governing the Notes contains non-financial and financial covenants, including requiring a minimum fixed charge coverage ratio. Interest is paid semi-annually in April and October. As of December 31, 2009, we were in compliance with all covenants.
During the year ended December 31, 2009, we received dividends of $19.1 million from our regulated subsidiaries. On July 1, 2008 we completed the acquisition of Celtic for a purchase price of approximately $82.0 million, net of unregulated cash acquired. During the year ended December 31, 2008, the Company received a dividend from Celtic of $31.4 million concurrent with the acquisition, and received an additional dividend of $17.0 million from a regulated subsidiary. During the year ended December 31, 2007, we received dividends of $35.4 million for the excess regulatory capital remaining in our Kansas and Missouri health plans and dividends of $18.5 million from other regulated subsidiaries.
Based on our operating plan, we expect that our available cash, cash equivalents and investments, cash from our operations and cash available under our credit facility and construction loan will be sufficient to finance our general operations, planned acquisition of Medicaid assets of South Carolina and capital expenditures for at least 12 months from the date of this filing.
Effective January 1, 2009, the Company adopted new guidance related to business combinations. The changes from the previous guidance include, but are not limited to: (1) acquisition costs are recognized separately from the acquisition; (2) known contractual contingencies at the time of the acquisition are considered part of the liabilities acquired and and measured at their fair value; all other contingencies are part of the liabilities acquired and measured at their fair value only if it is more likely than not that they meet the definition of a liability; (3) contingent consideration based on the outcome of future events is recognized and measured at the time of the acquisition; and (4) business combinations achieved in stages (step acquisitions) recognize the identifiable assets and liabilities, as well as noncontrolling interest, in the acquiree, at the full amounts of their fair values. The new guidance has been utilized for all acquisitions since January 1, 2009.
Our discussion and analysis of our results of operations and liquidity and capital resources are based on our consolidated financial statements which have been prepared in accordance with GAAP. In connection with the preparation of our consolidated financial statements, we are required to make assumptions and estimates about future events, and apply judgments that affect the reported amounts of assets, liabilities, revenue, expenses, and the related disclosures. We base our assumptions, estimates and judgments on historical experience, current trends and other factors we believe to be relevant at the time we prepared our consolidated financial statements. On a regular basis, we review the accounting policies, assumptions, estimates and judgments to ensure that our consolidated financial statements are presented fairly and in accordance with GAAP. However, because future events and their effects cannot be determined with certainty, actual results could differ from our assumptions and estimates, and such differences could be material.
Our medical claims liability includes claims reported but not yet paid, or inventory, estimates for claims incurred but not reported, or IBNR, and estimates for the costs necessary to process unpaid claims at the end of each period. We estimate our medical claims liability using actuarial methods that are commonly used by health insurance actuaries and meet Actuarial Standards of Practice. These actuarial methods consider factors such as historical data for payment patterns, cost trends, product mix, seasonality, utilization of healthcare services and other relevant factors.
The paid and received completion factors, claims per member per month and per diem cost trend factors are the most significant factors affecting the IBNR estimate. The following table illustrates the sensitivity of these factors and the estimated potential impact on our operating results caused by changes in these factors based on December 31, 2009 data:
Changes in estimates of incurred claims for prior years are primarily attributable to reserving under moderately adverse conditions. In addition, claims processing initiatives yielded increased claim payment recoveries and coordination of benefits related to prior year dates of service. Changes in medical utilization and cost trends and the effect of medical management initiatives may also contribute to changes in medical claim liability estimates. While we have evidence that medical management initiatives are effective on a case by case basis, medical management initiatives primarily focus on events and behaviors prior to the incurrence of the medical event and generation of a claim. Accordingly, any change in behavior, leveling of care, or coordination of treatment occurs prior to claim generation and as a result, the costs prior to the medical management initiative are not known by us. Additionally, certain medical management initiatives are focused on member and provider education with the intent of influencing behavior to appropriately align the medical services provided with the member’s acuity. In these cases, determining whether the medical management initiative changed the behavior cannot be determined. Because of the complexity of our business, the number of states in which we operate, and the volume of claims that we process, we are unable to practically quantify the impact of these initiatives on our changes in estimates of IBNR.
We have made several acquisitions that have resulted in our recording of intangible assets. These intangible assets primarily consist of customer relationships, purchased contract rights, provider contracts, trade names and goodwill. At December 31, 2009, we had $224.6 million of goodwill and $22.5 million of other intangible assets.
We have audited the accompanying consolidated balance sheets of Centene Corporation and subsidiaries as of December 31, 2009 and 2008, and the related consolidated statements of operations, stockholders’ equity, and cash flows for each of the years in the three-year period ended December 31, 2009. These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.
Centene Corporation, or the Company (or “us”, “we”, “our”), is a multi-line healthcare enterprise operating in two segments: Medicaid Managed Care and Specialty Services. The Medicaid Managed Care segment provides Medicaid and Medicaid-related health plan coverage to individuals through government subsidized programs, including Medicaid, the State Children’s Health Insurance Program, or CHIP, Foster Care, Medicare Special Needs Plans and the Supplemental Security Income Program, also known as the Aged, Blind or Disabled Program, or collectively ABD. The health plans in Florida, Georgia, Indiana, Ohio, South Carolina, Texas and Wisconsin are included in the Medicaid Managed Care segment. The Specialty Services segment provides specialty services, including behavioral health, individual health insurance, life and health management, long-term care programs, managed vision, telehealth services, and pharmacy benefits management to state programs, healthcare organizations, employer groups and other commercial organizations, as well as to our own subsidiaries. The health plans in Arizona, which is operated by our long-term care company, and Massachusetts, which is operated by our individual health insurance provider, are included in the Specialty Services segment. The Specialty Services segment also provides a full range of healthcare solutions for the rising number of uninsured Americans.
Beginning January 1, 2009, the Company has presented the investment in Access Health Solutions LLC, or Access, as a consolidated subsidiary in its financial statements. Prior to January 1, 2009, Access had been recorded under the equity method of accounting. We determined that we should have accounted for our investment in Access as a consolidated subsidiary since July 1, 2007. The impact of the difference in presentation is not material to our financial statements for any period. As a result of the presentation of Access as a consolidated subsidiary beginning January 1, 2009, cash flows from investing activities increased by $4,839 to reflect the cash held by Access on January 1, 2009. The noncontrolling interest of Access is presented within stockholders’ equity.
The Company uses the cost method to account for its investment in entities that it does not control and for which it does not have the ability to exercise significant influence over operating and financial policies. These investments are recorded at the lower of their cost or fair value.
Short-term and long-term investments are generally classified as available for sale and are carried at fair value. Certain equity investments are recorded using the cost method. Unrealized gains and losses on investments available for sale are excluded from earnings and reported in accumulated other comprehensive income, a separate component of stockholders’ equity, net of income tax effects. Premiums and discounts are amortized or accreted over the life of the related security using the effective interest method. The Company monitors the difference between the cost and fair value of investments. Investments that experience a decline in value that is judged to be other than temporary are written down to fair value and a realized loss is recorded in investment and other income. To calculate realized gains and losses on the sale of investments, the Company uses the specific amortized cost of each investment sold. Realized gains and losses are recorded in investment and other income.
Senior unsecured notes: Estimated based on third-party quoted market prices for the same or similar issues.
Variable rate debt: The carrying amount of our floating rate debt approximates fair value because the interest rates adjust based on market rate adjustments.
Additional information regarding fair value measurements is included in Note 8, Fair Value Measurements.
The Company tests for impairment of long-lived assets, including intangible assets, whenever events or changes in circumstances indicate that the carrying value of an asset or asset group (hereinafter referred to as “asset group”) may not be recoverable by comparing the sum of the estimated undiscounted future cash flows expected to result from use of the asset group and its eventual disposition to the carrying value. Such factors include, but are not limited to, significant changes in membership, state funding, state contracts and provider networks and contracts. If the sum of the estimated undiscounted future cash flows is less than the carrying value, an impairment determination is required. The amount of impairment is calculated by subtracting the fair value of the asset group from the carrying value of the asset group. An impairment charge, if any, is recognized within earnings from operations.
Medical claims liability includes claims reported but not yet paid, or inventory, estimates for claims incurred but not reported, or IBNR, and estimates for the costs necessary to process unpaid claims at the end of each period. The Company estimates its medical claims liability using actuarial methods that are commonly used by health insurance actuaries and meet Actuarial Standards of Practice. These actuarial methods consider factors such as historical data for payment patterns, cost trends, product mix, seasonality, utilization of healthcare services and other relevant factors.
The Company uses its judgment to determine the assumptions to be used in the calculation of the required estimates. The assumptions it considers when estimating IBNR include, without limitation, claims receipt and payment experience (and variations in that experience), changes in membership, provider billing practices, healthcare service utilization trends, cost trends, product mix, seasonality, prior authorization of medical services, benefit changes, known outbreaks of disease or increased incidence of illness such as influenza, provider contract changes, changes to Medicaid fee schedules, and the incidence of high dollar or catastrophic claims.
The Company’s Medicaid Managed Care segment generates revenues primarily from premiums received from the states in which it operates health plans. The Company receives a fixed premium per member per month pursuant to its state contracts. The Company generally receives premium payments during the month it provides services and recognizes premium revenue during the period in which it is obligated to provide services to its members. In some instances, the Company’s base premiums are subject to an adjustment, or risk score, based on the acuity of its membership. Generally, the risk score is determined by the State analyzing encounter submissions of processed claims data to determine the acuity of the Company’s membership relative to the entire state’s Medicaid membership. Some states enact premium taxes, similar assessments and provider pass-through payments, collectively premium taxes, and these taxes are recorded as a separate component of both revenues and operating expenses. Some contracts allow for additional premium related to certain supplemental services provided such as maternity deliveries. Revenues are recorded based on membership and eligibility data provided by the states, which may be adjusted by the states for updates to this data. These eligibility adjustments have been immaterial in relation to total revenue recorded and are reflected in the period known.
Centene's subsidiaries report reinsurance premiums as medical costs, while related reinsurance recoveries are reported as deductions from medical costs. The Company limits its risk of catastrophic losses by maintaining high deductible reinsurance coverage.
Effective January 1, 2009, the Company adopted new guidance related to consolidation and reporting of noncontrolling interest, which requires all entities to report noncontrolling (minority) interests in subsidiaries in the same way, that is, as equity in the consolidated financial statements. Moreover, this guidance eliminates the diversity that existed in accounting by requiring transactions between the Company and the noncontrolling interest be treated as equity transactions. As discussed in Note 2, Summary of Significant Accounting Policies, and Note 6, Centene Center LLC, the noncontrolling interest in Access and Centene Center LLC is presented within stockholders’ equity.
The Company has determined that all other recently issued accounting guidance will not have a material impact on its consolidated financial position, results of operations and cash flows, or do not apply to its operations.
In 2008, as a result of the plan to sell certain assets of UHP, the Company conducted an impairment analysis of the assets of UHP. The impairment analysis resulted in an impairment charge for fixed assets of $2,546. During the year ended December 31, 2009 and 2008, the Company incurred exit costs consisting primarily of lease termination fees and employee severance. The change in exit cost liability for UHP is summarized as follows:
The Company did not recognize any restructuring charges during the years ended December 31, 2009 or December 31, 2008.
The Company allocated total consideration paid to the assets acquired and liabilities assumed based on its estimates of fair value using methodologies and assumptions that it believed were reasonable. The purchase price allocation resulted in estimated identifiable intangible assets, associated deferred tax liabilities and goodwill of $8,600, $3,000 and $24,300, respectively. The identifiable intangible assets have estimated useful lives ranging from seven to 15 years. The acquired goodwill is not deductible for income tax purposes.
As part of financing the real estate development, the joint venture executed a $95,000 construction loan due June 1, 2011, which may be extended for two additional one year terms. The Company and its development partner have guaranteed up to $65,000 each associated with this construction loan. As of December 31, 2009, there was $32,559 outstanding under this loan and the Company has capitalized $116 of interest in 2009. Additional information regarding the construction loan is included in Note 13, Debt.
The following table summarizes fair value measurements by level at December 31, 2009 for assets and liabilities measured at fair value on a recurring basis:
The aggregate carrying amount of the Company’s life insurance contracts and cost-method investments, which approximates fair value, was $23,601 and $30,503 as of December 31, 2009 and December 31, 2008, respectively. During 2008, the fair value estimates of corporate securities and state and municipal securities were categorized as Level I. The prior period disclosure has been reclassified to reflect these securities as Level II measurements.
Goodwill additions in 2009 and 2008 were related to the acquisitions discussed in Note 5, Acquisitions.
Amortization expense was $3,692, $2,480 and $1,970 for the years ended December 31, 2009, 2008 and 2007, respectively.
The Company recognizes interest accrued related to unrecognized tax benefits in the provision for income taxes. Interest accrued, net of federal benefit, was $1,072 and $560 as of December 31, 2009 and December 31, 2008, respectively. No penalties have been accrued.
During the third quarter of 2009, the Company paid the balance of the revolving loan agreement and refinanced a portion of the balance with another bank as a mortgage note payable. The mortgage note is collateralized by the Company’s existing headquarters building and parking garage. The collateralized properties had a net book value of $17,958 at December 31, 2009. The mortgage is due August 31, 2014 and bears interest at the LIBOR rate plus 3% or the bank’s certificate of deposit rate plus 2%. The mortgage includes financial covenants requiring a minimum fixed charge coverage ratio. The weighted average interest rate of outstanding borrowings was 3.12% at December 31, 2009.
The Company has a $300,000 five-year Revolving Credit Agreement dated September 14, 2004 with various financial institutions. Borrowings under the agreement bear interest based upon LIBOR rates, the Federal Funds Rate or the Prime Rate. There is a commitment fee on the unused portion of the agreement that ranges from 0.15% to 0.275% depending on the total debt-to-EBITDA ratio. The agreement contains non-financial and financial covenants, including requirements of minimum fixed charge coverage ratios, maximum debt-to-EBITDA ratios and minimum tangible net worth. The agreement will expire in September 2011. As of December 31, 2009, the Company had $84,000 in borrowings outstanding under the agreement and $40,495 in letters of credit outstanding, leaving availability of $175,505. The outstanding borrowings at December 31, 2009 bore interest at LIBOR plus 1.0%, or the prime rate. The weighted average interest rate of outstanding borrowings was 1.69% at December 31, 2009.
The Company has 10,000,000 authorized shares of preferred stock at $.001 par value. At December 31, 2009, there were no preferred shares outstanding.
Option activity for the year ended December 31, 2009 is summarized below:
For the years ended December 31, 2009, 2008 and 2007, the Company used a projected expected life for each award granted based on historical experience of employees’ exercise behavior. The expected volatility is primarily based on historical volatility levels along with the implied volatility of exchange traded options to purchase Centene common stock. The risk-free interest rates are based on the implied yield currently available on U.S. Treasury instruments with a remaining term equal to the expected life.
A summary of the status of the Company's non-vested restricted stock and restricted stock unit shares as of December 31, 2009, and changes during the year ended December 31, 2009, is presented below:
As of December 31, 2009, there was $32,660 of total unrecognized compensation cost related to non-vested share-based compensation arrangements granted under the plans; that cost is expected to be recognized over a weighted-average period of 2.0 years. The actual tax benefit realized for the tax deductions from stock option exercises totaled $395, $1,127 and $512 for the years ended December 31, 2009, 2008 and 2007, respectively.
The Company maintains an employee stock purchase plan and has issued 34,306 shares, 36,682 shares, and 32,563 shares in 2009, 2008 and 2007, respectively.
In May 2008, the Internal Revenue Services began an audit of the Company’s 2006 and 2007 tax returns. As a result of this audit, the IRS has initially denied the $34,856 tax benefit the Company recognized for the abandonment of the FirstGuard stock in 2007. The Company is proceeding with the appeals process and believes that it is more likely than not that the Company’s tax position will be upheld. Accordingly, the Company has not made any adjustments to the reserve for this position.
The Company is routinely subjected to legal proceedings in the normal course of business. While the ultimate resolution of such matters is uncertain, the Company does not expect the results of any of these matters discussed above individually, or in the aggregate, to have a material effect on its financial position or results of operations.
The calculation of diluted earnings per common share for 2009, 2008 and 2007 excludes the impact of 2,351,679 shares, 2,004,778 shares and 3,002,030 shares, respectively, related to anti-dilutive stock options, restricted stock and restricted stock units.
Segment information as of and for the year ended December 31, 2009, follows:
(2) Includes a $3.7 million pre-tax charge primarily for asset impairments and employee severance related to the sale of the New Jersey health plan, included in discontinued operations.
During 2009, 2008 and 2007, the Registrant received dividends from its subsidiaries totaling $19,122, $48,411 and $53,937, respectively.
On January 21, 2010, the Company completed the sale of an additional 5.75 million shares of common stock for $19.25 per share. Net proceeds from the sale of the additional shares were approximately $104,500. A portion of the proceeds was used to repay the outstanding indebtedness under our $300,000 revolving credit loan facility ($84,000 as of December 31, 2009). The Company intends to use the remaining net proceeds for general corporate purposes, which may include the repayment of indebtedness, funding for acquisitions, capital expenditures, additions to working capital and to meet statutory capital requirements in new or existing states.