We do not own any real property. We lease office space in Virginia Beach, Virginia, where our primary headquarters, call, claims and data centers are located. We also lease real property in each of the health plan locations. We are obligated by various insurance and Medicaid regulatory authorities to have offices in the service areas where we provide Medicaid benefits.
We are a multi-state managed healthcare company focused on serving people who receive healthcare benefits through publicly sponsored programs, including Medicaid, SCHIP and FamilyCare. 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 our tenth year of operations, 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.
During the year of 2004, we successfully integrated members in Texas, Florida and the District of Columbia which came to us from competitors exiting these markets.
The State of Texas awarded us a contract for the Travis service area, which includes Austin and seven additional counties, bringing the number of counties that we serve in Texas to 27. While initial estimates of growth are modest, this service area complements our long-term growth strategy. Currently, these counties are served by only one other health plan.
In 2004, our health benefits ratio (HBR) was 81.0% versus 80.2% in 2003. The HBR increase is driven by a reduction in the favorable prior year development offset by increased leverage of premium revenue. The reduction in favorable prior year development is due to a decrease in claims payment variability related to maturing products and markets.
We expect acquisitions to continue to be an important part of our growth strategy. As of December 31, 2004, over 41% of our current membership has resulted from nine acquisitions and we are currently evaluating potential acquisition opportunities. Effective January 1, 2005, we acquired CarePlus with membership of approximately 115,000 participating in New York State Medicaid, Child Health Plus and Family Health Plus programs. We believe our undrawn credit facility and our cash flows from operating activities position us to continue to take advantage of acquisition opportunities.
The State of Florida approved our request effective March 1, 2005 for expansion into Polk and Pasco counties for long-term care services.
We have 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 covers an estimated 129,000 AMERICAID members in Fort Worth, Texas. Of these members, approximately 110,000, or 85%, are children under the age of 15 who may utilize services of either CCPN or CCMC. Of this subset, approximately 25,000 are signed up with primary care physicians who are either employees of CCPN or exclusively contracted with CCPN. Unless either party gives the other a written notice of non-renewal six months in advance, the risk-sharing arrangement with CCHCN and CCPN would automatically be extended for a one year period commencing on August 31, 2005. On February 25, 2005, we received a written notice of non-renewal from CCHCN and CCPN; therefore this contract will terminate on August 31, 2005.
It is our intent to enter into a new contract with CCPN, CCMC and the CCPN physicians individually. However, there is no assurance that our contracting effort will be successful or that the terms of any new contract will be as favorable as the current risk-sharing arrangement. Therefore, our results from operations could be harmed as a result of the expiration of the risk-sharing arrangement and the impact could be material. Additionally, we could lose members if CCPN chooses to associate with another HMO or if CCHCN obtains its own contract with the State of Texas to provide healthcare services to Medicaid recipients.
In the ordinary course of business, we have made 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.
historical per-member per-month claims cost, including provider settlements, changes in the age and gender of our membership and variations in the severity of medical conditions. These variations are considered in determining our current medical liabilities and adjusted to reflect expected changes in cost or utilization patterns.
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.
As of December 31, 2004 and 2003, we had goodwill and other intangible assets of $140.4 million and $144.4 million, respectively, net of accumulated amortization. We review our intangible assets with defined lives for impairment whenever events or changes in circumstances indicate we might not recover their carrying value. We assess our goodwill for impairment at least annually. In assessing the recoverability of these assets, we must make assumptions regarding estimated future utility and cash flows and other internal and external factors to determine the fair value of the respective assets. If these estimates or their related assumptions change in the future, we may be required to record impairment charges for these assets.
On December 16, 2004, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standard No. 123 (revised 2004) (SFAS No. 123(R)), Shared-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 APB Opinion No. 25, Accounting for Stock Issued to Employees, and SFAS No. 148, Accounting for Stock Based Compensation, and amends FASB Statement of Financial Accounting Standard 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
As permitted by SFAS No. 123, we currently account for share-based payments to employees using APB Opinion No. 25’s intrinsic value method and, as such, generally recognize no compensation cost for employee stock options. Accordingly, the adoption of the fair value method of SFAS No. 123(R) will have a significant impact on our results of operations, although it will have no impact on our overall financial position. The impact of adoption of SFAS No. 123(R) cannot be predicted at this time because it will depend on levels of share-based payments granted in the future. However, had we adopted SFAS No. 123(R) in prior periods, the impact of the standard would have approximated the impact of SFAS No. 123 as described in the disclosure of proforma net income and earnings per share in Note 2(h) to our consolidated financial statements. SFAS No. 123(R) also requires the benefits of tax deductions in excess of recognized compensation cost to be reported as a financing cash flow, rather than as an operating cash flow as required under current literature. This requirement will reduce net operating cash flows and increase net financing cash flows in periods after adoption. While we cannot estimate what those amounts will be in the future (because they depend on, among other things, when employees exercise stock options), the amount of operating cash flows recognized in prior periods for such excess tax deductions were $8.0 million, $4.5 million and $3.8 million in 2004, 2003 and 2002, respectively.
Interest expense was $0.7 million and $1.9 million for the years ended December 31, 2004 and 2003, respectively. The decrease primarily relates to the repayment of our outstanding balance of our credit facility on October 21, 2003, with a portion of the net proceeds from our October 16, 2003 public offering.
Income tax expense for 2003 was $46.6 million with an effective tax rate of 40.9% as compared to the $32.7 million for 2002 with an effective tax rate of 41.0%.
Our primary sources of liquidity are cash and cash equivalents, short and long-term investments, cash flows from operations and borrowings under our Amended and Restated Credit Agreement (Credit Agreement). As of December 31, 2004, we had cash and cash equivalents of $227.1 million, short and long-term investments of $384.9 million and restricted investments on deposit for licensure of $38.4 million. As of December 31, 2004, there were no borrowings outstanding under our $95.0 million Credit Agreement. Cash and investments totaled $612.1 million at December 31, 2004. A significant portion of this cash and investments is regulated by state capital requirements. However, $271.7 million of our cash and investments were unregulated and held at the parent level.
On October 16, 2003, we completed a public offering of 6,325,000 shares of common stock at $23.25 per share, including an over-allotment issuance of 825,000 shares. Net proceeds from the offering, after fees and expenses, were approximately $138.8 million. On October 21, 2003, we used $30.0 million of proceeds from the offering to repay the outstanding balance under our revolving credit facility. The balance of approximately $108.8 million was used to partially fund the CarePlus acquisition effective January 1, 2005.
Cash from operations was $102.1 million for the year ended December 31, 2004 compared to $128.5 million for the year ended December 31, 2003. The decrease in cash from operations is primarily due to the following items:
a reduction in the increase in the claim liability of $15.0 million primarily related to the payment of provider settlements in 2004;
Cash flows provided by investing activities was $37.9 million for the year ended December 31, 2004 compared to cash flows used in investing activities of $246.1 million for the year ended December 31, 2003. The increase in cash provided by investing activities was primarily due to a net increase in the proceeds from sales of investments offset by purchases of investments in 2004 compared to 2003. The cash for these additional investments in 2003 was generated from our public offering in October 2003, as well as cash flow from operations. We currently anticipate that our 2005 capital expenditures will be approximately $28.0 million.
Our investment policies are designed to provide liquidity, preserve capital and maximize total return on invested assets. As of December 31, 2004, our investment portfolio consisted primarily of fixed-income securities. The weighted average maturity is less than six months. We utilize investment vehicles such as commercial paper, municipal bonds, U.S. government backed agencies, 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, 2004 was approximately 2.24%.
Cash provided by financing activities was $3.1 million and $98.6 million for the year ended December 31, 2004 and 2003, respectively. The decrease in cash provided by financing activities consisted primarily of net proceeds from our public offering in 2003 of $138.8 million partially offset by $50.0 million in repayments in 2003 of borrowings under our revolving credit facility.
On October 22, 2003, we entered into a $95.0 million Credit Agreement with a syndicate of banks. 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 $30.0 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 2.00% and 2.50% and the applicable margin for alternate base rate borrowings is between 1.00% and 1.50%. The applicable margin will vary depending on our leverage ratio. The Credit Agreement is secured by substantially all of the assets of AMERIGROUP Corporation 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 0.375% to 0.50%, depending on the leverage ratio. The Credit Agreement terminates on October 22, 2006 and was undrawn as of December 31, 2004.
Our subsidiaries are required to maintain minimum statutory capital requirements prescribed by various jurisdictions, including the departments of insurance in each of the states in which we operate. As of December 31, 2004, our subsidiaries were in compliance with all minimum statutory capital requirements. We believe that we will continue to be in compliance with these requirements for the next 12 months.
In January 2005, we used $126.8 million of unregulated cash to effect the stock acquisition of CarePlus. Remaining cash, cash equivalents and short-term investments are sufficient to meet current cash requirements without the need to liquidate securities held earlier than anticipated.
Credit Agreement. On October 22, 2003, we entered into a $95.0 million Credit Agreement with a syndicate of banks. 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 $30.0 million. The proceeds of the Credit Agreement are available for general corporate purposes, including, without limitation, permitted acquisitions of businesses, assets and technologies. The commitment fee on the unused portion of the Credit Agreement ranges from 0.375% to 0.50%, depending on our leverage ratio. The Credit Agreement terminates on October 22, 2006 and was undrawn as of December 31, 2004.
Our operations are conducted through our wholly-owned subsidiaries, which include HMOs and one MCO. HMOs and MCOs 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 require individual HMOs to maintain statutory capital levels higher than the state regulations. As of December 31, 2004, we believe our subsidiaries are in compliance with all minimum statutory capital requirements. We believe that we will continue to be in compliance with these requirements at least through the end of 2005.
As of December 31, 2004, our subsidiaries had aggregate statutory capital and surplus of approximately $132.0 million, compared with the required minimum aggregate statutory capital and surplus requirements of approximately $67.7 million.
The change in rules for insurance companies became effective as of December 31, 1998. Illinois, Texas and the District of Columbia adopted various forms of the rules as of December 31, 1999, 2000 and 2003, respectively. Since our Maryland subsidiary is licensed in both the District of Columbia and Maryland, the highest risk-based capital requirement between the two will prevail. New Jersey and Florida have not yet adopted risk-based capital as their net worth requirements. The NAIC’s HMO rules, if adopted by these states in their proposed form, may increase the minimum capital required for our subsidiaries. Effective December 31, 2004, our New Jersey subsidiary is required to maintain a statutory capital level greater than the state regulations.
Although the general rate of inflation has remained relatively stable and healthcare cost inflation has stabilized in recent years, the national healthcare cost inflation rate still exceeds the general inflation rate. We use various strategies to mitigate the negative effects of healthcare cost inflation. Specifically, our health plans try to control medical and hospital costs through contracts with independent providers of healthcare services. Through these contracted care providers, our health plans emphasize preventive healthcare and appropriate use of specialty and hospital services.
AMERIGROUP Corporation, a Delaware corporation (the “Company”), 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.
Short and long-term investments and investments on deposit for licensure at December 31, 2004 and 2003 consist of commercial paper, money market funds, U.S. Treasury securities, cash escrow accounts, asset-backed 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 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, 2004 and 2003, our auction rate securities are classified as available-for-sale. All other securities are classified as held-to-maturity.
As permitted under Statement of Financial Accounting Standards No. 123, Accounting for Stock-Based Compensation (SFAS No. 123), we have chosen to account for stock-based compensation using the intrinsic value method prescribed in Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees (APB Opinion No. 25), and related interpretations. Accordingly, compensation cost for stock options is measured as the excess, if any, of the estimated fair value of our stock at the date of grant over the amount an employee must pay to acquire the stock. In December 2002, Statement of Financial Accounting Standards No. 148, Accounting for Stock-Based Compensation (SFAS No. 148), was issued which requires that we illustrate the effect on net income and net income per share if we had applied the fair value principles included in
We record premium revenue based on membership and premium information from each state. Premiums are due monthly and are recognized as revenue during the period in which we are obligated to provide services to members. In all of our states except Florida, we are eligible to receive supplemental payments for newborn obstetric deliveries. Each state contract is specific as to what is required before payments are generated. Upon delivery of a newborn, each state is notified according to our contract. Revenue is recognized in the period that the delivery occurs and the related services are provided to our member. Additionally, in some states we receive supplemental payments for certain services such as high cost drugs and early childhood prevention screenings. Any amounts that have not been received from the state by the end of the period are recorded on our balance sheet as premium receivables.
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 percentage of the contract profits, as defined, in the contract with the state. The profitability computation includes premium revenue received from the state less actual medical and administrative costs incurred and paid and less estimated unpaid claims payable for the applicable membership. The unpaid claims payable estimates are based on historical payment patterns using actuarial techniques. A final settlement is generally made 334 days after the contract period ends using paid claims data. Any adjustment made to the experience rebate payable as a result of final settlement is included in current operations.
Accrued medical expenses for inpatient, outpatient surgery, emergency room, specialist, pharmacy and ancillary medical claims include amounts billed and not paid and an estimate of costs incurred for unbilled services provided. These liabilities are principally based on historical payment patterns using actuarial techniques. In addition, claims processing costs are accrued based on an estimate of the costs necessary to process unpaid claims. Claims payable are reviewed and adjusted periodically and, as adjustments are made, differences are included in current operations. Claims payable also includes estimates of amounts due to or from contracted providers under risk-sharing arrangements. The arrangements are typically based upon quality
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, 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 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 balance sheet. No impairment of long-lived assets was recorded in 2004, 2003 or 2002.
On December 16, 2004, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standard No. 123 (revised 2004) (SFAS No. 123(R)), Shared-Based Payment, which is a revision of SFAS No. 123. SFAS No. 123(R) supersedes APB Opinion No. 25, Accounting for Stock Issued to Employees, and SFAS No. 148 and amends FASB Statement of Financial Accounting Standard 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.
SFAS No. 123(R) must be adopted no later than July 1, 2005. Early adoption will be permitted in periods in which financial statements have not yet been issued. We expect to adopt SFAS No. 123(R) on July 1, 2005.
As permitted by SFAS No. 123, the Company currently accounts for share-based payments to employees using APB Opinion No. 25’s intrinsic value method and, as such, generally recognizes no compensation cost for employee stock options. Accordingly, the adoption of the fair value method of SFAS No. 123(R) will have a significant impact on our results of operations, although it will have no impact on our overall financial position. The impact of adoption of SFAS No. 123(R) cannot be predicted at this time because it will depend on levels of share-based payments granted in the future. However, had we adopted SFAS No. 123(R) in prior periods, the impact of the standard would have approximated the impact of SFAS No. 123 as described in the disclosure of proforma net income and earnings per share in Note 2(h) to our consolidated financial statements. SFAS No. 123(R) also requires the benefits of tax deductions in excess of recognized compensation cost to be reported as a financing cash flow, rather than as an operating cash flow as required under current literature. This requirement will reduce net operating cash flows and increase net financing cash flows in periods after adoption. While the company cannot estimate what those amounts will be in the future (because they depend on, among other things, when employees exercise stock options), the amount of operating cash flows recognized in prior periods for such excess tax deductions were $8,009, $4,547 and $3,775 in 2004, 2003 and 2002, respectively.
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, 2004, we served members who received healthcare benefits through 13 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, 2004, with the largest of these contracts representing approximately 19% 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 90 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. Our contracts in our Texas market, which represented approximately 41% of our revenues in 2004, are currently undergoing a re-procurement process. Although the State of Texas has said it will announce contract awards in early 2005 with implementation continuing into 2006, the announcement of the awards may not occur until after the conclusion of the Texas legislative session on May 30, 2005.
As a condition for licensure by various state governments to operate HMOs or MCOs, we are required to maintain certain funds on deposit with or under the control of the various departments of insurance. Accordingly, at December 31, 2004 and 2003, the amortized cost, gross unrealized holding gains, gross unrealized holding losses and fair value for these held-to-maturity securities are summarized as follows:
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, at December 31, 2003, all of which had experienced declines in value for less than 12 months.
The temporary declines in value as of December 31, 2004 and 2003, are primarily due to fluctuations in short-term market interest rates.
Effective January 1, 2002, we purchased certain assets of MethodistCare, Inc.’s (MethodistCare) Houston, Texas Medicaid line of business. The assets purchased consisted of MethodistCare’s rights to provide managed care services to its Medicaid members. We paid $1,232 in cash, including transaction costs, resulting in goodwill of the same amount, all of which is deductible for income tax purposes.
The following table summarizes the fair values of the assets acquired and liabilities assumed of PHP at the date of acquisition.
The unaudited proforma summary information reflects adjustments made to our historical financial statements by including the applicable results of operations of PHP’s Medicaid and SCHIP lines of business in Florida prior to the acquisition.
Goodwill and acquired intangible assets for the years ended December 31, 2004 and 2003 are as follows:
Total income taxes for the years ended December 31, 2004, 2003 and 2002 were allocated as follows:
Income tax expense (benefit) for the years ended December 31, 2004, 2003 and 2002 consists of the following:
Prepaid income tax was $2,287 at December 31, 2004 and is included in prepaid expenses and other current assets. Income taxes payable was $7,005 at December 31, 2003 and is included in accrued expenses and other current liabilities.
On October 22, 2003, we entered into a $95,000 Amended and Restated Credit Agreement (Credit Agreement) with a syndicate of banks. 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 $30,000. 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 2.00% and 2.50% and the applicable margin for alternate base rate borrowings is between 1.00% and 1.50%. The applicable margin will vary depending on our leverage ratio. The Credit Agreement is secured by substantially all of the assets of
AMERIGROUP Corporation 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 0.375% to 0.50%, depending on the leverage ratio. The Credit Agreement terminates on October 22, 2006 and was undrawn as of December 31, 2004.
During 2001, we entered into a Credit and Guaranty Agreement with a syndicate of banks to obtain a $60,000 revolving credit facility. In July 2002, we expanded the facility to include an additional bank and to increase the revolving credit facility to $75,000. The facility was secured by the assets of AMERIGROUP Corporation and by the common stock of its direct, wholly-owned subsidiaries. At December 31, 2002, $50,000 was outstanding under the facility. Amounts outstanding under the facility accrued interest at one of the following rates, at our option: LIBOR plus the applicable margin or an alternate bank rate plus the applicable margin. The applicable margin for LIBOR borrowings was between 2.0% and 2.5%. The applicable margin for alternate bank rate borrowings was between 1.0% and 1.5%. The applicable margin varied depending on our leverage ratio. We also paid a 0.50% commitment fee on the unused portion of the facility. This credit facility was repaid during 2003 and replaced with the Credit Agreement.
In May 2003, our shareholders approved and we adopted the 2003 Equity Incentive Plan (2003 Plan), which provides for the granting of stock options, restricted stock, phantom stock and stock bonuses to employees and directors. We reserved for issuance a maximum of 3,300,000 shares of common stock under the 2003 Plan. In addition, shares remaining available for issuance under our 2000 Stock Plan (described below) and our 1994 Stock Plan (described below) will be available for issuance under the 2003 Plan. Under all plans, an option’s maximum term is ten years. As of December 31, 2004, we had a total of 1,601,552 options available for issuance under our 2003 Plan, 2000 Plan and 1994 Plan.
In July 2000, we adopted the 2000 Equity Incentive Plan (2000 Plan), which provides for the granting of stock options, restricted stock, phantom stock and stock bonuses to employees, directors and consultants. We reserved for issuance a maximum of 4,128,000 shares of common stock under the 2000 Plan at inception. In addition, shares remaining available for issuance under our 1994 Stock Plan (described below) were available for issuance under the 2000 Plan. Twenty percent of the options vest upon grant date or at an employee’s hiring anniversary date, whichever is later, and five percent at the end of each three-month period thereafter.
A summary of stock plans at December 31, 2004, 2003, and 2002 and the changes during the years then ended follows:
The following table summarizes information related to the stock options outstanding at December 31, 2004:
Cash surrender value of life insurance policies: The carrying amount approximates fair value which was determined based on quoted market prices.
Regulations governing our managed care operations in the District of Columbia, Florida, Illinois, Maryland, New Jersey and Texas require the applicable subsidiary to meet certain minimum net worth requirements. Each subsidiary was in compliance with its requirements at December 31, 2004.
We are obligated under capital leases covering certain office equipment that expires at various dates during the next four years. At December 31, 2004 and 2003, the gross amount of office equipment and related accumulated amortization recorded under capital leases was as follows:
In connection with our acquisition of PHP effective January 1, 2003, AMERIGROUP Corporation agreed to guarantee a certain lease for office space occupied by a business operated by former management of PHP. Minimum lease payments under the guaranteed lease are $99 in 2005. The fair value of the stand ready obligation under the guarantee is $7 and has been reflected in the December 31, 2004 consolidated balance sheet. If the lessee defaults due to non-payment, all future rental payments are accelerated, subject to our right to cure, by bringing the payments up to date. The lease term ends on March 31, 2005.
Total rent expense for all office space and office equipment under non-cancelable operating leases was approximately $8,704, $8,187 and $5,459 in 2004, 2003 and 2002, respectively, and is included in selling, general and administrative expenses in the accompanying consolidated income statements.
Our employees have the option to participate in a deferred compensation plan sponsored by the Company. All full-time and most part-time employees of AMERIGROUP Corporation and subsidiaries may elect to participate in this plan. This plan is exempt from income taxes under Section 401(k) of the Internal Revenue Code. Participants may contribute a certain percentage of their compensation subject to maximum federal and plan limits. We may elect to match a certain percentage of each employees’ contributions up to specified limits. For the years ended December 31, 2004, 2003 and 2002, the matching contribution under the plan in total was $1,227, $720 and $794, respectively.
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 corresponding charge to premium revenue during the year ended December 31, 2004. Additionally, the Legislature directed that the Department of Health and Mental Hygiene complete a study by September 2004 on the relevance of the medical loss ratio threshold as an indicator of quality. The results of this, which were released in October 2004, did not directly address what would happen in the future if a managed care organization reported a medical loss ratio below 84%. As a result, we believe the Maryland Legislature could enact similar legislation in 2005 as part of its fiscal year 2006 budget, requiring premium recoupment. We have recorded a reduction in premium in our financial statements of our best estimate of the outcome of this issue as of December 31, 2004. It is possible that the Maryland Legislature in 2006, as part of its fiscal year 2007 budget, could enact similar legislation relating to the year ended December 31, 2004. However, at this time we are unable to predict the regulatory, economic or political climate that might exist at that time. Accordingly, we have not recorded any liability for the twelve months ended December 31, 2004. However, if the Maryland Legislature were to enact legislation in April 2006 consistent with the legislation passed in April 2004 and we failed to meet the required quality measures, we could have a recoupment obligation for that period commencing on July 1, 2006 ranging from zero to approximately $757 with respect to the premium revenue for the twelve month period ended December 31, 2004.
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 61,684 and 70,078 shares under the Employee Stock Purchase Plan in 2004 and 2003, respectively.
Under date of February 25, 2005, we reported on the consolidated balance sheets of AMERIGROUP Corporation and subsidiaries as of December 31, 2004 and 2003, and the related consolidated income statements and statements of stockholders’ equity and cash flows for each of the years in the three-year period ended December 31, 2004, 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.