-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, JNYJnDoKRt0jEXjswJzDu0i20wSLJq+8B1FggB3fS3rc00hn+kptwShPVPtakB0U TUZIvX8nC39kLONblZ1V4Q== 0000950135-02-005570.txt : 20021216 0000950135-02-005570.hdr.sgml : 20021216 20021216171532 ACCESSION NUMBER: 0000950135-02-005570 CONFORMED SUBMISSION TYPE: 8-K PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 20021201 ITEM INFORMATION: Acquisition or disposition of assets ITEM INFORMATION: Financial statements and exhibits FILED AS OF DATE: 20021216 FILER: COMPANY DATA: COMPANY CONFORMED NAME: CENTENE CORP CENTRAL INDEX KEY: 0001071739 STANDARD INDUSTRIAL CLASSIFICATION: HOSPITAL & MEDICAL SERVICE PLANS [6324] IRS NUMBER: 041406317 FILING VALUES: FORM TYPE: 8-K SEC ACT: 1934 Act SEC FILE NUMBER: 000-33395 FILM NUMBER: 02859152 BUSINESS ADDRESS: STREET 1: 7711 CARONDELET AVE CITY: ST LOUIS STATE: MO ZIP: 63105 BUSINESS PHONE: 3147254477 MAIL ADDRESS: STREET 1: 7711 CARONDELET AVE STREET 2: SUITE 800 CITY: ST LOUIS STATE: MO ZIP: 63105 8-K 1 b44931cce8vk.txt CENTENE CORPORATION SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ------------------- FORM 8-K CURRENT REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 Date of report (Date of earliest event reported) DECEMBER 1, 2002 -------------------------------- CENTENE CORPORATION - -------------------------------------------------------------------------------- (Exact name of registrant as specified in its charter) DELAWARE 000-33395 04-1406317 - -------------------------------------------------------------------------------- (State or other jurisdiction of (Commission (I.R.S. Employer incorporation or organization) File Number) Identification No.) 7711 CARONDELET AVENUE, SUITE 800, SAINT LOUIS, MISSOURI 63105 - -------------------------------------------------------------------------------- (Address of Principal Executive Offices) (Zip Code) Registrant's telephone number, including area code (314) 725-4477 ------------------------------ NOT APPLICABLE - -------------------------------------------------------------------------------- (Form Name or Former Address, if Changed Since Last Report) ITEM 2. ACQUISITION OR DISPOSITION OF ASSETS. On December 1, 2002, we completed our acquisition of 80 percent of the outstanding capital stock of University Health Plans, Inc., or UHP, pursuant to the terms of a stock purchase agreement entered into on August 2, 2002. We acquired the capital stock from University of Medicine and Dentistry of New Jersey, or the University, which continues to own 20 percent of the outstanding capital stock of UHP, subject to our purchase rights described below. Established in 1994, UHP is a managed health plan serving approximately 50,000 Medicaid members throughout New Jersey. UHP currently operates in 15 of the 21 counties in New Jersey, and it has a network of more than 7,500 providers. Following the acquisition, Centene and the University will operate UHP as a joint venture that continues to serve UHP's Medicaid members, and Centene will manage UHP's operations in a manner consistent with our other Medicaid-only health plan subsidiaries. In accordance with our philosophy of providing localized services, support and branding, UHP will continue to operate under the name of University Health Plans. The terms of our acquisition of UHP capital stock, including the purchase price, were the result of our arm's-length negotiations with the University. We paid an aggregate purchase price of approximately $8.7 million for our interest in UHP. The purchase price was calculated on the basis of 80 percent of the product of (a) $250.00 and (b) the number of enrolled risk members (excluding commercial members) of UHP as of December 1, 2002, after giving effect to approximately $1.8 million of adjustments contemplated by the stock purchase agreement. We paid the purchase price from working capital and will account for the acquisition as a purchase transaction. In connection with the acquisition, we entered into an investor rights agreement with the University to set forth arrangements with respect to the ownership of the capital stock of UHP. The investor rights agreement provides that: - We have the right, exercisable at any time prior to September 1, 2003, to purchase the remaining shares of UHP held by the University for a cash purchase price of $2.6 million, which equals 20 percent of the product of (a) $250.00 and (b) the number of enrolled risk members (excluding commercial members) of UHP as of December 1, 2002. - If we do not exercise the right described above, the remaining shares of UHP held by the University will be exchanged on December 1, 2005 for a purchase price payable in either, at our election, shares of our common stock or cash. The purchase price would equal the greater of: - the product of (1) the enterprise value of UHP as of December 1, 2005 and (2) the percentage of the outstanding UHP common stock (on a fully diluted basis) then represented by the shares owned by the University; and - $2.6 million. In addition, the investor rights agreement provides for voting obligations, transfer restrictions, rights of first refusal, co-sale rights, pre-emptive rights and dividend rights with respect to the capital stock of UHP. The State of New Jersey Department of Banking and Insurance approved the terms of the acquisition, including the terms for our future purchase of the remaining shares of UHP held by the University, on November 26, 2002. 2 The preceding discussion is only a summary and is qualified in its entirety by reference to the stock purchase agreement and investor rights agreement entered into in connection with the acquisition. Copies of these agreements are included as exhibits to this report and are incorporated by reference herein. ITEM 7. FINANCIAL STATEMENTS, PRO FORMA FINANCIAL INFORMATION AND EXHIBITS.
PAGE ---- (a) Financial Statements of Business Acquired. (1) AUDITED FINANCIAL STATEMENTS OF UNIVERSITY HEALTH PLANS, INC.: Report of Independent Accountants (PricewaterhouseCoopers LLP)............................ 4 Balance Sheets as of December 31, 2001 and 2000........................................... 5 Statements of Operations for the Years Ended December 31, 2001 and 2000................... 6 Statements of Stockholder's Equity for the Years Ended December 31, 2001 and 2000................................................................................ 7 Statements of Cash Flows for the Years Ended December 31, 2001 and 2000................... 8 Notes to Financial Statements............................................................. 9 (2) INTERIM FINANCIAL STATEMENTS OF UNIVERSITY HEALTH PLANS, INC.: Balance Sheets as of September 30, 2002 (unaudited) and December 31, 2001................. 18 Statements of Operations for the Nine Months Ended September 30, 2002 (unaudited) and the Year Ended December 31, 2001........................................ 19 Statements of Cash Flows for the Nine Months Ended September 30, 2002 (unaudited) and the Year Ended December 31, 2001........................................ 20 Notes to Financial Statements (unaudited)................................................. 21 (b) Pro Forma Financial Information. PRO FORMA FINANCIAL STATEMENTS OF CENTENE CORPORATION, INCLUDING UNIVERSITY HEALTH PLANS, INC.: Pro Forma Consolidated Balance Sheet as of September 30, 2002 (unaudited)................. 24 Pro Forma Consolidated Statement of Operations for the Nine Months Ended September 30, 2002 (unaudited).......................................................... 25 Pro Forma Consolidated Statement of Operations for the Year Ended December 31, 2001 (unaudited)........................................................... 26 Notes to Pro Forma Consolidated Financial Statements (unaudited).......................... 27
3 REPORT OF INDEPENDENT ACCOUNTANTS To The Board of Directors University Health Plans, Inc.: In our opinion, the accompanying balance sheet as of December 31, 2001, and the related statements of operations, stockholder's equity and cash flows present fairly, in all material respects, the financial position of University Health Plans, Inc. (the "Company") at December 31, 2001, and the results of its operations and its cash flows for the year then ended in conformity with accounting principles generally accepted in the United States of America. These financial statements are the responsibility of the Company's management; our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with auditing standards generally accepted in the United States of America, which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. The financial statements of the Company as of December 31, 2000 and for the year then ended were audited by other independent accountants whose report dated March 2, 2001 expressed an unqualified opinion on those financial statements. /s/ PricewaterhouseCoopers LLP February 22, 2002, except for Note 11, as to which the date is August 2, 2002. 4 UNIVERSITY HEALTH PLANS, INC. BALANCE SHEETS AS OF DECEMBER 31, 2001 AND 2000 - --------------------------------------------------------------------------------
2001 2000 ASSETS Current assets: Cash and cash equivalents $ 8,331,930 $ 2,279,502 Short-term investments 877,291 5,210,202 Premiums receivable, less allowances for doubtful accounts of $428,000 and $309,000 in 2001 and 2000, respectively 4,538,659 2,156,775 Deposits, reinsurance and other receivables 1,751,053 702,878 Capital contribution receivable 5,570,685 -- Prepaid expenses 157,397 165,514 ------------ ------------ TOTAL CURRENT ASSETS 21,227,015 10,514,871 Restricted assets 8,359,163 6,350,952 Property and equipment, net 707,132 917,716 Intangible assets, net 87,883 439,416 Security deposit 66,933 80,457 ------------ ------------ TOTAL ASSETS $ 30,448,126 $ 18,303,412 ============ ============ LIABILITIES AND STOCKHOLDER'S EQUITY Current liabilities: Medical claims payable $ 20,753,526 $ 10,818,351 Accounts payable and accrued expenses 2,428,111 1,361,729 Unearned premium revenue 1,400,443 1,092,774 ------------ ------------ TOTAL CURRENT LIABILITIES 24,582,080 13,272,854 ------------ ------------ Stockholder's equity: Common stock, stated value $80,000, 100 shares authorized 20 shares issued and outstanding 1,600,000 1,600,000 Additional paid-in capital 9,176,932 9,176,932 Capital contribution receivable 5,570,685 -- Accumulated deficit (10,481,571) (5,746,374) ------------ ------------ TOTAL STOCKHOLDER'S EQUITY 5,866,046 5,030,558 ------------ ------------ TOTAL LIABILITIES AND STOCKHOLDER'S EQUITY $ 30,448,126 $ 18,303,412 ============ ============
The accompanying notes are an integral part of these financial statements. 5 UNIVERSITY HEALTH PLANS, INC. STATEMENTS OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31, 2001 AND 2000 - --------------------------------------------------------------------------------
2001 2000 Revenue: Premiums $ 93,526,159 $ 64,556,104 Interest income 822,443 1,136,778 Other income 56,503 81,346 ------------ ------------ TOTAL REVENUE 94,405,105 65,774,228 ------------ ------------ Expenses: Medical and hospital service expenses 83,114,320 51,340,510 Salaries and employee benefits 4,736,496 4,165,800 Administrative service agreement expenses 4,404,529 3,478,817 Other selling, general and administrative expenses 6,177,420 5,342,797 Depreciation and amortization 707,537 692,252 ------------ ------------ TOTAL EXPENSES 99,140,302 65,020,176 ------------ ------------ NET (LOSS) INCOME $ (4,735,197) $ 754,052 ============ ============
The accompanying notes are an integral part of these financial statements. 6 UNIVERSITY HEALTH PLANS, INC. STATEMENTS OF STOCKHOLDER'S EQUITY FOR THE YEARS ENDED DECEMBER 31, 2001 AND 2000 - --------------------------------------------------------------------------------
ADDITIONAL CAPITAL TOTAL COMMON STOCK PAID-IN CONTRIBUTION ACCUMULATED STOCKHOLDER'S SHARES AMOUNT CAPITAL RECEIVABLE DEFICIT EQUITY BALANCE AT DECEMBER 31, 1999 20 $ 1,600,000 $ 9,176,932 $ (760,259) $ (6,500,426) $ 3,516,247 Net income 754,052 754,052 Collection of capital contribution receivable 760,259 760,259 -- ------------ ------------ ------------ ------------ ------------ BALANCE AT DECEMBER 31, 2000 20 $ 1,600,000 $ 9,176,932 $ -- $ (5,746,374) $ 5,030,558 Net income (4,735,197) (4,735,197) Capital contribution receivable 5,570,685 5,570,685 -- ------------ ------------ ------------ ------------ ------------ BALANCE AT DECEMBER 31, 2001 20 $ 1,600,000 $ 9,176,932 $ 5,570,685 $(10,481,571) $ 5,866,046 == ============ ============ ============ ============ ============
The accompanying notes are an integral part of these financial statements. 7 UNIVERSITY HEALTH PLANS, INC. STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED DECEMBER 31, 2001 AND 2000 - -------------------------------------------------------------------------------
2001 2000 Cash flows from operating activities: Net (loss) income $ (4,735,197) $ 754,052 Adjustments to reconcile net (loss) income to net cash used in operating activities: Depreciation and amortization 707,537 692,252 Changes in operating assets and liabilities: Premiums receivable, net (2,381,884) (1,320,361) Deposits, reinsurance and other receivables (1,048,175) 514,700 Capital contribution receivable (5,570,685) -- Due from/to UMDNJ -- (20,192) Prepaid expenses 8,117 (94,450) Security deposit 13,524 (80,457) Medical claims payable 9,935,175 (1,747,953) Accounts payable and accrued expenses 1,066,382 320,823 Unearned premium revenue 307,669 (72,913) ------------ ------------ NET CASH USED IN OPERATING ACTIVITIES (1,697,537) (1,054,499) ------------ ------------ Cash flows from investing activities: Purchases of furniture and equipment, net of proceeds from sales (145,420) (628,802) Sale of short-term investments 9,399,129 981,436 Purchase of short-term investments (5,066,218) (6,191,638) Sale of restricted assets 15,306,090 2,428,227 Purchase of restricted assets (17,314,301) (6,358,710) ------------ ------------ NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES 2,179,280 (9,769,487) ------------ ------------ Cash flows from financing activities: Proceeds from capital contributions 5,570,685 760,259 ------------ ------------ NET CASH PROVIDED BY FINANCING ACTIVITIES 5,570,685 760,259 ------------ ------------ NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 6,052,428 (10,063,727) Cash and cash equivalents at beginning of year 2,279,502 12,343,229 ------------ ------------ Cash and cash equivalents at end of year $ 8,331,930 $ 2,279,502 ============ ============
The accompanying notes are an integral part of these financial statements. 8 UNIVERSITY HEALTH PLANS, INC. NOTES TO FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- 1. ORGANIZATION University Health Plans, Inc. (the "Company"), a New Jersey corporation, was formed as a health maintenance organization ("HMO") for purposes of providing comprehensive managed health care services to employer groups and low-income (primarily Medicaid-eligible) residents of New Jersey. The Company is licensed to provide such services to residents throughout the State of New Jersey. The Company is a wholly owned subsidiary of the University of Medicine and Dentistry of New Jersey ("UMDNJ"). 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES BASIS OF ACCOUNTING The accompanying financial statements are prepared on the accrual basis of accounting in accordance with accounting principles generally accepted in the United States of America. USE OF ESTIMATES The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reported period. The most significant estimates included in the financial statements relate to the Company's valuation of medical claims payable and the allowance for uncollectible premiums receivable. Actual results may differ from those estimates. CASH AND CASH EQUIVALENTS Cash and cash equivalents include cash and certificates of deposit with original maturities of three months or less when purchased. SHORT-TERM INVESTMENTS Short-term investments consist primarily of U.S. Treasury Notes with maturities of one year or less. At December 31, 2001, the fair value of the short-term investments approximates carrying value. PREMIUMS RECEIVABLE, NET Premiums receivable are recorded at net realizable value, adjusted for estimated uncollectible amounts. As of December 31, 2001 and 2000, the premiums receivable balance included an allowance for doubtful accounts of approximately $428,000 and $309,000 respectively. During 2001 and 2000, the Company recorded a provision for doubtful accounts totaling approximately $119,000 and $170,000, respectively. These amounts are included in other selling, general and administrative expenses in the statements of operations. RESTRICTED ASSETS Under the State of New Jersey Department of Banking and Insurance (the "DOBI") regulations, the Company is required to maintain certain insolvency deposits in a custodial account for the protection of enrollees. The Company is entitled to receive interest income on these deposits; however, the principal may not be withdrawn without the written consent of the Commissioner of the DOBI. The minimum deposit requirement is calculated on December 31 of each year and must be funded by June 30 of the following year. The restricted amounts are invested in money market funds. 9 UNIVERSITY HEALTH PLANS, INC. NOTES TO FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- The minimum deposit requirement based on the December 31, 2001 calculation is $15,149,590. The total unfunded balance at December 31, 2001 is as follows: Minimum deposit requirement based on December 31, 2001 calculation $15,149,590 Less: Deposit balance December 31, 2001 8,359,163 ----------- $ 6,790,427 ===========
The Company intends to fund the minimum deposit requirement from unrestricted cash and cash equivalents. The minimum deposit requirement was due June 30, 2002. However, the Company appealed the minimum deposit requirement with the DOBI. On August 6, 2002, the DOBI stated in a letter to the Company that the minimum claim deposit requirement was reduced to $11,067,600. The Company fulfilled this requirement on August 30, 2002. PROPERTY AND EQUIPMENT Furniture and equipment is recorded at cost. The Company provides for the depreciation of computer equipment, software, furniture, fixtures and office equipment on a straight-line basis over the estimated useful lives of 1 to 10 years. Leasehold improvements are amortized over the shorter of the term of the related leases or the estimated useful lives of the assets. When assets are retired or otherwise disposed of, the cost and the related depreciation are reversed from the accounts, and any gain or loss is reflected in current operations. Repair and maintenance expenditures are expensed as incurred. INTANGIBLE ASSETS During 1999, the Company entered into an asset purchase agreement, with HIP of New Jersey, Inc. ("HIPNJ") for the purchase of HIPNJ's Medicaid contract with the New Jersey Department of Human Services, Division of Medical Assistance and Health Services (the "NJDHS"). The Company acquired the right to provide health insurance coverage to Medicaid recipients previously insured by HIPNJ. The intangible assets acquired of approximately $1,055,000 are carried at cost, net of accumulated amortization, and are amortized using the straight-line method over 3 years. Accumulated amortization at December 31, 2001 and 2000 was approximately $967,000 and $615,000, respectively. RISK SHARING ARRANGEMENTS The Company contracts with physicians or provider groups to provide medical services to their members. The Company pays capitation or negotiated fees for defined services provided by the physicians. PREMIUM REVENUE Premium revenues are due monthly and are recognized as revenue during the period in which the Company is obligated to provide services to members. Premiums collected in advance are deferred and recorded as unearned premium revenue. Approximately 81% and 69% of the Company's premium revenue was earned under a contract with the NJDHS for the years ended December 31, 2001 and 2000, respectively. The current contract with NJDHS runs through June 30, 2002 and is renewable annually. The contract can be suspended by NJDHS or terminated by either party upon the occurrence of certain events. Substantially all premiums are based on a capitated rate per eligible enrolled member per month. 10 UNIVERSITY HEALTH PLANS, INC. NOTES TO FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- ADVERTISING COSTS Advertising costs are charged to operations when incurred. During 2001 and 2000, advertising costs totaled approximately $408,000 and $78,000, respectively. These amounts are included in other selling, general and administrative expenses in the statements of operations. MEDICAL AND HOSPITAL SERVICE EXPENSE Medical claims payable include estimates of payments to be made under health insurance coverage provided by the Company for reported claims and for losses incurred but not yet reported. Management develops these estimates using actuarial methods based upon historical data for claim payment patterns, cost trends, product mix, seasonality, utilization of health care services and other relevant factors. When estimates change, the Company records the adjustment in benefits, losses and settlement expenses in the period the change in estimate occurs. The Company's arrangements with hospitals for inpatient services are primarily on a per diem reimbursement basis. Primary care physicians are reimbursed on a capitation basis, and specialists and other ancillary services are paid on a fee-for-service basis. INCOME TAXES Under the balance sheet based liability method specified by Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes", ("SFAS 109"), deferred tax assets and liabilities are determined based on differences between the financial statements and tax bases of assets and liabilities as measured by the enacted tax rates which will be in effect when the differences reverse. As of December 31, 2001 and 2000, the Company has recorded a full valuation allowance to reduce deferred tax assets expected to be realized to $0. REINSURANCE Reinsurance premiums are reported as medical expense, and reinsurance recoveries are reported as reductions of medical expense (see Note 7). 3. PROVISION FOR INCOME TAXES In 2000, the Company reported income from operations. In 2001, the Company incurred operating losses for financial statement and income tax reporting purposes. The Company had no current or deferred tax provision for 2001. Deferred taxes are generally recognized based upon enacted tax rates when assets and liabilities have different values for financial statement and tax reporting purposes. Due to its earnings history, management has established a full valuation allowance against its deferred tax asset balance. Net operating loss (NOL) carryforwards totaling approximately $7,282,000 and $3,347,000 at December 31, 2001 and 2000, respectively, for federal and state income tax reporting purposes (which are subject to certain limitations) will be available to offset future taxable income. No NOL carryforwards were utilized in 2001. Such NOL carryforwards will expire in various years through 2021. 11 UNIVERSITY HEALTH PLANS, INC. NOTES TO FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- The Company's effective tax rate for 2001 is different from the enacted U.S. federal tax rate of 34%. The significant items causing this difference are as follows:
2001 Income tax benefit at statutory rate $(1,609,967) Permanent differences: Penalties 5,666 Meals and entertainment 11,298 Dues, lobbying and contributions 510 Change in valuation allowance 1,590,000 Other 2,493 ----------- Tax provision $ -- ===========
Significant components of the Company's net rate reconciliation deferred tax assets at December 31, 2001 and 2000 are as follows:
2001 2000 Loss reserve discounting $ 206,000 $ 107,000 Net operating loss carryforwards 2,476,000 1,138,000 Unearned premiums 95,000 74,000 Renewal rights 263,000 167,000 Allowance for doubtful accounts 145,000 105,000 Other 86,000 90,000 ----------- ----------- Total deferred tax assets before valuation allowance 3,271,000 1,681,000 Valuation allowance for deferred tax assets (3,271,000) (1,681,000) ----------- ----------- Deferred tax assets, net of valuation allowance -- -- Deferred tax liabilities -- -- ----------- ----------- Total deferred tax assets, net of deferred tax liabilities -- -- ----------- ----------- Net deferred tax assets $ -- $ -- =========== ===========
12 UNIVERSITY HEALTH PLANS, INC. NOTES TO FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- 4. PROPERTY AND EQUIPMENT Property and equipment consists of the following:
2001 2000 Computer hardware $ 469,645 $ 394,342 Computer software 588,010 539,476 Furniture and equipment 528,810 527,538 Leasehold improvements 287,881 287,881 Construction in progress 34,954 14,643 ----------- ----------- Total 1,909,300 1,763,880 Accumulated depreciation and amortization (1,202,168) (846,164) ----------- ----------- $ 707,132 $ 917,716 =========== ===========
Depreciation and amortization expense on property and equipment was $356,004 and $340,718 for the years ended December 31, 2001 and 2000, respectively. 5. RELATED PARTY TRANSACTIONS The Company paid approximately $6,100,000 and $5,662,000 for the years ended December 31, 2001 and 2000, respectively, in service fees for medical claims to health care providers which are employed by UMDNJ. Under the terms of the Company's Certificate of Authority, UMDNJ has guaranteed to maintain statutory net worth requirements of the Company in perpetuity. During 2000, UMDNJ paid $760,259 in contributed capital to the Company. At December 31, 2001, UMDNJ has guaranteed a contribution of $5,570,685, which is included as capital contribution receivable in the balance sheet. During January 2002, all monies guaranteed by UMDNJ were received by the Company. The Company's Medical Director provides services to the Company pursuant to a contractual arrangement with UMDNJ. Amounts paid to UMDNJ related to this arrangement totaled approximately $27,000, annually, for the years ended December 31, 2001 and 2000. The Company entered into an agreement with UMDNJ to provide comprehensive health care benefits to the students of the University. The students electing coverage are responsible for the entire cost of the insurance premiums. Approximately $2,348,000 and $2,100,000 of student health insurance premiums are included in premium revenues in the statements of operations for the years ended December 31, 2001 and 2000, respectively. 6. COMMITMENTS AND CONTINGENCIES STATUTORY NET WORTH Financial statements issued in accordance with statutory accounting practices differ from financial statements issued in accordance with generally accepted accounting principles ("GAAP"). Statutory financial statements exclude certain assets included in GAAP financial statements. These "non-admitted" assets include prepaid expenses, property, plant and equipment other than certain computer equipment, intangible assets and certain other assets. Further, statutory financial statements include capital contributions receivable as admitted assets. 13 UNIVERSITY HEALTH PLANS, INC. NOTES TO FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- The Company is required to maintain a minimum statutory net worth in accordance with DOBI guidelines and under the terms of its contract with the NJDHS. For 2001 and 2000, the minimum requirements were approximately $4,605,000 and $2,584,000, respectively. At December 31, 2001, the Company was in compliance with the DOBI and NJDHS minimum statutory surplus requirements. However, since the Company statutory net worth has fallen below the 125% minimum statutory requirement, the Company is required by DOBI regulations to submit a plan of corrective action demonstrating how the 125% of minimum surplus shall be attained, specifying marketing and financial projections. The Company is currently working with the DOBI to finalize this plan of corrective action. The following table illustrates the reconciliation of the company's GAAP basis financial statements to those prepared in accordance with statutory accounting principles:
2001 2000 -------------------------------------------- --------------------------------------------- GAAP ADJUSTMENTS STATUTORY GAAP ADJUSTMENTS STATUTORY Assets $30,448,126 $(1,180,016) $29,268,110 $18,303,412 $(1,286,842) $17,016,570 Liabilities 24,582,080 24,582,080 13,272,854 -- 13,272,854 ----------- ----------- ----------- ----------- ----------- ----------- Net worth $ 5,866,046 $(1,180,016) $ 4,686,030 $ 5,030,558 $(1,286,842) $ 3,743,716 ============ ============ ============ ============ ============ ============
LITIGATION Various investigations, suits and claims arising in the normal course of operations are pending or on appeal against the Plan. While the ultimate effect of such actions cannot be determined at this time, liabilities which may arise from such actions, could materially affect the financial position or results of operations of the Company. THIRD-PARTY ADMINISTRATOR The Company has an agreement with a third-party administrator ("TPA") to provide information system outsourcing services and administrative services including eligibility administration, claims and encounter processing, capitation management, premium billing and broker commission processing. Fees payable to the TPA under this arrangement are based on a specified monthly fee per member enrolled in the Company's health benefit plans and are reported as administrative service agreement expenses in the statements of operations. The contract period for the current agreement with the TPA expires in 2004. Under the terms of this agreement, the Company may terminate the administrative services at any time without penalty while the information system outsourcing services may only be terminated subject to an early termination fee based on the year of termination. 14 UNIVERSITY HEALTH PLANS, INC. NOTES TO FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- OPERATING LEASES Future minimum annual rentals under all noncancelable operating leases having initial remaining terms of one year or more consist of the following: Year ended: 2002 $ 345,941 2003 465,221 2004 470,922 2005 483,952 2006 595,353 Thereafter 1,753,869 ---------- TOTAL MINIMUM PAYMENTS $4,115,258 ========== The Company leases office space under an operating lease agreement expiring in September 2010. Total rental expense in 2001 for this lease was approximately $507,000. 7. REINSURANCE The Company limits its losses on individual claims through reinsurance. Under the HMO reinsurance agreement, the Company is reimbursed for eligible hospital services and out of area emergency hospital services in excess of $30,000 per member per contract year, with a $2,000,000 maximum per member per contract year. Reimbursement for services provided at hospitals are subject to coinsurance provisions. Eligible hospital services are limited to a maximum average $2,000 per day with the exception of certain per diem hospital arrangements, which are reimbursed at amounts specified in the HMO reinsurance agreement. The HMO reinsurance agreement also provides for certain coverage in the event of the insolvency of the Company, as defined in the reinsurance agreement. The reinsurance company agrees to continue benefits to the Company's members who are hospitalized at the time of the insolvency until the earlier of the member's discharge from the hospital or the date the member becomes eligible for health coverage under another plan, but not to exceed one year from the date of insolvency. The reinsurance company will also continue benefits for any member for medical services incurred for a service date subsequent to the date of insolvency provided that premium for the member is current. Coverage for such medical services will continue for 30 days after the Plan becomes insolvent. The reinsurance company's aggregate maximum liability under this provision of the HMO reinsurance agreement will not exceed $5,000,000. Insolvency coverage is conditional upon the guarantee of UMDNJ to fund operating deficits and capital expenditures at a level sufficient to assure continued operations. In accordance with the DOBI regulations, the Company has obtained reinsurance coverage for the entire cost of out-of-network covered services rendered to members enrolled in the Company's Point-of-Service health benefit plans. Under the Company's Point-of-Service Indemnity Agreement, the Company is reimbursed 100% for the cost of out-of-network covered services. The maximum indemnity payable under the Point-of-Service Indemnity Agreement for out-of-network covered services for each member is $2,000,000 per contract year. Reinsurance premiums of approximately $5,036,000 and $4,862,000 are included in medical and hospital service expense in 2001 and 2000, respectively. Approximately $2,848,000 and $3,519,000 in reinsurance recoveries were recognized and deducted from medical expense in 2001 and 2000, respectively. Included in other receivables is approximately $1,480,000 and $503,000 recoverable from the reinsurer at December 31, 2001 and 2000, respectively. Reinsurance recoveries are subject to audit and adjustment at the discretion of the reinsurer. 15 UNIVERSITY HEALTH PLANS, INC. NOTES TO FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- 8. EMPLOYEE BENEFIT PLAN The Company maintains a 401(k) retirement plan (the "Plan") for all employees meeting age and service requirements. Under the Plan, eligible employees may voluntarily contribute up to 15% of their compensation or make additional contributions not to exceed the maximum allowed by the applicable Internal Revenue Service guidelines. The Company matches employee contributions to the Plan on a discretionary basis at the end of each plan year. Approximately $24,000 related to the Plan's matching contribution is included in salary and employee benefits expense for the year ended December 31, 2001 in the statements of operations. 9. CONCENTRATION OF CREDIT RISK Concentration of credit risk exists with cash and cash equivalents. For cash balances held greater than the FDIC insured amount, the Company assumes a certain degree of associated risk. However, the Company places its cash and cash equivalents with high credit quality institutions. Substantially all cash and equivalents are currently held with one financial institution. Premiums receivable represented uncollected premiums for the Company's managed health care services provided to employer groups and low-income residents, all of which are located in New Jersey. Premiums receivable at December 31, 2001 and 2000, before allowances for doubtful accounts, consists approximately, of the following:
2001 2000 State of New Jersey Department of Human Services, Division of Medical Assistance and Health Services 82% 53% Commercial group (none over 10%) 18 47 --- --- 100% 100% === ===
10. CODIFICATION The State of New Jersey has adopted legislation and implemented regulations requiring that New Jersey licensed health maintenance organizations adopt financial accounting and reporting practices set forth in the National Association of Insurance Commissioners ("NAIC") developed Accounting Practices and Procedures Manual (the "Accounting Manual") for statutory purposes. The Accounting Manual represents a codification of statutory accounting principles. The purpose of the codification of statutory accounting principles is to produce a comprehensive guide for regulators, insurers and auditors, as well as to enhance the consistency of the accounting treatment of assets, liabilities, reserves, income and expenses in completing annual and quarterly financial statements required by law. The cumulative effect of the change of accounting principle decreased surplus by approximately $414,000 as of January 1, 2001. 16 UNIVERSITY HEALTH PLANS, INC. NOTES TO FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- 11. SUBSEQUENT EVENTS On August 2, 2002, the Company entered into a stock purchase agreement with the Centene Corporation ("Centene") to sell 80% of its outstanding capital stock for cash consideration of approximately $10,000,000. In accordance with terms of the agreement, the purchase price may be adjusted based on certain conditions present at closing or up to one year thereafter. The agreement also provides terms for Centene's future purchase of the remaining 20% of the Company's outstanding capital stock. The sale is expected to close during the fourth quarter of 2002 and is subject to certain regulatory approvals. The Company is currently exploring various strategic alternatives relating to its remaining commercial line of business. 17 UNIVERSITY HEALTH PLANS, INC. BALANCE SHEETS AS OF SEPTEMBER 30, 2002 AND DECEMBER 31, 2001 (Dollars in thousands)
SEPTEMBER 30, DECEMBER 31, 2002 2001 ------------ ----------- (UNAUDITED) ASSETS CURRENT ASSETS: Cash and cash equivalents ................................................... $ 3,428 $ 8,332 Premium and related receivables, net ........................................ 9,219 6,290 Short-term investments, at fair value ....................................... 60 877 Other current assets ........................................................ 3,511 5,728 -------- -------- Total current assets ..................................................... 16,218 21,227 RESTRICTED DEPOSITS ............................................................ 12,130 8,359 PROPERTY AND EQUIPMENT, net .................................................... 571 707 INTANGIBLE ASSETS, net ......................................................... -- 88 OTHER ASSETS ................................................................... 67 67 -------- -------- Total assets ............................................................. $ 28,986 $ 30,448 ======== ======== LIABILITIES AND STOCKHOLDER'S EQUITY CURRENT LIABILITIES: Medical claims liabilities .................................................. $ 17,902 $ 20,754 Unearned capitation premium ................................................. 909 1,400 Accounts payable and accrued expenses ....................................... 2,973 2,428 -------- -------- Total current liabilities ................................................ 21,784 24,582 STOCKHOLDER'S EQUITY: Common stock, stated value $80, 100 shares authorized, 20 shares issued and outstanding ........................................................ 1,600 1,600 Additional paid-in capital .................................................. 18,189 14,748 Retained deficit ............................................................ (12,587) (10,482) -------- -------- Total stockholder's equity ............................................... 7,202 5,866 -------- -------- Total liabilities and stockholder's equity ............................... $ 28,986 $ 30,448 ======== ========
The accompanying notes are an integral part of these statements. 18 UNIVERSITY HEALTH PLANS, INC. STATEMENTS OF OPERATIONS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2002 AND THE YEAR ENDED DECEMBER 31, 2001 (Dollars in thousands)
FOR THE NINE FOR THE MONTHS ENDED YEAR ENDED SEPTEMBER 30, 2002 DECEMBER 31, 2001 (UNAUDITED) REVENUES: Premiums ............................. $105,576 $ 93,526 Administrative services fees ......... -- -- -------- -------- Total revenues .................... 105,576 93,526 -------- -------- EXPENSES: Medical services costs ............... 94,237 83,114 General and administrative expenses .. 12,827 16,026 -------- -------- Total operating expenses .......... 107,064 99,140 -------- -------- Losses from operations ............ (1,488) (5,614) OTHER INCOME (EXPENSE): Investment and other income, net ..... 328 879 Interest expense ..................... -- -- -------- -------- Losses before income taxes ........ (1,160) (4,735) INCOME TAX EXPENSE ...................... 425 -- -------- -------- Net losses ........................ $ (1,585) $ (4,735) ======== ========
The accompanying notes are an integral part of these statements. 19 UNIVERSITY HEALTH PLANS, INC. STATEMENTS OF CASH FLOWS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2002 AND FOR THE YEAR ENDED DECEMBER 30, 2001 (Dollars in thousands)
FOR THE NINE FOR THE MONTHS ENDED YEAR ENDED SEPTEMBER 30, DECEMBER 31, 2002 2001 (UNAUDITED) CASH FLOWS FROM OPERATING ACTIVITIES: Net losses .............................................................................. $ (1,585) $ (4,735) Adjustments to reconcile net losses to net cash (used in) provided by operating activities: Depreciation and amortization ...................................................... 281 708 Changes in operating assets and liabilities: Premium and related receivables, net ................................................. (2,929) (3,431) Other current assets ................................................................. 88 22 Accounts payable and accrued expenses ................................................ 24 1,066 Medical claims liabilities ........................................................... (2,852) 9,935 Unearned capitation premium .......................................................... (491) 308 -------- -------- Net cash (used in) provided by operating activities ................................ (7,464) 3,873 CASH FLOWS FROM INVESTING ACTIVITIES: Purchase of furniture and equipment ..................................................... (58) (146) Sale of short-term investments .......................................................... 817 9,399 Purchase of short-term investments ...................................................... -- (5,066) Sale of restricted deposits ............................................................. 8,202 15,306 Purchase of restricted deposits ......................................................... (11,972) (17,314) -------- -------- Net cash (used in) provided by investing activities .................................. (3,011) 2,179 CASH FLOWS FROM FINANCING ACTIVITIES: Collection of capital contribution receivable ........................................... 5,571 -- -------- -------- Net cash provided by financing activities ............................................ 5,571 -- -------- -------- Net (decrease) increase in cash and cash equivalents ............................... (4,904) 6,052 CASH AND CASH EQUIVALENTS, beginning of year ............................................... 8,332 2,280 -------- -------- CASH AND CASH EQUIVALENTS, end of period ................................................... $ 3,428 $ 8,332 ======== ========
The accompanying notes are an integral part of these statements. 20 UNIVERSITY HEALTH PLANS, INC. NOTES TO FINANCIAL STATEMENTS (Dollars in thousands) (Unaudited) 1. ORGANIZATION University Health Plans, Inc. (the Company or UHP), a New Jersey corporation, was formed as a health maintenance organization (HMO) for the purposes of providing comprehensive managed health care services to employer groups and low-income (primarily Medicaid-eligible) residents of New Jersey. The company is licensed to provide such services to residents throughout the State of New Jersey. The Company is a wholly owned subsidiary of the University of Medicine and Dentistry of New Jersey (UMDNJ). 2. BASIS OF PRESENTATION The unaudited financial statements herein have been prepared by the Company pursuant to the rules and regulations of the Securities and Exchange Commission. These interim financial statements have been prepared under the presumption that users of the interim financial information have either read or have access to the audited financial statements for the latest fiscal year ended December 31, 2001. Accordingly, footnote disclosures which would substantially duplicate the disclosures contained in the December 31, 2001 audited financial statements have been omitted from these interim financial statements. In the opinion of management, these financial statements reflect all adjustments, consisting only of normal recurring adjustments, which are necessary for a fair presentation of the results of the interim periods presented. 3. INCOME TAXES In 2001, the Company incurred operating losses for financial statement and income tax reporting purposes. The Company had no current or deferred tax provision for 2001. Deferred taxes are generally recognized based upon enacted tax rates when assets and liabilities have different values for financial statement and tax reporting purposes. Due to its earnings history, management has established a full valuation allowance against its deferred tax asset balance. Effective January 1, 2002, the state of New Jersey passed a law requiring an alternative minimum tax to be calculated and paid based on gross receipts. As a result, the company recorded $425 in income tax expense for the nine months ended September 30, 2002. 4. RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS In July 2001, SFAS No. 142, "Goodwill and Other Intangible Assets," was issued which requires that goodwill and intangible assets with indefinite useful lives no longer be amortized, but instead tested at least annually for impairment. The Company has adopted SFAS No. 142 effective January 1, 2002. Goodwill amortization has been discontinued. The Company reviews goodwill and other long-lived assets annually for impairment and recognizes impairment losses if expected undiscounted future cash flows of the related assets are less than their carrying value. An impairment loss represents the amount by which the carrying value of an asset exceeds the fair value of the asset. The Company did not recognize any impairment losses for the periods presented. In August 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets." SFAS No. 144 provides updated guidance concerning the recognition and measurement of an impairment loss for certain types of long-lived assets. It also expands the scope of a discontinued operation to include a component of an entity. SFAS No. 144 is effective for financial statements issued for fiscal years beginning after December 15, 2001, and interim periods within those years. The adoption of the provisions of SFAS No. 144 did not have a material impact on the Company's results of operations, financial position or cash flows. In May 2002, the FASB issued SFAS No. 145, "Recission of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections as of April 2002." As a result of the recission of SFAS No. 4, 21 UNIVERSITY HEALTH PLANS, INC. NOTES TO FINANCIAL STATEMENTS (Dollars in thousands) (unaudited) gains and losses related to the extinguishment of debt should be classified as extraordinary only if they meet the criteria outlined under APB Opinion No. 30, "Reporting the Results of Operations-Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions." SFAS No. 64. "Extinguishments of Deb Made to Satisfy Sinking-Fund Requirements," was an amendment to SFAS No. 4 and is no longer necessary. SFAS No. 44, "Accounting for Intangible Assets of Motor Carriers," defined accounting requirements for the effects of the transition to the Motor Carrier Act of 1980. The transitions are complete and SFAS No. 44 is no longer necessary. SFAS No. 145 amends SFAS No. 13, "Accounting for Leases," requiring that any capital lease that is modified resulting in an operating lease should be accounted for under the sale-leaseback provisions of SFAS No. 98 or SFAS No. 28, as applicable. SFAS No. 145 is effective for fiscal years beginning after May 15, 2002. The adoption of the provisions of SFAS No. 145 is not expected to have a material impact on the Company's results of operations, financial position or cash flows. In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated with Exit or Disposal Activities," which requires that a liability for a costs associated with an exit or disposal activity be recognized when the liability is incurred. This statement nullifies Emerging Issues Task Force Issue No. 94-3, "Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring)," which required that a liability for an exit cost be recognized upon the entity's commitment to an exit plan. SFAS No. 146 is effective for exit or disposal activities that are initiated after December 31, 2002. The adoption of the provisions of SFAS No. 146 is not expected to have a material impact on the Company's results of operations, financial position or cash flows. 5. SUBSEQUENT EVENTS Effective November 22, 2002, in contemplation of its stock Purchase Agreement with Centene Corporation (Centene), the Company entered into an agreement with a third party related to its commercial membership. Any members not enrolling with the third party will not be renewed by the Company. 22 PRO FORMA FINANCIAL STATEMENTS OF CENTENE CORPORATION, INCLUDING UNIVERSITY HEALTH PLANS, INC. The following unaudited pro forma financial statements are presented for illustrative purposes only and are not necessarily indicative of the financial position or operating results that would have actually occurred had the acquisition been completed at the beginning of the periods or on the dates indicated, nor are they necessarily indicative of future financial position or operating results. The allocation of the purchase price reflected in the unaudited pro forma consolidated financial statements is preliminary. The actual purchase price allocation to reflect the fair values of assets acquired and liabilities assumed will be completed when we finish our valuation of such assets acquired and liabilities assumed. The final purchase price may differ significantly from the preliminary allocation included in this report. The unaudited pro forma financial statements should be read in conjunction with our audited consolidated financial statements and related notes included in our annual report on Form 10-K for the year ended December 31, 2001 and the audited consolidated financial statements and related notes of UHP for the year ended December 31, 2001 and 2000, included elsewhere in this report on this current Form 8-K. 23 CENTENE CORPORATION AND SUBSIDIARIES PRO FORMA CONSOLIDATED BALANCE SHEET AS OF SEPTEMBER 30, 2002 (Dollars in thousands) (Unaudited)
CENTENE UNIVERSITY CORPORATION CENTENE HEALTH PRO FORMA PRO FORMA CORPORATION PLANS, INC. ADJUSTMENTS COMBINED ----------- ----------- ----------- --------- ASSETS CURRENT ASSETS: Cash and cash equivalents .................... $ 56,066 $ 3,428 $(10,633) (A) $ 48,861 Premium and related receivables, net ......... 8,250 9,219 17,469 Short-term investments, at fair value ........ 9,834 60 3,441 (B) 13,335 Deferred income taxes ........................ 2,589 -- 2,589 Other current assets ......................... 3,202 3,511 (3,441) (B) 3,272 -------- -------- -------- -------- Total current assets ...................... 79,941 16,218 (10,633) 85,526 LONG-TERM INVESTMENTS, at fair value ............ 76,974 -- 76,974 RESTRICTED DEPOSITS ............................. -- 12,130 12,130 PROPERTY AND EQUIPMENT, net ..................... 5,600 571 6,171 INTANGIBLE ASSETS, net .......................... 3,217 -- 4,871 (C) 8,088 OTHER ASSETS .................................... 5,034 67 5,101 -------- -------- -------- -------- Total assets .............................. $170,766 $ 28,986 $ (5,762) $193,990 ======== ======== ======== ======== LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES: Medical claims liabilities ................... $ 65,194 $ 17,902 $ $ 83,096 Unearned capitation premium .................. 897 909 1,806 Accounts payable and accrued expenses ........ 5,235 2,973 8,208 -------- -------- -------- -------- Total current liabilities ................. 71,326 21,784 93,110 OTHER LIABILITIES ............................... 4,546 -- 4,546 MINORITY INTEREST ............................... -- -- 1,440 (D) 1,440 -------- -------- -------- -------- Total liabilities ......................... 75,872 21,784 1,440 99,096 STOCKHOLDERS' EQUITY: Common stock ................................. 11 1,600 (1,600) (E) 11 Additional paid-in capital ................... 72,058 18,189 (18,189) (E) 72,058 Net unrealized gain on investments, net of tax 931 -- 931 Retained earnings (deficit) .................. 21,894 (12,587) 12,587 (E) 21,894 -------- -------- -------- -------- Total stockholders' equity ................ 94,894 7,202 (7,202) 94,894 -------- -------- -------- -------- Total liabilities and stockholders' equity $170,766 $ 28,986 $ (5,762) $193,990 ======== ======== ======== ========
See notes to pro forma consolidated financial statements. 24 CENTENE CORPORATION AND SUBSIDIARIES PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2002 (Dollars in thousands, except share data) (Unaudited)
HISTORICAL CENTENE ----------------------------------- CORPORATION CENTENE UNIVERSITY PRO FORMA PRO FORMA CORPORATION HEALTH PLANS, INC. ADJUSTMENTS (F) COMBINED ------------ ------------------ ------------ ------------ REVENUES: Premiums .................................... $ 319,441 $ 105,576 $ (20,100) $ 404,917 Administrative services fees ................ 320 -- 320 ------------ ------------ ------------ ------------ Total revenues ........................... 319,761 105,576 (20,100) 405,237 ------------ ------------ ------------ ------------ EXPENSES: Medical services costs ...................... 262,697 94,237 (21,208) 335,726 General and administrative expenses ......... 35,056 12,827 (2,309) 45,574 ------------ ------------ ------------ ------------ Total operating expenses ................. 297,753 107,064 (23,517) 381,300 ------------ ------------ ------------ ------------ Earnings (losses) from operations ........ 22,008 (1,488) 3,417 23,937 OTHER INCOME (EXPENSE): Investment and other income, net ............ 8,659 328 (74) 8,913 Interest expense ............................ (27) -- (27) ------------ ------------ ------------ ------------ Earnings (losses) from before income taxes 30,640 (1,160) 3,343 32,823 INCOME TAX EXPENSE ............................. 11,833 425 523 12,781 ------------ ------------ ------------ ------------ Net earnings (losses) .................... $ 18,807 $ (1,585) $ 2,820 $ 20,042 ============ ============ ============ ============ EARNINGS PER COMMON SHARE, BASIC: Net earnings per common share ............... $ 1.81 $ 1.93 EARNINGS PER COMMON SHARE, DILUTED: Net earnings per common share ............... $ 1.63 $ 1.73 SHARES USED IN COMPUTING PER SHARE AMOUNTS: Basic ....................................... 10,372,053 10,372,053 Diluted ..................................... 11,565,345 11,565,345
See notes to pro forma consolidated financial statements. 25 CENTENE CORPORATION AND SUBSIDIARIES PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 2001 (Dollars in thousands, except share data) (Unaudited)
HISTORICAL CENTENE ----------------------------------- CORPORATION CENTENE UNIVERSITY PRO FORMA PRO FORMA CORPORATION HEALTH PLANS, INC. ADJUSTMENTS (F) COMBINED ----------- ------------------ ----------- ----------- REVENUES: Premiums .................................... $ 326,184 $ 93,526 $ (24,940) $ 394,770 Administrative services fees ................ 385 -- 385 ----------- ----------- ----------- ----------- Total revenues ........................... 326,569 93,526 (24,940) 395,155 ----------- ----------- ----------- ----------- EXPENSES: Medical services costs ...................... 270,151 83,114 (24,691) 328,574 General and administrative expenses ......... 37,946 16,026 (3,388) 50,584 ----------- ----------- ----------- ----------- Total operating expenses ................. 308,097 99,140 (28,079) 379,158 ----------- ----------- ----------- ----------- Earnings (losses) from operations ........ 18,472 (5,614) 3,139 15,997 OTHER INCOME (EXPENSE): Investment and other income, net ............ 3,916 879 (289) 4,506 Interest expense ............................ (362) -- (362) ----------- ----------- ----------- ----------- Earnings (losses) before income taxes .... 22,026 (4,735) 2,850 20,141 INCOME TAX EXPENSE ............................. 9,131 -- 9,131 ----------- ----------- ----------- ----------- Net earnings (losses) .................... 12,895 (4,735) 2,850 11,010 ACCRETION OF REDEEMABLE PREFERRED STOCK ........ (467) -- (467) ----------- ----------- ----------- ----------- Net earnings attributable to common stockholders ............................. $ 12,428 $ (4,735) $ 2,850 $ 10,543 =========== =========== =========== =========== EARNINGS PER COMMON SHARE, BASIC: Net earnings per common share ............... $ 8.97 $ 7.61 EARNINGS PER COMMON SHARE, DILUTED: Net earnings per common share ............... $ 1.61 $ 1.37 SHARES USED IN COMPUTING PER SHARE AMOUNTS: Basic ....................................... 1,385,399 1,385,399 Diluted ..................................... 8,019,497 8,019,497
See notes to pro forma consolidated financial statements. 26 CENTENE CORPORATION AND SUBSIDIARIES NOTES TO PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS (Dollars in thousands) (Unaudited) (A) Decrease in cash and cash equivalents: Total estimated cash consideration to UHP's stockholder $ 8,698 Estimated transaction costs related to the acquisition 1,125 Estimated termination of claims processing agreement 810 ------- Total decrease in cash and cash equivalents $10,633 =======
Pursuant to the Stock Purchase Agreement, stockholders of UHP will receive 80% of $250 multiplied by the number of enrolled risk members of UHP (excluding commercial membership) on the date of acquisition less any deficiency in minimum statutory net worth requirements. Total cash consideration estimated to be paid equals $8,698. Total estimated transaction costs related to the acquisition are estimated to be $1,125, which includes consulting fees, attorney fees, actuarial fees and accounting fees. As a result of the acquisition, UHP will terminate a third-party agreement related to the outsourcing of its claims processing. Total estimated termination costs are $810. (B) Included in UHP's historical September 30, 2002 balance sheet is a capital contribution receivable from stockholder. This amount of $3,441 was paid subsequent to September 30, 2002. (C) Represents the allocation of the purchase price in excess of 80% of the fair market value of the net assets of UHP, as follows: Total estimated cash consideration to UHP's stockholder and related acquisition costs (see note A) $10,633 Fair value of net assets acquired (80%) (5,762) ------- Total increase in intangible assets $ 4,871 =======
(D) Represents the minority interest owned by UMDNJ. (E) Represents the elimination of UHP's equity. (F) Effective July 1, 2002, the state of New Jersey excluded the General Assistance population from managed care programs. In addition, effective November 22, 2002, in contemplation of its Stock Purchase Agreement with Centene, UHP entered into an agreement with a third party related to its commercial membership. Any members not enrolling with the third party will not be renewed by UHP. The tables below provide the financial results of the Commercial Membership and the General Assistance population for the periods presented.
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2002 ---------------------------------- GENERAL COMMERCIAL ASSISTANCE MEMBERSHIP POPULATION TOTAL ---------- ---------- ------- REVENUES: Premiums $14,674 $ 5,426 $20,100 Administrative services fees -- -- -- ------- ------- ------- Total revenues 14,674 5,426 20,100 EXPENSES: Medical service costs 12,635 8,573 21,208 General and administrative expenses 2,024 285 2,309 ------- ------- ------- Total operating expenses 14,659 8,858 23,517 Earnings (losses) from operations 15 (3,432) (3,417) OTHER INCOME (EXPENSE): Investment and other income, net 48 26 74 Interest expense -- -- -- ------- ------- ------- Earnings (losses) before income taxes 63 (3,406) (3,343) INCOME TAX EXPENSE (BENEFIT) 60 (583) (523) ------- ------- ------- Net earnings (losses) $ 3 $(2,823) $(2,820) ======= ======= =======
FOR THE YEAR ENDED DECEMBER 31, 2001 ------------------------------------ GENERAL COMMERCIAL ASSISTANCE MEMBERSHIP POPULATION TOTAL ----------- ---------- --------- REVENUES: Premiums $17,929 $ 7,011 $24,940 Administrative services fees -- -- -- ------- ------- ------- Total revenues 17,929 7,011 24,940 EXPENSES: Medical service costs 13,990 10,701 24,691 General and administrative expenses 2,881 507 3,388 ------- ------- ------- Total operating expenses 16,871 11,208 28,079 Earnings (losses) from operations 1,058 (4,197) (3,139) OTHER INCOME (EXPENSE): Investment and other income, net 220 69 289 Interest expense -- -- -- ------- ------- ------- Earnings (losses) before income taxes 1,278 (4,128) (2,850) INCOME TAX EXPENSE -- -- -- ------- ------- ------- Net earnings (losses) $ 1,278 $(4,128) $(2,850) ======= ======= =======
27 (c) Exhibits
EXHIBIT NUMBER DESCRIPTION ------- ----------- 2.1 Stock Purchase Agreement dated as of August 2, 2002 among University Health Plans, Inc., University of Medicine and Dentistry of New Jersey and Centene Corporation 2.2 Investor Rights Agreement dated as of December 1, 2002 among University of Medicine and Dentistry of New Jersey, University Health Plans, Inc. and Centene Corporation
28 SIGNATURE Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, as of December 16, 2002. CENTENE CORPORATION By: /s/ Michael F. Neidorff ------------------------------------- Michael F. Neidorff President and Chief Executive Officer 29 EXHIBIT INDEX EXHIBIT NUMBER DESCRIPTION - ------- ----------- 2.1 Stock Purchase Agreement dated as of August 2, 2002 among University Health Plans, Inc., University of Medicine and Dentistry of New Jersey and Centene Corporation 2.2 Investor Rights Agreement dated as of December 1, 2002 among University of Medicine and Dentistry of New Jersey, University Health Plans, Inc. and Centene Corporation 30 EX-2.1 3 b44931ccexv2w1.txt STOCK PURCHASE AGREEMENT EXHIBIT 2.1 STOCK PURCHASE AGREEMENT DATED AS OF AUGUST 2, 2002 AMONG UNIVERSITY HEALTH PLANS, INC., UNIVERSITY OF MEDICINE AND DENTISTRY OF NEW JERSEY AND CENTENE CORPORATION TABLE OF CONTENTS
PAGE ---- 1. Purchase and Sale of the Shares...................................... 1 1.1. Purchase of the Shares from the Stockholder..................... 1 1.2. Purchase Price for the Shares................................... 1 1.3. Closing......................................................... 2 2. Representations of the Stockholder................................... 2 2.1. Organization.................................................... 3 2.2. Authorization................................................... 3 2.3. Non-Contravention............................................... 3 2.4. Title to Shares................................................. 3 2.5. Transfer of Shares.............................................. 3 3. Representations of the Stockholder and the Company................... 4 3.1. Organization.................................................... 4 3.2. Capitalization.................................................. 4 3.3. Subsidiaries.................................................... 4 3.4. Authorization................................................... 4 3.5. Non-Contravention............................................... 5 3.6. Financial Statements............................................ 5 3.7. Absence of Undisclosed Liabilities.............................. 6 3.8. Litigation...................................................... 7 3.9. Insurance....................................................... 7 3.10. Assets......................................................... 7 3.11. Intellectual Property.......................................... 8 3.12. Real Estate.................................................... 9 3.13. Tax Matters.................................................... 9 3.14. Books and Records.............................................. 10 3.15. Contracts and Commitments...................................... 10 3.16. Compliance with Agreements and Laws............................ 12 3.17. Employee Relations............................................. 13 3.18. Employee Benefit Plans......................................... 14 3.19. Absence of Certain Changes or Events........................... 15 3.20. Providers...................................................... 17 3.21. Members........................................................ 17 3.22. Commercial Business............................................ 17 3.23. Indebtedness to and from Officers, Directors and the Stockholder ............................................. 17 3.24. Banking Facilities............................................. 18 3.25. Powers of Attorney and Suretyships............................. 18 3.26. Conflicts of Interest.......................................... 18 3.27. Brokers........................................................ 18 4. Representations of the Buyer......................................... 18 4.1. Organization and Authority...................................... 18 4.2. Authorization................................................... 19 4.3. Non-Contravention............................................... 19 4.4. Investment Representation....................................... 19
-i- 5. Pre-Closing Covenants................................................ 20 5.1. Access to Management, Properties and Records.................... 20 5.2. Confidentiality................................................. 20 5.3. Public Announcements............................................ 21 5.4. Communications with Members and Providers....................... 21 5.5. Conduct of Business............................................. 21 5.6. Absence of Material Changes..................................... 21 5.7. Delivery of Interim Financial Statements........................ 23 5.8. Compliance with Laws and Regulations............................ 24 5.9. Provider Agreements............................................. 25 5.10. Employees...................................................... 25 5.11. Disposition of Commercial Business............................. 25 5.12. Exclusivity.................................................... 26 5.13. Taxes.......................................................... 26 5.14. Notices of Breaches............................................ 26 5.15. Notices and Consents........................................... 26 5.16. Closing Efforts................................................ 27 5.17. Expenses....................................................... 27 6. Conditions to Obligations of the Buyer............................... 28 6.1. Representations, Warranties and Covenants....................... 28 6.2. Investor Rights Agreement....................................... 28 6.3. Escrow Agreement................................................ 28 6.4. Amended Organizational Documents................................ 28 6.5. Provider Agreements............................................. 28 6.6. Employment Arrangements......................................... 28 6.7. Disposition of Commercial Business.............................. 29 6.8. IBNR Certification.............................................. 29 6.9. Medicaid Contract............................................... 29 6.10. Consents....................................................... 29 6.11. Indebtedness................................................... 29 6.12. Adverse Proceedings............................................ 29 6.13. Opinions of Counsel............................................ 29 6.14. Management Contract............................................ 29 6.15. Closing Deliveries............................................. 30 7. Conditions to Obligations of the Stockholder and the Company......... 30 7.1. Representations, Warranties and Covenants....................... 30 7.2. Investor Rights Agreement....................................... 31 7.3. Escrow Agreement................................................ 31 7.4. Fairness Opinion................................................ 31 7.5. Consents........................................................ 31 7.6. Adverse Proceedings............................................. 31 7.7. Opinion of Counsel.............................................. 31 7.8. Closing Deliveries.............................................. 31 8. Price Reduction...................................................... 31 8.1. Damages......................................................... 32 8.2. Reduction Claims................................................ 33 8.3. Survival of Representations and Warranties...................... 36 8.4. Limitations..................................................... 36
-ii- 9. Post-Closing Agreements.............................................. 37 9.1. Proprietary Information......................................... 37 9.2. Further Assurances.............................................. 38 9.3. No Solicitation or Hiring of Former Employees................... 38 9.4. Non-Competition Agreement....................................... 38 10. Termination of Agreement............................................. 38 10.1. Termination by Lapse of Time................................... 38 10.2. Termination by Agreement of the Parties........................ 39 10.3. Termination by Reason of Breach................................ 39 10.4. Availability of Remedies at Law................................ 39 11. General.............................................................. 39 11.1. Notices........................................................ 39 11.2. Successors and Assigns......................................... 40 11.3. Entire Agreement; Amendments................................... 40 11.4. Severability................................................... 40 11.5. Investigation of the Parties................................... 40 11.6. Submission to Jurisdiction..................................... 40 11.7. Governing Law.................................................. 41 11.8. Construction................................................... 41 11.9. Counterparts................................................... 41 Signatures............................................................... 42 EXHIBIT A. Form of Investor Rights Agreement............................. A-1 EXHIBIT B. Form of Escrow Agreement...................................... B-1 EXHIBIT C. Form of Opinion of Counsel for the Stockholder................ C-1 EXHIBIT D. Form of Opinion of Counsel for the Company.................... D-1 EXHIBIT E. Form of Opinion of Counsel for the Buyer...................... E-1
-iii- THIS STOCK PURCHASE AGREEMENT dated as of August 2, 2002 (this "Agreement") is entered into among University Health Plans, Inc., a New Jersey corporation with its principal office at 555 Broad Street, 17th Floor, Newark, New Jersey 07102 (the "Company"), University of Medicine and Dentistry of New Jersey, a body corporate politic of the State of New Jersey created pursuant to N.J.S.A. 18A:64G-1, et seq. with its principal office at 65 Bergen Street, Newark, New Jersey 07107 (the "Stockholder"), and Centene Corporation, a Delaware corporation with its principal office at 7711 Carondelet Avenue, Suite 800, St. Louis, Missouri 63105 (the "Buyer"). PRELIMINARY STATEMENT A. The Stockholder owns 20 shares of the common stock, without par value ("Common Stock"), of the Company, which shares represent all of the issued and outstanding shares of capital stock of the Company. B. The Buyer desires to purchase, and the Stockholder desires to sell, 16 shares of Common Stock (the "Shares") for the consideration set forth below, subject to the terms and conditions of this Agreement. C. In connection with the purchase and sale of the Shares, the Buyer and the Stockholder wish to enter into an Investor Rights Agreement providing for, among other things, the exchange, on the third anniversary of the Closing Date (as defined in Subsection 1.3), of the other four shares of Common Stock held by the Stockholder for shares of common stock of Centene, all as contemplated by this Agreement, including the Investor Rights Agreement to be entered into as of the Closing Date in the form attached hereto as EXHIBIT A (the "Investor Rights Agreement"). NOW, THEREFORE, in consideration of the mutual promises hereinafter set forth and other good and valuable consideration, the receipt of which is hereby acknowledged, the parties hereby agree as follows: 1. Purchase and Sale of the Shares 1.1.Purchase of the Shares from the Stockholder. Subject to and upon the terms and conditions of this Agreement, at the closing of the transactions contemplated by this Agreement (the "Closing"), the Stockholder shall sell, transfer, convey, assign and deliver the Shares to the Buyer, and the Buyer shall purchase, acquire and accept the Shares from the Stockholder. At the Closing the Stockholder shall deliver to the Buyer a certificate or certificates evidencing the Shares, duly endorsed in blank or with a stock power duly executed by the Stockholder. 1.2. Purchase Price for the Shares (a) The aggregate purchase price to be paid by the Buyer for all of the Shares (the "Purchase Price") shall be equal to 80% of the product of (i) $250.00 and (ii) the number of enrolled risk members of the Company as reflected in the final enrollment data provided by the New Jersey Division of Medical Assistance and Health Services with respect to the Closing Date, subject to adjustment pursuant to Subsections 6.1 and 6.8 (together, the "Closing Adjustments") and subject to reduction after the Closing Date pursuant to Section 8. (b) The Purchase Price shall be payable in cash, by wire transfers of immediately available funds, as follows: (i) on the Closing Date (or, if the Closing Date is not a business day, then the next succeeding business day), the Buyer shall deliver to Fleet Bank, N.A., as escrow agent (the "Escrow Agent"), the sum of $5,500,000 to be held in an interest-bearing escrow account (the "Escrow Account") pursuant to the terms of an Escrow Agreement in the form attached hereto as EXHIBIT B (the "Escrow Agreement"), as a reserve to satisfy any and all or part of any reduction in the Purchase Price pursuant to Section 8; and (ii) on the second business day following the date on which the New Jersey Division of Medical Assistance and Health Services provides the data referred to in paragraph (a) of this Subsection 1.2 (but no earlier than the date of the payment pursuant to the preceding clause (i)), (A) the Buyer shall deliver to the Stockholder an amount equal to the Purchase Price less (1) $5,500,000 and (2) the amount of the Closing Adjustments or (B) in the event the Closing Adjustments exceed an amount equal to the Purchase Price less $5,500,000, then the Stockholder shall deliver to the Buyer an amount equal to (1) the Closing Adjustments less (2) the Purchase Price less $5,500,000. (c) In the event of an adjustment in the Purchase Price as the result of one or both Closing Adjustments, the parties agree that it is in their mutual best interests for the Buyer to contribute to the Company an amount in cash equal to the aggregate amount of the Closing Adjustments. The Buyer hereby agrees that (i) to the extent a Closing Adjustment results in the payment of an amount in cash to the Buyer by the Stockholder, the Stockholder shall make such payment to the Company, on behalf of the Buyer and in satisfaction of the Buyer's obligations under this paragraph (c) with respect to such amount and (ii) to the extent a Closing Adjustment results in a reduction in the Purchase Price but not a payment of cash to the Buyer, the Buyer shall deliver to the Company the amount of such Closing Adjustment in cash on the date of the payment pursuant to paragraph (b) of this Subsection 1.2. (d) As a condition to the Closing, the parties shall agree upon, for purposes of calculating the amount of any Closing Adjustment pursuant to Subsection 6.1 and for purposes of determining certain Damages under Section 8, a procedure for the preparation, by no later than the date of the payment pursuant to clause (b)(ii) of this Subsection 1.2, of a mutually agreed upon balance sheet, including the amount of premium receivable and other receivable (the "Closing Receivables"), and related calculation of net worth of the Company as of the Closing. The balance sheet referred to in the preceding sentence shall be prepared in accordance with the actuarial and accounting practices prescribed or permitted by the State of New Jersey Department of Banking and Insurance and, for the purposes of preparing such balance sheet, no premium receivable with respect to a state supplemental delivery payment shall be booked until an outcome (i.e., a live birth, still birth or miscarriage occurring at the thirteenth week or greater of gestation) has occurred. 1.3.Closing. The Closing shall take place as of 12:01 a.m., Eastern time, on the first calendar day of the calendar month that immediately follows the calendar month in which the conditions set forth in Sections 6 and 7 (other than delivery of items to be delivered at the Closing and other than satisfaction of those conditions that by their nature are to be satisfied at the Closing, it being understood that the occurrence of the Closing shall remain subject to the delivery of such items and the satisfaction or waiver of such conditions at the Closing) are first satisfied or waived, or on such later date as may be mutually agreed upon in writing by the parties. The date of the Closing, as so determined, is referred to herein as the "Closing Date." 2. Representations of the Stockholder. The Stockholder represents and warrants to the Buyer that the statements contained in this Section 2 are true and correct, except as expressly set forth in the disclosure schedule of the Stockholder and the Company being delivered to the Buyer contemporaneously -2- with the execution and delivery of this Agreement (the "Disclosure Schedule"). The Stockholder confirms that the information in the Disclosure Schedule relating to exceptions to the statements contained in this Section 2 is arranged in sections corresponding to the numbered subsections and lettered paragraphs of this Section 2, and that the disclosure in any section of the Disclosure Schedule shall qualify only such specifically enumerated subsection or paragraph of this Agreement and any other paragraph of this Agreement to which an explicit and clear cross-reference has been made. 2.1.Organization. The Stockholder is a body corporate politic of the State of New Jersey created pursuant to N.J.S.A. 18A:64G-1, et seq. duly organized, validly existing and in good standing under the laws of the State of New Jersey, and has all requisite power and authority (corporate and other) to own its properties, to execute and deliver this Agreement and the agreements contemplated herein, and to transfer, convey and sell the Shares to the Buyer at the Closing. Certified copies of the charter documents of the Stockholder, as amended to date, have been previously delivered to the Buyer, are complete and correct, and no amendments have been made thereto or have been authorized since the date thereof. 2.2.Authorization. The execution and delivery by the Stockholder of this Agreement and the agreements provided for herein, and the consummation by the Stockholder of all transactions contemplated hereunder and thereunder by the Stockholder, have been duly authorized by all requisite corporate or other action. This Agreement has been duly executed by the Stockholder. This Agreement and all other agreements and obligations entered into and undertaken in connection with the transactions contemplated hereby to which the Stockholder is a party constitute the valid and binding obligations of the Stockholder, enforceable against the Stockholder in accordance with their respective terms, except as such enforcement may be limited by applicable bankruptcy, insolvency, reorganization, moratorium, fraudulent conveyance or similar laws relating to or affecting the rights of creditors generally or by general equitable principles (the "Enforceability Exception"). 2.3. Non-Contravention. Subject to compliance with the applicable requirements of the Securities Act of 1933, as amended (the "Securities Act") and any applicable state securities laws, neither the execution and delivery by the Stockholder of this Agreement or the agreements provided for herein, nor the consummation by the Stockholder of the transactions contemplated hereby or thereby, will (a) conflict with or violate the provisions of any law, rule or regulation applicable to the Stockholder or any of its properties or assets, (b) conflict with or violate the provisions of the charter documents of the Stockholder, (c) require on the part of the Stockholder any notice to or filing with, or permit, authorization, consent or approval of, any court, arbitrator, administrative agency or commission or other governmental or regulatory authority, body, instrumentality or agency, domestic or foreign (each, a "Governmental Entity"), (d) violate any judgment, decree, order or award of any Governmental Entity by which the Stockholder or any of its properties are bound, or (e) conflict with, result in breach of, constitute (with or without due notice or lapse of time or both) a default under, result in the acceleration of obligations under, create in any party any right to terminate, modify or cancel, or require any notice, consent or waiver under, any contract or instrument to which the Stockholder is a party or by which it is bound or to which any of its assets are subject. 2.4. Title to Shares. The Stockholder has good, valid and marketable title to the Shares, free and clear of any and all covenants, conditions, restrictions, voting trust arrangements, liens, charges, encumbrances, options and adverse claims or rights whatsoever. 2.5. Transfer of Shares. Upon consummation of the purchase contemplated hereby, the Buyer will acquire from the Stockholder good and marketable title to the Shares, free and clear of all -3- covenants, conditions, restrictions, voting trust arrangements, liens, charges, encumbrances, options and adverse claims or rights whatsoever, subject to the provisions of the Investor Rights Agreement. 3. Representations of the Stockholder and the Company. The Stockholder and the Company represent and warrant to the Buyer that the statements contained in this Section 3 are true and correct, except as expressly set forth in the Disclosure Schedule. As set forth in Section 3 of the Disclosure Schedule, certain of the statements in this Section 3 are, to the extent made by the Stockholder, made only to the knowledge of the Stockholder; those statements are not so qualified with respect to the Company. The Stockholder and the Company confirm that the information in the Disclosure Schedule relating to exceptions to the statements contained in this Section 3 is arranged in sections corresponding to the numbered subsections and lettered paragraphs of this Section 3, and that the disclosure in any section of the Disclosure Schedule shall qualify only such specifically enumerated subsection or paragraph of this Agreement and any other paragraph of this Agreement to which an explicit and clear cross-reference has been made. As used herein, "Company MAE" shall mean any material adverse change, event, circumstance or development with respect to, or material adverse effect on, (i) the business, assets, liabilities, capitalization, prospects, condition (financial or other), or results of operations of the Company or (ii) the ability of the Company to operate its Medicaid business after the Closing. 3.1. Organization. The Company is a corporation duly organized, validly existing and in good standing under the laws of the State of New Jersey, and has all requisite power and authority (corporate and other) to own its properties, to carry on its business as now being conducted, to execute and deliver this Agreement and the agreements contemplated herein, and to consummate the transactions contemplated hereby and thereby. The Company is not required, based on its ownership of property or the character of its business, to be qualified to do business in any jurisdiction other than the State of New Jersey. Certified copies of the Certificate of Incorporation and Bylaws of the Company, as amended to date, have been previously delivered to the Buyer, are complete and correct, and no amendments have been made thereto or have been authorized since the date thereof. 3.2. Capitalization. The Company's authorized capital stock consists of 100 shares of Common Stock, without par value, of which 20 shares are issued and outstanding and held of record and beneficially by the Stockholder. All such issued and outstanding shares of Common Stock have been duly and validly issued and are fully paid and non-assessable. There are no outstanding (a) options, warrants or other rights to purchase from the Company any capital stock of the Company, (b) securities convertible into or exchangeable for shares of such stock, or (c) other commitments of any kind for the issuance of additional shares of capital stock or options, warrants or other securities of the Company. No shares of Common Stock are held in the treasury of the Company. 3.3. Subsidiaries. The Company does not presently own or control, directly or indirectly, any interest in any other corporation, association or other business entity. The Company is not a participant in any joint venture, partnership or similar arrangement. 3.4. Authorization. Execution and delivery by the Company of this Agreement and the agreements provided for herein, and the consummation by the Company of all transactions contemplated hereunder and thereunder by the Company, have been duly authorized by all requisite corporate action. This Agreement has been duly executed by the Company. This Agreement and all other agreements and obligations entered into and undertaken in connection with the transactions contemplated hereby to which the Company is a party constitute the valid and binding obligations of the Company, enforceable against the Company in accordance with their respective terms, subject to the Enforceability Exception. -4- 3.5. Non-Contravention. Neither the execution and delivery by the Company of this Agreement or the agreements provided for herein, nor the consummation by the Company of the transactions contemplated hereby and thereby, will (a) conflict with or violate the provisions of any law, rule or regulation applicable to the Company or any of its properties or assets, except for any conflicts or violations that, in the aggregate, do not and will not have a Company MAE, (b) conflict with or violate the provisions of the Certificate of Incorporation or Bylaws of the Company, (c) require on the part of the Company any notice to or filing with, or any permit, authorization, consent or approval of, any Governmental Entity, (d) violate any judgment, decree, order or award of any Governmental Entity by which the Company or its properties are bound, or (e) conflict with, result in breach of, constitute (with or without due notice or lapse of time or both) a default under, result in the acceleration of obligations under, create in any party any right to terminate, modify or cancel, or require any notice, consent or waiver under, any contract or instrument to which the Company is a party or by which it is bound or to which any of its assets are subject, except for (i) any conflict, breach, default, acceleration, termination, modification or cancellation which, individually or in the aggregate, would not have a Company MAE and would not adversely affect the consummation of the transactions contemplated hereby or (ii) any notice, consent or waiver the absence of which, individually or in the aggregate, would not have a Company MAE and would not adversely affect the consummation of the transactions contemplated hereby. 3.6. Financial Statements (a) The Stockholder or the Company has previously delivered to the Buyer (i) the audited statutory statement of admitted assets, liabilities and surplus of the Company as of, and the audited statutory statements of income, changes in surplus, and cash flows of the Company for the fiscal year ended, December 31, 2001 (collectively, the "Audited Statutory Financial Statements") and (ii) the unaudited statutory statement of admitted assets, liabilities and surplus of the Company as of, and the unaudited statutory statements of income, changes in surplus, and cash flows of the Company for the quarter ended, March 31, 2002 (collectively with the Audited Statutory Financial Statements, the "Statutory Financial Statements"). The Audited Statutory Financial Statements have been certified without qualification by PricewaterhouseCoopers LLC, the Company's independent public accountants. The Statutory Financial Statements have been prepared in accordance with accounting practices prescribed or permitted by the State of New Jersey Department of Banking and Insurance applied on a basis consistent throughout the periods covered, fairly present, in all material respects, the admitted assets, liabilities and surplus as of the respective dates thereof and the results of operations and cash flows of the Company for the periods referred to therein, on the basis of the accounting described in the respective notes thereto, and are consistent with the books and records of the Company. (b) The Stockholder or the Company has also previously delivered to the Buyer (i) the unaudited balance sheet of the Company as of, and the unaudited statements of operations and cash flows of the Company for the fiscal years ended, December 31, 2001 and 2000 and (ii) the unaudited balance sheet of the Company as of May 30, 2002, the unaudited balance sheet of the Company as of June 30, 2002 (the "Current Balance Sheet") and the unaudited statements of operations and cash flows of the Company for the five-month period ended May 30, 2002 and six-month period ended June 30, 2002 (the financial statements in clauses (i) and (ii) of this paragraph (b) collectively being referred to as the "Financial Statements"). The Financial Statements have been prepared in accordance with United States generally accepted accounting principles applied on a basis consistent throughout the periods covered thereby, fairly present the financial condition, results of operations and cash flows of the Company as of the respective dates thereof and for the periods referred to therein, and are consistent with -5- the books and records of the Company, provided that the Financial Statements referred to in clause (ii) above are subject to normal recurring year-end adjustments (which will not be material) and do not include all footnotes required by such generally accepted accounting principles. (c) The Stockholder or the Company has also previously delivered to the Buyer the unaudited Medicaid financial reports by rate cell grouping of the Company and for the six-month period ended June 30, 2002 (the "Medicaid Financial Reports"). The Medicaid Financial Reports have been prepared on a basis consistent throughout the period covered thereby, fairly present the results of operations of the Medicaid business of the Company for the six-month period ended June 30, 2002, and are consistent with the books and records of the Company. (d) The reserves recorded in the accounting records of the Company for medical benefits, losses, claims and expenses incurred in connection with the Medicaid and commercial businesses of the Company and any other reserves (i) were prepared in accordance with the actuarial and accounting practices prescribed or permitted by the State of New Jersey Department of Banking and Insurance, (ii) make good and sufficient provisions for all insurance obligations of the Company, (iii) to the best knowledge of the Company, meet the requirements of any law, rule or regulation applicable to such reserves and the requirements of the Permits (as defined in paragraph (a) of Subsection 3.16), and (iv) are computed on the basis of assumptions consistent with those used in computing the corresponding reserves in the prior fiscal year. All payments to and/or settlements with providers of any medical services have been accounted for in the appropriate medical expense reserve account (by category of medical expense) and have been reflected as a medical expense of the Company. (e) The Company has provided to Buyer true and correct documentation, electronic and otherwise, of data representing all medical claims (including all medical payments and/or settlements) of the Company's business as of June 30, 2002. The Company has also provided documentation, electronic and otherwise, that supports the medical claims data provided. The medical claims data provided to Buyer reflect any changes to the Company's business since its inception that would materially affect total medical costs. All paid medical claims and settlements of the Company's Medicaid business since January 1, 2001 have been properly reflected as medical expenses. All unpaid medical claims and settlements of the Company's Medicaid business since January 1, 2001 have been properly reflected as losses incurred but not reported for purposes of computing the Company's claims payable and claims adjustment expenses, except to the extent that any such unpaid medical claims and settlements do not exceed $50,000 in amount, in the aggregate, in either the year ended December 31, 2001 or the period subsequent to January 1, 2002. (f) The amounts shown as accrued for current and deferred income and other taxes in the Current Balance Sheet are sufficient for the payment of all accrued and unpaid federal, state and local income taxes, interest, penalties, assessments or deficiencies applicable to the Company, whether disputed or not, for the six months ended June 30, 2002 and all periods prior thereto. 3.7. Absence of Undisclosed Liabilities. The Company has no liability or obligation, secured or unsecured, whether accrued, absolute, contingent, unasserted or otherwise, that is material to the condition (financial or otherwise) of the assets, properties, business or prospects of the Company, except as and to the extent (a) any such liability or obligation is reflected and reserved against in the Current Balance Sheet or (b) any such liability or obligation, other than a liability or obligation -6- arising under a Provider Agreement (as defined in clause (a)(ii) of Subsection 3.15), either (i) was incurred in the ordinary course of business after June 30, 2002 or (ii) did not exceed $25,000 in amount, in the aggregate, in either the year ended December 31, 2001 or the period subsequent to January 1, 2002. 3.8. Litigation. There is no action, suit, proceeding or investigation to which the Company is a party (either as a plaintiff or defendant) pending. To the knowledge of the Stockholder and the Company, (a) no such action, suit, proceeding or investigation is threatened before any Governmental Entity and (b) there is no basis for any such action, suit or proceeding. There is no action, suit, proceeding or investigation of which the Stockholder or the Company is aware pending or threatened before any Governmental Entity that challenges the validity or propriety of this Agreement or any action to be taken by the Stockholder or the Company in connection with this Agreement. Neither the Company nor any officer, director or employee of the Company has been permanently or temporarily enjoined by any order, judgment or decree of any Governmental Entity from engaging in or continuing any conduct or practice in connection with the business, assets or properties of the Company. There is not in existence on the date hereof any order, judgment or decree of any Governmental Entity that has been properly served or of which the Company or the Stockholder otherwise is aware enjoining or requiring the Company or the Stockholder to take any action of any kind with respect to the business, assets or properties of the Company. 3.9. Insurance. Section 3.9 of the Disclosure Schedule sets forth a true, correct and complete list of all fire, theft, casualty, general liability, workers compensation, business interruption, environmental impairment, product liability, automobile and other insurance policies maintained by the Company and of all life insurance policies maintained on the lives of any of its employees, specifying the type of coverage, the amount of coverage, the premium, the insurer and the expiration date of each such policy (collectively, the "Insurance Policies") and all claims made under such Insurance Policies since January 1, 2001. The Stockholder and the Company have previously delivered to the Buyer true, correct and complete copies of all Insurance Policies. The Insurance Policies are in full force and effect and are in amounts of a nature that are adequate and customary for the Company's business. All premiums due on the Insurance Policies or renewals thereof have been paid, and there is no default by the Company under the Insurance Policies. The Company has not received any notice or other communication from any issuer of the Insurance Policies since January 1, 2001 canceling or materially amending any of the Insurance Policies, materially increasing any deductibles or retained amounts thereunder, or materially increasing the annual or other premiums payable thereunder, and, to the knowledge of the Stockholder and the Company, no such cancellation, amendment or increase of deductibles, retainages or premiums is threatened. The Company has no outstanding claims or disputes with any insurance carrier regarding claims, settlements or premiums, and the Company has not failed to give any notice or present any claim under any Insurance Policy in due and timely fashion. There are no outstanding requirements or recommendations by any issuer of the Insurance Policies or by any Board of Fire Underwriters or other similar body exercising similar functions or by any governmental authority exercising similar functions that require or recommend any changes in the conduct of the business of, or any repairs or other work to be done on or with respect to any of the properties or assets of, the Company. 3.10. Assets. The Company has good and marketable title to all of the assets (tangible or intangible) purported to be owned by the Company and relating to, or used in, its business, free and clear of all liens, leases, encumbrances, claims under bailment and storage agreements, equities, conditional sales contracts, security interests, charges and restrictions, except for liens, if any, for personal property taxes not due. The Company owns or leases all tangible assets sufficient for the conduct of its business as presently conducted and as presently proposed to be conducted. Each such tangible asset is free from material defects, has been maintained in accordance with normal -7- industry practice, is in good operating condition and repair (subject to normal wear and tear) and is suitable for the purposes for which it presently is used. Each item of equipment and other asset that the Company has possession of pursuant to a lease agreement or other contractual arrangement and relating to, or used in, its business is in such condition that, upon its return to its lessor or owner under the applicable lease or contract, the obligations of the Company to such lessor owner will have been discharged in full. 3.11. Intellectual Property (a) Section 3.11 of the Disclosure Schedule sets forth: (i) a true, correct and complete list and, where appropriate, a description of, all items of Intellectual Property owned by, or used or useful in connection with the Medicaid business of, the Company, including trade secrets, know-how, any other confidential information of the Company, trade names, trademarks, trade name and trademark registrations, copyrights and copyright registrations, and applications for any of the foregoing but excluding (A) rights under the Medicaid Contract and (B) off-the-shelf software programs licensed by the Company pursuant shrink wrap and similar licenses (the "Intellectual Property"); and (ii) a true, correct and complete list of all licenses or similar agreements or arrangements to which the Company is a party, either as licensee or licensor, with respect to the Intellectual Property. The Company is the sole and exclusive owner of all right, title and interest in and to the Intellectual Property and all designs, permits, labels and packages used on or in connection therewith, free and clear of all liens, security interests, charges, encumbrances, equities or other adverse claims. The Company has the right and authority to use, and to continue to use after the Closing, the Intellectual Property in connection with the conduct of its business in the manner presently conducted, and such use or continuing use does not and will not conflict with, infringe upon or violate any rights of any other person, corporation or entity. (b) The Company has not received any notice of, nor has any knowledge of any basis for, a pleading or threatened claim, interference action or other judicial or adversarial proceeding against the Company that any of the operations, activities, products, services or publications of the Company infringes or will infringe any patent, trademark, trade name, copyright, trade secret or other property right of a third party, or that it is illegally or otherwise using the trade secrets, formulae or property rights of others. There are no outstanding, nor to the knowledge of the Stockholder or the Company, any threatened, disputes or other disagreements with respect to any licenses or similar agreements or arrangements described in Section 3.11 of the Disclosure Schedule or with respect to infringement by a third party of any of the Intellectual Property. Neither the Company nor the Stockholder has any knowledge that any third party is infringing, or will threaten to infringe, upon or otherwise violate any of the Intellectual Property in which the Company has ownership rights. (c) The Intellectual Property owned or licensed by the Company is sufficient to conduct the Company's business as presently conducted. The Company has taken all steps reasonably necessary to protect its right, title and interest in and to the Intellectual Property and the continued use of the Intellectual Property. (d) No officer, director, stockholder or employee of the Company or the Stockholder, nor any spouse, child or other relative or affiliate thereof, owns directly or indirectly, in whole or in part, any of the Intellectual Property. -8- 3.12. Real Estate (a) Section 3.12 of the Disclosure Schedule sets forth the identity of the sole lease of real property to which the Company is a party (the "Lease"). The Stockholder and the Company have previously delivered to the Buyer a true, correct and complete copy of the Lease and all amendments, modifications and supplemental agreements thereto. The Lease is in full force and effect, is valid, binding and enforceable against the Company in accordance with its terms (subject to the Enforceability Exception), and has not been modified or amended since the date of delivery to the Buyer. Neither the Company nor the landlord has delivered written notice to the other claiming that such party is in default thereunder and that such default remains uncured. To the knowledge of the Stockholder and the Company, no event has occurred that would constitute a breach of or default in the performance of any covenant, agreement or condition contained in the Lease, nor has any event occurred that with the passage of time or the giving of notice or both would constitute such a breach or material default. The Company is not obligated to pay any leasing or brokerage commission relating to the Lease and, will not have any obligation to pay any leasing or brokerage commission upon the renewal of the Lease. No construction, alteration or other leasehold improvement work with respect to the Lease remains to be paid for or to be performed by the Company. (b) The Company does not own any real property. 3.13. Tax Matters (a) Within the times and in the manner prescribed by law, the Company has filed all federal, state and local tax returns and all tax returns for foreign countries, provinces and other governing bodies having jurisdiction to levy taxes upon it that are required to be filed. The Company has paid all taxes, interest, penalties, assessments and deficiencies that have become due or that have been claimed to be due, including income, franchise, real estate, sales and withholding taxes. All tax returns filed by the Company for the taxable years ending December 31, 1995 through December 31, 2001 constitute complete and accurate representations of the tax liabilities of the Company for such years and accurately set forth all items (to the extent required to be included or reflected in such returns) relevant to its future tax liabilities, including the tax bases of its properties and assets. The Company has not waived or extended any applicable statute of limitations relating to the assessment of federal, state, local or foreign taxes. No examinations of the federal, state, local or foreign tax returns of the Company is currently in progress nor threatened, and no deficiencies have been asserted or assessed against the Company as a result of any audit by the Internal Revenue Service or any state or local taxing authority, and no such deficiency has been proposed or threatened. The Company has never been (i) a member of any consolidated group for federal or state income tax purposes or (ii) a party to any tax sharing agreement or other similar arrangements. (b) The Company has not filed a consent pursuant to Section 341(f) of the Internal Revenue Code of 1954, as amended (the "Code") relating to collapsible corporations nor has any such corporation agreed to have Section 341(f)(2) of the Code apply to any disposition of a subsection (f) asset (as such term is defined in Section 341(f)(4) of the Code). The Company has never participated in or cooperated with an international boycott, within the meaning of Section 999 of the Code, nor has any such corporation had operations that are or may hereafter become reportable under Section 999 of the Code. The Company does not have any transaction subject to Treasury Regulation 1.1502-13 in connection with deferred intercompany transactions. There are no plans, arrangements, contracts or other agreements covering any current or former employees of the Company that, considered collectively, will, -9- or could reasonably be expected to, give rise directly or indirectly to the payment of any amount that would not be deductible pursuant to Section 280G or Section 162(m) of the Code. (c) Section 3.13 of the Disclosure Schedule sets forth those taxable years for which the tax returns of the Company have been reviewed or audited by applicable federal, state, local and foreign taxing authorities and those tax years for which said tax returns have received clearances or other indications of approval from applicable federal, state, local and foreign taxing authorities. No issue or issues have been raised in connection with any prior or pending review or audit of said federal, state, local or foreign tax returns that the Stockholder reasonably believes may be expected to be raised in the future by such taxing authorities in connection with the audit or review of the tax returns of the Company. 3.14. Books and Records. The general ledgers and books of account of the Company are in all material respects complete and correct and have been maintained in accordance with good business practice and in accordance with all applicable procedures required by laws and regulations. 3.15. Contracts and Commitments (a) Section 3.15 of the Disclosure Schedule contains a true, complete and correct list and description of the following contracts and agreements, whether written or oral: (i) the agreement between the Company and the New Jersey Department of Human Services, Division of Medical Assistance and Health Services, including all amendments, modifications and supplements thereto (as so amended, modified and supplemented, the "Medicaid Contract"); (ii) all loan agreements, indentures, mortgages and guaranties to which the Company is a party or by which the Company or any of its property is bound; (iii) all pledges, conditional sale or title retention agreements, security agreements, equipment obligations, personal property leases and lease purchase agreements to which the Company is a party or by which the Company or any of its property is bound; (iv) all contracts, agreements, commitments or other understandings or arrangements to which the Company is a party or by which the Company or any of its property is bound that (A) involve payments or receipts by the Company of more than $50,000 in the case of any single contract, agreement, commitment, understanding or arrangement under which full performance (including payment) has not been rendered by all parties thereto or (B) may materially adversely affect the condition (financial or otherwise) or the properties, assets, business or prospects of the Company; (v) all collective bargaining agreements, employment and consulting agreements, offer letters, executive compensation plans, bonus plans, deferred compensation agreements, pension plans, retirement plans, severance agreements or policies, change in control agreements, employee stock option or stock purchase plans and group life, health and accident insurance and other employee benefit plans, agreements, arrangements or commitments to which the Company is a party or by which the Company or any of its property is bound; -10- (vi) all contracts, agreements or other understandings or arrangements between the Company and the Stockholder or their respective affiliates; (vii) all leases, whether operating, capital or otherwise, under which the Company is lessor or lessee; (viii) all contracts, agreements or other arrangements imposing a non-competition or non-solicitation obligation on the Company or any of its employees; and (ix) any other material agreements or contracts entered into by the Company. As used herein, the term "Contracts" refers collectively to the contracts and agreements described in the preceding clauses (i) through (ix), and also includes all contracts and agreements (collectively, the "Provider Agreements") with physicians, hospitals and other providers of health care services that have contracted directly or indirectly with the Company (collectively, "Providers") to provide covered health care services to Medicaid beneficiaries (collectively, the "Members") enrolled under the Medicaid Contract; (b) Each Contract is a valid and binding agreement of the Company, enforceable against the Company in accordance with its terms (subject to the Enforceability Exception), and the Company has no knowledge that any Contract is not a valid and binding agreement of the other parties thereto. (c) Each of the Provider Agreements and, subject to receipt of the approval of the transactions contemplated hereby by the New Jersey Department of Human Services, Division of Medical Assistance and Health Services, the Medicaid Contract will continue to be a valid and binding obligation of each party thereto, enforceable against each such party in accordance with its terms, subject in each case to the Enforceability Exception. (d) The Company has fulfilled all material obligations required pursuant to the Contracts to have been performed by the Company, as the case may be, on its part prior to the date hereof, and the Company, as the case may be, has no reason to believe that it will not be able to fulfill, when due, all of its obligations under the Contracts that remain to be performed after the date hereof. (e) The Company is not in breach of or default under any Contract, and no event has occurred that with the passage of time or giving of notice or both would constitute such a default, result in a loss of rights or result in the creation of any lien, charge or encumbrance, thereunder or pursuant thereto. (f) There is no existing breach or default by any other party to any Contract, and no event has occurred that with the passage of time or giving of notice or both would constitute a default by such other party, result in a loss of rights or result in the creation of any lien, charge or encumbrance thereunder or pursuant thereto. (g) There are not, and since January 1, 2000 have not been, any claims of a non-routine nature relating to the Company by the Providers in excess of (i) $5,000 individually or (ii) $100,000 in the aggregate in the year ended December 31, 2000, the year ended December 31, 2001 or the period subsequent to January 1, 2002. (h) The Company has no written or oral contracts to perform services that are expected to be performed at, or to result in, a loss. -11- (i) The Company and the Stockholder have previously delivered to the Buyer true, correct and complete copies of all Contracts. 3.16. Compliance with Agreements and Laws (a) The Company has all requisite certificates of authority, licenses, permits, consents, orders, approvals and certificates from all Governmental Entities necessary to conduct its Medicaid business and own and operate the assets relating to its Medicaid business (collectively, the "Medicaid Permits"). Section 3.16 of the Disclosure Schedule sets forth a true, correct and complete list of all such Medicaid Permits, copies of which have previously been delivered by the Company or the Stockholder to the Buyer. The Company is not in violation of any federal law, rule, license, decree, regulation or ordinance (including laws, rules, licenses, decrees, regulations or ordinances of applicable Governmental Entities) relating to its Medicaid business or the properties relating to its Medicaid business. The Company is not in violation of any state, local or foreign law, rule, license, decree, regulation or ordinance (including laws, rules, licenses, decrees, regulations or ordinances of applicable Governmental Entities) relating to its Medicaid business or the properties relating to its Medicaid business, except for any violation which, individually or in the aggregate, would not have a Company MAE and would not adversely affect the consummation of the transactions contemplated hereby. (b) The business of the Company as conducted since its inception has not violated, and on the date hereof does not violate, in any material respect, any federal, state, local or foreign laws, regulations or orders (including any of the foregoing relating to insurance, employment discrimination, occupational safety, environmental protection, hazardous waste, conservation, or corrupt practices, the enforcement of which would have a material adverse effect on the results of operations, condition (financial or otherwise), assets, properties business or prospects of the Company. The Company has not had notice or communication from any federal, state or local governmental or regulatory authority or otherwise since its inception of any such violation or noncompliance. The Company has filed all statements and reports, including any required plan of corrective action in connection with a failure to maintain the minimum required statutory surplus, with insurance regulatory authority required by the law, regulations, licensing requirements and orders administered or issued by such regulatory authorities. No event has occurred with respect to any of the Medicaid Permits that would have or has had a material adverse effect on the Medicaid Contract. The Company has not, and none of its executive officers, directors or employees (in their respective capacities as such) has, engaged in any activity constituting fraud or abuse under the laws relating to health care or insurance. Section 3.16 of the Disclosure Schedule sets forth all examinations of the Company related to its business conducted by any governmental entity and identifies by date any correspondence between such a governmental entity and regarding sanctions, conclusions made and/or corrective action required or suggested based on such examination. (c) The Company maintains the minimum statutory surplus required in accordance with the written regulations of the State of New Jersey Department of Banking and Insurance and under the terms of the Medicaid Contract. The Company has no unfunded balance with respect to the minimum insolvency deposits required in accordance with the written regulations of the State of New Jersey Department of Banking and Insurance and under the terms of the Medicaid Contract. The Company has no unfunded balance with respect to the minimum administrative deposits required in accordance with the written regulations of the State of New Jersey Department of Banking and Insurance and under the terms of the Medicaid Contract. -12- (d) The Company is not in violation of any federal, state, county or municipal authority law, ruling, order, decree, regulation, permit, or other environmental or hazardous waste requirement applicable to the Company relating to health, safety, pollution, hazardous waste, environmental or other similar matters, that has not been entirely corrected and that has or will have a material adverse impact on the transactions contemplated herein. The Company has not received notice from any federal, state, county or municipal authority alleging any such violation. (e) For purposes of this Subsection 3.16, "hazardous waste" means "hazardous waste" as defined in the Resource Conservation and Recovery Act, as amended, 42 U.S.C. Section 6921 et seq., and the regulations adopted pursuant thereto. 3.17. Employee Relations (a) The Company is in compliance with all federal, state and municipal laws respecting employment and employment practices, terms and conditions of employment, and wages and hours, and is not engaged in any unfair labor practice, and there are no arrears in the payment of wages or social security taxes. (b) None of the employees of the Company is represented by any labor union, and the Company is not a party to any collective bargaining agreement. There is no unfair labor practice complaint against the Company pending before the National Labor Relations Board or any state or local agency. There is no pending labor strike or other material labor trouble affecting the Company (including any organizational drive). There is no labor grievance pending against the Company. There is no pending representation question respecting the employees of the Company. (c) The Company has no continuing obligation for health, life, medical insurance or other similar fringe benefits to any former employee of the Company. (d) Section 3.17 of the Disclosure Schedule sets forth a true, correct and complete list of all employees of the Company, including the job descriptions and salary or wage rates of each employee, showing separately for each such person the maximum amounts paid or payable as salary and bonus payments for the fiscal years ending December 31, 2001 and December 31, 2002, as well as the amount of any accrued and unused vacation and other accrued and unpaid benefits earned by such person. Section 3.17 of the Disclosure Schedule also sets forth a true and complete listing of the names of all employees to whom the Company has made severance or similar payments since January 1, 2001 with respect to the termination of the employment of those individuals, together with the amount of such payments and a statement as to whether such payments were made pursuant to a pre-existing contract, an agreement entered into in connection with such termination, a corporate policy, or otherwise. The Company has fewer than 100 employees, and neither the Stockholder nor any other entity may be deemed an employer of any of the Company's employees. (e) There have been no complaints made by any Company employee to any Governmental Entity of any violation of any law by the Company any officer, director, employee or agent of the Company, and neither the Stockholder nor the Company is aware of any basis for such a complaint. There have been no complaints of harassment or discrimination made by or against any employee of the Company, and neither the Stockholder nor the Company is aware of any basis for such a complaint. -13- 3.18. Employee Benefit Plans (a) Section 3.18 of the Disclosure Schedule contains a true, correct and complete list of all pension, benefit, profit sharing, retirement, deferred compensation, welfare, insurance, disability, bonus, vacation pay, severance pay and other similar plans, programs and agreements, whether reduced to writing or not, other than any "multiemployer plan" as such term is defined in Section 4001(a)(3) of ERISA, relating to the Company's employees, or maintained at any time since June 30, 1999 by the Company or by any other member (as used in this Subsection 3.18, a "Plan Affiliate") of any controlled group of corporations, group of trades or businesses under common control, or affiliated service group (as defined for purposes of Section 414(b), (c) and (m), respectively, of the Internal Revenue Code of 1986, as amended (the "Code")) (the "Employee Plans"), and the Company has no obligations, contingent or otherwise, past or present, under applicable law or the terms of any Employee Plan. (b) With respect to all Employee Plans, the Company and its Plan Affiliates are in compliance with the requirements prescribed by any and all statutes, orders or governmental rules or regulations currently in effect, including ERISA and the Code, applicable to such Employee Plans, including all reporting, notice and disclosure requirements. The Company and its Plan Affiliates have in all respects performed all obligations required to be performed by them under, and is not in violation in any respect of, and there has been no default or violation by any other party with respect to, any of the Employee Plans. Neither the Company nor any Plan Affiliate has failed to pay any amounts due and owing as required by the terms of any Employee Plan. (c) There is no multiemployer plan to which the Company or its Plan Affiliates contribute, are required to contribute, or have ever been required to contribute, or to which any of the employees are beneficiaries as a result of their employment with the Company. (d) No Employee Plan provides health or life insurance benefits for retirees. (e) The Company has previously delivered to the Buyer true, correct and complete copies of all Employee Plans and all agreements, including trust agreements and insurance contracts, related to such Employee Plans. (f) Each Employee Plan intended to qualify under Section 401(a) of the Code has been determined by the Internal Revenue Service to so qualify, and the trusts created thereunder have been determined to be exempt from tax under the provisions of Section 501(a). (g) Neither the Company nor any corporation or trade or business (whether or not incorporated) that would be treated as a member of the controlled group of the Company under Section 4001(a)(14) of ERISA would be liable for any amount pursuant to Section 4062, 4063, 4064, 4068 or 4069 of ERISA if any of the Employee Plans that are subject to Title IV of ERISA were to terminate. All premiums or other payments required by the terms of any group or individual insurance policies and programs maintained by the Company and covering any present or former employees of the Company with respect to all periods up to and including the Closing Date have been fully paid for the length of the obligation. To the extent not heretofore satisfied or accrued on the Current Balance Sheet, the Stockholder shall be responsible for, and shall cause to be paid without using any of the Company's assets, any welfare benefits not fully covered by third-party insurance policies or programs relating to claims incurred by present or former employees of the Company on or before the Closing Date. -14- (h) There are no threatened or pending claims, suits or other proceedings by present or former employees of the Company or its affiliates, plan participants, beneficiaries or spouses of any of the above, the Internal Revenue Service, the PBGC, or any other person or entity involving any Employee Plan including claims against the assets of any trust, involving any Employee Plan, or any rights or benefits thereunder, other than ordinary and usual claims for benefits by participants or beneficiaries including claims pursuant to domestic relations orders. (i) Section 3.18 of the Disclosure Schedule specifies those Employee Plans that are to be continued by the Company following the Closing Date and those that are to be terminated. At the Buyer's election, the Company shall take any actions as may be necessary or appropriate under all applicable laws and the terms of the Employee Plans to establish the Buyer, or an affiliate of the Buyer, as having all rights and obligations with respect to any of the Employee Plans that are to be continued including rights with respect to all annuity or insurance contracts that form a part of any of such Employee Plans, together with all other Employee Plan assets. The Company shall obtain as of the Closing Date any and all consents from trustees required to effect any transfer of any trust(s) related to such assumed Employee Plans to such trustee(s) as may be appointed by the Buyer. (j) Except as heretofore accrued on the Current Financial Statements, there are no liabilities with respect to any Employee Plan that relate to any period prior to the Closing Date, including any taxes, accrued vacation or sick pay (whether or not vested), accrued vacation, sick and personal leaves, employee policies, employee benefit claims or liability to the Pension Benefit Guaranty Corporation. Without limiting the foregoing and except as contemplated hereby, no employees of the Company will be entitled to any severance pay by reason of the consummation of the transactions contemplated by this Agreement, and no severance pay will have accrued prior to the Closing Date and will be payable to any employees upon any subsequent termination of their employment after the Closing Date. 3.19. Absence of Certain Changes or Events (a) Since June 30, 2002, the Company has not entered into any transaction that is not in the usual and ordinary course of business and, without limiting the generality of the foregoing, has not: (i) authorized any declaration or payment of dividends by the Company, or paid any such dividends, or authorized any transfer of assets of any kind whatsoever by the Company to the Stockholder with respect to any shares of capital stock; (ii) failed to pay any medical claim liability or indebtedness when due, and all such claim liabilities have been properly recorded in the accounts of the Company, except for (A) any such failure attributable to a claim contested by the Company in good faith in the ordinary course of business and (B) up to an aggregate of $25,000 assessed with respect to the period ending as of the date hereof as penalties or interest attributable to late payments by The TriZetto Group, Inc., as third party administrator for the Company; (iii) incurred any material obligation or liability for borrowed money; (iv) discharged or satisfied any lien or encumbrance or paid any obligation or liability other than current liabilities reflected in the Current Balance Sheet; -15- (v) mortgaged, pledged or subjected to lien, charge or other encumbrance any of their respective properties or assets; (vi) sold or purchased, assigned or transferred any of its tangible assets or cancelled any debts or claims, except for (A) inventory sold and raw materials purchased in the ordinary course of business and (B) debts and claims settled with Providers in the ordinary course of business and consistent with clause (ii) above; (vii) made any material amendment to or termination of any Contract or done any act or omitted to do any act that would cause the breach of any Contract; (viii) suffered any losses of personal property, whether insured or uninsured, and whether or not in the control of the Company in excess of $50,000 in the aggregate, or waived any rights of any value; (ix) instituted, settled or agreed to settle, or received notice of any, pending or threatened litigation, action or proceeding before any Governmental Entity; (x) made any material change in the terms, status or funding condition of any Employee Plan, as defined in Subsection 3.18; (xi) engaged any new employee; (xii) made, or committed to make, any changes in the compensation payable to any officer, director, employee or agent of the Company, or any bonus payment or similar arrangements made to or with any of such officers, directors, employees or agents, except to the extent of any such changes that are made in the ordinary course of business and are (A) in an amount less than six percent of the compensation payable to such individual and (B) in an amount less than $25,000 in the aggregate; (xiii) incurred any capital expenditure in excess of $15,000 in any instance or $100,000 in the aggregate; (xiv) made any material alteration in the manner of keeping the books, accounts or records of the Company, or in the accounting practices therein reflected, except as may be required by statutory accounting principles, in which case the Company or the Stockholder has promptly notified the Buyer in writing of the nature of and reason for the change; or (xv) suffered any material adverse change in the consolidated statutory results of operations, condition (financial or otherwise), assets, liabilities (whether absolute, accrued, contingent or otherwise), business or prospects of the Company. (b) The Company has no knowledge of any existing or threatened occurrence, event or development that, as far as can be reasonably foreseen, could have a material adverse effect on the business, properties, assets, condition (financial or otherwise) or prospects of the Company. (c) The Company has conducted its Medicaid business in a commercially prudent manner, as a going concern and in the ordinary course. -16- 3.20. Providers. Section 3.20 of the Disclosure Schedule sets forth a true, correct and complete list of (a) the names and addresses of each of the Providers and (b) each monetary settlement or pending settlement that exceeds $1,000 with a provider, including a Provider, and that is not reflected in the claims incurred but not reported set forth in the data referred to in the first sentence of paragraph (e) of Subsection 3.6. No Provider Agreement may be terminated pursuant to its terms upon less than 90 days' notice. The Company uses good and reasonable efforts to maintain good relations with all of its Providers, and the Company uses reasonable business efforts to cause its accounts payable and other payments owing to any Provider to be not more than 30 days in arrears. The Stockholder and the Company have provided to the Buyer a true, correct and complete copy of the standard weekly claims inventory report for the Company, prepared by The TriZetto Group, Inc. 3.21. Members. Section 3.21 of the Disclosure Schedule describes each written, pending and unresolved complaint received by the Company from a Member and generally describes the nature and disposition of such complaint. 3.22. Commercial Business. Notwithstanding anything herein to the contrary: (a) The Company has all requisite certificates of authority, licenses, permits, consents, orders, approvals and certificates from all Governmental Entities necessary to conduct its Commercial Business (as defined in Subsection 5.11) and own and operate the assets relating to its Commercial Business (collectively, the "Commercial Permits"). Section 3.22 of the Disclosure Schedule sets forth a true, correct and complete list of all such Commercial Permits, copies of which have previously be delivered by the Company or the Stockholder to the Buyer. The Company is not in violation of any federal law, rule, license, decree, regulation or ordinance (including laws, rules licenses, decrees, regulations or ordinances of applicable Governmental Entities) relating to its Commercial Business or the properties relating to its Commercial Business. The Company is not in violation of any state, local or foreign law, rule license, decree, regulation or ordinance (including laws, rules, licenses, decrees, regulations or ordinances of applicable Governmental Entities) relating to its Commercial Business or the properties relating to its Commercial Business, except for any violation which, individually or in the aggregate, would not have a Company MAE and would not adversely affect the consummation of the transactions contemplated hereby. (b) All unpaid medical claims and settlements of the Commercial Business since January 1, 2001 have been properly reflected as losses incurred but not reported for purposes of computing the Company's claims payable and claims adjustment expenses, except to the extent that any such unpaid medical claims and settlements do not exceed $50,000 in amount, in the aggregate, in either the year ended December 31, 2001 or the period subsequent to January 1, 2002. 3.23. Indebtedness to and from Officers, Directors and the Stockholder (a) The Company is not indebted, directly or indirectly, to any of its officers or directors, to the Stockholder or to any officers or directors of the Stockholder, or any affiliate of any such person, in any amount whatsoever other than for salaries for services rendered to the Company or reimbursable business expenses, which salaries and expenses are reflected in the Current Financial Statements or were incurred by the Company in the ordinary course of business after June 30, 2002. (b) Neither the Stockholder nor any such officer, director or affiliate is indebted to the Company (including any amount payable by the Stockholder with respect to a capital -17- contribution) except for advances made to employees of the Company in the ordinary course of business to meet reimbursable business expenses anticipated to be incurred by such obligor. 3.24. Banking Facilities. Section 3.23 of the Disclosure Schedule sets forth a true, correct and complete list of: (a) each bank, savings and loan or similar financial institution in which the Company has an account or safety deposit box and the numbers of the accounts or safety deposit boxes maintained by the Company thereat; and (b) the names of all persons authorized to draw on each such account or to have access to any such safety deposit box facility, together with a description of the authority (and conditions thereof, if any) of each such person with respect thereto. 3.25. Powers of Attorney and Suretyships. The Company has no general or special powers of attorney outstanding (whether as grantor or grantee thereof) or any obligation or liability (whether actual, accrued, accruing, continent or otherwise) as guarantor, surety, co-signer, endorser, co-maker, indemnitor or otherwise in respect of the obligation of any person, corporation, partnership, joint venture, association, organization or other entity, except as endorser or maker of checks or letters of credit, respectively, endorsed or made in the ordinary course of business. 3.26. Conflicts of Interest. Neither the Stockholder, any officer or director of the Company or the Stockholder, nor any affiliate of any of the foregoing, now has or within the last three years had, either directly or indirectly: (a) an equity or debt interest in any corporation, partnership, joint venture, association, organization or other person or entity that furnishes or during such period furnished services to the Company, or otherwise does or during such period did business with the Company; or (b) a beneficial interest in any contract, commitment or agreement to which the Company is or was a party or under which it is or was obligated or bound or to which any of its properties may be or may have been subject, other than contracts, commitments or agreements between the Company and such persons in their capacities as employees, officers or directors of the Company. 3.27. Brokers. No person, firm or corporation has acted in the capacity of broker or finder on behalf of the Company or the Stockholder to bring about the negotiation of this Agreement. Thomas Weisel Partners LLC may provide a fairness opinion to the Board of Directors of the Company pursuant to Subsection 7.4, but has not undertaken any other activities on behalf of the Company or the Stockholder in connection with the negotiation of this Agreement. 4. Representations of the Buyer. The Buyer represents and warrants to the Stockholder as follows: 4.1.Organization and Authority. The Buyer is a corporation duly organized, validly existing and in good standing under the laws of the State of Delaware, and has all requisite power and authority (corporate and other) to own its properties and to carry on its business as now being conducted. The Buyer has full power to execute and deliver this Agreement and the agreements contemplated herein, and to consummate the transactions contemplated hereby and thereby. Certified copies of the Certificate of Incorporation and the Bylaws of the Buyer, as amended to date, -18- have been previously delivered to the Stockholder, are complete and correct, and no amendments have been made thereto or have been authorized since the date thereof. 4.2. Authorization. The execution and delivery of this Agreement by the Buyer, and the agreements provided for herein, and the consummation by the Buyer of the transactions contemplated hereby and thereby, have been duly authorized by all requisite corporate action. This Agreement and all such other agreements and written obligations entered into and undertaken in connection with the transactions contemplated hereby constitute the valid and binding obligations of the Buyer, enforceable against the Buyer in accordance with their respective terms, subject in each case to the Enforceability Exception. 4.3. Non-Contravention. Neither the execution and delivery of this Agreement or the agreements provided for herein, nor the consummation by the Buyer of the transactions contemplated hereby and thereby, will not (a) conflict with or violate the provisions of any law, rule or regulation applicable to the Buyer; (b) conflict with or violate the provisions of the Buyer's Certificate of Incorporation or Bylaws; (c) require on the part of the Buyer any notice to or filing with, or permit, authorization, consent or approval of, any Governmental Entity, (d) violate any judgment, decree, order or award of any Governmental Entity by which the Buyer or its properties are bound, or (e) conflict with, result in breach of, constitute (with or without due notice or lapse of time or both) a default under, result in the acceleration of obligations under, create in any party any right to terminate, modify or cancel, or require any notice, consent or waiver under, any contract or instrument to which the Buyer is a party or by which it is bound or to which any of its assets are subject, except in any such case for (i) compliance with applicable requirements of the Securities Act, any applicable state securities laws and the Exchange Act, (ii) approval of the State of New Jersey Department of Banking and Insurance and the New Jersey Department of Human Services, Division of Medical Assistance and Health Services of the transactions contemplated hereby, and (iii) consent of LaSalle Bank National Association, as lender under the bank credit facility of the Buyer. 4.4. Investment Representation. The Buyer is acquiring the Shares from the Stockholder for the Buyer's own account for investment only and not with a view to, or for sale in connection with, any distribution of the Shares in violation of the Securities Act or any rule or regulation thereunder. The Buyer has no present intention of distributing or selling the Shares, and the Buyer has no present or contemplated agreement, undertaking, arrangement, obligation, indebtedness or commitment providing for the disposition of the Shares. The Buyer is an "accredited investor" within the meaning of Rule 501(a) under the Securities Act. The Buyer has had adequate opportunity to obtain from representatives of the Company such information about the Company as is necessary for the Buyer to evaluate the merits and risks of the Buyer's acquisition of the Shares pursuant to this Agreement. The Buyer acknowledges that it has received certain forward-looking information from the Stockholder or the Company in connection with this Agreement and the transactions contemplated hereby. The Buyer understands that neither the Company nor the Stockholder can guarantee that the Company actually will achieve the plans, intentions or expectations disclosed in such forward-looking statements and that the Company's actual results could differ materially from the plans, intentions and expectations disclosed in the forward-looking statements. The Buyer has sufficient expertise in business and financial matters to be able to evaluate the risks involved in the acquisition of the Shares pursuant to the Agreement and to make an informed investment decision with respect to such acquisition. The Buyer understands that (a) the Shares have not been registered under the Securities Act and are "restricted securities" within the meaning of Rule 144 under the Securities Act and (b) the Shares cannot be sold, transferred or otherwise disposed of unless they are subsequently registered under the Securities Act or an -19- exemption from registration is then available. A legend substantially in the following form will be placed on the certificate or certificates representing the Shares: "The shares represented by this certificate have not been registered under the Securities Act of 1933, as amended, and may not be sold, transferred or otherwise disposed of in the absence of an effective registration statement under such Act or an opinion of counsel satisfactory to the corporation to the effect that such registration is not required." 5. Pre-Closing Covenants. From and after the date hereof and until the Closing Date: 5.1. Access to Management, Properties and Records (a) The Stockholder and the Company shall afford the officers, attorneys, accountants and other authorized representatives of the Buyer free and full access upon reasonable notice and during normal business hours to all management personnel, offices, properties, books and records of the Company, so that the Buyer may have full opportunity to make such investigation as it shall desire to make of the management, business, properties and affairs of the Company, and the Buyer shall be permitted to make abstracts from, or copies of, all such books and records. The Stockholder and the Company shall furnish to the Buyer such financial and operating data and other information as to the business of the Company as the Buyer shall reasonably request. Without limiting the foregoing, the Stockholder and the Company shall furnish the Buyer with copies of drafts and executed documents relating to the Company's proposed sale of the Commercial Business as defined in Subsection 5.11. (b) The Stockholder and the Company shall authorize the release to the Buyer of all files pertaining to the business or operations of the Company held by any federal, state, county or local authorities, agencies or instrumentalities. The authorizations of the Stockholder and the Company shall specifically waive all previous claims of privilege or other restrictions, and in any case where a release by a present or former employee of the Company is necessary, the Stockholder and the Company shall exercise their best efforts to obtain such a release. 5.2. Confidentiality (a) The Company and the Stockholder have furnished and will continue to furnish the Buyer with certain information that is either non-public, confidential or proprietary in nature and that (i) is identified in writing as being proprietary and confidential, (ii) is not already known to persons other than the Company, the Stockholder, their representatives and third parties that have entered into written non-disclosure agreements with the Company and (iii) has not been independently developed by the Buyer. All such information furnished to the Buyer, its directors, officers, employees, agents or representatives, including attorneys, accountants, consultants, potential lenders, investors and financial advisors (collectively "representatives"), by the Company, the Stockholder, or any of their respective representatives, and all analyses, compilations, data, studies or other documents prepared by the Buyer or its representatives containing or based in whole or in part on any such furnished information or reflecting the Buyer's review of, or interest in, the Company is hereinafter referred to as "Information." (b) Subject to the requirements of applicable law, the Buyer hereby agrees to use the Information solely in connection with the consummation of the transactions contemplated by this Agreement and to transmit the Information only to those representatives of the Buyer who need to know the Information. -20- 5.3. Public Announcements. No disclosures shall be made to third parties, nor shall there be any general public pronouncements or other general public communications, concerning this Agreement and the purchase of the Shares by the Buyer without the consent of the Buyer, on one hand, and the Company and the Stockholder on the other, except as may be required by law, in which event the non-disclosing party shall be given an opportunity to review in advance the proposed disclosure. 5.4. Communications with Members and Providers (a) Unless instructed otherwise by the Buyer in writing, the Company shall continue to provide managed healthcare services to Members throughout the service areas covered by the Medicaid Contract consistent with past practice. (b) The Company shall be responsible for all communications with Members and Providers, provided that the Buyer will provide the Company with such assistance as may be reasonably requested by the Company in connection with such communications. 5.5. Conduct of Business. The Company shall operate its Medicaid business diligently, in a commercially prudent manner and substantially in the same manner as heretofore and shall not engage in any transaction in respect to its Medicaid business that is either not in the ordinary course or not consistent with past practice, or make or institute any unusual or new methods of accounting or operation, except as agreed to in writing by the Buyer. In connection with their obligations under Subsections 6.14 and 7.8, the Company and the Buyer shall use their Reasonable Best Efforts to negotiate and agree upon the form of a management agreement (the "Management Agreement") by no later than August 16, 2002 pursuant to which the Buyer shall provide certain administrative and financial services to the Company (such services, however, not to include actuarial, auditing, legal or marketing services) in exchange for the fees provided for therein. The fees under the Management Agreement shall consist of (a) a fee, payable in monthly installments, of 12 percent of the gross revenues of the Company per annum, (b) a fee of $1.50 per Member per month for provision of the Buyer's NurseWise nurse triage services and (c) the Buyer's customary fees for reinsurance provided by Bankers Reserve Life Insurance Company of Wisconsin, a wholly owned subsidiary of the Buyer. All of the property of the Company relating to, or used in, its Medicaid business shall be used, operated, repaired and maintained in a normal business manner consistent with past practice. 5.6. Absence of Material Changes. Except for transactions contemplated or necessitated by this Agreement, the Company shall not, without the prior written consent of the Buyer: (a) amend or modify the terms upon which any of the Providers are compensated or reimbursed; (b) terminate any Provider Agreement, except for any terminations in the ordinary course of business that do not, in the aggregate, affect more than one percent of the Members; (c) terminate or amend any Medicaid Contract; (d) fail to pay any medical claim liability or indebtedness relating to the Company's Medicaid business when due or improperly record such claim liabilities in the accounts of the Company, except for (i) any such failure attributable to a claim contested by the Company in good faith in the ordinary course of business and (ii) up to an aggregate of $25,000 per calendar month (or a portion thereof) assessed as -21- penalties or interest attributable to late payments by The TriZetto Group, Inc., as third party administrator for the Company; (e) take any action to amend its Certificate of Incorporation or Bylaws; (f) issue any stock, bonds or other corporate securities or grant any option or issue any warrant to purchase or subscribe for any of such securities or issue any securities convertible into such securities; (g) incur any obligation or liability (absolute or contingent), except current liabilities incurred, obligations under any Provider Agreement and obligations under the Contracts, or otherwise incurred in the ordinary course of business up to $30,000 in the aggregate; (h) declare or make any payment or distribution to the Stockholder with respect to its stock, or purchase or redeem any shares of its capital stock; (i) mortgage, pledge, or subject to any lien, charge or any other encumbrance any of their respective assets or properties; (j) sell, assign, or transfer any of its assets, except in the ordinary course of business; (k) cancel any debts or claims, except in the ordinary course of business; (l) merge or consolidate with or into any corporation or other entity; (m) make, accrue or become liable for any bonus, profit sharing or incentive payment, except for accruals under existing plans, if any, or increase the rate of compensation payable or to become payable by it to any of its officers, directors or employees, other than increases in the ordinary course of business consistent with past practice; (n) make any election or give any consent under the Code or the tax statutes of any state or other jurisdiction or make any termination, revocation or cancellation of any such election or any consent or compromise or settle any claim for past or present tax due; (o) waive any rights of material value; (p) modify, amend, alter or terminate any of its executory contracts of a material value or that are material in amount; (q) take or permit any act or omission constituting a breach or default under any contract, indenture or agreement by which it or its properties are bound, except for any acts or omissions that, in the aggregate, do not and will not have a Company MAE; (r) fail to (i) preserve the possession and control of its assets and business, (ii) use its best efforts, to the extent commercially reasonable ("Reasonable Best Efforts"), to keep in faithful service its present officers and key employees, except as agreed with the Buyer, (iii) preserve the goodwill of its relationships with Providers, Members, regulatory bodies, agents, brokers and others having business relations with it, and (iv) keep and preserve its Medicaid business existing on the date hereof until the Closing Date; -22- (s) fail to operate its business and maintain its books, accounts and records in the customary manner and in the ordinary and regular course of business and maintain in good repair its business premises, fixtures, furniture and equipment; (t) enter into any lease, contract, agreement or understanding, other than (i) those entered into in the ordinary course of business calling for payments that in the aggregate do not exceed $25,000 for each such lease, contract, agreement or understanding or (ii) any Provider Agreement; (u) incur any capital expenditure in excess of $15,000 in an instance or $100,000 in the aggregate; (v) engage any new employee; (w) materially alter the terms, status or funding condition of any Employee Plan; or (x) commit or agree to do any of the foregoing in the future. 5.7. Delivery of Interim Financial Statements (a) As promptly as practicable following the last day of each calendar month after the date hereof until the Closing Date, and in any event within 20 days after the end of each such month, the Stockholder or the Company shall deliver to the Buyer (i) an unaudited balance sheet as of the end of such month, (ii) unaudited statements of operations and cash flows for such month and for the period from January 1, 2002 through the end of such month, and (iii) a calculation of statutory net worth requirement for the period from January 1, 2002 through the end of such month. Each set of unaudited financial statements delivered pursuant to clauses (i) and (ii) above shall be prepared in accordance with United States generally accepted accounting principles applied on a basis consistent with the periods covered by the Financial Statements, shall fairly present the financial condition, results of operations and cash flows of the Company as of the respective dates thereof and for the periods referred to therein, shall be consistent in scope and format with the Financial Statements as of, and for the period ended, May 31, 2002 and shall be consistent with the books and records of the Company, provided that such unaudited financial statements may be subject to normal recurring year-end adjustments (which shall not be material) and need include only footnotes equivalent to those contained in the Financial Statements. Each calculation of statutory net worth requirement delivered pursuant to clause (iii) above shall be certified by the chief financial officer of the Company to the effect that such calculation has been prepared in conformity with accounting practices prescribed or permitted by the State of New Jersey Department of Banking and Insurance. No later than August 16, 2002, the Stockholder or the Company may provide to the Buyer an unaudited balance sheet of the Company as of June 30, 2002, which balance sheet, unless consented to in writing by the Buyer (which consent shall not be unreasonably withheld), shall not be filed with the State of New Jersey Division of Medical Assistance and Health Services or any other Governmental Entity and shall not be used as the basis for the calculation of the statutory net worth requirement applicable to the Company as of such date. In the event the Buyer so consents to such balance sheet, then, beginning as of the date of such consent, such balance sheet shall constitute the "Current Balance Sheet" for purposes of this Agreement. (b) As promptly as practicable following the last day of each calendar month after the date hereof until the Closing Date, and in any event at least two business days before any filing thereof with the State of New Jersey Department of Banking and Insurance, the Stockholder or -23- the Company shall deliver to the Buyer a copy of any regulatory filing to be made with the State of New Jersey Department of Banking and Insurance, an unaudited statutory statement of admitted assets, liabilities and surplus of the Company as of the end of such month and unaudited statutory statements of income, changes in surplus and cash flows for the period from January 1, 2002 through the end of such month. Any such statutory financial statements shall be prepared in accordance with accounting practices prescribed or permitted by the State of New Jersey Department of Banking and Insurance applied on a basis consistent with the periods covered by the Statutory Financial Statements, fairly present, in all material respects, the admitted assets, liabilities and surplus as of the respective dates thereof and the results of operations and cash flows of the Company for the periods referred to therein, on the basis of the accounting described in the respective notes thereto, and are consistent with the books and records of the Company. (c) As promptly as practicable following the last day of each calendar month after the date hereof until the Closing Date, and in any event at least two business days before any filing thereof with the State of New Jersey Division of Medical Assistance and Health Services, the Stockholder or the Company shall deliver to the Buyer a copy of the Medicaid Financial Reports and comparable financial reports for the Commercial Business as of the end of such month and for the period from July 1, 2002 through the end of such month. Any such financial reports shall be prepared in accordance with accounting practices prescribed or permitted by the State of New Jersey Division of Medical Assistance and Health Services applied on a basis consistent with the periods covered by the Medicaid Financial Reports, fairly present the financial condition and results of operations of the Medicaid business of the Company as of the end of such month and for the period from July 1, 2002 through the end of such month, and are consistent with the books and records of the Company. (d) As promptly as practicable following the last day of each calendar week after the date hereof until the Closing Date, the Stockholder or the Company shall deliver to the Buyer a true, correct and complete copy of the standard weekly claims inventory report for the Company, prepared by The TriZetto Group, Inc., summarizing those accounts payable and other payments owing by the Company to any Provider that were more than 30 days in arrears as of the last day of such calendar week, which report shall be consistent in form and detail with the schedule described in the last sentence of Subsection 3.20. 5.8.Compliance with Laws and Regulations. The Company will comply with all federal, state, local and foreign laws and regulations that are applicable to it or to the conduct of its Medicaid business, except for any non-compliance with state, local and foreign laws and regulations which, individually or in the aggregate, would not have a Company MAE and would not adversely affect the consummation of the transactions contemplated hereby. The Company will perform and comply with all contracts, commitments and obligations by which it is bound. The Company shall maintain at all times from August 15, 2002 at least the minimum (a) statutory surplus, (b) insolvency deposits and (c) administrative deposits, each as required in accordance with the written regulations of the State of New Jersey Department of Banking and Insurance and under the terms of the Medicaid Contract. Each of the Buyer, the Company and the Stockholder shall have the right to contact and confer with the Centers for Medicare and Medicaid Services, the New Jersey Department of Human Services, Division of Medical Assistance and Health Services, or any other regulatory authorities having jurisdiction over the transactions contemplated hereby, and the parties agree to use their Reasonable Best Efforts to comply with any laws or regulations applicable to the transactions contemplated hereby and to obtain any waivers, permits, consents, approvals or other authorizations from any party, including Governmental Entities, required for the transactions contemplated hereby. -24- 5.9. Provider Agreements. The Stockholder and the Company shall use their Reasonable Best Efforts to assist the Buyer in re-negotiating Provider Agreements with any and all Providers identified by the Buyer from time to time prior to the Closing Date. 5.10. Employees. The Stockholder and the Company shall use their Reasonable Best Efforts to assist the Buyer in obtaining affirmations from those individuals identified under the heading "Specified Employees" in a letter to be delivered by the Buyer to the Stockholder and the Company, by no later than the earlier of August 16, 2002 and the second business day before the Closing Date (the "Supplemental Letter"), that such individuals intend to continue their employment with the Company for an indefinite period following the Closing Date. The Stockholder and the Company shall take such steps as are necessary in order to ensure that, as of the time immediately before the Closing, individuals identified under the heading "Specified Employees" in the Supplemental Letter constitute the only employees of the Company. To the extent any severance or other payments (other than for salaries earned in the ordinary course for services rendered prior to the Closing Date) are, under applicable statutes or rules, existing contracts, corporate policy or otherwise, necessary or are, in the opinion of the Stockholder or the Company, desirable in connection with the termination of the employment of one or more individuals, those payments shall be made prior to the Closing by (a) the Company up to the amount of $450,000 in the aggregate and (b) the Stockholder (or made by the Company and reimbursed by the Stockholder) to the extent those payments exceed $450,000 in the aggregate. 5.11. Disposition of Commercial Business. The Company shall use its Reasonable Best Efforts to transfer and dispose of the assets and liabilities of the commercial line of business currently conducted by the Company (the "Commercial Business"), a complete list of the assets and liabilities of which is set forth in Section 5.11 of the Disclosure Schedule, prior to the Closing Date. The Company shall not, without the prior written consent of the Buyer, sell, convey, transfer or otherwise dispose of any assets other than those listed in Section 5.11 of the Disclosure Schedule in connection with the sale of the Commercial Business, except for (a) a sale of the Commercial Business in accordance with the terms of the letter of intent related thereto dated July 9, 2002, a true, complete and copy of which has been provided by the Stockholder to the Buyer, and (b) a sale or sales of a portion of the assets of the Commercial Business in the ordinary course of business. The Company or the Stockholder shall provide to the Buyer a copy of any agreement that the Company or the Stockholder proposes to enter into in connection with the sale of the Commercial Business, together with an estimated, pro forma balance sheet with respect to the Commercial Business giving effect to such proposed sale as of the proposed sale date, not less than five business days prior to the execution of any such agreement. The Company and the Stockholder shall provide to the Buyer such assurances as the Buyer shall, in its sole discretion, deem sufficient that the Company and the Stockholder have made provision, acceptable to the Buyer, (a) for all of the obligations and liabilities of the Commercial Business, including a guarantee (the "Guarantee") by the Stockholder of all medical claims for services rendered in connection with the Commercial Business prior to such sale, (b) against any diminution of the assets, or increase in the liabilities, of the Commercial Business, as such assets and liabilities are reflected in the unaudited balance sheet with respect to the Commercial Business as of June 30, 2002 previously delivered by the Stockholder or the Company to the Buyer, provided that no Guarantee shall be required pursuant to this clause (b) unless the aggregate amount of any such diminutions in assets and increases in liabilities exceeds $50,000, or (c) against any impairment of the ability of the Company to continue to conduct its Medicaid business consistent in all material respects with the conduct of such business as of the date hereof. Not less than five business days following the execution of the agreement for the sale of the Commercial Business, the Company or the Stockholder shall deliver to the Buyer a final balance sheet with respect to the Commercial Business as of the date of such closing. In connection with such transfer and disposition of the Commercial Business, the Company shall terminate its -25- arrangements for the provision of commercial insurance to students of the Stockholder. In addition, the parties shall use their Reasonable Best Efforts to negotiate and agree upon the form of the Guarantee by no later than the fifth business day following the execution of the agreement for the sale of the Commercial Business. The Stockholder shall reimburse the Company for any expenses incurred by the Company after the date hereof in connection with the transfer and disposition of the Commercial Business, including the termination of such arrangements with students of the Stockholder, in excess of $100,000 in the aggregate. 5.12. Exclusivity. Except in connection with the disposition of the Commercial Business, none of the Company, the Stockholder or their respective officers, directors, employees, representatives and agents shall, directly or indirectly, (a) initiate, solicit, encourage or otherwise facilitate any inquiry, proposal, offer or discussion with any party (other than the Buyer) concerning any merger, reorganization, consolidation, recapitalization, business combination, liquidation, dissolution, share exchange, sale of stock, sale of material assets or similar business transaction involving the Company, (b) furnish any non-public information concerning the business, properties or assets of the Company to any party (other than the Buyer) or (c) engage in discussions or negotiations with any party (other than the Buyer) concerning any such transaction. If the Company or the Stockholder receives any inquiry, proposal or offer of the nature described in the preceding sentence, the Company shall, within one business day after such receipt, notify the Buyer of such inquiry, proposal or offer, including the identity of the other party and the terms of such inquiry, proposal or offer. 5.13. Taxes. The Company will duly and timely file all reports or returns required to be filed with federal, state, local and foreign authorities and will promptly pay or make adequate provision for all federal, state, local and foreign taxes, assessments and governmental charges levied or assessed upon it or any of its properties (unless contesting such in good faith and adequate provision has been made therefor), including any taxes, assessments and governmental charges relating to the period from January 1, 2002 to the Closing Date. 5.14. Notices of Breaches (a) From the date of this Agreement until the Closing, the Company shall promptly deliver to the Buyer supplemental information concerning events or circumstances occurring subsequent to the date hereof which would ender any representation, warranty or statement in this Agreement or the Disclosure Schedule inaccurate or incomplete at any time after the date of this Agreement until the Closing. No such supplemental information shall be deemed to avoid or cure any misrepresentation or breach of warranty or constitute an amendment of any representation, warranty or statement in this Agreement or the Disclosure Schedule. (b) From the date of this Agreement until the Closing, the Buyer shall promptly deliver to the Company in a manner satisfactory in form and substance supplemental information concerning events or circumstances occurring subsequent to the date hereof which would render any representation or warranty in this Agreement inaccurate or incomplete at any time after the date of this Agreement until the Closing. No such supplemental information shall be deemed to avoid or cure any misrepresentation or breach of warranty or constitute an amendment of any representation or warranty in this Agreement. 5.15. Notices and Consents (a) The Company and the Stockholder shall use their Reasonable Best Efforts to obtain, at their expense, all waivers, permits, consents, approvals or other authorizations from Governmental Entities, and to effect all registrations, filings and notices with or to -26- Governmental Entities, as may be required for such parties to consummate the transactions contemplated by this Agreement and to otherwise comply with all applicable laws and regulations in connection with the consummation of the transactions contemplated by this Agreement, as are required to be listed in the Disclosure Schedule. The Company and the Stockholder shall use their reasonable best efforts to obtain, at their expense, all such waivers, consents or approvals from third parties other than Governmental Entities, and to give all such notices to third parties, as are required to be listed in the Disclosure Schedule. (b) The Buyer shall use its Reasonable Best Efforts to obtain, at its expense, all waivers, permits, consents, approvals or other authorizations from Governmental Entities, and to effect all registrations, filings and notices with or to Governmental Entities, as may be required for it to consummate the transactions contemplated by this Agreement and to otherwise comply with all applicable laws and regulations in connection with the consummation of the transactions contemplated by this Agreement, as are required by Subsection 4.3. The Buyer shall use its Reasonable Best Efforts to obtain, at its expense, all such waivers, consents or approvals from third parties other than Governmental Entities, and to give all such notices to third parties, as are required pursuant to Subsection 4.3. 5.16. Closing Efforts. Each of the parties shall use its Reasonable Best Efforts to take all actions and to do all things necessary, proper or advisable to consummate the transactions contemplated by this Agreement, including using its reasonable best efforts to ensure that (i) its representations and warranties remain true and correct in all material respects through the Closing Date and (ii) the conditions to the obligations of the other parties to consummate the sale of the Shares to the Buyer are satisfied. 5.17. Expenses (a) Except as otherwise expressly provided herein, the Buyer will pay all fees and expenses (including legal, accounting and broker's fees and other costs and expenses) incurred by it in connection with the transactions contemplated hereby. (b) Except as otherwise expressly provided herein, the Stockholder will pay all fees and expenses (including legal, accounting and broker's fees and other costs and expenses) incurred by it or the Company in connection with the transactions contemplated hereby. The Stockholder shall be responsible for payment of all sales or transfer taxes arising out of the conveyance of the Shares. The fees and expenses of Epstein Becker & Green, P.C., special counsel to the Company, in connection with this transaction shall be paid at the Closing by (i) the Company up to the amount of $50,000 and (ii) the Stockholder (or paid by the Company and reimbursed by the Stockholder) to the extent those payments exceed $50,000. Any transfer taxes and fees payable to any Governmental Entity to obtain any necessary authorizations, consents and approvals shall be borne equally by the Buyer and the Stockholder. (c) In the event that legal proceedings are commenced by the Buyer against the Stockholder (or the Company, if the transactions contemplated hereby are not consummated), or by the Stockholder against the Buyer, in connection with this Agreement or the transactions contemplated hereby, the party or parties that do not prevail in such proceedings shall pay the reasonable attorneys' fees and other costs and expenses, including investigation costs, incurred by the prevailing party in such proceedings. -27- 6. Conditions to Obligations of the Buyer. The obligations of the Buyer under this Agreement are subject to the fulfillment, at the Closing Date, of the following conditions precedent, each of which may be waived in writing in the sole discretion of the Buyer: 6.1. Representations, Warranties and Covenants (a) Except for any changes permitted by the terms hereof or consented to in writing by the Buyer, the representations and warranties of the Stockholder and the Company (including paragraph (e) of Subsection 3.6 and paragraph (c) of Subsection 3.16) shall be true on and as of the Closing Date as though such representations and warranties were made on and as of such date, except to the extent such representations and warranties are specifically made as of a particular date, (in which case such representations and warranties shall be true and correct as of such date), provided that if paragraph (c) of Subsection 3.16 shall not be true on and as of the Closing Date as though such representation was made on and as of such date (giving effect to the statutory and contractual requirements in effect as of such date, including any binding written determination by a Governmental Entity to decrease the minimum balances and deposits referenced therein), the Purchase Price shall be reduced by the lesser of (i) $3,700,000 or (ii) the total amount that the Company would be required to fund in order to comply with such paragraph (c) of Subsection 3.16. In the event that the total amount contemplated by clause (ii) of the immediately preceding sentence exceeds $4,700,000, the Buyer, in its discretion, may determine not to proceed with the Closing. The Stockholder and the Company shall have performed and complied with all terms, conditions, covenants, obligations, agreements and restrictions required by this Agreement to be performed or complied with by each of them prior to or at the Closing Date. (b) At the Closing, the Stockholder shall have delivered to the Buyer a certificate signed by the Senior Vice President, Administration and Finance of the Stockholder as to the Stockholder's compliance with paragraph (a) of this Subsection 6.1. At the Closing, the Company shall have delivered to the Buyer a certificate signed by the President and Chief Executive Officer of the Company as to the Company's compliance with paragraph (a) of this Subsection 6.1. 6.2. Investor Rights Agreement. The Stockholder and the Company shall have entered into the Investor Rights Agreement with the Buyer. 6.3. Escrow Agreement. The Stockholder and the Escrow Agent shall have entered into the Escrow Agreement. 6.4. Amended Organizational Documents. The Bylaws of the Company shall have been amended and restated, effective immediately upon or immediately after the Closing and in a form reasonably acceptable to the Buyer, to the effect set forth under the heading "Amended and Restated Bylaws" in the Supplemental Letter. 6.5. Provider Agreements. The Company and each of the Providers identified under the heading "Providers" in the Supplemental Letter shall have entered into agreements amending or replacing their existing Provider Agreements, which new agreements shall be satisfactory in form and substance to the Buyer. 6.6. Employment Arrangements. On or prior to the Closing Date, (a) each individual listed in the Supplemental Letter under the heading "Employment Agreements" shall have entered into an employment agreement with the Company in the form agreed upon by such individual and the Buyer prior to the date hereof and (b) at least 70% of the individuals listed in the Supplemental -28- Letter under the heading "Specified Employees" shall have advised the Buyer of their intention to continue their employment with the Company for an indefinite period following the Closing Date. 6.7. Disposition of Commercial Business. The Company shall have disposed of the Commercial Business and shall have delivered the Guarantee to the Buyer; which Guarantee shall be satisfactory to the Buyer in form and substance. Such disposition shall not, in the reasonable judgment of the Buyer, have impaired the ability of the Company to continue to conduct its Medicaid business consistent in all material respects with the conduct of such business as of the date hereof. 6.8. IBNR Certification. On the Closing Date, the Buyer shall have received a certification of the National Healthcare Office of PricewaterhouseCoopers LLP confirming that all medical claims of the Company's Medicaid business and Commercial Business have been properly reflected as losses incurred but not reported for the purposes of computing the Company's claims payable and claims adjustment expenses, provided that if such Office is unable to deliver such certification, the Buyer, in its discretion, may determine to waive the preceding condition and, as consideration therefor, the Purchase Price shall be reduced by the amount that such Office certifies the Company has failed to properly reflect in claims payable and claims adjustment expenses with respect to its Medicaid business. 6.9. Medicaid Contract. The Buyer shall have received such assurances, as the Buyer shall, in its sole discretion, deem sufficient that neither the sale of the Shares as contemplated hereby nor any other actions contemplated hereby will materially affect any of the Company's rights under the Medicaid Contract. 6.10. Consents. The Stockholder and the Company shall have obtained at their own expense (and shall have provided copies to the Buyer of) all of the waivers, permits, consents, approvals or other authorizations referred to in paragraph (a) Subsection 5.15 that are required on the part of the Company or the Stockholder, consents and approvals of all lenders, lessors, Governmental Entities and other third parties whose authorization, consent or approval is required in order for the Stockholder and the Company to consummate the transactions contemplated hereby, and for the Buyer to operate the Company's Medicaid business, including those set forth in Section 3.5 of the Disclosure Schedule. 6.11. Indebtedness. Any indebtedness described in paragraph (b) of Subsection 3.23 shall have been paid to the Company. 6.12. Adverse Proceedings. No action or proceeding by or before any Governmental Entity shall have been instituted or threatened by any governmental body or person whatsoever that shall seek to restrain, prohibit or invalidate the transactions contemplated by this Agreement or that might affect the right of the Buyer to own the Shares or to own or operate the business of the Company after the Closing. 6.13. Opinions of Counsel. The Buyer shall have received (a) an opinion of counsel to the Stockholder, which counsel shall be reasonably acceptable to the Buyer, dated as of the Closing Date, substantially in the form attached hereto as EXHIBIT C and (b) an opinion of Epstein Becker & Green, P.C., special counsel to the Company, dated as of the Closing Date, in substantially the form attached hereto as EXHIBIT D. 6.14. Management Agreement. The Company shall have entered into the Management Agreement, satisfactory to the Buyer in form and substance. -29- 6.15. Closing Deliveries. The Buyer shall have received at or prior to the Closing such additional documents, instruments or certificates as the Buyer may reasonably request including: (a) the stock certificate representing the Shares, duly endorsed in accordance with Subsection 1.1 of this Agreement; (b) such certificates of the Company's officers and of the Stockholder's officers and such other documents evidencing satisfaction of the conditions specified in this Section 6 as the Buyer shall reasonably request; (c) a certificate of the Secretary of State of the State of New Jersey as to the legal existence and good standing (including tax) of the Company in New Jersey; (d) certificates of the Secretary of the Company and of the Stockholder attesting to the incumbency of the Company's officers, the authenticity of the resolutions authorizing the transactions contemplated by this Agreement, and the authenticity and continuing validity of the charter documents delivered pursuant to Subsection 3.1; (e) where required by the applicable Lease, estoppel certificates from each Lessor from whom the Company leases real or personal property consenting to the acquisition of the Shares by the Buyer and the other transactions contemplated hereby, and representing that there are no outstanding claims against the Company under such Lease; (f) where required by the applicable Lease, estoppel certificates from each tenant to whom the Company leases real property consenting to the acquisition of the Shares by the Buyer and the other transactions contemplated hereby, and representing that there are no outstanding claims against the Company under such Lease; (g) certificates of appropriate governmental officials in each state in which the Company is required to qualify to do business as a foreign corporation as to the due qualification and good standing (including tax) of the Company in each such jurisdiction; (h) written resignations of all directors and officers of the Company, other than as set forth in under the heading "Continuing Directors and Officers" in the Supplemental Letter; and (i) the original corporate minute books of the Company and all corporate seals. 7. Conditions to Obligations of the Stockholder and the Company. The obligations of the Stockholder and the Company under this Agreement are subject to the fulfillment, at the Closing Date, of the following conditions precedent, each of which may be waived in writing in the sole discretion of the Stockholder: 7.1. Representations, Warranties and Covenants (a) The representations and warranties of the Buyer in this Agreement shall be true on and as of the Closing Date as though such representations and warranties were made on and as of such date, except for any changes consented to in writing by the Stockholder. The Buyer shall have performed and complied with all terms, conditions, covenants, obligations, -30- agreements and restrictions required by this Agreement to be performed or complied with by it prior to or at the Closing Date. (b) At the Closing, the Buyer shall have delivered to the Stockholder a certificate signed by the President and Chief Executive Officer of the Buyer as to the Buyer's compliance with paragraph (a) of this Subsection 7.1. 7.2. Investor Rights Agreement. The Buyer shall have entered into the Investor Rights Agreement with the Stockholder and the Company. 7.3. Escrow Agreement. The Buyer and the Escrow Agent shall have entered into the Escrow Agreement with the Stockholder. 7.4. Fairness Opinion. The Board of Directors of the Company shall have received, by no later than the earlier of the Closing Date and August 15, 2002, an opinion of Thomas Weisel Partners LLC to the effect that the consideration to be received by the Stockholder in connection with the sale of the Shares is fair to the Stockholder from a financial point of view. 7.5. Consents. The Buyer shall have obtained at its own expense (and shall have provided copies thereof to the Company or the Stockholder) all of the waivers, permits, consents, approvals or other authorizations, and effected all of the registrations, filings and notices, referred to in paragraph (b) of Subsection 5.15 that are required on the part of the Buyer. 7.6. Adverse Proceedings. No action or proceeding by or before any Governmental Entity shall have been instituted or threatened by any governmental body or person whatsoever that shall seek to restrain, prohibit or invalidate the transactions contemplated by this Agreement or that might affect the right of the Stockholder to transfer the Shares. 7.7. Opinion of Counsel. The Stockholder shall have received an opinion of Hale and Dorr LLP, counsel to the Buyer, dated as of the Closing Date, in substantially the form attached hereto as EXHIBIT E. 7.8. Management Agreement. The Buyer shall have entered into the Management Agreement, satisfactory to the Stockholder and the Company in form and substance. 7.9. Closing Deliveries. The Stockholder shall have received at or prior to the Closing such additional documents, instruments or certificates as the Buyer may reasonably request, including: (a) such certificates of the Buyer's officers and such other documents evidencing satisfaction of the conditions specified in this Section 7 as the Stockholder shall reasonably request; (b) a certificate of the Secretary of State of the State of Delaware as to the legal existence and good standing (including tax) of the Buyer in Delaware; and (c) a certificate of the Secretary of the Buyer attesting to the incumbency of the Buyer's officers, the authenticity of the resolutions authorizing the transactions contemplated by this Agreement, and the authenticity and validity of charter documents. 8. Price Reduction -31- 8.1. Damages. After the Closing, the Stockholder shall repay or cause to be repaid to the Buyer, in the manner and subject to the terms and limitations set forth in this Section 8, a portion of the Purchase Price (a "Price Reduction") in the event the Buyer or the Company incurs, suffers or is subject to any claims, damages, losses, liabilities, costs and expenses (including settlement costs and any legal, accounting or other expenses for investigating or defending any actions or threatened actions) (collectively, the "Damages") in connection with each and all of the following: (a) all obligations or liabilities of the Company arising or accruing under the Medicaid Contract or any contract relating to or involving the Commercial Business to the extent such obligations or liabilities arise or accrue as of or prior to the time of the Closing and have not been reflected as losses incurred but not reported for purposes of computing the Company's claims payable and claims adjustment expenses (as adjusted to give effect to any reduction in the Purchase Price pursuant to Subsection 6.8), including (i) any medical claims incurred under any Provider Agreement for services rendered to Members as of or prior to the time of the Closing, (ii) any medical claims incurred under any contract or agreement with a physician, hospital or other healthcare service provider for services rendered to members or customers of the Commercial Business as of or prior to the time of the Closing, (iii) any claims of Members who are hospitalized as of or prior to the time of the Closing through the date of discharge of such Members and (iv) any claims of members or customers of the Commercial Business who are hospitalized as of or prior to the time of the Closing through the date of discharge of such members or customers; (b) any (i) breach, as of the date of this Agreement or as of the Closing Date, of any representation or warranty of the Stockholder or the Company contained in this Agreement or any other agreement or instrument furnished by the Stockholder or the Company to the Buyer pursuant to this Agreement, (ii) write-off by the Company, prior to the date that is six months after the Closing Date, of any portion of the Closing Receivables in accordance with the normal practice of the Buyer and its subsidiaries and with generally accepted accounting principles, provided that Damages shall be deemed to accrue under this clause (ii) only after the date that is three months after the Closing Date, or (iii) failure to collect, prior to the date that is five business days before the first anniversary of the Closing Date, any of the Closing Receivables, other than those written-off as contemplated by the preceding clause (ii); (c) any failure to perform any covenant or agreement of the Stockholder or the Company contained in this Agreement (including Subsections 5.10 and 5.11) or any agreement or instrument furnished by the Stockholder or the Company to the Buyer pursuant to this Agreement; (d) any failure of the Stockholder to have good, valid and marketable title to the Shares, free and clear of any and all covenants, conditions, restrictions, voting trust arrangements, liens, charges, encumbrances, options and adverse claims or rights whatsoever; or (e) any claim by a former stockholder of the Company, or any other person or entity, seeking to assert, or based upon: (i) ownership or rights to ownership of any shares of stock of the Company; (ii) any rights of a stockholder, including preemptive rights; (iii) any rights under the Certificate of Incorporation or Bylaws of the -32- Company; or (iv) any claim that his, her or its shares were wrongfully repurchased by the Company. 8.2. Reduction Claims (a) If the Buyer is entitled, or seeks to assert rights, to a Price Reduction pursuant to this Section 8, it shall give written notification to the Stockholder of the commencement of any suit or proceeding by a person or entity other than a party hereto for which a reduction is sought (a "Third Party Action"). Such notification shall be given within 20 days after receipt by the Buyer of notice of such Third Party Action, and shall describe in reasonable detail (to the extent known by the Buyer) the facts constituting the basis for such Third Party Action and the amount of the claimed damages; provided, however, that no delay or failure on the part of the Buyer in so notifying the Stockholder shall relieve the Stockholder of any obligation to reduce the Purchase Price hereunder except to the extent of any damage or liability caused by or arising out of such failure. Within 20 days after delivery of such notification, the Stockholder may, upon written notice thereof to the Buyer, assume control of the defense of such Third Party Action with counsel reasonably satisfactory to the Buyer; provided that (i) the Stockholder may only assume control of such defense if (A) it acknowledges in writing to the Buyer that any damages, fines, costs or other liabilities that may be assessed against the Buyer in connection with such Third Party Action constitute Damages for which the Buyer shall be entitled to a Price Reduction pursuant to this Section 8 and (B) the ad damnum is less than or equal to the amount of Damages for which the Purchase Price is to be reduced pursuant to this Section 8 and (ii) the Stockholder may not assume control of the defense of a Third Party Action involving criminal liability or in which equitable relief is sought against the Buyer. If the Stockholder does not, or is not permitted under the terms hereof to, so assume control of the defense of a Third Party Action, the Buyer shall control such defense. The party not controlling the defense of the Third Party Action (the "Non-controlling Party") may participate in such defense at its own expense. The party controlling such defense (the "Controlling Party") shall keep the Non-controlling Party advised of the status of such Third Party Action and the defense thereof and shall consider in good faith recommendations made by the Non-controlling Party with respect thereto. The Non-controlling Party shall furnish the Controlling Party with such information as it may have with respect to such Third Party Action (including copies of any summons, complaint or other pleading which may have been served on such party and any written claim, demand, invoice, billing or other document evidencing or asserting the same) and shall otherwise cooperate with and assist the Controlling Party in the defense of such Third Party Action. The fees and expenses of counsel to the Buyer with respect to a Third Party Action shall be considered Damages for purposes of this Agreement if (i) the Buyer controls the defense of such Third Party Action pursuant to the terms of this paragraph (a) of Subsection 8.2 or (ii) the Stockholder assumes control of such defense and the Buyer reasonably concludes that the Stockholder and the Buyer have conflicting interests or different defenses available with respect to such Third Party Action. The Stockholder shall not agree to any settlement of, or the entry of any judgment arising from, any Third Party Action without the prior written consent of the Buyer, which shall not be unreasonably withheld, conditioned or delayed; provided that the consent of the Buyer shall not be required if the Stockholder agrees in writing to pay any amounts payable pursuant to such settlement or judgment and such settlement or judgment includes a complete release of the Buyer from further liability and has no other adverse effect on the Buyer. The Buyer shall not agree to any settlement of, or the entry of any judgment arising from, any such Third Party Action without the prior written consent of the Stockholder, which shall not be unreasonably withheld, conditioned or delayed. -33- (b) In order to seek a Price Reduction pursuant to this Section 8, the Buyer shall deliver to the Stockholder and the Escrow Agent written notification (a "Claim Notice") that contains (i) a description of the Damages incurred or reasonably expected to be incurred by the Buyer or the Company and the amount of such Damages (the "Claimed Amount"), to the extent then known, (ii) a statement that the Buyer is entitled to a Price Reduction pursuant to this Section 8 for such Damages and a reasonable explanation of the basis therefor, and (iii) a demand for payment in the amount of such Damages. (c) Within 20 days after delivery of a Claim Notice (unless such Claim Notice is delivered pursuant to paragraph (a) of Subsection 8.1, in which case within two business days after delivery of such Claim Notice), the Stockholder shall deliver to the Buyer a written response (the "Response") in which the Stockholder shall: (i) agree that the Buyer is entitled to receive a Price Reduction equal to the Claimed Amount, in which case the Stockholder and the Buyer shall deliver to the Escrow Agent, within three days following the delivery of the Response, a written notice executed by both parties instructing the Escrow Agent to distribute the Claimed Amount from the Escrow Account to the Buyer or the Company, as contemplated by paragraph (g) of this Subsection 8.2; (ii) agree that the Buyer is entitled to receive a Price Reduction equal to a part (the "Agreed Amount"), but not all, of the Claimed Amount, in which case the Stockholder and the Buyer shall deliver to the Escrow Agent, within three days following the delivery of the Response, a written notice executed by both parties instructing the Escrow Agent to distribute the Agreed Amount from the Escrow Account to the Buyer or the Company, as contemplated by paragraph (g) of this Subsection 8.2; or (iii) dispute that the Buyer is entitled to receive a Price Reduction for any of the Claimed Amount. (d) During the 30-day period following the delivery of a Response that reflects a dispute by the Stockholder of its liability for a Price Reduction for all or a part of the Claimed Amount (a "Dispute"), the Stockholder and the Buyer shall use good faith efforts to resolve the Dispute. If the Dispute is not resolved within such 30-day period, the Stockholder and the Buyer shall discuss in good faith the submission of the Dispute to binding arbitration, and if the Stockholder and the Buyer agree in writing to submit the Dispute to such arbitration, then the provisions of paragraph (e) of this Subsection 8.2 shall become effective with respect to such Dispute. The provisions of this paragraph (d) shall not obligate the Stockholder and the Buyer to submit to arbitration or any other alternative dispute resolution procedure with respect to any Dispute, and in the absence of an agreement by the Stockholder and the Buyer to arbitrate a Dispute, such Dispute shall be resolved in a state or federal court sitting in the State of New Jersey, in accordance with Subsection 11.6. The Stockholder and the Buyer shall deliver to the Escrow Agent, promptly following the resolution of the Dispute (whether by mutual agreement, arbitration, judicial decision or otherwise), a written notice executed by both parties instructing the Escrow Agent as to the amount that shall be distributed to the Buyer or the Company, as contemplated by paragraph (g) of this Subsection 8.2 (which notice shall be consistent with the terms of the resolution of the Dispute). (e) If, as set forth in paragraph (d) of this Subsection 8.2, the Buyer and the Stockholder agree to submit any Dispute to binding arbitration, the arbitration shall be conducted by a single arbitrator (the "Arbitrator") in accordance with the Commercial Rules in effect from time to time and the following provisions: (i) In the event of any conflict between the Commercial Rules in effect from time to time and the provisions of this Agreement, the provisions of this Agreement shall prevail and be controlling. -34- (ii) The parties shall commence the arbitration by jointly filing a written submission with the Newark, New Jersey office of the American Arbitration Association in accordance with Commercial Rule 5 (or any successor provision). (iii) No depositions or other discovery shall be conducted in connection with the arbitration. (iv) Not later than 30 days after the conclusion of the arbitration hearing, the Arbitrator shall prepare and distribute to the parties a writing setting forth the arbitral award and the Arbitrator's reasons therefor. Any award rendered by the Arbitrator shall be final, conclusive and binding upon the parties, and judgment thereon may be entered and enforced in any court of competent jurisdiction (subject to Subsection 11.6), provided that the Arbitrator shall have no power or authority to (x) award damages in excess of the portion of the Claimed Amount that is subject to such Dispute, (y) award multiple, consequential, punitive or exemplary damages, or (z) grant injunctive relief, specific performance or other equitable relief. (v) The Arbitrator shall have no power or authority, under the Commercial Rules or otherwise, to (x) modify or disregard any provision of this Agreement, including the provisions of paragraph (e) of this Subsection 8.3, or (y) address or resolve any issue not submitted by the parties. (vi) In connection with any arbitration proceeding pursuant to this Agreement, each party shall bear its own costs and expenses, except that the fees and costs of the American Arbitration Association and the Arbitrator, the costs and expenses of obtaining the facility where the arbitration hearing is held, and such other costs and expenses as the Arbitrator may determine to be directly related to the conduct of the arbitration and appropriately borne jointly by the parties (which shall not include any party's attorneys' fees or costs, witness fees (if any), costs of investigation and similar expenses) shall be shared equally by the Buyer and the Stockholder. (f) Notwithstanding the other provisions of this Subsection 8.2, if a third party asserts (other than by means of a lawsuit) that the Buyer is liable to such third party for a monetary or other obligation that may constitute or result in Damages for which the Buyer may be entitled to a Price Reduction pursuant to this Section 8, and the Buyer reasonably determines that it has a valid business reason to fulfill such obligation, then (i) the Buyer shall be entitled to satisfy such obligation, without prior notice to or consent from the Stockholder, (ii) the Buyer may subsequently make a claim for a Price Reduction in accordance with the provisions of this Section 8, and (iii) the Buyer shall be reimbursed, in accordance with the provisions of this Section 8, for any such Damages for which it is entitled to a Price Reduction pursuant to this Section 8 (subject to the right of the Stockholder to dispute the Buyer's entitlement to a Price Reduction, or the amount for which the Buyer is entitled to a Price Reduction, under the terms of this Section 8). (g) It is understood that, pursuant to the provisions of Subsection 8.1, a Price Reduction may result from Damages that are incurred by or attributable to the Company and that result in economic harm to the Buyer solely as the result of its status as a stockholder of the Company. In such an event, the parties agree that it is in their mutual best interests for the repayment of any such Price Reduction to be made to the Company, rather than the Buyer. In no event shall any reduction in the amount of any Damages or any Price Reduction and Damages be made to reflect the fact that the Buyer owns less than all of the outstanding capital stock of the Company. -35- 8.3.Survival of Representations and Warranties. All representations and warranties that are covered by agreements in paragraphs (a) and (b) of Subsection 8.1 shall (a) survive the Closing and (b) shall expire one year after the Closing Date. If the Buyer delivers to the Stockholder, before expiration of a representation or warranty, either a Claim Notice based upon a breach of such representation or warranty, or a notice that, as a result of a legal proceeding instituted by or written claim made by a third party, the Buyer reasonably expects to incur Damages for which it is entitled to a Price Reduction under this Section 8 based upon a breach of such representation or warranty (an "Expected Claim Notice"), then the applicable representation or warranty shall survive until, but only for purposes of, the resolution of the matter covered by such notice. If the legal proceeding or written claim with respect to which an Expected Claim Notice has been given is definitively withdrawn or resolved in favor of the Buyer, the Buyer shall promptly so notify the Stockholder; and if the Buyer has delivered a copy of the Expected Claim Notice to the Escrow Agent and funds have been retained in the Escrow Account after the Termination Date (as defined in the Escrow Agreement) with respect to such Expected Claim Notice, the Stockholder and the Buyer shall promptly deliver to the Escrow Agent a written notice executed by both parties instructing the Escrow Agent to distribute such retained funds to the Stockholder in accordance with the terms of the Escrow Agreement. The rights to a Price Reduction set forth in this Section 8 shall not be affected by (i) any investigation conducted by or on behalf of the Buyer or any knowledge acquired (or capable of being acquired) by the Buyer, whether before or after the date of this Agreement or the Closing Date, with respect to the inaccuracy or noncompliance with any representation, warranty, covenant or obligation which is the subject of a Price Reduction hereunder or (ii) any waiver by the Buyer of any closing condition relating to the accuracy of representations and warranties or the performance of or compliance with agreements and covenants. 8.4. Limitations (a) Notwithstanding anything to the contrary herein: (i) the aggregate Price Reduction for Damages under this Section 8 shall not exceed the amount of funds contained in the Escrow Account; (ii) no Price Reduction shall be made under this Section 8 with respect to a claim pursuant to clause (i) of paragraph (b) of Subsection 8.1 (other than a claim relating to a breach of the representations and warranties set forth in Subsections 2.4, 2.5 and 3.2) unless and until the aggregate Damages with respect to claims pursuant to clause (i) of paragraph (b) of Subsection 8.1 (other than as aforesaid) exceed $1,000,000; (iii) the Price Reduction for Damages under clause (iii) of paragraph (b) of Subsection 8.1 shall be reduced to the extent that any Closing Receivables that were the subject of a Price Reduction under clause (ii) of such paragraph (b) are subsequently collected prior to the fifth business day preceding the first anniversary of the Closing Date; and (iv) the aggregate Price Reduction for Damages under clauses (ii) and (iii) of paragraph (b) of Subsection 8.1 (as adjusted pursuant to the preceding clause (iii)) shall not exceed an amount equal to 25 percent of the total Closing Receivables. For purposes solely of determining the amount of Damages pursuant to this Section 8 (and not for purposes of determining the existence of a breach of a representation or warranty), all representations and warranties of the Stockholder and the Company in Sections 2 and 3 shall be -36- construed as if the terms "Company MAE," "material" and variations thereof were omitted from such representations and warranties. (b) The Escrow Agreement shall be the exclusive means for the Buyer to collect any Damages for which it is entitled to a Price Reduction under this Section 8. (c) Except with respect to claims based on fraud, after the Closing, the rights of the Buyer under this Section 8 and the Escrow Agreement shall be the exclusive remedy of the Buyer with respect to claims against the Stockholder or the Company resulting from or relating to any misrepresentation, breach of warranty or failure to perform any covenant or agreement contained in this Agreement. (d) The Stockholder shall not have any right of contribution against the Company with respect to any breach by the Company of any of its representations, warranties, covenants or agreements. The amount of the Price Reduction recoverable by the Buyer under this Section 8 with respect to a Price Reduction shall be reduced by (i) any proceeds received by the Buyer or the Company, with respect to the Damages to which the Price Reduction relates, from an insurance carrier and (ii) the amount of any tax savings actually realized by the Buyer or the Company, for the tax year in which Damages were incurred, which are clearly attributable to the Damages to which such Price Reduction relates (net of any increased tax liability that may result from the receipt of the indemnity payment or any insurance proceeds relating to such Damages). 9. Post-Closing Agreements. The Stockholder agrees that from and after the Closing Date: 9.1. Proprietary Information (a) The Stockholder and each of its affiliates (as such term is defined in the Securities Act of 1933, as amended, and the rules and regulations promulgated thereunder) (individually, an "Affiliate" and collectively "Affiliates") shall hold in confidence and shall use their Reasonable Best Efforts to have all officers, directors and personnel who continue after the Closing to be employed by such Stockholder or any Affiliate thereof to hold in confidence all knowledge and information of a secret or confidential nature with respect to the business of the Company and not to disclose, publish or make use of the same without the consent of the Buyer, except to the extent that such information shall have become public knowledge other than by breach of this Agreement by the Stockholder. (b) If (i) the employment of an officer, director or other employee of the Stockholder or any Affiliate thereof, to whom secret or confidential knowledge or information concerning the business of the Company has been disclosed, is terminated and (ii) such individual is subject to an obligation to maintain such knowledge or information in confidence after such termination, the Stockholder shall, upon request by the Buyer, take all reasonable steps at its expense to enforce such confidentiality obligation in the event of an actual or threatened breach thereof. Any legal counsel retained by the Stockholder in connection with any such enforcement or attempted enforcement shall be selected by the Stockholder, but shall be subject to the approval of the Buyer, which approval shall not be unreasonably withheld. (c) The Stockholder agrees that the remedy at law for any breach of this Subsection 9.1 would be inadequate and that the Buyer shall be entitled to injunctive relief in addition to any other remedy it may have upon breach of any provision of this Subsection 9.1. -37- 9.2. Further Assurances. At any time and from time to time after the Closing, at the Buyer's request and without further consideration, the Stockholder shall promptly execute and deliver such instruments of sale, transfer, conveyance, assignment and confirmation, and take all such other action as the Buyer may reasonably request, more effectively to transfer, convey and assign to the Buyer, and to confirm the Buyer's title to, the Shares, to assist the Buyer in exercising all rights with respect thereto and to carry out the purpose and intent of this Agreement. 9.3. No Solicitation or Hiring of Former Employees. Except as provided by law, for a period of one year after the Closing Date, neither the Stockholder nor any Affiliate thereof shall (a) solicit or otherwise induce any individual identified under the heading "Specified Employees" in the Supplemental Letter to terminate his or her employment or with the Buyer (or the Company) or to become an employee of the Stockholder or and Affiliate thereof or (b) hire any individual identified under the heading "Specified Employees" in the Supplemental Letter. 9.4. Non-Competition Agreement (a) For a period of five years after the Closing Date, the Stockholder shall not engage directly or indirectly in the ownership, management or operation of any health insurance or health benefit program, including any health maintenance organization, health care preferred provider organization or traditional indemnity program, offered to Medicaid beneficiaries through the State of New Jersey Medicaid managed care program or to beneficiaries through the Children's Health Insurance Program authorized under Title XXI of the Social Security Act, as amended, in the State of New Jersey (a "Competing Business"). Notwithstanding the foregoing, during such period the Stockholder shall be permitted to acquire, or make investments in, entities that constitute a Competing Business, provided that (i) the gross revenues of such entities' Competing Businesses are not material in the aggregate to Buyer, as Buyer's business is then conducted, and (ii) the Medicaid memberships of those entities' Competing Businesses in the Service Areas are not material in the aggregate to Buyer, as Buyer's business is then conducted. (b) The parties hereto agree that the duration and geographic scope of the non-competition provision set forth in this Subsection 9.4 are reasonable. In the event that any court of competent jurisdiction determines that the duration or the geographic scope, or both, are unreasonable and that such provision is to that extent unenforceable, the parties hereto agree that the provision shall remain in full force and effect for the greatest time period and in the greatest area that would not render it unenforceable. The parties intend that this non-competition provision shall be deemed to be a series of separate covenants, one for each and every county of each and every state of the United States of America and each and every political subdivision of each and every country outside the United States of America where this provision is intended to be effective. The Stockholder agrees that damages are an inadequate remedy for any breach of this provision and that the Buyer shall, whether or not it is pursuing any potential remedies at law, be entitled to equitable relief in the form of preliminary and permanent injunctions without bond or other security upon any actual or threatened breach of this non-competition provision. 10. Termination of Agreement 10.1. Termination by Lapse of Time. This Agreement shall terminate at 5:00 p.m., Eastern Time, on January 1, 2003, if the transactions contemplated hereby have not been consummated, unless such date is extended by the written consent of the Company, the Buyer and the Stockholder. -38- 10.2. Termination by Agreement of the Parties. This Agreement may be terminated by the mutual written agreement of the parties hereto. In the event of such termination by agreement, the Buyer shall have no further obligation or liability to the Stockholder or the Company under this Agreement, and the Stockholder shall have no further obligation or liability to the Buyer under this Agreement. 10.3. Termination by Reason of Breach. This Agreement may be terminated by the Stockholder, if at any time prior to the Closing there shall occur a breach of any of the representations, warranties or covenants of the Buyer or the failure by the Buyer to perform any condition or obligation hereunder, and may be terminated by the Buyer, if at any time prior to the Closing there shall occur a breach of any of the representations, warranties or covenants of the Stockholder or the Company or the failure of the Stockholder or the Company to perform any condition or obligation hereunder. In addition, the Stockholder may terminate this Agreement on or before August 16, 2002, in the event that Thomas Weisel Partners LLC advises the Company that it will be unable to deliver the opinion contemplated by Subsection 7.4. 10.4. Availability of Remedies at Law. In the event this Agreement is terminated by the Buyer or the Stockholder pursuant to the provisions of this Section 10, the parties hereto shall have available to them all remedies afforded to them by applicable law. 11. General 11.1. Notices. All notices, requests, demands, claims, and other communications hereunder shall be in writing. Any notice, request, demand, claim or other communication hereunder shall be deemed duly delivered four business days after it is sent by registered or certified mail, return receipt requested, postage prepaid, or one business day after it is sent for next business day delivery via a reputable nationwide overnight courier service, in each case to the intended recipient as set forth below: To the Company: University Health Plans, Inc. 555 Broad Street, 17th Floor Newark, New Jersey 07102 Attention: President To the Buyer: Centene Corporation 7711 Carondelet Avenue, Suite 800 St. Louis, Missouri 63801 Attention: President and Chief Executive Officer With a copy to: Hale and Dorr LLP 60 State Street Boston, Massachusetts 02109 Attention: Mark L. Johnson To the Stockholder: University of Medicine and Dentistry of New Jersey 65 Bergen Street Newark, New Jersey 07107 Attention: Senior Vice President, Administration and Finance With a copy to: Epstein Becker & Green, P.C. 1227 25th Street, NW, Suite 700
-39- Washington, DC 20037-1175 Attention: Robert D. Reif
Any party may give any notice, request, demand, claim or other communication hereunder using any other means (including personal delivery, expedited courier, messenger service, telecopy, telex, ordinary mail or electronic mail), but no such notice, request, demand, claim or other communication shall be deemed to have been duly given unless and until it actually is received by the party for whom it is intended. Any party may change the address to which notices, requests, demands, claims, and other communications hereunder are to be delivered by giving the other Parties notice in the manner herein set forth. 11.2. Successors and Assigns. This Agreement shall be binding upon and inure to the benefit of the parties hereto and their respective successors and assigns, except that the Buyer, on the one hand, and the Stockholder and the Company, on the other hand, may not assign their respective obligations hereunder without the prior written consent of the other party; provided, however, that the Buyer may assign this Agreement, and its rights and obligations hereunder, to a wholly owned subsidiary of the Buyer. Any assignment in contravention of this provision shall be void. No assignment shall release the Buyer, the Stockholder or the Company from any obligation or liability under this Agreement. 11.3. Entire Agreement; Amendments (a) This Agreement, the Disclosure Schedules, all Exhibits hereto, and all agreements and instruments to be delivered by the parties pursuant hereto represent the entire understanding and agreement between the parties hereto (including the Supplemental Letter) with respect to the subject matter hereof and supersede all prior oral and written and all contemporaneous oral negotiations, commitments and understandings between such parties. The Disclosure Schedule and the Exhibits attached hereto are hereby incorporated as integral parts of this Agreement. (b) This Agreement may be amended only with the written consent of each of the parties. No waiver of any right or remedy hereunder shall be valid unless the same shall be in writing and signed by the party giving such waiver. No waiver by any party with respect to any condition, default or breach of covenant hereunder shall be deemed to extend to any prior or subsequent condition, default or breach of covenant hereunder or affect in any way any rights arising by virtue of any prior or subsequent such occurrence. 11.4. Severability. Any provision of this Agreement that is invalid, illegal or unenforceable in any jurisdiction shall, as to that jurisdiction, be ineffective to the extent of such invalidity, illegality or unenforceability, without affecting in any way the remaining provisions hereof in such jurisdiction or rendering that or any other provision of this Agreement invalid, illegal or unenforceable in any other jurisdiction. 11.5. Investigation of the Parties. All representations and warranties contained herein that are made to the best knowledge of a party shall require that such party make reasonable investigation and inquiry with respect thereto to ascertain the correctness and validity thereof. 11.6. Submission to Jurisdiction. Each party (a) submits to the jurisdiction of any state or federal court sitting in Essex County, New Jersey in any action or proceeding arising out of or relating to this Agreement (including any action or proceeding for the enforcement of any arbitral award made in connection with any arbitration of a Dispute hereunder), (b) agrees that all claims in respect of such action or proceeding may be heard and determined in any such court, (c) waives any -40- claim of inconvenient forum or other challenge to venue in such court, (d) agrees not to bring any action or proceeding arising out of or relating to this Agreement in any other court and (e) waives any right it may have to a trial by jury with respect to any action or proceeding arising out of or relating to this Agreement; provided in each case that, solely with respect to any arbitration of a Dispute, the Arbitrator shall resolve all threshold issues relating to the validity and applicability of the arbitration provisions of this Agreement, contract validity applicability of statutes of limitations and issue preclusion, and such threshold issues shall not be heard or determined by such court. 11.7. Governing Law. This Agreement shall be governed by and construed in accordance with the laws of the State of New Jersey. 11.8. Construction (a) The language used in this Agreement shall be deemed to be the language chosen by the parties to express their mutual intent, and no rule of strict construction shall be applied against any party. (b) The headings of the Sections and Subsections of this Agreement are included only for convenience and shall not affect the meaning or interpretation of this Agreement. (c) References herein to Sections and Subsections shall mean such Sections and Subsections of this Agreement, except as otherwise specified. The words "herein" and "hereof" and other words of similar import refer to this Agreement as a whole and not to any particular part of this Agreement. The word "including" as used herein shall not be construed so as to exclude any other thing not referred to or described. (d) In computing any period of time under this Agreement, the day from which the designated period of time begins to run shall not be included; the last day of the period so computed shall be included, unless it is not a business day, in which event the period shall run until the end of the next day that is a business day. For purposes of this Agreement, the term "business day" shall mean the day that is not a Saturday, a Sunday or a statutory or civic holiday in either the State of Missouri or the State of New Jersey. (e) If the provisions of any Exhibit to this Agreement are inconsistent with the provisions of this Agreement, the provisions of this Agreement shall prevail. 11.9. Counterparts. This Agreement may be executed in two or more counterparts, each of which shall be deemed to be an original, but all of which shall constitute one and the same document. -41- IN WITNESS WHEREOF, this Agreement has been duly executed by the parties hereto as of and on the date first above written. UNIVERSITY HEALTH PLANS, INC. By: /s/ Alexander H. McLean ------------------------------------ Name: Alexander H. McLean Title: President and Chief Executive Officer UNIVERSITY OF MEDICINE AND DENTISTRY OF NEW JERSEY By: /s/ James A. Archibald ------------------------------------ Name: James A. Archibald Title: Senior Vice President CENTENE CORPORATION By: /s/ Michael F. Neidorff ------------------------------------ Name: Michael F. Neidorff Title: President and Chief Executive Officer -42- STOCK PURCHASE AGREEMENT DATED AS OF AUGUST 2, 2002 AMONG UNIVERSITY HEALTH PLANS, INC., UNIVERSITY OF MEDICINE AND DENTISTRY OF NEW JERSEY AND CENTENE CORPORATION -------------------------------------------------------------------------- Disclosure schedule of University Health Plans, Inc. and University of Medicine and Dentistry of New Jersey is omitted in accordance with Item 601(b)(2) of Regulation S-K. Centene Corporation will furnish supplementally a copy of the omitted disclosure schedule to the Securities and Exchange Commission upon request, provided, however, that Centene Corporation may request confidential treatment pursuant to Rule 24b-2 of the Securities Exchange Act of 1934, as amended, for certain portions of such disclosure schedule. EX-2.2 4 b44931ccexv2w2.txt INVESTOR RIGHTS AGREEMENT EXHIBIT 2.2 INVESTOR RIGHTS AGREEMENT THIS INVESTOR RIGHTS AGREEMENT dated as of December 1, 2002 (this "Agreement") is entered into among University of Medicine and Dentistry of New Jersey (the "University"), University Health Plans, Inc. (the "Company") and Centene Corporation ("Centene"). PRELIMINARY STATEMENT A. Pursuant to a Stock Purchase Agreement dated as of August 2, 2002 among the University, the Company and Centene (the "Purchase Agreement"), Centene is purchasing from the University, contemporaneously with the execution and delivery of this Agreement, a total of 16 shares (the "Initial Company Shares") of the common stock, without par value, of the Company ("Company Common"). B. Immediately after its sale of the Initial Company Shares to Centene, the University will continue to own four shares of Company Common (the "Additional Company Shares," and collectively with the Initial Company Shares, the "Company Shares"). C. Centene may, at its option, purchase the Additional Company Shares for cash within nine months after the date hereof. If Centene does not exercise such option, then, on the third anniversary of the date hereof (the "Exchange Date"), the University and Centene will exchange (the "Exchange") the Additional Company Shares for shares (the "Centene Shares") of the common stock, $0.001 par value per share ("Centene Common"), of Centene or, at the election of Centene, for cash. D. The University, the Company and Centene desire to, among other things, (1) provide for certain rights and obligations of the University and Centene in their capacities as stockholders of the Company prior to the Exchange, (2) establish the terms of the Exchange, and (3) provide for certain registration rights of the University with respect to its ownership of the Centene Shares after the Exchange. NOW, THEREFORE, in consideration of the mutual promises hereinafter set forth and other good and valuable consideration, the receipt of which is hereby acknowledged, the parties hereto hereby agree as follows: 1. Certain Definitions. As used in this Agreement, the following terms shall have the following respective meanings: "Additional Company Shares" means the four shares of Company Common as set forth in the recitals hereto, together with (a) any other Company Equity Securities issued in respect of such shares (because of stock splits, stock dividends, reclassifications, recapitalizations or similar events) and (b) any other Company Equity Securities acquired by the University or its Affiliates in accordance with Section 5. "Affiliate" means, with respect to the University or Centene, any person or entity that, directly or indirectly, controls, is controlled by or is under common control with such party, including any officer or director of such party, provided that the Company shall not be deemed to constitute an Affiliate of the University or Centene for purposes of this Agreement. "Basic Amount" means, with respect to the University or Centene, such party's pro rata portion of the Company Equity Securities determined by multiplying the number of Company Equity Securities by a fraction, the numerator of which is the aggregate number of Company Shares then held by such party and the denominator of which is the total number of Company Shares then outstanding. "Beneficiary Party" means a party entitled to indemnification by Centene pursuant to paragraph (a) of Subsection 7.4 or a party entitled to receive payment by the University pursuant to paragraph (b) of Subsection 7.4. "business day" means a day that is not a Saturday, a Sunday or a statutory or civic holiday in either the State of Missouri or the State of New Jersey. "Commission" means the Securities and Exchange Commission, or any other federal agency at the time administering the Securities Act. "Company Equity Securities" means (a) any shares of Company Common, (b) any other equity securities of the Company, including shares of preferred stock, (c) any option, warrant or other right to subscribe for, purchase or otherwise acquire any equity securities of the Company, or (d) any debt securities convertible into capital stock of the Company. "Company Sale" means: (a) a merger or consolidation in which: (i) the Company is a constituent party or (ii) a Company Subsidiary is a constituent party and the Company issues shares of its capital stock pursuant to such merger or consolidation, except any such merger or consolidation in which the holders of capital stock of the Company immediately prior to such merger or consolidation continue to hold immediately following such merger or consolidation more than 50% by voting power of the capital stock of or ownership interest in (A) the surviving or resulting entity or (B) if the surviving or resulting entity is a wholly owned subsidiary of another entity immediately following such merger or consolidation, the parent entity of such surviving or resulting entity; or (b) the sale, in a single transaction or series of related transactions, (i) by the Company of all or substantially all the assets of the Company (except where such sale is to a wholly owned subsidiary of the Company) or (ii) by the stockholders of the Company of more than 50% by voting power of the then-outstanding capital stock of the Company. "Company Subsidiary" means any corporation, partnership, trust, limited liability company or other non-corporate business enterprise in which the Company (or a Company Subsidiary) holds stock or other ownership interests representing (a) more that 50% of the voting power of all outstanding stock or ownership interests of such entity or (b) the right to receive more than 50% of the net assets of such entity available for distribution to the holders of outstanding stock or ownership interests upon a liquidation or dissolution of such entity. "Exchange Act" means the Securities Exchange Act of 1934, as amended. "Initial Company Shares" means the 16 shares of Company Common as set forth in the recitals hereto, together with (a) any other Company Equity Securities issued in respect of such shares (because of stock splits, stock dividends, reclassifications, recapitalizations or similar events) and (b) any other Company Equity Securities acquired by Centene or its Affiliates in accordance with Section 5. 2 "Notice of Acceptance" means a written notice from the University or Centene to the Company containing the information specified in Subsection 5.2. "Notice of Offer" means a written notice of any proposed or intended issuance, sale or exchange of Company Equity Securities containing the information specified in Subsection 5.1. "Notice of Proposed Transfer" means a written notice from Centene indicating its desire to Transfer any of the Initial Company Shares, or any interest in the Initial Company Shares, in any transaction pursuant to Subsection 4.1. "Offered Company Shares" means any Initial Company Shares that Centene proposes to Transfer, as indicated in a Notice of Proposed Transfer. "Offeror" means the party to which Centene proposes to Transfer any Offered Company Shares or any interest in any Offered Company Shares. "Option Period" means the period described in paragraph (a) of Subsection 4.2. "Other Holders" means holders of securities of Centene, other than the University, that are entitled, by contract with Centene, to have securities included in a Registration Statement. "Prospectus" means the prospectus included in any Registration Statement, as amended or supplemented by an amendment or prospectus supplement, including post-effective amendments, and all material incorporated by reference or deemed to be incorporated by reference in such Prospectus. "Reasonable Best Efforts" means best efforts, to the extent commercially reasonable. "Refused Securities" means those Company Equity Securities as to which a Notice of Acceptance has not been given by the University or Centene pursuant to Subsection 5.2. "Registration Statement" means a registration statement filed by Centene with the Commission for a public offering and sale of securities of Centene, other than a registration statement on Form S-8 or Form S-4, or their successor forms, or any other form for a similar limited purpose. "Registration Expenses" means all expenses incurred by Centene in complying with the provisions of Section 7, including (a) registration and filing fees, (b) fees of each securities exchange or automated quotation system on which the Centene Common is listed or quoted, (c) printing expenses, (d) fees and expenses of counsel for Centene, (e) fees and expenses of one counsel selected by the University to represent the University, up to a maximum of $10,000, (f) securities or Blue Sky fees and expenses of any state or province and (g) costs of any special audits incident to or required by any registration, but excluding underwriting discounts and selling commissions. "Registrable Shares" means (a) the Centene Shares, if any, issued to the University in the Exchange and (b) any other Centene Shares issued in respect of such shares (because of stock splits, stock dividends, reclassifications, recapitalizations or similar events), provided that any Centene Shares that are Registrable Shares shall cease to be Registrable Shares (i) upon any Transfer to a person or entity that is not entitled, pursuant to Subsection 10.3, to the rights under this Agreement or (ii) at such time as all of the Registrable Shares may be sold within a three-month period pursuant to Rule 144. 3 "Responsible Party" means Centene, to the extent obligated to provide indemnification pursuant to paragraph (a) of Subsection 7.4, and the University, to the extent obligated to make payments pursuant to paragraph (b) of Subsection 7.4. "Securities Act" means the Securities Act of 1933, as amended. "Transfer" means a sale, transfer or other disposition, whether voluntarily or by operation of law. "Undersubscription Amount" means, with respect to the University or Centene, any additional portion of the Company Equity Securities attributable to the Basic Amount of such other party as the University or Centene indicates it will purchase or acquire should such other party subscribe for less than its Basic Amount. 2. Voting of Company Shares 2.1. Voting Regarding Directors. In any and all elections of directors of the Company (whether at a meeting or by written consent in lieu of a meeting), each of the University and Centene shall vote or cause to be voted all Company Shares owned by it, or over which it has voting control, and otherwise use its respective Reasonable Best Efforts, so as to fix the number of directors of the Company at eight and to elect (a) six members designated by Centene and (b) two members designated by the University. Two of the directors initially designated by Centene are Alexander H. McLean and Michael F. Neidorff, and Centene shall provide the names of the remaining four designees to the University by December 1, 2002 or as soon thereafter as practicable. The University shall provide to Centene the names of its two initial designees by December 1, 2002 or as soon thereafter as practicable. 2.2. Limitation on Removal of Directors. Neither the University nor Centene shall vote to remove any director of the Company designated by the other pursuant to Subsection 2.1 unless (a) it is instructed to do so by such other party or (b) the director acts in bad faith or commits willful misconduct. 2.3. Limitation on Amendments of Rights. The voting rights of the University and Centene contained in this Section 2 are coupled with an interest and may not be revoked, except by an amendment or modification effected in accordance with paragraph (b) of Subsection 10.4. 2.4. Transfers of Rights. Any person or entity to which Company Shares are transferred by the University or Centene, whether voluntarily or by operation of law, shall be bound by the voting obligations imposed upon the transferor under this Agreement, to the same extent as if such transferee were the University or Centene; and no transfer of any Company Shares shall be given effect unless the transferee provides a written instrument to the Company notifying the Company of such transfer and agreeing in writing to be bound by the terms of this Agreement. 2.5. Legend. All certificates representing Company Shares owned or hereafter acquired by the University and Centene or any transferee of any such party bound by this Agreement shall have affixed thereto a legend substantially in the following form: "The shares of stock represented by this certificate are subject to certain voting agreements as set forth in an Investor Rights Agreement, a copy of which is available for inspection at the offices of the Secretary of the Company." 4 3. Restrictions on Transfers of Company Shares 3.1. Restriction. Any Transfer of any Initial Company Shares by Centene or of any Additional Company Shares by the University, other than according to the terms of this Agreement, shall be void and transfer no right, title, or interest in or to any of such Initial Company Shares to the purported transferee. 3.2. Legend. Any certificate representing Company Shares held by the University or Centene shall bear in a prominent manner the following legend: "The sale or other disposition of any of the shares represented by this certificate is restricted by an Investor Rights Agreement dated as of December 1, 2002, a copy of which is available for inspection during normal business hours at the principal executive office of this corporation." 3.3. Constructive Trust. The proceeds of any sale made by the University or Centene without compliance with the provisions of this Section 3 shall be deemed to be held in constructive trust in such amount as would have been due to the other party if the University or Centene, as the case may be, had complied with this Agreement. 3.4. Loan Agreement. The University acknowledges that Centene is required to pledge to LaSalle Bank National Association ("LaSalle") any Company Shares acquired by Centene, pursuant to the terms of a Loan Agreement dated as of May 1, 2002 between Centene and LaSalle. The University further acknowledges that (a) such pledge (and any pledge required by any successor loan agreement to which Centene is a party) does not constitute a Transfer for purposes of this Agreement and (b) subject to compliance with the second and third sentences of Subsection 10.3, the transfer of any pledged Company Shares to a lender upon a realization event with respect to such pledged Company Shares shall constitute a permitted Transfer for purposes of this Agreement, notwithstanding anything herein to the contrary. 4. Permitted Transfers of Initial Company Shares 4.1. Notice of Proposed Transfer. If Centene desires to Transfer any of the Initial Company Shares, or any interest in such Initial Company Shares, in any transaction, Centene shall first deliver to the University a Notice of Proposed Transfer as to its desire to do so, in the manner prescribed in Subsection 10.2. The Notice of Proposed Transfer must specify: (a) the name and address of the Offeror; (b) the number of Offered Company Shares; (c) the consideration per Offered Company Share to be delivered to Centene for the proposed Transfer; and (d) all other material terms and conditions of the proposed Transfer. 4.2. University's Option to Purchase (a) Subject to Subsection 4.3, the University shall have the first option to purchase all, but not less than all, of the Offered Company Shares for the consideration per Initial Company Share and on the terms and conditions specified in the Notice of Proposed Transfer. The University must give written notice to Centene, in the manner set forth in Subsection 10.2, of its intent to exercise such option by no later than 15 days after the Notice of Proposed Transfer is deemed under Subsection 10.2 to have been delivered to it. (b) In the event the University duly notifies Centene of its intent to exercise its option to purchase all of the Offered Company Shares, the closing of such purchase shall take place at the offices of Centene on the date five business days after the expiration of such 15-day period, 5 or on such other date as may be mutually agreed upon in writing by the University and Centene. 4.3. Failure to Exercise Option; Co-Sale (a) If the University does not exercise its option to purchase all of the Offered Company Shares within the Option Period, then the option of the University to purchase the Offered Company Shares arising as a result of the Notice of Proposed Transfer set forth in Subsection 4.1 shall terminate, but the University shall be entitled to sell the Additional Company Shares in the transaction pursuant to Subsection 4.1 and shall continue to have the rights set forth in Subsections 4.2 and 4.3 with regard to any subsequent proposed Transfers of Offered Company Shares. In such event, Centene shall use its Reasonable Best Efforts to interest the Offeror in purchasing, in addition to the Offered Company Shares, the Additional Company Shares the University wishes to sell. If the Offeror does not wish to purchase all of the Company Shares made available by the University and Centene, then the University and Centene shall be entitled to sell, at the price and on the terms and conditions set forth in the Notice of Proposed Transfer, a portion of the Company Shares being sold to the Offeror, in the same proportion as the respective numbers of Company Shares owned by them bears to the aggregate number of Company Shares outstanding. The transaction contemplated by the Notice of Proposed Transfer shall be consummated not later than 60 days after the expiration of the Option Period. (b) If the University does not elect to sell the full number of Additional Company Shares that it is entitled to sell pursuant to paragraph (a) of Subsection 4.3, Centene shall be entitled to sell to the Offeror, according to the terms set forth in the Notice of Proposed Transfer, that number of its Initial Company Shares that equals the difference between the number of Company Shares desired to be purchased by the Offeror and the number of Additional Company Shares that the University is entitled to sell pursuant to paragraph (a) of Subsection 4.3. If Centene wishes to Transfer any such Initial Company Shares at a price per Initial Company Share that differs from that set forth in the Notice of Proposed Transfer, upon terms different from those previously offered to the University, or more than 60 days after the expiration of the Option Period, then, as a condition precedent to such transaction, such Initial Company Shares must first be offered to the University on the same terms and conditions as given the Offeror, and in accordance with the procedures and time periods set forth above, including the opportunity for the University to elect to sell all or part of its Additional Company Shares in such revised sale transaction. 4.4. Calculation of Share Numbers. In determining the number of Company Shares owned by a party for purposes of exercising rights under this Section 4, all Company Shares held by Affiliates of such party shall be aggregated together, provided that no shares shall be attributed to more than one entity or person within any such group of affiliated entities or persons. 4.5. Limitation. The provisions of Subsections 4.1, 4.2 and 4.3 shall not apply to any sale of Company Shares pursuant to a Company Sale to the extent that the nature, and fair market value per Company Share, of the consideration deliverable or payable to the University and Centene, in their capacities as holders of Company Common, are, in all respects, identical. 5. Right of First Refusal Regarding Company Equity Securities 5.1. Notice of Offer. The Company shall not issue, sell or exchange, agree to issue, sell or exchange, or reserve or set aside for issuance, sale or exchange, any Company Equity Securities, unless in each such case the Company shall have first complied with this Section 5. The Company shall deliver to each of the University and Centene a Notice of Offer, which shall (a) identify and 6 describe the Company Equity Securities, (b) describe the price and other terms upon which they are to be issued, sold or exchanged, and the number or amount of the Company Equity Securities to be issued, sold or exchanged, (c) identify the persons or entities (if known) to which or with which the Company Equity Securities are to be offered, issued, sold or exchanged, and (d) offer to issue and sell to or exchange with the University and Centene such party's Basic Amount and Undersubscription Amount. 5.2. Notice of Acceptance. To accept a Notice of Offer in whole or in part, the University or Centene must deliver to the Company, on or prior to the date five business days after the date of delivery of the Notice of Offer, a Notice of Acceptance providing a representation letter certifying that such party is an accredited investor within the meaning of Rule 501 under the Securities Act and indicating the portion of such party's Basic Amount that such party elects to purchase and, if such party shall elect to purchase all of its Basic Amount, the Undersubscription Amount (if any) that such party elects to purchase. If the University or Centene has set forth an Undersubscription Amount in its Notice of Acceptance, and if such other party subscribes for less than its Basic Amount, the University or Centene shall be entitled to purchase, in addition to its Basic Amount, the Undersubscription Amount that is available and for which it has subscribed. 5.3. Sale of Refused Securities. The Company shall have 30 days from the expiration of the period set forth in Subsection 5.2 to issue, sell or exchange all or any part of the Refused Securities, but only to the offerees or purchasers described in the Notice of Offer (if so described therein) and only upon terms and conditions (including unit prices and interest rates) that are not more favorable, in the aggregate, to the acquiring person or persons or less favorable to the Company than those set forth in the Notice of Offer. In the event the Company shall propose to sell less than all the Refused Securities, then each of the University and Centene may, at its sole option and in its sole discretion, reduce the number or amount of the Company Equity Securities specified in its Notice of Acceptance to an amount that shall be not less than the number or amount of the Company Equity Securities that such party elected to purchase pursuant to Subsection 5.2 multiplied by a fraction, (a) the numerator of which shall be the number or amount of Company Equity Securities the Company actually proposes to issue, sell or exchange (including Company Equity Securities to be issued or sold to the University and Centene pursuant to Subsection 5.2 prior to such reduction) and (b) the denominator of which shall be the original amount of the Company Equity Securities. In the event that the University or Centene so elects to reduce the number or amount of Company Equity Securities specified in its Notice of Acceptance, the Company may not issue, sell or exchange more than the reduced number or amount of the Company Equity Securities unless and until such securities have again been offered to the University and Centene in accordance with Subsection 5.1. 5.4. Issuance of Company Equity Securities. Upon (a) the closing of the issuance, sale or exchange of all or less than all of the Refused Securities or (b) such other date agreed to by the Company and the purchaser or purchasers who have subscribed for a majority of the Company Equity Securities, such purchaser or purchasers shall acquire from the Company, and the Company shall issue to such purchaser or purchasers, the number or amount of Company Equity Securities specified in the Notice of Acceptance, as reduced pursuant to Subsection 5.3 if any of the University or Centene have so elected, upon the terms and conditions specified in the Notice of Offer. 5.5. Negotiation of Stock Purchase Agreement. The purchase by Centene or University of any Company Equity Securities is subject in all cases to the preparation, execution and delivery by the Company and Centene and/or the University of a stock purchase agreement relating to such Company Equity Securities reasonably satisfactory in form and substance to Centene and/or the University and their respective counsel. 7 5.6. Subsequent Offers. Any Company Equity Securities not acquired by the University or Centene or other persons in accordance with Subsection 5.3 may not be issued, sold or exchanged until they are again offered to the University and Centene under the procedures specified in this Agreement. 5.7. Exceptions to Right of First Refusal. The rights of the University and Centene under this Section 5 shall not apply to: (a) the issuance of any shares of Company Common as a stock dividend to holders of Company Common or upon any subdivision or combination of shares of Company Common; (b) the issuance of any shares of Company Common upon conversion of shares of convertible preferred stock of the Company; (c) the issuance of Company Equity Securities solely in consideration for the acquisition (whether by merger or otherwise) by the Company or any of its subsidiaries of all or substantially all of the stock or assets of any other entity; (d) the issuance of shares of Company Common by the Company in a firm-commitment underwritten public offering pursuant to an effective registration statement under the Securities Act; or (e) the issuance of shares of Company Common, or the grant of warrants therefor, in connection with any present or future borrowing, line of credit, leasing or similar financing arrangement approved by the Board of Directors of the Company. 6. Exchange of Additional Company Shares for Centene Shares 6.1. Terms of the Exchange. Subject to and upon the terms and conditions of this Section 6, on the Exchange Date the University shall transfer, convey, assign and deliver the Additional Company Shares (which term for purposes of this Section 6 shall exclude any Additional Company Shares previously transferred in accordance with the terms of this Agreement, but shall include any Additional Company Shares then held by Affiliates of the University) to Centene, and Centene shall acquire and accept the Additional Company Shares from the University. On the Exchange Date, the University shall deliver to Centene a certificate evidencing the Additional Company Shares, duly endorsed in blank or with a stock power duly executed by the University. This Section 6 shall not apply in the event Centene exercises the option provided in Subsection 8.1. 6.2. Consideration for the Additional Company Shares. In consideration for the transfer of the Additional Company shares by the University, Centene shall deliver to the University on the Exchange Date either, at Centene's option, (a) a number of Centene Shares equal to the Deemed Value (as defined in this Subsection 6.2) divided by the average of the daily volume weighted average trading price (the total dollar amount traded on each day divided by trading volume for such day) of the Centene Common for the twenty Trading Days immediately preceding the Exchange Date, as reported at 4:15 (New York time) on the Exchange Date as reported by Bloomberg, LP function key HP by using W to calculate the daily weighted average or (b) cash in the amount of the Deemed Value. For these purposes, "Trading Day" shall mean (i) any day on which the Centene Common is traded on the Nasdaq National Market, or (ii) if the Centene Common is not then listed or quoted on any national securities exchange, market or trading or quotation facility, then a day on which trading occurs on the New York Stock Exchange (or any successor thereto). For these purposes, the "Deemed Value" of the Additional Company Shares shall mean an amount equal to the greater of: 8 (i) an amount equal to 25 percent of the Purchase Price (as defined in the Purchase Agreement), without giving effect to any reduction or adjustment thereto applicable under the terms of the Purchase Agreement, and (ii) the enterprise value of the Company as of the Exchange Date, as established by the mutual agreement of the University and Centene (or, in the absence of such agreement, an investment bank or other appraisal firm mutually satisfactory to the University and Centene) multiplied by the percentage of the outstanding Company Common (on a fully diluted basis) represented by the Additional Company Shares. 6.3. Representations and Covenants of the University. The University represents and warrants to, and agrees with, Centene as follows: (a) The University has, and will have on the Option Closing Date or the Exchange Date (as the case may be), all requisite power and authority (corporate and other) to transfer, convey and sell the Additional Company Shares to Centene in the Exchange. Execution and delivery by the University of this Agreement, and the consummation by the University of all transactions contemplated hereunder, have been duly authorized by all requisite corporate or other action. This Agreement has been duly executed by the University. This Agreement constitutes the valid and binding obligations of the University, enforceable against the University in accordance with its terms. The execution and delivery by the University of this Agreement and the consummation by the University of the transactions contemplated hereby do not, and will not on the Option Closing Date or the Exchange Date (as the case may be), (i) conflict with or violate the provisions of any law, rule or regulation applicable to the University or any of its properties or assets, (b) conflict with or violate the provisions of the charter documents of the University, (c) require on the part of the University any notice to or filing with, or any permit, authorization, consent or approval of, any Governmental Entity (as defined in the Purchase Agreement), (d) violate any judgment, decree, order or award of any court, governmental body or arbitrator by which the University or its properties, including the Additional Company Shares, are bound, (e) conflict with, result in breach of, constitute (with or without due notice or lapse of time or both) a default under, result in the acceleration of obligations under, create in any party any right to terminate, modify or cancel, or require any notice, consent or waiver under, any contract or instrument to which the University is a party or by which it is bound or to which any of its assets, including the Additional Company Shares, are subject or (f) result in the creation of any lien, security interest, restriction or other encumbrance on the Additional Company Shares. (b) The University has, and will have on the Option Closing Date or the Exchange Date (as the case may be), good, valid and marketable title to the Additional Company Shares, free and clear of any and all covenants, conditions, restrictions, voting trust arrangements, liens, charges, encumbrances, options and adverse claims or rights whatsoever. Upon consummation of the Exchange, Centene will acquire from the University good and marketable title to the Additional Company Shares, free and clear of all covenants, conditions, restrictions, voting trust arrangements, liens, charges, encumbrances, options and adverse claims or rights whatsoever. (c) To the extent that Centene issues or proposes to issue any Centene Shares pursuant to Subsection 6.2, the University is, and will be on the Exchange Date, acquiring such Centene Shares for the University's own account for investment only and not with a view to, or for sale in connection with, any distribution of the Centene Shares in violation of the Securities Act or any rule or regulation thereunder. The University does not have, and will not have on the 9 Exchange Date, any intention of distributing or selling the Centene Shares, and the University does not have, and will not have on the Exchange Date, any agreement, undertaking, arrangement, obligation, indebtedness or commitment, whether existing or contemplated, providing for the disposition of the Centene Shares. The University is, and will be on the Exchange Date, an "accredited investor" within the meaning of Rule 501(a) under the Securities Act. The University has had, and will have had on the Exchange Date, adequate opportunity to obtain from representatives of Centene such information about Centene as is necessary for the University to evaluate the merits and risks of the University's acquisition of the Centene Shares pursuant to this Agreement. The University has, and will have on the Exchange Date, sufficient expertise in business and financial matters to be able to evaluate the risks involved in the acquisition of the Centene Shares pursuant to the Agreement and to make an informed investment decision with respect to such acquisition. The University understands that the Centene Shares (i) have not been, and will not be on the Exchange Date, registered under the Securities Act and are, and will be on the Exchange Date, "restricted securities" within the meaning of Rule 144 under the Securities Act, (ii) cannot be sold, transferred or otherwise disposed of unless they are subsequently registered under the Securities Act or an exemption from registration is then available, and (iii) will be represented by a certificate or certificates bearing a legend substantially in the following form: "The shares represented by this certificate have not been registered under the Securities Act of 1933, as amended, and may not be sold, transferred or otherwise disposed of in the absence of an effective registration statement under such Act or an opinion of counsel satisfactory to the corporation to the effect that such registration is not required." (d) At any time and from time to time after the Option Closing Date or the Exchange Date (as the case may be), at Centene's request and without further consideration, the University shall promptly execute and deliver, or cause to be executed and delivered, such consents and instruments of transfer, conveyance, assignment and confirmation, and take all such other action as Centene may reasonably request, to implement and carry out the purpose of any provision of this Agreement or to more effectively transfer, convey and assign to Centene good and marketable title to, the right to validly and lawfully hold, and to put Centene in actual possession of, the Additional Company Shares free and clear of all liens, charges, encumbrances, options and adverse claims or rights whatsoever. (e) To the extent Centene Shares are issued in the Exchange, all sales of those shares shall be effected through a brokerage firm acting as a market maker for Centene Common or such other broker-dealer as shall be agreed upon by Centene (which agreement shall not be unreasonably withheld). 6.4. Representations of Centene. Centene represents and warrants to the University as follows: (a) Centene has full power to execute and deliver this Agreement to consummate the transactions contemplated hereby. The execution and delivery of this Agreement by Centene and the consummation by Centene of the transactions contemplated hereby have been duly authorized by all requisite corporate action. This Agreement constitutes the valid and binding obligations of Centene, enforceable against Centene in accordance with its terms. The execution and delivery by Centene of this Agreement and the consummation by Centene of the transactions contemplated hereby do not, and will not on the Option Closing Date or the Exchange Date (as the case may be), (a) conflict with or violate the provisions of any law, rule 10 or regulation applicable to Centene; (b) conflict with or violate the provisions of Centene's Certificate of Incorporation or Bylaws; (c) require on the part of Centene any notice to or filing with, or permit, authorization, consent or approval of, any Governmental Entity, (d) violate any judgment, decree, order or award of any court, governmental body or arbitrator by which Centene or its properties are bound, or (e) conflict with, result in breach of, constitute (with or without due notice or lapse of time or both) a default under, result in the acceleration of obligations under, create in any party any right to terminate, modify or cancel, or require any notice, consent or waiver under, any contract or instrument to which Centene is a party or by which it is bound or to which any of its assets are subject, except in any such case for (i) compliance with applicable requirements of the Securities Act, any applicable state securities laws and the Exchange Act and (ii) approval of the State of New Jersey Department of Banking and Insurance and the New Jersey Department of Human Services, Division of Medical Assistance and Health Services of the transactions contemplated hereby. (b) Centene is, and will be on the Option Closing Date or the Exchange Date (as the case may be), acquiring the Additional Company Shares from the University for Centene's own account for investment only and not with a view to, or for sale in connection with, any distribution of the Additional Company Shares in violation of the Securities Act or any rule or regulation thereunder. Centene does not have, and will not have on the Option Closing Date or the Exchange Date (as the case may be), any intention of distributing or selling the Additional Company Shares, and Centene does not have, and will not have on the Option Closing Date or the Exchange Date (as the case may be), any agreement, undertaking, arrangement, obligation, indebtedness or commitment, whether existing or contemplated, providing for the disposition of the Additional Company Shares. Centene is, and will be on the Option Closing Date or the Exchange Date (as the case may be), an "accredited investor" within the meaning of Rule 501(a) under the Securities Act. Centene has had, and will have had on the Option Closing Date or the Exchange Date (as the case may be), adequate opportunity to obtain from representatives of the University and the Company such information about the Company as is necessary for Centene to evaluate the merits and risks of Centene's acquisition of the Additional Company Shares pursuant to this Agreement. Centene has, and will have on the Option Closing Date or the Exchange Date (as the case may be), sufficient expertise in business and financial matters to be able to evaluate the risks involved in the acquisition of the Additional Company Shares pursuant to the Agreement and to make an informed investment decision with respect to such acquisition. Centene understands that the Additional Company Shares (i) have not been, and will not be on the Option Closing Date or the Exchange Date (as the case may be), registered under the Securities Act and are, and will be on the Option Closing Date or the Exchange Date (as the case may be), "restricted securities" within the meaning of Rule 144 under the Securities Act, (ii) cannot be sold, transferred or otherwise disposed of unless they are subsequently registered under the Securities Act or an exemption from registration is then available and (iii) will be represented by a certificate or certificates bearing a legend substantially in the following form: "The shares represented by this certificate have not been registered under the Securities Act of 1933, as amended, and may not be sold, transferred or otherwise disposed of in the absence of an effective registration statement under such Act or an opinion of counsel satisfactory to the corporation to the effect that such registration is not required." (c) To the extent that Centene issues or proposes to issue any Centene Shares pursuant to Subsection 6.2, the issuance and delivery of such Centene Shares will be, prior to the 11 Exchange, duly authorized by all necessary corporate action on the part of Centene. The Centene Shares, when so issued, will be duly and validly issued, fully paid and nonassessable. (d) Centene has previously furnished or made available to the University complete and accurate copies, as amended or supplemented, of (i) its Annual Report on Form 10-K for the fiscal year ended December 31, 2001, as filed with the Commission and (ii) all other reports filed by Centene under Section 13 or subsections (a) or (c) of Section 14 of the Exchange Act with the Commission since January 1, 2002 (such reports are collectively referred to herein as the "Centene Reports"). The Centene Reports constitute all of the documents required to be filed by Centene with the Commission under Section 13 or subsections (a) or (c) of Section 14 of the Exchange Act from January 1, 2002 through the date of this Agreement. The Centene Reports complied in all material respects with the requirements of the Exchange Act and the rules and regulations thereunder when filed. As of their respective dates, the Centene Reports did not contain any untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances under which they were made, not misleading. The audited financial statements and unaudited interim financial statements of Centene included in the Centene Reports (i) complied as to form in all material respects with applicable accounting requirements and the published rules and regulations of the Commission with respect thereto when filed, (ii) were prepared in accordance with United States generally accepted accounting principles applied on a consistent basis throughout the periods covered thereby (except as may be indicated therein or in the notes thereto, and in the case of quarterly financial statements, as permitted by Form 10-Q under the Exchange Act), (iii) fairly present the consolidated financial condition, results of operations and cash flows of Centene as of the respective dates thereof and for the periods referred to therein, and (iv) are consistent with the books and records of Centene. (e) Since June 30, 2002, there has occurred no event or development that has had, or could reasonably be expected to have in the future, a material adverse change, event, circumstance or development with respect to, or material adverse effect on, the business, assets, liabilities, capitalization, prospects, condition (financial or other), or results of operations of Centene and its subsidiaries, taken as a whole. 7. Registration Rights Regarding Centene Shares 7.1. Incidental Registration (a) Whenever Centene proposes to file a Registration Statement covering Centene Shares at any time and from time to time after the Exchange Date, it will, prior to such filing, give written notice to the University of its intention to do so, provided that no such notice need be given if no Registrable Shares are to be included therein as a result of a written notice from the managing underwriter pursuant to paragraph (b) of this Subsection 7.1. (b) Whenever Centene proposes to file a Registration Statement covering Centene Shares (other than a Registration Statement covering Centene Shares to be sold solely for the account of Other Holders, which Centene Shares were acquired, or are acquirable, pursuant to (i) an acquisition of a company of which the Other Holders were formerly stockholders, (ii) a "private investment, public equity" financing or (iii) Rule 144A under the Securities Act) to be offered at any time and from time to time after the Exchange Date, it will, prior to such filing, give written notice to the University of its intention to do so, provided that no such notice need be given if no Registrable Shares are to be included therein as a result of a written notice from a managing underwriter pursuant to paragraph (b) of this Subsection 7.1. Upon the written request of the University given within five business days after Centene provides such notice, Centene shall use its Reasonable Best Efforts to cause all Registrable Shares that Centene has 12 been requested by the University to register to be registered under the Securities Act to the extent necessary to permit their sale or other disposition in accordance with the intended methods of distribution specified in the request of the University, provided that Centene shall have the right to postpone or withdraw any registration effected pursuant to this Subsection 7.1 without obligation to the University. (c) If the registration for which Centene gives notice pursuant to paragraph (a) of this Subsection 7.1 is a registered public offering involving an underwriting, Centene shall so advise the University as a part of the written notice given pursuant to paragraph (a) of this Subsection 7.1. In such event, (i) the right of the University to include its Registrable Shares in such registration pursuant to this Subsection 7.1 shall be conditioned upon the University's participation in such underwriting on the terms set forth herein and (ii) the University's entering into an underwriting agreement, including terms of indemnification, upon customary terms with the underwriter or underwriters selected for the underwriting by Centene, as may be modified by the University and the underwriters with respect to indemnification. If the University disapproves of the terms of the underwriting, the University may elect, by written notice to Centene, to withdraw its shares from inclusion in such Registration Statement. If the managing underwriter advises Centene in writing that marketing factors require a limitation on the number of shares to be underwritten, the shares held by holders other than the University and Other Holders shall be excluded from such Registration Statement to the extent deemed advisable by the managing underwriter, and, if a further reduction of the number of shares is required, the number of shares that may be included in such Registration Statement and underwriting shall be allocated among the University and Other Holders requesting registration in proportion, as nearly as practicable, to the respective number of shares of Centene Shares held by them on the date Centene gives the notice specified in paragraph (a) of this Subsection 7.1. If the University or any Other Holder would thus be entitled to include more shares than such holder requested to be registered, the excess shall be allocated among the University and Other Holders pro rata in the manner described in the preceding sentence. 7.2. Registration Procedures (a) If and whenever Centene is required by the provisions of this Agreement to use its Reasonable Best Efforts to effect the registration of any Registrable Shares under the Securities Act, Centene shall: (i) file with the Commission a Registration Statement with respect to such Registrable Shares and use its Reasonable Best Efforts to cause that Registration Statement to become effective as soon as possible; (ii) as expeditiously as possible prepare and file with the Commission any amendments and supplements to the Registration Statement and the prospectus included in the Registration Statement as may be necessary to comply with the provisions of the Securities Act (including the anti-fraud provisions thereof) and to keep the Registration Statement effective for such period as Centene may agree or determine; (iii) as expeditiously as possible furnish to the University such reasonable numbers of copies of the Prospectus, including any preliminary Prospectus, in conformity with the requirements of the Securities Act, and such other documents as the University may reasonably request in order to facilitate the public sale or other disposition of the Registrable Shares owned by the University; 13 (iv) as expeditiously as possible use its Reasonable Best Efforts to register or qualify the Registrable Shares covered by the Registration Statement under the securities or Blue Sky laws of such states as the University shall reasonably request, and do any and all other acts and things that may be necessary or desirable to enable the University to consummate the public sale or other disposition in such states of the Registrable Shares owned by the University, provided that Centene shall not be required in connection with this clause (iv) to qualify as a foreign corporation or execute a general consent to service of process in any jurisdiction; (v) as expeditiously as possible, cause all such Registrable Shares to be listed on each securities exchange or automated quotation system on which similar securities issued by Centene are then listed; (vi) promptly make available for inspection by the University, any managing underwriter participating in any disposition pursuant to such Registration Statement, and any attorney or accountant or other agent retained by any such underwriter or selected by the University, all financial and other records, pertinent corporate documents and properties of Centene and cause Centene's officers, directors, employees and independent accountants to supply all information reasonably requested by any such seller, underwriter, attorney, accountant or agent in connection with such Registration Statement; (vii) notify the University, promptly after it shall receive notice thereof, of the time when such Registration Statement has become effective or a supplement to any Prospectus forming a part of such Registration Statement has been filed; and (viii) as expeditiously as possible following the effectiveness of such Registration Statement, notify the University of any request by the Commission for the amending or supplementing of such Registration Statement or Prospectus. (b) If Centene has delivered a Prospectus to the University and, after having done so, the Prospectus is amended to comply with the requirements of the Securities Act, Centene shall promptly notify the University and, if requested, the University shall immediately cease making offers of Registrable Shares and return all Prospectuses to Centene. Centene shall promptly provide the University with revised Prospectuses and, following receipt of the revised Prospectuses, the University shall be free to resume making offers of the Registrable Shares. (c) In the event that, in the judgment of Centene, it is advisable to suspend use of a Prospectus included in a Registration Statement due to pending material developments or other events that have not yet been publicly disclosed and as to which Centene believes public disclosure would be detrimental to Centene, Centene shall notify the University to such effect, and, upon receipt of such notice, the University shall immediately discontinue any sales of Registrable Shares pursuant to such Registration Statement until the University has received copies of a supplemented or amended Prospectus or until the University is advised in writing by Centene that the then current Prospectus may be used and has received copies of any additional or supplemental filings that are incorporated or deemed incorporated by reference in such Prospectus. 7.3. Allocation of Expenses. Centene will pay, or cause to be paid, all Registration Expenses incurred by or on behalf of Centene or the University for all registrations pursuant to Subsection 7.1. 14 7.4. Indemnification, Payments and Contribution (a) In the event of any registration of any of the Registrable Shares under the Securities Act pursuant to this Agreement, Centene will indemnify and hold harmless the University, each underwriter of such Registrable Shares, and each other person, if any, who controls the University or such underwriter within the meaning of the Securities Act or the Exchange Act against any losses, claims, damages or liabilities, joint or several, to which the University and such underwriter or controlling person may become subject under the Securities Act, the Exchange Act, state securities or Blue Sky laws or otherwise, insofar as such losses, claims, damages or liabilities (or actions in respect thereof) arise out of or are based upon (i) any untrue statement or alleged untrue statement of any material fact contained in any Registration Statement under which such Registrable Shares were registered under the Securities Act, any preliminary prospectus or final prospectus contained in the Registration Statement, or any amendment or supplement to such Registration Statement, (ii) the omission or alleged omission to state a material fact required to be stated therein or necessary to make the statements therein not misleading, or (iii) any violation or alleged violation by Centene of the Securities Act, the Exchange Act, any state securities law or any rule or regulation promulgated under the Securities Act, the Exchange Act or any state securities law in connection with the Registration Statement or the offering contemplated thereby. Centene will reimburse the University, such underwriter and each such controlling person for any legal or any other expenses reasonably incurred by the University and such underwriter or controlling person in connection with investigating or defending any such loss, claim, damage, liability or action, provided that Centene will not be liable in any such case to the extent that any such loss, claim, damage or liability arises out of or is based upon any untrue statement or omission made in such Registration Statement, preliminary prospectus or prospectus, or any such amendment or supplement, in reliance upon and in conformity with information furnished to Centene, in writing, by or on behalf of the University or such underwriter or controlling person specifically for use in the preparation thereof. (b) In the event of any registration of any of the Registrable Shares under the Securities Act pursuant to this Agreement, the University will pay to Centene, each of its directors and officers, each underwriter (if any) and each person, if any, who controls Centene or any such underwriter within the meaning of the Securities Act or the Exchange Act, all or a portion of the net proceeds to the University of Registrable Shares sold in connection with such registration in the event Centene or any such director, officer, underwriter or controlling person incurs, suffers or is subject to any losses, claims, damages or liabilities, joint or several, under the Securities Act, Exchange Act, state securities or Blue Sky laws or otherwise, insofar as such losses, claims, damages or liabilities (or actions in respect thereof) arise out of or are based upon (i) any untrue statement or alleged untrue statement of a material fact contained in any Registration Statement under which such Registrable Shares were registered under the Securities Act, any preliminary prospectus or final prospectus contained in the Registration Statement, or any amendment or supplement to the Registration Statement, or (ii) any omission or alleged omission to state a material fact required to be stated therein or necessary to make the statements therein not misleading, if and to the extent (and only to the extent) that the statement or omission was made in reliance upon and in conformity with information relating to the University furnished to Centene, in writing, by the University specifically for use in connection with the preparation of such Registration Statement, prospectus, amendment or supplement. The obligations of the University hereunder shall be limited to an amount equal to the net proceeds to the University of Registrable Shares sold in connection with such registration. 15 (c) Each Beneficiary Party shall give notice to the Responsible Party promptly after such Beneficiary Party has actual knowledge of any claim as to which indemnity may be sought from Centene pursuant to paragraph (a) of this Subsection 7.4 or as to which payment may be sought from the University pursuant to paragraph (b) of this Subsection 7.4, as the case may be, and shall permit the Responsible Party to assume the defense of any such claim or any litigation resulting therefrom, provided that counsel for the Responsible Party, who shall conduct the defense of such claim or litigation, shall be approved by the Beneficiary Party (whose approval shall not be unreasonably withheld, conditioned or delayed), and, provided further that the failure of any Beneficiary Party to give notice as provided herein shall not relieve the Responsible Party of its obligations under this Subsection 7.4 except to the extent that the Responsible Party is adversely affected by such failure. The Beneficiary Party may participate in such defense at such party's expense, provided that the Responsible Party shall pay such expense if the Beneficiary Party reasonably concludes that representation of such Beneficiary Party by the counsel retained by the Responsible Party would be inappropriate due to actual or potential differing interests between the Beneficiary Party and any other party represented by such counsel in such proceeding; provided further that in no event shall the Responsible Party be required to pay the expenses of more than one law firm per jurisdiction as counsel for the Beneficiary Party. The Responsible Party also shall be responsible for the expenses of such defense if the Responsible Party does not elect to assume such defense. No Responsible Party, in the defense of any such claim or litigation shall, except with the consent of each Beneficiary Party, consent to entry of any judgment or enter into any settlement that does not include as an unconditional term thereof the giving by the claimant or plaintiff to such Beneficiary Party of a release from all liability in respect of such claim or litigation, and no Beneficiary Party shall consent to entry of any judgment or settle such claim or litigation without the prior written consent of the Responsible Party, which consent shall not be unreasonably withheld, conditioned or delayed. (d) In order to provide for just and equitable contribution in circumstances in which the indemnification provided for in paragraph (a) of this Subsection 7.4 or a payment provided for in paragraph (b) of this Subsection 7.4 is due in accordance with its terms but for any reason is held to be unavailable to an Beneficiary Party in respect to any losses, claims, damages and liabilities referred to herein, then the Responsible Party shall, in lieu of indemnifying or paying such Beneficiary Party (as the case may be), contribute to the amount paid or payable by such Beneficiary Party as a result of such losses, claims, damages or liabilities to which such party may be subject in such proportion as is appropriate to reflect the relative fault of Centene on the one hand and the University on the other in connection with the statements or omissions that resulted in such losses, claims, damages or liabilities, as well as any other relevant equitable considerations. Any such contribution by the University shall be made from the net proceeds to the University of Registrable Shares sold in connection with such registration. The relative fault of the University and Centene shall be determined by reference to, among other things, whether the untrue or alleged untrue statement of material fact related to information supplied by the University or Centene and the parties' relative intent, knowledge, access to information and opportunity to correct or prevent such statement or omission. the University and Centene agree that it would not be just and equitable if contribution pursuant to this paragraph (d) were determined by pro rata allocation or by any other method of allocation that does not take account of the equitable considerations referred to above. Notwithstanding the provisions of this paragraph (d), (i) in no case shall the University be liable or responsible for any amount in excess of the net proceeds received by the University from the offering of Registrable Shares and (ii) Centene shall be liable and responsible for any amount in excess of such proceeds, provided that no person guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of the Securities Act) shall be entitled to contribution from any person who was not guilty of such fraudulent misrepresentation. Any party entitled to 16 contribution will, promptly after receipt of notice of commencement of any action, suit or proceeding against such party in respect of which a claim for contribution may be made against another party or parties under this paragraph (d), notify such party or parties from whom contribution may be sought, but the omission so to notify such party or parties from whom contribution may be sought shall not relieve such party from any other obligation it or they may have thereunder or otherwise under this paragraph (d). No party shall be liable for contribution with respect to any action, suit, proceeding or claim settled without its prior written consent, which consent shall not be unreasonably withheld, conditioned or delayed. (e) The rights and obligations of the University and Centene under this Subsection 7.4 shall survive the termination of this Agreement. 7.5. Information from the University. The University shall furnish to Centene such information regarding the University and the distribution proposed by the University as Centene may reasonably request in writing and as shall be required in connection with any registration, qualification or compliance referred to in this Section 7. 7.6. "Lock-Up" Agreement; Confidentiality of Notices (a) The University, if requested by Centene or the managing underwriter of any registered offering of Centene Common at any time at which the University holds Registrable Shares, shall not Transfer any shares of Centene Common held by the University for a period of 90 days following the effective date of the Registration Statement relating to such offering, provided that all executive officers and directors of Centene enter into similar agreements. Centene may impose stop-transfer instructions with respect to any shares of Centene Common subject to the foregoing restriction until the end of such 90-day period. (b) The University shall treat any written notice from Centene regarding Centene's plans to file a Registration Statement as confidential and shall not disclose such information to any person other than as necessary to exercise its rights under this Agreement. 7.7. Rule 144 Requirements. Centene agrees to: (a) make and keep current public information about Centene available, as those terms are understood and defined in Rule 144; (b) use its Reasonable Best Efforts to file with the Commission in a timely manner all reports and other documents required of Centene under the Securities Act and the Exchange Act; and (c) furnish to the University upon request (i) a written statement by Centene as to its compliance with the reporting requirements of Rule 144 and the Exchange Act and (ii) such other reports and documents of Centene as the University may reasonably request to avail itself of any similar rule or regulation of the Commission allowing it to sell any Registrable Shares without registration. 8. Centene's Option to Purchase Additional Company Shares 8.1. Terms of Purchase. Subject to and upon the terms and conditions of this Section 8, Centene shall have the option to purchase all, but not less than all, of the Additional Company Shares from the University for cash consideration per Additional Company Share equal to 6.25 percent of the Purchase Price (as defined in the Purchase Agreement), without giving effect to any reduction or adjustment thereto applicable under the terms of the Purchase Agreement. 17 8.2. Exercise of Option If Centene desires to exercise the option set forth in Subsection 8.1, Centene shall deliver to the University a notice as to its desire to do so, in the manner prescribed in Subsection 10.2. The notice must specify the date on which such purchase shall be effected (the "Option Closing Date"), which Option Closing Date shall be a business day occurring (a) no earlier than 15 days after such notice is deemed under Section 10.2 to have been delivered to the University and (b) no later than nine months after the date hereof. 8.3. Closing. In the event duly Centene notifies the University of its intent to exercise its option set forth in Subsection 8.1, the closing of the purchase of the Additional Company Shares shall take place at the offices of Centene on the Option Closing Date or on such other date as may be mutually agreed upon in writing by the University and Centene. On the Option Closing Date the University shall transfer, convey, assign and deliver the Additional Company Shares (which term for purposes of this Section 8 shall exclude any Additional Company Shares previously transferred in accordance with the terms of this Agreement, but shall include any Additional Company Shares then held by Affiliates of the University) to Centene, and Centene shall acquire and accept the Additional Company Shares from the University. On the Option Closing Date, the University shall deliver to Centene a certificate evidencing the Additional Company Shares, duly endorsed in blank or with a stock power duly executed by the University. 9. Covenants 9.1. Negative Covenants. So long as the University owns five percent or more of the outstanding Company Common, the Company shall not, without prior written consent of the University: (a) declare or pay any dividend or make any distribution (other than dividends on Company Common payable solely in Company Common); (b) apply any of its assets to the redemption, retirement, purchase or acquisition, directly or indirectly (including through a Company Subsidiary), or otherwise, of any shares of Company Common; (c) authorize, designate or issue any class of preferred stock of the Company; (d) amend any management agreement between Centene (or any Affiliate of Centene) and the Company; (e) amend or repeal any provision of, or add any provision to, the Company's Certificate of Incorporation or Bylaws; or (f) enter into any agreement with any stockholder, officer or director of the Company, or any Affiliate of any such person, including any agreement or other arrangement providing for the furnishing of services by, rental of real or personal property from, or otherwise requiring payments to, any such person or entity, unless the Board of Directors of the Company has unanimously determined that the terms of such agreement are equivalent to those that would have been determined though arm's-length negotiations with an unrelated person or entity. 9.2. Limitation on Issuances of Company Equity Securities. Notwithstanding anything herein (including in Subsection 5.1) to the contrary, the Company shall not, without the consent of the University, issue any Company Equity Securities for cash if (a) the Company has not generated more than $500,000,000 in total revenues during any period of 12 consecutive months and, as a result of such issuance, the University would own less than five percent of the outstanding Company 18 Common (on a fully diluted basis) or (b) the Company has not generated more than $750,000,000 in total revenues during any period of 12 consecutive months and, as a result of such issuance, the University would own less than four percent of the outstanding Company Common (on a fully diluted basis). 9.3. Limitation on Expansion. Centene shall not acquire, initiate or otherwise operate, directly or indirectly through a subsidiary, any Medicaid-related business in the State of New Jersey that competes with the business of the Company, other than through the Company and Company Subsidiaries. 9.4. Financial Statements and Other Information. Until such time as the University no longer holds any of the Additional Company Shares: (a) The Company shall deliver to the University and Centene as promptly as practicable following the last day of each fiscal year of the Company, and in any event within 90 days after the end of each such fiscal year, (i) the unaudited statutory statement of admitted assets, liabilities and surplus of the Company as of the last day of the fiscal year then ended and the unaudited statutory statements of income, changes in surplus, and cash flows of the Company for such fiscal year and (ii) the unaudited balance sheet of the Company as of the last day of the fiscal year then ended and the unaudited statements of operations and cash flows of the Company as of such fiscal year. The financial statements delivered pursuant to clause (i) above shall be prepared in accordance with accounting practices prescribed or permitted by the State of New Jersey Department of Banking and Insurance applied on a basis consistent throughout the periods covered, and shall fairly present, in all material respects, the admitted assets, liabilities and surplus as of the respective dates thereof and the results of operations and cash flows of the Company for the periods referred to therein, on the basis of the accounting described in the respective notes thereto, and shall be consistent with the books and records of the Company. The financial statements delivered pursuant to clause (ii) above shall be prepared in accordance with United States generally accepted accounting principles applied on a basis consistent throughout the periods covered thereby, fairly present the financial condition, results of operations and cash flows of the Company as of the respective dates thereof and for the periods referred to therein, and be consistent with the books and records of the Company, provided that such financial statements shall be subject to normal recurring year-end adjustments (which shall not be material) and do not include all footnotes required by such generally accepted accounting principles. (b) The Company shall deliver to the University and Centene as promptly as practicable following the last day of each calendar month after the date hereof (other than the final month of any fiscal year), and in any event within 30 days after the end of each such month, (i) an unaudited balance sheet as of the end of such month, (ii) unaudited statements of operations and cash flows for such month and for the portion of the fiscal year ending as of the end of such month, and (iii) a calculation of statutory net worth requirement for the portion of the fiscal year ending as of the end of such month. Each set of unaudited financial statements delivered pursuant to clauses (i) and (ii) above shall be prepared in accordance with United States generally accepted accounting principles applied on a basis consistent with the periods covered by the financial statements, shall fairly present the financial condition, results of operations and cash flows of the Company as of the respective dates thereof and for the periods referred to therein, and shall be consistent with the books and records of the Company, provided that such unaudited financial statements may be subject to normal recurring year-end adjustments (which shall not be material) and need not include all footnotes required under such principles. 19 9.5. Board of Directors (a) The Company shall promptly reimburse in full each director of the Company who is not an employee of the Company for all of his or her reasonable out-of-pocket expenses incurred in attending each meeting of the Board of Directors of the Company or any committee thereof. (b) The Company's Certificate of Incorporation shall at all times provide for the indemnification of the directors of the Company to the fullest extent provided by the law of the jurisdiction in which the Company is organized. In the event that the Company or any of its successors or assigns (i) consolidates with or mergers into any other entity and shall not be the continuing or surviving corporation in such consolidation or merger or (ii) transfers or conveys all or substantially all of its properties and assets to any entity, then, and in each such case, to the extent necessary, proper provision shall be made so that the successors and assigns of the Company assume the obligations of the Company with respect to indemnification of directors of the Company as contained in the Company's Certificate of Incorporation. 9.6. Surplus Allocation. In the event the Company acquires all or substantially all of the capital stock or assets of a company or business providing Medicaid-related programs and services, and in the event that the Board of Directors of the Company subsequently determines to distribute to the Company's stockholders any reserve in excess of statutory requirements, the University shall be entitled to receive a percentage of such distribution equal to 1.4 multiplied by the percentage of common stock of the Company (on a fully diluted basis) then held by the University, provided that the rights of the University set forth in this Subsection 9.6 will terminate upon the termination or expiration of the provider agreement between the Company and University Hospital. Notwithstanding the foregoing, it is understood that the Board of Directors of the Company will not consider any distribution of excess reserves to stockholders except to the extent the amount of the reserves exceeds 140% of the applicable statutory requirement. 10. General 10.1. Termination. The provisions of Sections 1 through 5, 8 and 9 shall terminate as of the earliest to occur of (a) the Option Closing Date, (b) the Exchange Date and (c) a Company Sale. The provisions of Section 7 shall terminate as of the first date on which the University and its permitted assigns no longer hold any Registrable Shares, except that all rights and obligations accruing to the parties under the provisions of Subsections 7.3 and 7.4 prior to such date shall continue and not terminate. The provisions of Subsection 9.2 shall terminate as of the first date on which the University no longer holds any Additional Company Shares. 10.2. Notices. All notices, requests, demands, claims, and other communications hereunder shall be in writing. Any notice, request, demand, claim or other communication hereunder shall be deemed duly delivered four business days after it is sent by registered or certified mail, return receipt requested, postage prepaid, or one business day after it is sent for next business day delivery via a reputable nationwide overnight courier service, in each case to the intended recipient as set forth below: To the University: University of Medicine and Dentistry of New Jersey 65 Bergen Street Newark, New Jersey 07107 Attention: Senior Vice President, Administration and Finance 20 With a copy to: Epstein Becker & Green, P.C. 1227 25th Street, NW, Suite 700 Washington, DC 20037-1175 Attention: Robert D. Reif To the Company: University Health Plans, Inc. 555 Broad Street, 17th Floor Newark, New Jersey 07102 Attention: President To Centene: Centene Corporation 7711 Carondelet Avenue, Suite 800 St. Louis, Missouri 63801 Attention: President and Chief Executive Officer With a copy to: Hale and Dorr LLP 60 State Street Boston, Massachusetts 02109 Attention: Mark L. Johnson Any party may give any notice, request, demand, claim or other communication hereunder using any other means (including personal delivery, expedited courier, messenger service, telecopy, telex, ordinary mail or electronic mail), but no such notice, request, demand, claim or other communication shall be deemed to have been duly given unless and until it actually is received by the party for whom it is intended. Any party may change the address to which notices, requests, demands, claims, and other communications hereunder are to be delivered by giving the other parties notice in the manner herein set forth. 10.3. Successors, Assigns and Transferees. This Agreement shall be binding upon and inure to the benefit of the parties hereto and their respective successors and permitted assigns. No party may assign its rights and obligations hereunder except that the University or Centene may assign their respective rights and obligations hereunder to (a) any person or entity to which Company Shares are transferred by such party, or (b) to any Affiliate of such party, and, in each case, such transferee shall be deemed a "party" for purposes of this Agreement, provided that such assignment of rights shall be contingent upon the transferee providing a written instrument to the Company notifying the Company of such transfer and assignment and agreeing in writing to be bound by the terms of this Agreement. Notwithstanding the foregoing, any person or entity to which any Company Shares or Registrable Shares are transferred by a party hereto, whether voluntarily or by operation of law, shall be bound by the terms of this Agreement to the same extent as if such transferee were a party hereunder and no party hereto shall transfer any Company Shares or Registrable Shares unless the transferee provides a written instrument to the Company notifying the Company of such transfer and agreeing in writing to be bound by the terms of this Agreement. Any assignment in contravention of this provision shall be void. 10.4. Entire Agreement; Amendments. (a) This Agreement represents the entire understanding and agreement between the parties hereto with respect to the subject matter hereof and supersedes all prior oral and written and all contemporaneous oral negotiations, commitments and understandings between such parties, except as contemplated by the Purchase Agreement. 21 (b) This Agreement may be amended only with the written consent of the University, the Company and Centene. No waiver of any right or remedy hereunder shall be valid unless the same shall be in writing and signed by the party giving such waiver. No waiver by any party with respect to any condition, default or breach of covenant hereunder shall be deemed to extend to any prior or subsequent condition, default or breach of covenant hereunder or affect in any way any rights arising by virtue of any prior or subsequent such occurrence. 10.5. Severability. Any provision of this Agreement that is invalid, illegal or unenforceable in any jurisdiction shall, as to that jurisdiction, be ineffective to the extent of such invalidity, illegality or unenforceability, without affecting in any way the remaining provisions hereof in such jurisdiction or rendering that or any other provision of this Agreement invalid, illegal or unenforceable in any other jurisdiction. 10.6. Specific Performance. In addition to any and all other remedies that may be available at law in the event of any breach of this Agreement, each party hereto shall be entitled to specific performance of the agreements and obligations of the Company hereunder and to such other injunctive or other equitable relief as may be granted by a court of competent jurisdiction. 10.7. Submission to Jurisdiction. Each party (a) submits to the jurisdiction of any state or federal court sitting in Essex County, New Jersey in any action or proceeding arising out of or relating to this Agreement (including any action or proceeding for the enforcement of any arbitral award made in connection with any arbitration of a Dispute hereunder), (b) agrees that all claims in respect of such action or proceeding may be heard and determined in any such court, (c) waives any claim of inconvenient forum or other challenge to venue in such court, (d) agrees not to bring any action or proceeding arising out of or relating to this Agreement in any other court and (e) waives any right it may have to a trial by jury with respect to any action or proceeding arising out of or relating to this Agreement; provided in each case that, solely with respect to any arbitration of a Dispute, the Arbitrator shall resolve all threshold issues relating to the validity and applicability of the arbitration provisions of this Agreement, contract validity applicability of statutes of limitations and issue preclusion, and such threshold issues shall not be heard or determined by such court. 10.8. Governing Law. This Agreement shall be governed by and construed in accordance with the laws of the State of New Jersey. 10.9. Construction (a) The language used in this Agreement shall be deemed to be the language chosen by the parties to express their mutual intent, and no rule of strict construction shall be applied against any party. (b) The headings of the Sections and Subsections of this Agreement are included only for convenience and shall not affect the meaning or interpretation of this Agreement. (c) References herein to Sections and Subsections shall mean such Sections and Subsections of this Agreement, except as otherwise specified. The words "herein" and "hereof" and other words of similar import refer to this Agreement as a whole and not to any particular part of this Agreement. The word "including" as used herein shall not be construed so as to exclude any other thing not referred to or described. (d) In computing any period of time under this Agreement, the day from which the designated period of time begins to run shall not be included; the last day of the period so computed shall be included, unless it is not a business day, in which event the period shall run until the end of the next day that is a business day. 22 10.10. Counterparts. This Agreement may be executed in two or more counterparts, each of which shall be deemed to be an original, but all of which shall constitute one and the same document. [Remainder of page intentionally blank] 23 IN WITNESS WHEREOF, this Agreement has been duly executed by the parties hereto as of and on the date first above written. UNIVERSITY OF MEDICINE AND DENTISTRY OF NEW JERSEY By:/s/ Denise Mulkern ----------------------------------------- Denise Mulkern Acting Senior Vice President, Administration and Finance UNIVERSITY HEALTH PLANS, INC. By:/s/ Alexander H. McLean ----------------------------------------- Alexander H. McLean President and Chief Executive Officer CENTENE CORPORATION By:/s/ Michael F. Neidorff ----------------------------------------- Michael F. Neidorff President and Chief Executive Officer 24 -----END PRIVACY-ENHANCED MESSAGE-----