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