Amerigroup 10-Q 2002 Q3 Quarterly report

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2002

COMMISSION FILE NO. 000-23087

AMERIGROUP CORPORATION

4425 Corporation Lane

Virginia Beach, VA 23462

(757) 490-6900

Delaware	54-1739323
(State or Other Jurisdiction of	(I.R.S. Employer
Incorporation or Organization)	Identification No.)

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yesx No¨

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

As of October 25, 2002, there were 20,428,945 shares outstanding of AMERIGROUP’s common stock, par value $0.01.

AMERIGROUP CORPORATION AND SUBSIDIARIES

TABLE OF CONTENTS

PART I.    FINANCIAL INFORMATION

Item 1.	Financial Statements (unaudited) Condensed Consolidated Balance Sheets—September 30, 2002 and December 31, 2001	3
	Condensed Consolidated Income Statements—For the three and nine month periods ended September 30, 2002 and 2001	4
	Condensed Consolidated Statements of Cash Flows—For the three and nine month periods ended September 30, 2002 and 2001	5
	Notes to Condensed Consolidated Financial Statements	6
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	9
Item 3.	Quantitative and Qualitative Disclosures about Market Risk	14
Item 4.	Controls and Procedures	14
	PART II.    OTHER INFORMATION
Item 1.	Legal Proceedings	15
Item 2.	Change in Securities and Use of Proceeds	15
Item 3.	Defaults upon Senior Securities	15
Item 4.	Submission of Matters to a Vote of Security Holders	15
Item 5.	Other Information	15
Item 6.	Exhibits and Reports on Form 8-K	16

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PART I. FINANCIAL INFORMATION

Item 1.    Financial Statements

AMERIGROUP CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(Dollars in thousands)

	September 30, 2002			December 31, 2001
	(unaudited)			(note)
ASSETS
Current assets:
Cash and cash equivalents	$	255,931		$	183,900
Short-term investments		44,080			55,230
Premium receivables		33,115			29,301
Deferred income taxes		7,575			4,518
Prepaid expenses and other current assets		5,900			7,416
Total current assets		346,601			280,365
Property and equipment, net of accumulated depreciation of $14,850 and $9,845 at September 30, 2002 and December 31, 2001, respectively		18,798			15,014
Software, net of accumulated amortization of $8,788 and $4,738 at September 30, 2002 and December 31, 2001, respectively		10,841			9,581
Goodwill, net		26,031			19,407
Long-term investments		65,206			62,707
Investments on deposit for licensure		29,554			18,501
Other long-term assets		2,745			1,367
	$	499,776		$	406,942
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Claims payable	$	200,214		$	180,346
Unearned revenue		25,956			240
Accounts payable		3,777			6,295
Accrued expenses and other current liabilities		40,561			33,678
Total current liabilities		270,508			220,559
Deferred income taxes and other long-term liabilities		5,278			2,867
Total liabilities		275,786			223,426
Stockholders’ equity:
Common stock, $.01 par value. Authorized 60,000,000 shares; issued and outstanding 20,427,715 and 19,851,690 at September 30, 2002 and December 31, 2001, respectively		204			199
Additional paid-in capital		173,624			168,676
Retained earnings		50,668			15,416
Deferred compensation		(506	)		(775	)
Total stockholders’ equity		223,990			183,516
	$	499,776		$	406,942

Note: The balance sheet at December 31, 2001 has been derived from the audited consolidated financial statements at that date but does not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements.

See accompanying notes to condensed consolidated financial statements.

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AMERIGROUP CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED INCOME STATEMENTS

(Unaudited, dollars in thousands, except for per share data)

	Three months ended September 30,				Nine months ended September 30,
	2002		2001		2002		2001
Revenues:
Premium	$297,025		$236,642		$844,688		$631,472
Investment income	2,030		2,445		6,090		8,550
Total revenues	299,055		239,087		850,778		640,022
Expenses:
Health benefits	240,407		192,485		684,889		506,880
Selling, general and administrative	33,927		27,442		96,166		79,652
Depreciation and amortization	3,412		2,396		9,397		6,719
Interest	207		221		576		633
Total expenses	277,953		222,544		791,028		593,884
Income before income taxes	21,102		16,543		59,750		46,138
Income tax expense	(8,652	)	(6,948	)	(24,498	)	(19,378	)
Net income	12,450		9,595		35,252		26,760
Accretion of redeemable preferred stock dividends	—		(1,821	)	—		(5,463	)
Net income attributable to common stockholders	$  12,450		$    7,774		$  35,252		$  21,297
Net income per share :
Basic net income per share	$      0.61		$      7.47		$      1.75		$    20.71
Weighted average number of common shares outstanding	20,333,897		1,040,911		20,089,289		1,028,487
Diluted net income per share	$      0.58		$      0.58		$      1.65		$      1.61
Weighted average number of common shares and potential dilutive common shares outstanding	21,478,501		15,985,161		21,405,391		15,925,470

See accompanying notes to condensed consolidated financial statements.

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AMERIGROUP CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited, dollars in thousands)

	Three months ended September 30,						Nine months ended September 30,
	2002			2001			2002			2001
Cash flows from operating activities:
Net income	$	12,450		$	9,595		$	35,252		$	26,760
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization		3,412			2,396			9,397			6,719
Deferred tax expense (benefit)		(2,979	)		93			(2,121	)		(332	)
Amortization of deferred compensation		89			90			269			270
Changes in assets and liabilities increasing (decreasing) cash flows from operations:
Premium receivables		4,555			(1,861	)		(3,814	)		(13,039	)
Prepaid expenses and other current assets		797			165			1,516			1,746
Other assets		(660	)		85			(1,590	)		98
Unearned revenue		25,596			234			25,716			234
Claims payable		12,453			10,738			19,868			22,864
Accounts payable and accrued expenses and other current liabilities		4,325			7,861			6,302			10,322
Other long-term liabilities		35			(150	)		653			(150	)
Net cash provided by operating activities		60,073			29,246			91,448			55,492
Cash flows from investing activities:
Proceeds from redemption of held-to-maturity securities		66,367			62,302			171,421			119,977
Purchase of held-to-maturity securities		(29,135	)		(79,950	)		(173,270	)		(160,046	)
Purchase of property, equipment and software		(4,438	)		(1,587	)		(10,693	)		(4,511	)
Proceeds from sale of investments on deposit for licensure		6,904			3,000			13,640			18,009
Purchase of investments on deposit for licensure		(6,899	)		(3,003	)		(14,193	)		(23,729	)
Purchase of contract rights and related assets		(101	)		(1,043	)		(6,624	)		(1,043	)
Net cash provided by (used in) investing activities		32,698			(20,281	)		(19,719	)		(51,343	)
Cash flows from financing activities:
Payment of capital lease obligations		(595	)		(378	)		(1,778	)		(822	)
Change in bank overdrafts		1,907			260			(543	)		(171	)
Payment of debt		—			(500	)		—			(1,500	)
Proceeds from exercise of common stock options		1,499			15			2,623			152
Net cash provided by (used in) financing activities		2,811			(603	)		302			(2,341	)
Net increase in cash and cash equivalents		95,582			8,362			72,031			1,808
Cash and cash equivalents at beginning of period		160,349			126,128			183,900			132,662
Cash and cash equivalents at end of period	$	255,931		$	134,470		$	255,931		$	134,470
Supplemental disclosures of cash flow information:
Cash paid for interest	$	187		$	208		$	480		$	633
Cash paid for income taxes	$	10,940		$	80		$	19,715		$	8,069
Supplemental disclosures of non-cash activities:
Property and equipment acquired under capital lease	$	399		$	424		$	3,534		$	4,594

See accompanying notes to condensed consolidated financial statements.

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AMERIGROUP CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

1.    The accompanying condensed consolidated financial statements of AMERIGROUP Corporation and subsidiaries have been prepared without audit. In our opinion, they include all normal recurring adjustments necessary for a fair presentation of the results of operations for the three and nine month periods ended September 30, 2002 and 2001 in accordance with the rules and regulations of the Securities and Exchange Commission. Although certain information and footnote disclosures normally included in financial statements presented in accordance with generally accepted accounting principles have been condensed or omitted, we believe the disclosures made are adequate to make the information presented not misleading. However, the condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in our Annual Report on Form 10-K filed with the Securities and Exchange Commission on March 12, 2002. The results of operations for the three and nine month periods ended September 30, 2002 are not necessarily indicative of the results for a full year because of the impact of seasonal and short-term variations. Certain prior period amounts have been reclassified to conform with the current period presentation.

On June 30, 2000, our Board of Directors and our stockholders approved a one-for-two reverse stock split of our common stock which was effected on November 9, 2001 in connection with the closing of the initial public offering. All agreements concerning stock options and warrants to purchase common stock provide for adjustments in the number of options or warrants and the related exercise price in the event of the declaration of a reverse stock split. All references to number of shares, except shares authorized, to common stock per share information, except par value per share, and to stock options and warrants to purchase common stock in the condensed consolidated financial statements have been restated to reflect the stock split on a retroactive basis.

On November 9, 2001, we completed our initial public offering of 4,985,000 shares of common stock including an over-allotment issuance of 585,000 shares at a price per share of $17.00. We received net proceeds from the offering of approximately $77.2 million. In conjunction with the offering, all Series A, B, C and D preferred stock in the aggregate was converted into 12,607,880 shares of common stock. We used proceeds from the offering to repay the balance of our long-term debt facility of approximately $4.4 million and to redeem the Series E mandatorily redeemable preferred stock for approximately $13.3 million. In addition, 1,123,823 shares of common stock were issued upon the exercise of all outstanding Series E warrants.

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AMERIGROUP CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

2.    Basic earnings per common share is computed by dividing net income attributable to common stockholders by the weighted average number of shares of common stock outstanding. Diluted earnings per common share is computed by dividing net income attributable to common stockholders plus the accretion of convertible preferred stock dividends by the weighted average number of shares of common stock outstanding plus other potentially dilutive securities. The following table sets forth the calculation of basic and diluted net income per share (dollars in thousands, except per share data):

	For the Three months ended September 30,				For the Nine months ended September 30,
	2002		2001		2002		2001
Basic net income per share:
Net income attributable to common stockholders	$	12,450	$	7,774	$	35,252	$	21,297
Weighted average number of common shares outstanding		20,333,897		1,040,911		20,089,289		1,028,487
Basic earnings per share	$	0.61	$	7.47	$	1.75	$	20.71
Diluted net income per share:
Net income attributable to common stockholders	$	12,450	$	7,774	$	35,252	$	21,297
Plus: Accretion of convertible preferred stock dividends due to assumed conversion		—		1,435		—		4,305
Diluted net income attributable to common stockholders	$	12,450	$	9,209	$	35,252	$	25,602
Weighted average number of common shares outstanding		20,333,897		1,040,911		20,089,289		1,028,487
Dilutive effect of stock options and warrants (as determined by applying the treasury stock method) and convertible preferred stock		1,144,604		14,944,250		1,316,102		14,896,983
Weighted average number of common shares and potential dilutive common shares outstanding		21,478,501		15,985,161		21,405,391		15,925,470
Diluted earnings per share	$	0.58	$	0.58	$	1.65	$	1.61

As of September 30, 2002, we had 2,557,661 options outstanding with a weighted average exercise price of $14.53.

3.    On August 21, 2002, we entered into an agreement to acquire PHP Holdings, Inc. and its subsidiary, Physicians Healthcare Plans, Inc. (together, PHP) for approximately $121 million. It is anticipated that approximately $60 million of the purchase price will be financed through AMERIGROUP’s existing credit facility with the balance funded through available unrestricted cash. The transaction is subject to receipt of regulatory approvals, and other customary conditions to closing. Subject to meeting all of these conditions, the transaction is expected to become effective in the first quarter of 2003. Under the agreement, AMERIGROUP will serve all of PHP’s Medicaid and SCHIP members and operate under the name AMERIGROUP Florida, Inc. PHP currently operates in 12 counties in central and south Florida, including the Miami/Ft. Lauderdale, Orlando and Tampa metropolitan areas. As of August 1, 2002, PHP had a Medicaid and SCHIP enrollment of approximately 184,000 members.

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AMERIGROUP CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

4.    In July 2002, we expanded the Credit and Guaranty Agreement entered into in November 2001 to include a fourth bank and to increase the revolving credit facility to $75 million from $60 million. The facility, which is currently undrawn, is collateralized by the assets of AMERIGROUP Corporation and by the common stock of its wholly owned subsidiaries.

5.    Effective July 1, 2002, we purchased Capital Community Health Plan’s (CCHP) Washington, D.C. Medicaid line of business. The assets purchased consisted of CCHP’s rights to provide managed care services to its Medicaid members, as well as certain provider agreements. In June 2002, approximately $6.8 million was placed in escrow for the acquisition.

6.    Effective January 1, 2002, we purchased MethodistCare, Inc.’s (MethodistCare) Houston, Texas Medicaid line of business for approximately $1.6 million. The assets purchased consisted of MethodistCare’s rights to provide managed care services to its Medicaid members, as well as certain provider agreements.

7.    In July 2001, Statement of Financial Accounting Standards No. 142,Goodwill and Other Intangible Assets(SFAS No. 142), was issued which requires that goodwill and intangible assets with indefinite useful lives no longer be amortized, but instead be tested annually for impairment. We have adopted SFAS No. 142 and have determined that our goodwill and other intangible assets are not impaired.

The following table presents net income and earnings per share exclusive of goodwill amortization expense for the three and nine months ended September 30, 2002 and 2001 (dollars in thousands, except per share data):

	Three months ended September 30,		Nine months ended September 30,
	2002	2001	2002	2001
Net income:
Reported net income	12,450	9,595	35,252	26,760
Goodwill amortization, net of tax effect	—	150	—	450
Adjusted net income	12,450	9,745	35,252	27,210
Basic net income per share:
Reported basic earnings per share	0.61	7.47	1.75	20.71
Goodwill amortization per basic share	—	0.14	—	0.43
Adjusted basic earnings per share	0.61	7.61	1.75	21.14
Diluted net income per share:
Reported diluted earnings per share	0.58	0.58	1.65	1.61
Goodwill amortization per diluted share	—	0.01	—	0.03
Adjusted diluted earnings per share	0.58	0.59	1.65	1.64

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Item 2.    Management’s Discussion and Analysis of Financial Condition and Results of Operations

Forward-looking Statements

This Quarterly Report on Form 10-Q, and other information we provide from time to time, contains certain “forward-looking” statements as that term is defined by Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. All statements regarding our expected future financial position, membership, results of operations or cash flows, our continued performance improvements, our ability to service our debt obligations, our ability to finance growth opportunities, our ability to respond to changes in government regulations, progress made and amounts to be spent on integrating our pending acquisition in Florida of PHP, the timing and expectation of the closure of the PHP acquisition, the expected accretion of such acquisitions and similar statements including, without limitation, those containing words such as “believes,” “anticipates,” “expects,” “may,” “will,” “should,” “estimates,” “intends,” “plans,” and other similar expressions are forward-looking statements.

Forward-looking statements involve known and unknown risks and uncertainties that may cause our actual results in future periods to differ materially from those projected or contemplated in the forward-looking statements as a result of, but not limited to, the following factors:

• national, state and local economic conditions, including their effect on the rate setting process, timing of payments, as well as their effect on the availability and cost of labor, utilities and materials;

• the effect of government regulations and changes in regulations governing the health care industry, including our compliance with such regulations and their effect on certain of our unit costs and our ability to manage our medical costs;

• changes in Medicaid payment levels and methodologies and the application of such methodologies by the government;

• liabilities and other claims asserted against the company;

• our ability to attract and retain qualified personnel;

• our ability to maintain compliance with all minimum capital requirements;

• the availability and terms of capital to fund acquisitions and capital improvements;

• the competitive environment in which we operate;

• our ability to maintain and increase membership levels; and

• demographic changes.

Investors should also refer to our Annual Report on Form 10-K filed with the Securities and Exchange Commission on March 12, 2002 for a discussion of risk factors. Given these risks and uncertainties, we can give no assurances that any forward-looking statements will, in fact, transpire and therefore caution investors not to place undue reliance on them.

Overview

We are a multi-state managed health care company focused on serving people who receive health care benefits through state-sponsored programs, including Medicaid, State Children’s Health Insurance Program (SCHIP) and FamilyCare. We were founded in December 1994 with the objective to become the leading managed care organization in the United States focused on serving people who receive these types of benefits. Our revenue is generated primarily from premiums received from the states in which we operate for providing health care benefits to members. We also generate revenues from investments. We generally receive a fixed premium per member per month to provide health care benefits to our members pursuant to contracts with four states and the District of Columbia. Our premiums are generally received in advance of providing services and we recognize premium revenue during the period in which we are obligated to provide services.

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The number of members we serve has increased since December 2001. The following table sets forth the approximate number of members we serve in each of our service areas for the periods presented.

Market	September			December 2001
	2002		2001
Houston	134,000		100,000	100,000
Fort Worth	68,000		47,000	50,000
Dallas	80,000		59,000	64,000
New Jersey	95,000		80,000	88,000
Maryland	124,000		118,000	118,000
District of Columbia	37,000		13,000	13,000
Chicago	34,000		38,000	39,000
Total	572,000		455,000	472,000
Percentage growth from September 30, 2001 to September 30, 2002	25.7	%

The following table sets forth the approximate number of members we serve in each of our products for the periods presented.

	September		December 2001
Product	2002	2001
AMERICAID (Medicaid—TANF)	379,000	289,000	294,000
AMERIKIDS (SCHIP)	123,000	104,000	112,000
AMERIPLUS (Medicaid—SSI)	45,000	42,000	43,000
AMERIFAM (FamilyCare)	25,000	20,000	23,000
Total	572,000	455,000	472,000

Results of Operations

The following table sets forth selected operating ratios. All ratios, with the exception of the health benefits ratio, are shown as a percentage of total revenues.

	Three months ended September 30,				Nine months ended September 30,
	2002		2001		2002		2001
Premium revenue	99.3	%	99.0	%	99.3	%	98.7	%
Investment income	0.7		1.0		0.7		1.3
Total revenues	100.0	%	100.0	%	100.0	%	100.0	%
Health benefits(1)	80.9	%	81.3	%	81.1	%	80.3	%
Selling, general and administrative expenses	11.3	%	11.5	%	11.3	%	12.4	%
Income before income taxes	7.1	%	6.9	%	7.0	%	7.2	%
Net income	4.2	%	4.0	%	4.1	%	4.2	%

(1) The health benefits ratio is shown as a percentage of premium revenue because there is a direct relationship between the premium received and the health benefits provided.

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Three and Nine Month Periods Ended September 30, 2002 Compared to the Three and Nine Month Periods Ended September 30, 2001

Revenues

Premium revenue for the three months ended September 30, 2002 increased $60.4 million, or 25.5%, to $297.0 million from $236.6 million for the three months ended September 30, 2001. Year-to-date premium revenue increased $213.2 million, or 33.8%, to $844.7 million from $631.5 million in 2001. The increase was principally due to internal growth in overall membership, premium rate increases and the acquisition of the Medicaid contracts and related assets of Humana’s Houston, Texas business in August 2001 (15,000 members), MethodistCare, Inc.’s Houston, Texas Medicaid contracts and related assets in January 2002 (11,000 members) and Capital Community Health Plan’s Medicaid line of business in July 2002 (23,000 members). Total membership increased 25.7% to 572,000 as of September 30, 2002 from 455,000 as of September 30, 2001.

Investment income decreased $0.4 million to $2.0 million for the three months ended September 30, 2002 and decreased $2.5 million to $6.1 million year-to-date. The decrease in investment income was primarily due to the continued decline in market interest rates and increased levels of investments in tax-advantaged securities partially offset by an increase in overall levels of cash and investments. Levels of cash and investments have primarily increased due to proceeds from our initial public offering, profitability and increases in the amount of premiums received versus the timing of the payment of the related health benefits.

Health benefits

Expenses relating to health benefits for the three months ended September 30, 2002 increased $47.9 million, or 24.9%, to $240.4 million from $192.5 million for the three months ended September 30, 2001. Year-to-date, expenses related to health benefits increased $178.0 million, or 35.1%, to $684.9 million in 2002 from $506.9 million in 2001. The overall increase in health benefits expense was primarily due to the increase in membership. The health benefits ratio, as a percentage of premium revenue, for the three months ended September 30, 2002 decreased to 80.9% from 81.3% for the three months ended September 30, 2001. Year-to-date, the health benefits ratio increased to 81.1% from 80.3% in 2001. The change in the health benefits ratio as compared to the three and nine months ended September 30, 2001, was primarily due to variations in levels of seasonality from 2001 to 2002 and changes in the mix of members by product.

Selling, general and administrative expenses

Selling, general and administrative expenses (SG&A) for the third quarter of 2002 increased $6.5 million, or 23.7%, to $33.9 million from $27.4 million for the three months ended September 30, 2001. Year-to-date, SG&A increased $16.5 million, or 20.7%, to $96.2 million in 2002 from $79.7 million in 2001. The increase in SG&A was primarily due to an increase in wages and related expenses for additional staff and other expenses to support our increased membership, our expenses related to the Health Insurance Portability and Accountability Act (HIPAA) as well as expenses related to market development activities. Our SG&A ratio to total revenue was 11.3% and 11.5% for the third quarter of 2002 and 2001, respectively. The decrease in the ratio was primarily a result of certain fixed costs being spread over a larger membership base and its related revenue.

Interest expense

Interest expense was $0.2 million and $0.6 million for each of the three months and nine months ended September 30, 2002 and 2001.

Provision for income taxes

Income tax expense for the third quarter of 2002 was $8.7 million with an effective tax rate of 41.0% as compared to $6.9 million in the third quarter of 2001 with an effective tax rate of 42.0%. Year-to-date, income tax expense was $24.5 million with an effective tax rate of 41.0% compared to $19.4 million with an effective tax rate of 42.0% in 2001. Our effective tax rates decreased in 2002 due to increased levels of investments in tax-advantaged securities.

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Net income

Net income for the third quarter of 2002 rose $2.9 million, or 30.2%, to $12.5 million, or $0.58 per diluted share, compared to $9.6 million, or $0.58 per diluted share for the third quarter of 2001. Year-to-date net income rose $8.5 million, or 31.7%, to $35.3 million, or $1.65 per diluted share in 2002 compared to $26.8 million, or $1.61 per diluted share in 2001. Diluted earnings per share remained unchanged due to the increase in net income offset by an increase of 4,985,000 common shares outstanding from our November 2001 initial public offering.

Liquidity and capital resources

Our primary sources of liquidity are cash and cash equivalents, short and long-term investments, cash flow from operations and borrowings under our credit facility. As of September 30, 2002, we had cash and cash equivalents of $255.9 million, short and long-term investments of $109.3 million and restricted investments on deposit for licensure of $29.6 million. Total cash and investments as of September 30, 2002 was $394.8 million, a portion of which is restricted by state regulatory requirements. Unrestricted cash as of September 30, 2002 was approximately $131.4 million. As of September 30, 2002, there were no amounts outstanding under our credit facility.

On November 9, 2001, we completed our initial public offering of 4,985,000 shares of common stock including an over-allotment issuance of 585,000 shares at a price per share of $17.00. We received net proceeds from the offering of approximately $77.2 million. In conjunction with the offering, all Series A, B, C and D preferred stock in the aggregate was converted into 12,607,880 shares of common stock. We used proceeds from the offering to repay the balance of our long-term debt facility of approximately $4.4 million and to redeem the Series E mandatorily redeemable preferred stock for approximately $13.3 million. In addition, 1,123,823 shares of common stock were issued upon the exercise of all outstanding Series E warrants.

Cash from operations was $60.1 million and $91.4 million for the three and nine months ended September 30, 2002 compared to $29.2 million and $55.5 million for the three and nine months ended September 30, 2001. The increase in cash from operations was primarily due to an increase in net income and the receipt of unearned premium payments of $25.7 million in September 2002. As of September 30, 2002, we had working capital and long-term investments of $141.3 million as compared to $122.5 million at December 31, 2001.

Cash provided by investing activities was $32.7 million for the three months ended September 30, 2002 and cash used in investing activities was $19.7 million for the nine months ended September 30, 2002. For the three and nine months ended September 30, 2001, cash used in investing activities was $20.3 million and $51.3 million. Cash provided by investing activities consists primarily of redemptions of held-to-maturity securities of $66.4 million, partially offset by purchases of held-to-maturity securities of $29.1 million. Other investing activities include the purchase of software and property and equipment. We anticipate total capital expenditures, including capitalized leases for both software and property and equipment, to be approximately $20 million to $25 million in 2002.

Our investment policies are designed to provide liquidity, preserve capital and maximize total return on invested assets. As of September 30, 2002, our investment portfolio consisted primarily of fixed-income securities. The average maturity is less than eleven months. We utilize investment vehicles such as municipal bonds, commercial paper, securities of U.S. government backed agencies, and U.S. Treasury instruments. The states in which we operate prescribe the types of instruments in which our subsidiaries may invest their cash. The average portfolio yield as of September 30, 2002 was approximately 2.13% compared to 3.74% as of September 30, 2001.

Effective January 1, 2002, we purchased certain assets of MethodistCare, Inc.’s (MethodistCare) Houston, Texas Medicaid line of business for approximately $1.6 million. The assets purchased consisted of MethodistCare’s rights to provide managed care services to its Medicaid members, and certain provider agreements.

Effective July 1, 2002, we purchased certain assets of Capital Community Health Plan’s (CCHP) Washington, D.C. Medicaid line of business. The assets purchased consist of CCHP’s rights to provide managed

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care services to its Medicaid members and certain provider agreements. In June 2002, approximately $6.8 million was placed in escrow for the acquisition.

On August 21, 2002, we entered into an agreement to acquire PHP Holdings, Inc. and its subsidiary, Physicians Healthcare Plans, Inc. (together, PHP) for approximately $121 million. It is anticipated that approximately $60 million of the purchase price will be financed through AMERIGROUP’s existing credit facility with the balance funded through available unrestricted cash. The transaction is subject to receipt of regulatory approvals, and other customary conditions to closing. Subject to meeting all of these conditions, the transaction is expected to become effective in the first quarter of 2003. The acquisition is expected to be immediately accretive to earnings by approximately $0.25 to $0.30 per share in 2003 and add nearly $300 million of annualized revenues. We expect to incur approximately $4 million of SG&A in the fourth quarter to help ensure a smooth transition of the PHP acquisition. Under the agreement, AMERIGROUP will serve all of PHP’s Medicaid and SCHIP members and operate under the name AMERIGROUP Florida, Inc. PHP currently operates in 12 counties in central and south Florida, including the Miami/Ft. Lauderdale, Orlando and Tampa metropolitan areas. As of August 1, 2002, PHP had a Medicaid and SCHIP enrollment of approximately 184,000 members.

Cash provided by financing activities was $2.8 million and $0.3 million for the three and nine months ended September 30, 2002 compared to cash used in financing activities of $0.6 million and $2.3 million for the three and nine months ended September 30, 2001. Cash provided by financing activities consisted primarily of proceeds from the exercise of stock options and changes in bank overdrafts, partially offset by payments on capital leases.

In July 2002, we expanded the Credit and Guaranty Agreement entered into in November 2001 to include a fourth bank and to increase the revolving credit facility to $75 million from $60 million. The facility is collateralized by the assets of AMERIGROUP Corporation and by the common stock of its wholly owned subsidiaries.

Our subsidiaries are required to maintain minimum statutory capital requirements prescribed by various jurisdictions, including the departments of insurance in each of the states in which we operate. As of September 30, 2002, our subsidiaries were in compliance with all minimum statutory capital requirements. We believe that we will continue to be in compliance with these requirements at least through the end of this year.

We believe that internally generated funds, the remaining proceeds from our initial public offering and amounts available under our Credit and Guaranty Agreement will be sufficient to support continuing operations, capital expenditures and our growth strategy for at least the next 12 months.

Recent Accounting Pronouncements

In July 2001, Statement of Financial Accounting Standards No. 142,Goodwill and Other Intangible Assets(SFAS No. 142), was issued which requires that goodwill and intangible assets with indefinite useful lives no longer be amortized, but instead be tested annually for impairment. We have adopted SFAS No. 142 and have determined that our goodwill and other intangible assets are not impaired.

In July 2002, the Financial Accounting Standards Board issued SFAS No. 146, “Accounting for Costs Associated with Exit or Disposal Activities,” which addresses the financial accounting and reporting of costs associated with an exit activity (including restructuring) or with a disposal of long-lived assets. SFAS No. 146 is effective prospectively after December 31, 2002. Our management does not believe the implementation of this standard will have a material effect on our financial condition or results of operations.

Regulatory Capital and Dividend Restrictions

Our operations are conducted through our wholly-owned subsidiaries, which include Health Maintenance Organizations, or HMOs, and one managed care organization, or MCO. HMOs and MCOs are subject to state regulations that, among other things, may require the maintenance of minimum levels of statutory capital, as defined by each state, and restrict the timing, payment and amount of dividends and other distributions that may be paid to their stockholders.

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The National Association of Insurance Commissioners (NAIC) has adopted rules which, to the extent that they are implemented by the states, will set new minimum capitalization requirements for insurance companies, HMOs and other entities bearing risk for health care coverage. The requirements take the form of risk-based capital rules. The change in rules for insurance companies became effective as of December 31, 1998. The new HMO rules, which may vary from state to state, are currently being considered for adoption. Illinois and Texas adopted various forms of the rules as of December 31, 1999 and 2000, respectively. Maryland adopted risk-based capital rules for MCOs as of December 31, 2001. However, Maryland exempted all MCOs from the rules for the years ended December 31, 2001 and 2002. New Jersey has not yet adopted risk-based capital. The NAIC’s risk-based capital rules, if adopted by other states in their proposed form, may increase the minimum capital required for our subsidiaries.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

As of September 30, 2002, we had short-term investments of $44.1 million, long-term investments of $65.2 million and investments on deposit for licensure of $29.6 million. These investments consist of highly liquid investments with maturities between three and twenty-four months. These investments are subject to interest rate risk and will decrease in value if market rates increase. We have the ability and intent to hold these investments to maturity, and as a result, we would not expect the value of these investments to decline significantly as a result of a sudden change in market interest rates. Declines in interest rates over time may reduce our investment income.

Item 4.    Controls and Procedures

(a) Evaluation of Disclosure Controls and Procedures.

Our Chief Executive Officer and Chief Financial Officer have evaluated the effectiveness of our disclosure controls and procedures (as such term is defined in Rules 13a-14(c) and 15d-14(c) under the Securities Exchange Act of 1934, as amended) as of a date within 90 days prior to the filing date of this quarterly report (the “Evaluation Date”). Based on such evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that, as of the Evaluation Date, our disclosure controls and procedures are effective in alerting them on a timely basis to material information relating to AMERIGROUP (including its consolidated subsidiaries) required to be included in our reports filed or submitted under the Securities Exchange Act of 1934, as amended.

(b) Changes in Internal Controls.

Since the Evaluation Date, there have not been any significant changes in our internal controls or in other factors that could significantly affect such controls.

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PART II.    OTHER INFORMATION

Item 1.    Legal Proceedings

We are from time to time the subject matter of, or involved in, legal proceedings including claims for reimbursement by providers. We believe that any liability or loss resulting from such matters will not have a material adverse effect on our financial position or results of operations.

Item 2.    Change in Securities and Use of Proceeds

(a) Change in securities.

None.

(b) Use of Proceeds from Initial Public Offering.

Our Registration Statement on Form S-1, Registration number 333-37410, relating to our initial public offering, was declared effective by the Securities and Exchange Commission on November 5, 2001. We used proceeds from the offering to repay the balance of our long-term debt facility of approximately $4.4 million and to redeem the Series E mandatorily redeemable preferred stock for approximately $13.3 million. We subsequently used proceeds from the offering to purchase certain assets of MethodistCare, Inc.’s Houston, Texas Medicaid line of business for approximately $1.6 million. In June 2002, we placed approximately $6.8 million into an escrow account for the acquisition of Capital Community Health Plan’s Medicaid line of business in Washington, D.C. The balance of approximately $51.1 million will be used for a portion of the acquisition cost of PHP Holdings, Inc. and its subsidiary, Physicians Healthcare Plans, Inc.

Item 3.    Defaults Upon Senior Securities

None.

Item 4.    Submission of Matters to a Vote of Security Holders

None.

Item 5.    Other Information

None.

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Item 6.    Exhibits and Reports on Form 8-K

a.    Exhibits:

Exhibit Number	Description
3.1*	Form of Amended and Restated Certificate of Incorporation of the Company.
3.2*	Form of By-Laws of the Company.
3.3*	Form of share certificate for common stock.
3.4*	AMERIGROUP Corporation Second Restated Investor Rights Agreement, dated July 28, 1998.
3.5*	Silicon Valley Registration Rights Agreement, entered into as of May 15, 1998.
3.6*	Stock Restriction and Registration Rights Agreement, between AMERIGROUP Corporation and Prudential Health Care Plan, Inc.
3.7*	Form of warrant issued in connection with the sale of Series E Redeemable Preferred Stock.
3.8*	Common Stock Purchase Warrant Issued to Silicon Valley Bank, dated May 15, 1998.
10.1*	1999 Contract for Services between the Texas Department of Health (“TDH” ) and HMO (Harris Service Area), dated August 9, 1999.
10.2*	1999 Contract For Services between the TDH and HMO (Tarrant Service Area), dated August 9, 1999.
10.3*	1999 Contract For Services between the TDH and HMO (Harris County Service Area STAR+PLUS Contract).
10.4*	2000 Contract For Services between TDH and HMO Dallas Service Area (replaces prior exhibit 10.4).
10.5*	Children’s Health Insurance Program Agreement for the Provision of Health Care Services between the Texas Department of Health and Human Services Commission and AMERICAID Texas, Inc., d/b/a Amerikids, dated January 19, 2000, as amended (replaces prior exhibit 10.5).
10.6*	Contract between State of New Jersey, Department of Human Services, Division of Medical Assistance and Health Services and [Americaid New Jersey, Inc.], Contractor (replaces prior exhibit 10.6).
10.7*	State of Illinois, Department of Public Aid Contract for Furnishing Health Services by a Health Maintenance Organization, dated April 1, 2000.
10.8*	Managed Care Organization HealthChoice Provider Agreement, dated as of January 1, 2000.
10.9*	District of Columbia Medicaid Managed Care Program, Department of Health, Prepaid, Capital Risk Contract.
10.10*	1994 Stock Plan.
10.11*	Form of 2000 Equity Incentive Plan.
10.12*	Form of Employee Stock Purchase Plan.
10.13*	Form of 2000 Cash Incentive Plan.
10.14*	Second Amended and Restated Employment Agreement of Jeffrey L. McWaters, dated October 2, 2000 (replaces prior exhibit 10.14).
10.15*	Employment Agreement of Lorenzo Childress, Jr., M.D.
10.16*	Form of Officer and Director Indemnification Agreement.
10.17*	CCPN and HMO Medicaid Agreement By and Between Americaid Texas Inc., d/b/a Americaid Community Care, and Cook Children’s Physician Network, A Texas 5.01 Non-profit Corporation, dated as of October 9, 1997, as amended.

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Exhibit Number	Description
10.18*	Third Medical Assistance Medical Services Agreement between Prudential Health Care Plan, Inc. and Johns Hopkins Medical Services Corporation, dated August 2, 1996, assigned to the Company pursuant to the Amendment and Assignment of Third Medical Assistance Medical Service Agreement, as of April 30, 1999.
10.19*	Loan and Security Agreement, between AMERIGROUP Corporation, as borrower, and the Financial Institutions Party Thereto From Time to Time, as Lender and Fleet Capital Corporation, as Agent, dated November 9, 1999.
10.20*	Amendment, dated September 1, 2001, to the 1999 Contract for Services between TDH and HMO (Harris County Service Area, STAR+PLUS Contract).
10.21**	Credit and Guaranty Agreement, between AMERIGROUP Corporation, as borrower and Bank of America N.A., administrative agent, UBS Warburg LLC and CIBC World Markets Corp., as lenders, dated December 14, 2001.
10.22***	District of Columbia Healthy Families Program, Department of Health, Prepaid, Capital Risk Contract dated April 9, 2002, together with amendments.
10.23+	Lender Joinder Agreement, by and among AMERIGROUP Corporation, Wachovia Bank, National Association, and the Securities named therein, dated as of June 28, 2002.
10.24	Amendment, dated September 1, 2002, to the 1999 Contract for services between the Health and Human Services (HHS) and HMO (Tarrant Service Area).
10.25	Amendment, dated September 1, 2002, to the 1999 Contract for Services between the HHS and HMO (Harris Service Area).
10.26	Amendment, dated September 1, 2002, to the 2000 Contract for Services between the HHS and HMO (Dallas Service Area).
10.27	Amendment, dated September 1, 2002, to the 1999 Contract for Services between the HHS and HMO (Harris County Service Area STAR+PLUS Contract).
10.28	Amendment, dated September 1, 2002, to the 2002 Contract for Services between the HHS and HMO (Childrens Health Insurance Program Agreement).
99.1	Certification of Chief Executive Officer and Chief Financial Officer, dated November 1, 2002.

* Previously filed as an exhibit to Registration Statement No. 333-3740 on Form S-1, which was declared effective by the Securities and Exchange Commission on November 5, 2001, and incorporated herein by reference.

** Previously filed as an exhibit to the Annual Report on Form 10-K filed on March 12, 2002.

*** Previously filed as an exhibit to the Quarterly Report on Form 10-Q filed on May 13, 2002.

+ Previously filed as an exhibit to the Quarterly Report on Form 10-Q filed on August 2, 2002.

b.    Reports on Form 8-K

None.

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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.

		AMERIGROUP CORPORATION
Date:	November 1, 2002	By:	/s/    JEFFREY L. MCWATERS
			Chairman and Chief Executive Officer

Date:	November 1, 2002	By:	/s/    SCOTT M. TABAKIN
			Senior Vice President, Chief Financial Officer (Principal Financial and Accounting Officer)

CEO CERTIFICATION

I, Jeffrey L. McWaters, certify that:

1.    I have reviewed this quarterly report on Form 10-Q of AMERIGROUP Corporation;

2.    Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report;

3.    Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report;

4.    The registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:

a)    designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared;

b)    evaluated the effectiveness of the registrant’s disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the “Evaluation Date”); and

c)    presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;

5.    The registrant’s other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent function):

a)    all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant’s ability to record, process, summarize and report financial data and have identified for the registrant’s auditors any material weaknesses in internal controls; and

b)    any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls; and

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6.    The registrant’s other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.

Date: November 1, 2002

        /s/    JEFFREY L. MCWATERS        

Jeffrey L. McWaters

Chief Executive Officer

CFO CERTIFICATION

I, Scott M. Tabakin, certify that:

1.    I have reviewed this quarterly report on Form 10-Q of AMERIGROUP Corporation;

2.    Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report;

3.    Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report;

4.    The registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:

a)    designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared;

b)    evaluated the effectiveness of the registrant’s disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the “Evaluation Date”); and

c)    presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;

5.    The registrant’s other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent function):

a)    all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant’s ability to record, process, summarize and report financial data and have identified for the registrant’s auditors any material weaknesses in internal controls; and

b)    any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls; and

6.    The registrant’s other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.

Date: November 1, 2002

/s/    SCOTT M. TABAKIN

Scott M. Tabakin

Chief Financial Officer

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EXHIBIT INDEX

Exhibit Number	Description
3.1*	Form of Amended and Restated Certificate of Incorporation of the Company.
3.2*	Form of By-Laws of the Company.
3.3*	Form of share certificate for common stock.
3.4*	AMERIGROUP Corporation Second Restated Investor Rights Agreement, dated July 28, 1998.
3.5*	Silicon Valley Registration Rights Agreement, entered into as of May 15, 1998.
3.6*	Stock Restriction and Registration Rights Agreement, between AMERIGROUP Corporation and Prudential Health Care Plan, Inc.
3.7*	Form of warrant issued in connection with the sale of Series E Redeemable Preferred Stock.
3.8*	Common Stock Purchase Warrant Issued to Silicon Valley Bank, dated May 15, 1998.
10.1*	1999 Contract for Services between the Texas Department of Health (“TDH” ) and HMO (Harris Service Area), dated August 9, 1999.
10.2*	1999 Contract For Services between the TDH and HMO (Tarrant Service Area), dated August 9, 1999.
10.3*	1999 Contract For Services between the TDH and HMO (Harris County Service Area STAR+PLUS Contract).
10.4*	2000 Contract For Services between TDH and HMO Dallas Service Area (replaces prior exhibit 10.4).
10.5*	Children’s Health Insurance Program Agreement for the Provision of Health Care Services between the Texas Department of Health and Human Services Commission and AMERICAID Texas, Inc., d/b/a Amerikids, dated January 19, 2000, as amended (replaces prior exhibit 10.5).
10.6*	Contract between State of New Jersey, Department of Human Services, Division of Medical Assistance and Health Services and [Americaid New Jersey, Inc.], Contractor (replaces prior exhibit 10.6).
10.7*	State of Illinois, Department of Public Aid Contract for Furnishing Health Services by a Health Maintenance Organization, dated April 1, 2000.
10.8*	Managed Care Organization HealthChoice Provider Agreement, dated as of January 1, 2000.
10.9*	District of Columbia Medicaid Managed Care Program, Department of Health, Prepaid, Capital Risk Contract.
10.10*	1994 Stock Plan.
10.11*	Form of 2000 Equity Incentive Plan.
10.12*	Form of Employee Stock Purchase Plan.
10.13*	Form of 2000 Cash Incentive Plan.
10.14*	Second Amended and Restated Employment Agreement of Jeffrey L. McWaters, dated October 2, 2000 (replaces prior exhibit 10.14).
10.15*	Employment Agreement of Lorenzo Childress, Jr., M.D.
10.16*	Form of Officer and Director Indemnification Agreement.
10.17*	CCPN and HMO Medicaid Agreement By and Between Americaid Texas Inc., d/b/a Americaid Community Care, and Cook Children’s Physician Network, A Texas 5.01 Non-profit Corporation, dated as of October 9, 1997, as amended.
10.18*	Third Medical Assistance Medical Services Agreement between Prudential Health Care Plan, Inc. and Johns Hopkins Medical Services Corporation, dated August 2, 1996, assigned to the Company pursuant to the Amendment and Assignment of Third Medical Assistance Medical Service Agreement, as of April 30, 1999.

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Exhibit Number	Description
10.19*	Loan and Security Agreement, between AMERIGROUP Corporation, as borrower, and the Financial Institutions Party Thereto From Time to Time, as Lender and Fleet Capital Corporation, as Agent, dated November 9, 1999.
10.20*	Amendment, dated September 1, 2001, to the 1999 Contract for Services between TDH and HMO (Harris County Service Area, STAR+PLUS Contract).
10.21**	Credit and Guaranty Agreement, between AMERIGROUP Corporation, as borrower and Bank of America N.A., administrative agent, UBS Warburg LLC and CIBC World Markets Corp., as lenders, dated December 14, 2001.
10.22***	District of Columbia Healthy Families Program, Department of Health, Prepaid, Capital Risk Contract dated April 9, 2002, together with amendments.
10.23+	Lender Joinder Agreement, by and among AMERIGROUP Corporation, Wachovia Bank, National Association, and the Securities named therein, dated as of June 28, 2002.
10.24	Amendment, dated September 1, 2002, to the 1999 Contract for services between the Health and Human Services (HHS) and HMO (Tarrant Service Area).
10.25	Amendment, dated September 1, 2002, to the 1999 Contract for Services between the HHS and HMO (Harris Service Area).
10.26	Amendment, dated September 1, 2002, to the 2000 Contract for Services between the HHS and HMO (Dallas Service Area).
10.27	Amendment, dated September 1, 2002, to the 1999 Contract for Services between the HHS and HMO (Harris County Service Area STAR+PLUS Contract).
10.28	Amendment, dated September 1, 2002, to the 2002 Contract for Services between the HHS and HMO (Childrens Health Insurance Program Agreement).
99.1	Certification of Chief Executive Officer and Chief Financial Officer, dated November 1, 2002.

* Previously filed as an exhibit to Registration Statement No. 333-3740 on Form S-1, which was declared effective by the Securities and Exchange Commission on November 5, 2001, and incorporated herein by reference.

** Previously filed as an exhibit to the Annual Report on Form 10-K filed on March 12, 2002.

*** Previously filed as an exhibit to the Quarterly Report on Form 10-Q filed on May 13, 2002.

+ Previously filed as an exhibit to the Quarterly Report on Form 10-Q filed on August 2, 2002.

b.    Reports on Form 8-K

None.

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