SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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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
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CENTENE CORPORATION
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(Exact name of registrant as specified in its charter)
DELAWARE 000-33395 04-1406317
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(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
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(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number, including area code (314) 725-4477
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NOT APPLICABLE
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(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
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(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
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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
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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
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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
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TOTAL CURRENT LIABILITIES 24,582,080 13,272,854
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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)
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TOTAL STOCKHOLDER'S EQUITY 5,866,046 5,030,558
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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
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2001 2000
Revenue:
Premiums $ 93,526,159 $ 64,556,104
Interest income 822,443 1,136,778
Other income 56,503 81,346
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TOTAL REVENUE 94,405,105 65,774,228
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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
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TOTAL EXPENSES 99,140,302 65,020,176
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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
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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
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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)
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NET CASH USED IN OPERATING ACTIVITIES (1,697,537) (1,054,499)
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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)
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NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES 2,179,280 (9,769,487)
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Cash flows from financing activities:
Proceeds from capital contributions 5,570,685 760,259
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NET CASH PROVIDED BY FINANCING ACTIVITIES 5,570,685 760,259
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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
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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
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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
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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
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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
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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
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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
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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
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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
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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.
<Table>
<Caption>
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)
======= ======= =======
</Table>
<Caption>
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)
======= ======= =======
</Table>
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