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Centene Corp – IPO: ‘424B1’ on 12/13/01

On: Thursday, 12/13/01 · Accession #: 950131-1-504490 · File #: 333-71258

  As Of                Filer                Filing    For·On·As Docs:Size              Issuer               Agent

12/13/01  Centene Corp                      424B1                  1:288K                                   Donnelley R R & S… 03/FA

Initial Public Offering (IPO): Prospectus — Rule 424(b)(1)
Filing Table of Contents

Document/Exhibit                   Description                      Pages   Size 

 1: 424B1       Prospectus                                            86    447K

Document Table of Contents

Page	(sequential)	\|	(alphabetic)	Top
			Alternative Formats (Word, et al.) Business Capitalization Description of Capital Stock Dilution Dividend Policy Employment Agreements Experts Forward-Looking Statements General and administrative expenses Income tax expense (benefit) Joseph P. Drozda, Jr., M.D Legal Matters Liquidity and Capital Resources Management Management's Discussion and Analysis of Financial Condition and Results of Operations Medical services costs Notes to Consolidated Financial Statements Offering, The Other Income Our approach to managed care is based on the following key attributes: Our objective is to become the leading national Medicaid managed care organization. We intend to achieve this objective by implementing the following key components of our strategy: Overview Principal and Selling Stockholders Prospectus Summary Registration Rights Related Party Transactions Report of Independent Public Accountants Revenues Risk Factors Selected Consolidated Financial Data Shares Eligible for Future Sale The Offering Thomas Weisel Partners LLC Underwriting Use of Proceeds
1	1st Page - Filing Submission
4	Prospectus Summary
"	Our approach to managed care is based on the following key attributes:
5	Our objective is to become the leading national Medicaid managed care organization. We intend to achieve this objective by implementing the following key components of our strategy:
6	The Offering
9	Risk Factors
18	Forward-Looking Statements
19	Use of Proceeds
"	Dividend Policy
20	Capitalization
21	Dilution
22	Selected Consolidated Financial Data
23	Management's Discussion and Analysis of Financial Condition and Results of Operations
"	Overview
"	Revenues
24	Other Income
25	Medical services costs
"	General and administrative expenses
27	Income tax expense (benefit)
"	Liquidity and Capital Resources
30	Business
43	Management
"	Joseph P. Drozda, Jr., M.D
50	Employment Agreements
52	Related Party Transactions
"	Registration Rights
54	Principal and Selling Stockholders
56	Description of Capital Stock
58	Shares Eligible for Future Sale
61	Underwriting
63	Legal Matters
"	Experts
65	Report of Independent Public Accountants
70	Notes to Consolidated Financial Statements
86	Thomas Weisel Partners LLC

424B1 1st Page of 86 TOC ↑Top Previous Next ↓Bottom Just 1st
Filed Pursuant to Rule 424(b)(1)
Registration No. 333-71258

PROSPECTUS

3,500,000 Shares

[LOGO] Centene Logo

Common Stock

This is an initial public offering of shares of common stock of Centene
Corporation. We are offering 3,250,000 shares of common stock, and the
Elizabeth A. Brinn Foundation is offering 250,000 shares of common stock. We
will not receive any of the proceeds of the sale of shares by the Foundation.

Our common stock has been approved for trading and quotation on the Nasdaq
National Market under the symbol "CNTE."

Our business involves significant risks. These risks are described under the
caption "Risk Factors" beginning on page 9.

Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or determined if
this prospectus is truthful or complete. Any representation to the contrary is
a criminal offense.

------------------

[Download Table]

Per Share Total

Public offering price.................... $14.00 $49,000,000
Underwriting discounts and commissions... $ 0.98 $ 3,430,000
Proceeds, before expenses, to Centene.... $13.02 $42,315,000
Proceeds to Elizabeth A. Brinn Foundation $13.02 $ 3,255,000

The underwriters may also purchase from selling stockholders named on page
55 up to an additional 525,000 shares of common stock at the public offering
price, less the underwriting discounts and commissions, to cover
over-allotments. We will not receive any of the proceeds of the sale of shares
by these selling stockholders.

------------------

SG COWEN
THOMAS WEISEL PARTNERS LLC

CIBC WORLD MARKETS

December 12, 2001

424B1 2nd Page of 86 TOC 1st Previous Next ↓Bottom Just 2nd
[Graphic depicting the heads and upper torsos of four children, accompanied
by the following text:
"Centene Corporation, Creating a better future in government services
healthcare"
"Centene Corporation provides managed care programs and related services to
individuals receiving benefits under Medicaid, including Supplemental Security
Income, and the State Children's Health Insurance Program."]

424B1 3rd Page of 86 TOC 1st Previous Next ↓Bottom Just 3rd
TABLE OF CONTENTS

[Download Table]

Page

Prospectus Summary..................... 4
Risk Factors........................... 9
Forward-Looking Statements............. 18
Use of Proceeds........................ 19
Dividend Policy........................ 19
Capitalization......................... 20
Dilution............................... 21
Selected Consolidated Financial Data... 22
Management's Discussion and Analysis of
Financial Condition and Results of
Operations........................... 23
[Download Table]

Page

Business.................................. 30
Management................................ 43
Related Party Transactions................ 52
Principal and Selling Stockholders........ 54
Description of Capital Stock.............. 56
Shares Eligible for Future Sale........... 58
Underwriting.............................. 61
Legal Matters............................. 63
Experts................................... 63
Where You Can Find Additional Information. 63
Index to Consolidated Financial Statements F-1

-----------------

You should rely only on the information contained in this prospectus. We
have not authorized anyone to provide you with information that is different.
We are offering to sell and seeking offers to buy shares of our common stock
only in jurisdictions where offers and sales are permitted. The information
contained in this prospectus is accurate only as of the date of this
prospectus, regardless of the time of delivery of this prospectus or of any
sale of our common stock.

Until January 6, 2002, all dealers that effect transactions in these
securities, whether or not participating in this offering, may be required to
deliver a prospectus. This requirement is in addition to the dealers'
obligation to deliver a prospectus when acting as underwriters and with respect
to their unsold allotments or subscriptions.

424B1 4th Page of 86 TOC 1st Previous Next ↓Bottom Just 4th
PROSPECTUS SUMMARY

The following summary highlights information contained elsewhere in this
prospectus. You should read the entire prospectus carefully, including the risk
factors and the consolidated financial statements and related notes included in
this prospectus, before you decide to invest in our common stock.

Centene Corporation

We provide managed care programs and related services to individuals
receiving benefits under Medicaid, including Supplemental Security Income, and
the State Children's Health Insurance Program. We have health plans in
Wisconsin, Indiana and Texas. In each of our service areas we have more
Medicaid members than any other managed care entity. We believe our local
approach to managing our health plans, including provider and member services,
enables us to provide accessible, high quality, culturally-sensitive healthcare
services to our members. Our disease management, educational and other
initiatives are designed to help members best utilize the healthcare system to
ensure they receive appropriate, medically necessary services and effective
management of routine health problems, as well as more severe acute and chronic
conditions. We combine our decentralized local approach with centralized
finance, information systems, claims processing and medical management support
functions. In order to focus on Medicaid and the State Children's Health
Insurance Program, we do not offer Medicare or commercial products. For the
nine months ended September 30, 2001, we generated $236.3 million in revenues
and $9.0 million in net income.

Our Industry

Medicaid is a health insurance program for low-income individuals and
individuals with disabilities. In 1998, Medicaid covered 15% of the total U.S.
population, or 40.6 million people. Historically, children have represented the
largest eligibility group for Medicaid, accounting for approximately 46% of the
covered individuals in 1998. The State Children's Health Insurance Program was
established to provide coverage for low-income children not otherwise covered
by Medicaid or other insurance programs. All states have adopted the State
Children's Health Insurance Program.

Since the early 1980s, increasing healthcare costs combined with
significant growth in the number of Medicaid recipients have led many states to
establish Medicaid managed care initiatives. State premium payments to managed
care plans are financed in part by the federal government and increased from
$700 million in 1988 to $13.2 billion in 1998. Recently, a growing number of
states, including each of the states in which we operate, have mandated that
their Medicaid recipients enroll in managed care plans.

Our Approach

Our approach to managed care is based on the following key attributes:

. Medicaid Expertise. Over the last 17 years, we have developed a
specialized Medicaid expertise that has helped us establish and maintain
strong relationships with our constituent communities of members,
providers and state governments. We achieve savings for state governments
and improve medical outcomes for members by reducing inappropriate
emergency room use, inpatient days and high cost interventions, as well as
by managing care of chronic illnesses.

. Localized Services, Support and Branding. We provide access to healthcare
services through local networks of providers and staff who focus on the
cultural norms of their individual communities. We use locally recognized
plan names, and we tailor our materials and processes to meet the needs of
the communities and the state programs we serve.

. Physician-Driven Approach. We have implemented a physician-driven approach
in which our physicians are actively engaged in developing and
implementing our healthcare delivery policies and strategies. This
approach is designed to eliminate unnecessary costs, improve service to
our members and simplify the administrative burdens on our providers. It
has enabled us to strengthen our provider networks through improved
physician recruitment and retention that, in turn, have helped to increase
our membership base.

424B1 5th Page of 86 TOC 1st Previous Next ↓Bottom Just 5th
. Efficiency of Business Model. The combination of our decentralized local
approach to operating our health plans and our centralized finance,
information systems, claims processing and medical management support
functions allows us to quickly and economically integrate new business
opportunities.

. Specialized Systems and Technology. Through our specialized information
systems, we are able to strengthen our relationships with providers and
states, which helps us to grow our membership base. These systems also
help us identify needs for new healthcare programs. Physicians use our
claims, utilization and membership data to manage their practices more
efficiently, and they benefit from our timely and accurate payments. State
agencies use data from our information systems to demonstrate that their
Medicaid populations are receiving quality healthcare in an efficient
manner.

. Complementary Business Lines. We have begun to broaden our service
offerings to address areas that we believe have been traditionally
underserved by Medicaid managed care organizations. We believe other
business lines, such as our NurseWise triage program, will allow us to
expand our services and diversify our sources of revenue.

Our Strategy

Our objective is to become the leading national Medicaid managed care
organization. We intend to achieve this objective by implementing the following
key components of our strategy:

. increase penetration of existing state markets;

. develop and acquire additional state markets;

. diversify our business lines; and

. leverage our information technologies to enhance operating efficiencies.

Additional Considerations

Nearly all of our revenues come from Medicaid premiums paid by the states
of Wisconsin, Indiana and Texas, which are the only states in which we operate.
Our operating results depend significantly on Medicaid program funding, premium
levels, eligibility standards, reimbursement levels and other regulatory
provisions established by the federal government and the governments of the
states in which we operate. Since we operate in a limited number of service
markets, any termination of or failure to renew our existing contracts or any
regulatory changes affecting those markets could materially reduce our revenues
and profitability. Moreover, because the premiums we receive are established by
contract, our profitability depends on our ability to predict and effectively
manage the costs of healthcare services delivered to our members. For a
discussion of these and other risks relating to an investment in our common
stock, see "Risk Factors" below.

Corporate Information

We were organized in Wisconsin in 1993 as Coordinated Care Corporation. We
initially were formed to serve as a holding company for a Medicaid managed care
line of business that has been operating in Wisconsin since 1984. We changed
our corporate name to Centene Corporation in 1997 and reincorporated in
Delaware in November 2001. Our corporate office is located at 7711 Carondelet
Avenue, Suite 800, Saint Louis, Missouri 63105, and our telephone number is
(314) 725-4477. The address of our Web site is www.centene.com. The information
on our Web site is not part of this prospectus.

"CENTENE" and "NURSEWISE" are our registered service marks, the Centene
logo is our service mark and "CONNECTIONS" is our trademark. We have also filed
an application with the U.S. Patent and Trademark Office to register "START
SMART FOR YOUR BABY" as our trademark. This prospectus also contains
trademarks, service marks and trade names of other companies.

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The Offering

[Enlarge/Download Table]

Common stock we are offering.......................... 3,250,000 shares

Common stock Elizabeth A. Brinn Foundation is offering 250,000 shares

Common stock to be outstanding after this offering.... 10,071,369 shares

Underwriters' over-allotment option................... 525,000 shares

Use of proceeds....................................... We intend to use our net proceeds of this offering
to repay $4.0 million in principal amount of
subordinated notes and for general corporate
purposes, including working capital and potential
acquisitions. See "Use of Proceeds."

Nasdaq National Market symbol......................... CNTE

The number of shares of common stock to be outstanding after this offering
is based on 6,821,369 shares of common stock outstanding as of November 21,
2001. This number includes shares to be issued upon conversion of our
outstanding preferred stock and the exercise of outstanding warrants at or
before the closing of this offering. It excludes:

. 498,540 shares subject to options vested as of November 21, 2001 and
having a weighted average exercise price of $2.02 per share;

. 881,500 shares subject to options unvested (or exercisable only to acquire
restricted shares that would be subject to future vesting) as of November
21, 2001 and having a weighted average exercise price of $2.22 per share;
and

. 732,185 additional shares reserved as of November 21, 2001 for future
issuance under our stock-based compensation plans.

-----------------

Except where we state otherwise, the information we present in this
prospectus reflects:

. no exercise of the underwriters' over-allotment option;

. the automatic conversion of our outstanding preferred stock into common
stock immediately before the closing of this offering; and

. the exercise of outstanding warrants to purchase common stock before the
closing of this offering.

424B1 7th Page of 86 TOC 1st Previous Next ↓Bottom Just 7th
Summary Consolidated Financial and Operating Data
(dollars in thousands, except per share data)

The following summary consolidated statement of operations data are derived
from, and qualified by reference to, the consolidated financial statements and
related notes appearing elsewhere in this prospectus. The pro forma share
information included in the consolidated statement of operations data have been
computed as described in note 22 of those notes.

[Enlarge/Download Table]

Nine Months Ended
Year Ended December 31, September 30,
-------------------------------- ----------------------
1998 1999 2000 2000 2001
---------- -------- ---------- ---------- ----------

Statement of Operations Data:
Premiums (1)......................................... $ 149,577 $200,549 $ 216,414 $ 157,994 $ 235,995
Administrative services fees......................... 861 880 4,936 3,543 283
Total revenues..................................... 150,438 201,429 221,350 161,537 236,278
Medical services costs............................... 132,199 178,285 182,495 133,575 195,512
General and administrative expenses.................. 25,066 29,756 32,335 24,133 27,992
Total operating expenses........................... 157,265 208,041 214,830 157,708 223,504
Income (loss) from continuing operations (2)......... (4,739) (5,484) 7,728 4,506 8,975
Net income (loss).................................... (6,962) (9,411) 7,728 4,506 8,975
Net income (loss) per common share:
Basic.............................................. $ (6.78) $ (10.99) $ 8.03 $ 4.59 $ 9.47
Diluted............................................ $ (6.78) $ (10.99) $ 1.06 $ 0.61 $ 1.11
Weighted average common shares outstanding:
Basic.............................................. 1,044,434 900,944 901,526 901,526 908,918
Diluted............................................ 1,044,434 900,944 6,819,595 6,793,208 7,787,653
Pro forma net income per common share:
Basic.............................................. $ 1.13 $ 1.31
Diluted............................................ $ 1.13 $ 1.15
Pro forma weighted average common shares outstanding:
Basic.............................................. 6,819,869 6,827,261
Diluted............................................ 6,819,595 7,787,653
Operating Data:
Medical loss ratio (3)............................... 88.4% 88.9% 84.3% 84.5% 82.8%
General and administrative expenses ratio (4)........ 16.7% 14.8% 14.6% 14.9% 11.8%
EBITDA from continuing operations (5)................ $ (4,403) $ (3,844) $ 8,830 $ 5,851 $ 16,854
Members at end of period............................. 135,600 142,300 194,200 185,450 224,800

--------
(1)Premiums consist of payments we receive from states to provide health
benefits to members and do not include investment income.
(2)We discontinued our commercial managed care line of business in 1999.
(3)Medical loss ratio represents medical services costs as a percentage of
premiums.
(4)General and administrative expenses ratio represents general and
administrative expenses as a percentage of total revenues.
(5)EBITDA from continuing operations represents net income (loss) before
interest expense, income tax expense (benefit), depreciation and
amortization, and discontinued operations. EBITDA should not be considered
in isolation or as a substitute for net income (loss), operating income
(loss), cash flows provided by operating activities or any other measure of
operating performance calculated in accordance with generally accepted
accounting principles. EBITDA from continuing operations is included because
we believe that some investors may find it useful in evaluating our ability
to meet future capital expenditure and working capital requirements. EBITDA
from continuing operations is not necessarily a measure of our ability to
fund our cash needs.

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The following table summarizes our balance sheet data at September 30, 2001:

. on an actual basis;

. on a pro forma basis to reflect the conversion of outstanding preferred
stock into common stock and the exercise of outstanding warrants, all
before the closing of this offering; and

. on a pro forma as adjusted basis to also reflect our sale of the 3,250,000
shares offered by us, after deducting underwriting discounts and
commissions and estimated offering expenses payable by us, and the
application of our estimated net proceeds.

[Download Table]

September 30, 2001
------------------------------
Pro Forma
Actual Pro Forma As Adjusted
-------- --------- -----------

Balance Sheet Data:
Cash, cash equivalents and short-term investments $ 62,023 $ 62,041 $ 99,556
Total assets..................................... 103,971 103,989 141,504
Long-term debt, net of current portion........... 4,000 4,000 --
Redeemable convertible preferred stock........... 19,231 -- --
Total stockholders' equity....................... 212 19,461 60,976

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RISK FACTORS

You should carefully consider the risks described below before making an
investment decision. The trading price of our common stock could decline due to
any of these risks, in which case you could lose all or part of your
investment. You should also refer to the other information in this prospectus,
including our consolidated financial statements and related notes. The risks
and uncertainties described below are those that we currently believe may
materially affect our company. Additional risks and uncertainties that we are
unaware of or that we currently deem immaterial also may become important
factors that affect our company.

Risks Related to Being a Regulated Entity

Reductions in Medicaid funding could substantially reduce our profitability.

Nearly all of our revenues come from Medicaid premiums. The base premium
rate paid by each state differs, depending on a combination of factors such as
defined upper payment limits, a member's health status, age, gender, county or
region, benefit mix and member eligibility categories. Future levels of
Medicaid premium rates may be affected by continued government efforts to
contain medical costs and may further be affected by state and federal
budgetary constraints. Changes to Medicaid programs could reduce the number of
persons enrolled or eligible, reduce the amount of reimbursement or payment
levels, or increase our administrative or healthcare costs under those
programs. States periodically consider reducing or reallocating the amount of
money they spend for Medicaid. We believe that additional reductions in
Medicaid payments could substantially reduce our profitability. Further, our
contracts with the states are subject to cancellation by the state immediately
or after a short notice period in the event of unavailability of state funds.

If our Medicaid and SCHIP contracts are terminated or are not renewed, our
business will suffer.

We provide healthcare services under five contracts with regulatory
entities in the areas in which we operate. The contracts expire on various
dates between December 31, 2001 and December 31, 2002. Our contracts with the
states of Indiana and Wisconsin accounted for 74% of our revenues for the nine
months ended September 30, 2001. Our contracts may be terminated if we fail to
perform up to the standards set by state regulatory agencies. In addition, the
Indiana contract under which we operate can be terminated by the state without
cause. Our contracts are generally intended to run for two years and may be
extended for one or two additional years if the state or its contractor elects
to do so. When our contracts expire, they may be opened for bidding by
competing healthcare providers. There is no guarantee that our contracts will
be renewed or extended. If any of our contracts is terminated, not renewed, or
renewed on less favorable terms, our business will suffer, and our operating
results may be materially affected.

Changes in government regulations designed to protect providers and members
rather than our stockholders could force us to change how we operate and could
harm our business.

Our business is extensively regulated by the states in which we operate and
by the federal government. The applicable laws and regulations are subject to
frequent change and generally are intended to benefit and protect health plan
providers and members rather than stockholders. Changes in existing laws and
rules, the enactment of new laws and rules, and changing interpretations of
these laws and rules could, among other things:

. force us to restructure our relationships with providers within our
network;

. require us to implement additional or different programs and systems;

. mandate minimum medical expense levels as a percentage of premiums
revenues;

. restrict revenue and enrollment growth;

. require us to develop plans to guard against the financial insolvency of
our providers;

. increase our healthcare and administrative costs;

. impose additional capital and reserve requirements; and

. increase or change our liability to members in the event of malpractice by
our providers.

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For example, Congress currently is considering various forms of patient
protection legislation commonly known as Patients' Bills of Rights. We cannot
predict the impact of this legislation, if adopted, on our business.

Regulations may decrease the profitability of our health plans.

Our Texas plans are required to pay a rebate to the state in the event
profits exceed established levels. This regulatory requirement, changes in this
requirement or the adoption of similar requirements by our other regulators may
limit our ability to increase our overall profits as a percentage of revenues.
In addition, states may attempt to reduce their contract premium rates if
regulators perceive our medical loss ratio as too low. Any of these regulatory
actions could harm our operating results.

Failure to comply with government regulations could subject us to civil and
criminal penalties.

Federal and state governments have enacted fraud and abuse laws and other
laws to protect patients' privacy and access to healthcare. Violation of the
laws or regulations governing our operations could result in the imposition of
civil or criminal penalties, the cancellation of our contracts to provide
services, the suspension or revocation of our licenses or our exclusion from
participating in the Medicaid, SSI, and SCHIP programs. These penalties or
exclusions, were they to occur, would negatively impact our ability to operate
our business. For example, failure to pay our providers promptly could result
in the imposition of fines and other penalties.

The Health Insurance Portability and Accountability Act of 1996, or HIPAA,
broadened the scope of fraud and abuse laws applicable to healthcare companies.
HIPAA created civil penalties for, among other things, billing for medically
unnecessary goods or services. HIPAA established new enforcement mechanisms to
combat fraud and abuse, including a whistle blower program. Further, a new
regulation promulgated pursuant to HIPAA imposes civil and criminal penalties
for failure to comply with the privacy standards for individually-identifiable
health records. Congress may enact additional legislation to increase penalties
and to create a private right of action under HIPAA, which would entitle
patients to seek monetary damages for violations of the privacy rules.

Compliance with new government regulations may require us to make significant
expenditures.

In August 2000, the Department of Health and Human Services, or HHS, issued
a new regulation under HIPAA requiring the use of uniform electronic data
transmission standards for healthcare claims and payment transactions submitted
or received electronically. We are required to comply with the new regulation
by October 16, 2002, and Texas has indicated that it may impose an earlier
compliance deadline. In August 1998, HHS proposed a regulation that would
require healthcare participants to implement organizational and technical
practices to protect the security of electronically maintained or transmitted
health-related information. In December 2000, HHS issued a new regulation
mandating heightened privacy and confidentiality protections under HIPAA that
became effective on April 14, 2001. Compliance with this regulation will be
required by April 14, 2003, unless the Bush Administration revises the
regulation or defers the implementation date.

In January 2001, the federal Centers for Medicare and Medicaid Services, or
CMS (then the Health Care Financing Administration), published new regulations
regarding Medicaid managed care. CMS subsequently delayed the effective date of
these regulations until August 16, 2002. In August 2001, CMS proposed new
regulations that would modify the January regulations. If adopted, these
regulations would implement the requirements of the Balanced Budget Act of 1997
that are intended to give states more flexibility in their administration of
Medicaid managed care programs, provide new patient protections for Medicaid
managed care enrollees and require states to meet new actuarial soundness
requirements.

The Bush Administration's issuance of new regulations, its review of the
existing HIPAA rules and other newly published regulations, the states' ability
to promulgate stricter rules, and uncertainty regarding many aspects of the
regulations may make compliance with the relatively new regulatory landscape
difficult. Our existing programs and systems would not enable us to comply in
all respects with these new regulations. In order to comply with the regulatory
requirements, we will be required to employ additional

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or different programs and systems, the costs of which are unknown to us at this
time. Further, compliance with these regulations would require changes to many
of the procedures we currently use to conduct our business, which may lead to
additional costs that we have not yet identified. We do not know whether, or
the extent to which, we will be able to recover our costs of complying with
these new regulations from the states. The new regulations and the related
compliance costs could have a material adverse effect on our business.

Changes in healthcare law may reduce our profitability.

Numerous proposals relating to changes in healthcare law have been
introduced, some of which have been passed by Congress and the states in which
we operate or may operate in the future. Changes in applicable laws and
regulations are continually being considered, and interpretations of existing
laws and rules may also change from time to time. We are unable to predict what
regulatory changes may occur or what effect any particular change may have on
our business. These changes could reduce the number of persons enrolled or
eligible for Medicaid and reduce the reimbursement or payment levels for
medical services. More generally, we are unable to predict whether new laws or
proposals will favor or hinder the growth of managed healthcare.

A recent example is state and federal legislation that would enable
physicians to collectively bargain with managed healthcare organizations. In
2000, the U.S. House of Representatives approved a collective bargaining
proposal that contained an exemption for public sector managed healthcare
organizations. If legislation of this type is enacted without such an
exemption, it would negatively impact our bargaining position with many of our
providers and might result in an increase in our cost of providing medical
benefits.

We cannot predict the outcome of these legislative or regulatory proposals
or the effect that they will have on us. Legislation or regulations that
require us to change our current manner of operation, provide additional
benefits or change our contract arrangements may seriously harm our operations
and financial results.

If we are unable to participate in SCHIP programs our growth rate may be
limited.

The State Children's Health Insurance Program is a relatively new federal
initiative designed to provide coverage for low-income children not otherwise
covered by Medicaid or other insurance programs. The programs vary
significantly from state to state. Participation in SCHIP programs is an
important part of our growth strategy. If states do not allow us to participate
or if we fail to win bids to participate, our growth strategy may be materially
and adversely affected.

If state regulators do not approve payments of dividends and distributions by
our subsidiaries to us, we may not have sufficient funds to implement our
business strategy.

We principally operate through our health plan subsidiaries. If funds
normally available to us become limited in the future, we may need to rely on
dividends and distributions from our subsidiaries to fund our operations. These
subsidiaries are subject to regulations that limit the amount of dividends and
distributions that can be paid to us without prior approval of, or notification
to, state regulators. If these regulators were to deny our subsidiaries'
request to pay dividends to us, the funds available to our company as a whole
would be limited, which could harm our ability to implement our business
strategy.

Risks Related to Our Business

Receipt of inadequate premiums would negatively affect our revenues and
profitability.

Nearly all of our revenues are generated by premiums consisting of fixed
monthly payments per member. These premiums are fixed by contract, and we are
obligated during the contract periods to provide healthcare services as
established by the state governments. We use a large portion of our revenues to
pay the costs of healthcare services delivered to our customers. If premiums do
not increase when expenses related to medical services rise, our earnings would
be affected negatively. In addition, our actual medical

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services costs may exceed our estimates, which would cause our medical loss
ratio, or our expenses related to medical services as a percentage of premium
revenues, to increase and our profits to decline. In addition, it is possible
for a state to increase the rates payable to the hospitals without granting a
corresponding increase in premiums to us. If this were to occur in one or more
of the states in which we operate, our profitability would be harmed.

Failure to effectively manage our medical costs or related administrative costs
would reduce our profitability.

Our profitability depends, to a significant degree, on our ability to
predict and effectively manage expenses related to health benefits. We have
less control over the costs related to medical services than we do over our
general and administrative expenses. Historically, our medical loss ratio has
fluctuated. For example, our medical loss ratio was 82.8% for the nine months
ended September 30, 2001 and 84.3% for 2000, but was 88.9% for 1999 and 88.4%
for 1998. Because of the narrow margins of our health plan business, relatively
small changes in our medical loss ratio can create significant changes in our
financial results. Changes in healthcare regulations and practices, the level
of use of healthcare services, hospital costs, pharmaceutical costs, major
epidemics, new medical technologies and other external factors, including
general economic conditions such as inflation levels, are beyond our control
and could reduce our ability to predict and effectively control the costs of
providing health benefits. We may not be able to manage costs effectively in
the future. If our costs related to health benefits increase, our profits could
be reduced or we may not remain profitable.

Failure to accurately predict our medical expenses could negatively affect our
reported results.

Our medical expenses include estimates of medical expenses incurred but not
yet reported, or IBNR. We estimate our IBNR medical expenses monthly based on a
number of factors. Adjustments, if necessary, are made to medical expenses in
the period during which the actual claim costs are ultimately determined or
when criteria used to estimate IBNR change. We cannot be sure that our IBNR
estimates are adequate or that adjustments to those estimates will not harm our
results of operations. From time to time in the past, our actual results have
varied from our estimates, particularly in times of significant changes in the
number of our members. Our failure to accurately estimate IBNR may also affect
our ability to take timely corrective actions, further harming our results.

Difficulties in executing our acquisition strategy could adversely affect our
business.

Historically, the acquisition of Medicaid contract rights and related
assets of other health plans, both in our existing service areas and in new
markets, has accounted for a significant amount of our growth. For example, our
acquisition of contract rights from Humana in February 2001 accounted for 90.0%
of the increase in our net premium revenues for the nine months ended September
30, 2001 compared to the same period in 2000. Many of the other potential
purchasers of Medicaid assets have greater financial resources than we have. In
addition, many of the sellers are interested either in (1) selling, along with
their Medicaid assets, other assets in which we do not have an interest or (2)
selling their companies, including their liabilities, as opposed to the assets
of their ongoing businesses.

We generally are required to obtain regulatory approval from one or more
state agencies when making acquisitions. In the case of an acquisition of a
business located in a state in which we do not currently operate, we would be
required to obtain the necessary licenses to operate in that state. In
addition, even if we may already operate in a state in which we acquire a new
business, we would be required to obtain additional regulatory approval. We
cannot assure you that we would be able to comply with these regulatory
requirements for an acquisition in a timely manner, or at all. In deciding
whether to approve a proposed acquisition, state regulators may consider a
number of factors outside our control, including giving preference to competing
offers made by locally owned entities or by not-for-profit entities.
Furthermore, we expect to enter into a credit facility that will prohibit some
acquisitions without the consent of our bank lender.

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In addition to the difficulties we may face in identifying and consummating
acquisitions, we will also be required to integrate and consolidate any
acquired business or assets with our existing operations. This may include the
integration of:

. additional personnel who are not familiar with our operations and
corporate culture;

. existing provider networks, which may operate on different terms than our
existing networks;

. existing members, who may decide to switch to another healthcare plan; and

. disparate administrative, accounting and finance, and information systems.

For example, in the Humana acquisition, the configuration of new provider
contracts temporarily extended our claims payment process.

Accordingly, we may be unable to successfully identify, consummate and
integrate future acquisitions or operate acquired businesses profitably. We
also may be unable to obtain sufficient additional capital resources for future
acquisitions. If we are unable to effectively execute our acquisition strategy,
our future growth will suffer and our results of operations could be harmed.

Failure to achieve timely profitability in any business would negatively affect
our results of operations.

Start-up costs associated with a new business can be substantial. For
example, in order to obtain a certificate of authority in most jurisdictions,
we must first establish a provider network, have systems in place and
demonstrate our ability to obtain a state contract and process claims. If we
were unsuccessful in obtaining the necessary license, winning the bid to
provide service or attracting members in numbers sufficient to cover our costs,
any new business of ours would fail. We also could be obligated by the state to
continue to provide services for some period of time without sufficient revenue
to cover our ongoing costs or recover start-up costs. In addition, we may not
be able to effectively commercialize any new programs or services we seek to
market to third parties. The expenses associated with starting up a new
business could have a significant impact on our results of operations if we are
unable to achieve profitable operations in a timely fashion.

We derive all of our revenues from operations in three states, and our
operating results would be materially affected by a decrease in revenues or
profitability in any one of those states.

Operations in Wisconsin, Indiana and Texas account for all of our revenues.
If we were unable to continue to operate in each of those states or if our
current operations in any portion of one of those states were significantly
curtailed, our revenues would decrease materially. In the first half of 2001,
our membership in Indiana declined by approximately 50,000 due to a
subcontracting provider organization terminating a percent-of-premium
arrangement. In 2000, we reduced our service area in Wisconsin from 36 to 18
counties. In 1999 and 2000, we terminated our services to most of the southern
counties of Indiana. Our reliance on operations in a limited number of states
could cause our revenue and profitability to change suddenly and unexpectedly,
depending on legislative actions, economic conditions and similar factors in
those states. Our inability to continue to operate in any of the states in
which we operate would harm our business.

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Competition may limit our ability to increase penetration of the markets that
we serve.

We compete for members principally on the basis of size and quality of
provider network, benefits provided and quality of service. We compete with
numerous types of competitors, including other health plans and traditional
state Medicaid programs that reimburse providers as care is provided. Subject
to limited exceptions by federally approved state applications, the federal
government requires that there be choices for Medicaid recipients among managed
care programs. Voluntary programs and mandated competition may limit our
ability to increase our market share.

Some of the health plans with which we compete have greater financial and
other resources and offer a broader scope of products than we do. In addition,
significant merger and acquisition activity has occurred in the managed care
industry, as well as in industries that act as suppliers to us, such as the
hospital, physician, pharmaceutical, medical device and health information
systems industries. To the extent that competition intensifies in any market
that we serve, our ability to retain or increase members and providers, or
maintain or increase our revenue growth, pricing flexibility and control over
medical cost trends may be adversely affected.

In addition, in order to increase our membership in the markets we
currently serve, we believe that we must continue to develop and implement
community-specific products, alliances with key providers and localized
outreach and educational programs. If we are unable to develop and implement
these initiatives, or if our competitors are more successful than us in doing
so, we may not be able to further penetrate our existing markets.

If we are unable to maintain satisfactory relationships with our provider
networks, our profitability will be harmed.

Our profitability depends, in large part, upon our ability to contract
favorably with hospitals, physicians and other healthcare providers. Our
provider arrangements with our primary care physicians, specialists and
hospitals generally may be cancelled by either party without cause upon 90 to
120 days' prior written notice. We cannot assure you that we will be able to
continue to renew our existing contracts or enter into new contracts enabling
us to service our members profitably. We will be required to establish
acceptable provider networks prior to entering new markets. We may be unable to
enter into agreements with providers in new markets on a timely basis or under
favorable terms. If we are unable to retain our current provider contracts or
enter into new provider contracts timely or on favorable terms, our
profitability will be harmed.

We may be unable to attract and retain key personnel.

We are highly dependent on our ability to attract and retain qualified
personnel to operate and expand our Medicaid managed care business. If we lose
one or more members of our senior management team, including our chief
executive officer, Michael F. Neidorff, who has been instrumental in developing
our mission and forging our business relationships, our business and operating
results could be harmed. We do not have an employment agreement with Mr.
Neidorff, and we cannot assure you that we will be able to retain his services.
Our ability to replace any departed members of our senior management or other
key employees may be difficult and may take an extended period of time because
of the limited number of individuals in the Medicaid managed care industry with
the breadth of skills and experience required to operate and expand
successfully a business such as ours. Competition to hire from this limited
pool is intense, and we may be unable to hire, train, retain or motivate these
personnel.

Negative publicity regarding the managed care industry may harm our business
and operating results.

Recently, the managed care industry has received negative publicity. This
publicity has led to increased legislation, regulation, review of industry
practices and private litigation in the commercial sector. These

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factors may adversely affect our ability to market our services, require us to
change our services, and increase the regulatory burdens under which we
operate. Any of these factors may increase the costs of doing business and
adversely affect our operating results.

Claims relating to medical malpractice could cause us to incur significant
expenses.

Our providers and employees involved in medical care decisions may be
subject to medical malpractice claims. In addition, some states, including
Texas, have adopted legislation that permits managed care organizations to be
held liable for negligent treatment decisions or benefits coverage
determinations. Claims of this nature, if successful, could result in
substantial damage awards against us and our providers that could exceed the
limits of any applicable insurance coverage. Therefore, successful malpractice
or tort claims asserted against us, our providers or our employees could
adversely affect our financial condition and profitability. Even if any claims
brought against us are unsuccessful or without merit, they would still be
time-consuming and costly and could distract our management's attention. As a
result, we may incur significant expenses and may be unable to operate our
business effectively.

Growth in the number of Medicaid-eligible persons during economic downturns
could cause our operating results and stock prices to suffer if state and
federal budgets decrease or do not increase.

Less favorable economic conditions may cause our membership to increase as
more people become eligible to receive Medicaid benefits. During such economic
downturns, however, state and federal budgets could decrease, causing states to
attempt to cut healthcare programs, benefits and rates. In particular, the
terrorist acts of September 11, 2001 have created an uncertain economic
environment, and we cannot predict the impact of these events, other acts of
terrorism or related military action on federal or state funding of healthcare
programs or on the size of the Medicaid-eligible population. If federal funding
were decreased or unchanged while our membership was increasing, our results of
operations would suffer.

Growth in the number of Medicaid-eligible persons may be countercyclical, which
could cause our operating results to suffer when general economic conditions
are improving.

Historically, the number of persons eligible to receive Medicaid benefits
has increased more rapidly during periods of rising unemployment, corresponding
to less favorable general economic conditions. Conversely, this number may grow
more slowly or even decline if economic conditions improve. Therefore,
improvements in general economic conditions may cause our membership levels to
decrease, thereby causing our operating results to suffer, which could lead to
decreases in our stock price during periods in which stock prices in general
are increasing.

We intend to expand primarily into markets where Medicaid recipients are
required to enroll in managed care plans.

We expect to continue to focus our business in states in which Medicaid
enrollment in managed care is mandatory. Currently, approximately two-thirds of
the states require health plan enrollment for Medicaid-eligible participants in
all or a portion of their counties. The programs are voluntary in other states.
Because we concentrate on markets with mandatory enrollment, we expect the
geographic expansion of our business to be limited to those states.

If we are unable to integrate and manage our information systems effectively,
our operations could be disrupted.

Our operations depend significantly on effective information systems. The
information gathered and processed by our information systems assists us in,
among other things, monitoring utilization and other cost factors, processing
provider claims, and providing data to our regulators. Our providers also
depend upon our information systems for membership verifications, claims status
and other information.

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Our information systems and applications require continual maintenance,
upgrading and enhancement to meet our operational needs. Moreover, our
acquisition activity requires frequent transitions to or from, and the
integration of, various information systems. We regularly upgrade and expand
our information systems capabilities. If we experience difficulties with the
transition to or from information systems or are unable to properly maintain or
expand our information systems, we could suffer, among other things, from
operational disruptions, loss of existing members and difficulty in attracting
new members, regulatory problems and increases in administrative expenses. In
addition, our ability to integrate and manage our information systems may be
impaired as the result of events outside our control, including acts of nature,
such as earthquakes or fires, or acts of terrorists.

Risks Related to This Offering and Ownership of Our Common Stock

Volatility of our stock price could cause you to lose all or part of your
investment.

The market price of our common stock, like that of the common stock of
others in our industry, may be highly volatile. The stock market in general has
recently experienced extreme price and volume fluctuations, and this volatility
has affected the market prices of securities of other companies for reasons
frequently unrelated, or disproportionate, to the operating performance of
those companies. The market price of our common stock may fluctuate
significantly in response to the following factors, some of which are beyond
our control:

. state and federal budget decreases;

. changes in securities analysts' estimates of our financial performance;

. changes in market valuations of similar companies, including commercial
managed care organizations;

. variations in our quarterly operating results;

. acquisitions and strategic partnerships;

. adverse publicity regarding managed care organizations;

. government action regarding Medicaid eligibility;

. changes in state mandatory Medicaid programs;

. changes in our management;

. broad fluctuations in stock market prices and volume; and

. general economic conditions, including inflation and unemployment rates.

Investors may not be able to resell their shares of our common stock
following periods of volatility because of the market's adverse reaction to the
volatility. We cannot assure you that our stock will trade at the same levels
as the stock of other companies in our industry or that the market in general
will sustain its current prices.

We cannot guarantee that an active trading market for our common stock will
develop or be sustained.

Prior to this offering, you could not buy or sell our common stock
publicly. An active public market for our common stock may not develop or be
sustained after this offering. We negotiated the initial public offering price
with the representatives of the underwriters based on several factors. This
price may not be indicative of prices that will prevail in the trading market
after this offering. If an active trading market fails to develop or be
sustained, you may be unable to sell your shares of common stock at or above
the initial offering price.

Future sales of common stock by our existing stockholders could cause our stock
price to fall.

Sales of substantial amounts of our common stock in the public market after
the completion of this offering, or the perception that those sales could
occur, could adversely affect the market price of our

424B1 17th Page of 86 TOC 1st Previous Next ↓Bottom Just 17th
common stock and could materially impair our future ability to raise capital
through offerings of our common stock. Based on shares outstanding as of
November 21, 2001, a total of 6,571,369 shares of common stock may be sold in
the public market by existing stockholders, assuming no exercise of the
underwriters' over-allotment option. The holders of substantially all of these
shares are contractually restricted from selling their shares for 180 days from
the date of this prospectus, but SG Cowen Securities Corporation may release
these shares from these contractual restrictions at any time in its discretion.
SG Cowen Securities Corporation has no pre-established conditions to waiving
the terms of the "lock-up" agreements, and any decision by it to waive those
conditions would depend on a number of factors, including market conditions,
the performance of the common stock in the market and our financial condition
at that time.

Our officers and directors and their affiliates may be able to control the
outcome of most corporate actions requiring stockholder approval.

After this offering, our directors and officers and their affiliates will
beneficially own 42.7% of our outstanding common stock. As a result, these
stockholders, if they act together, will be able to influence our management
and affairs and all matters requiring stockholder approval, including the
election of directors and approval of significant corporate transactions. This
concentration of ownership may have the effect of delaying or preventing a
change in control of our company and might affect the market price of our
common stock.

We may allocate the net proceeds from this offering in ways with which you may
not agree.

Our business plan is general in nature and is subject to change based upon
changing conditions and opportunities. Our management has broad discretion in
applying $37.5 million of the total $41.5 million in net proceeds we estimate
we will receive in this offering. Because this portion of the net proceeds is
not required to be allocated to any specific investment or transaction, you
cannot determine at this time the value or propriety of our application of the
proceeds. Moreover, you will not have the opportunity to evaluate the economic,
financial or other information on which we base our decisions on how to use our
proceeds. As a result, you and other stockholders may not agree with our
decisions.

Our corporate documents and provisions of Delaware law may prevent a change in
control or management that stockholders may consider desirable.

Section 203 of the Delaware General Corporation Law, laws of states in
which we operate, and our charter and by-laws contain provisions that might
enable our management to resist a takeover of our company. These provisions
could have the effect of delaying, deferring, or preventing a change in control
of Centene or a change in our management that stockholders may consider
favorable or beneficial. These provisions could also discourage proxy contests
and make it more difficult for you and other stockholders to elect directors
and take other corporate actions. These provisions could also limit the price
that investors might be willing to pay in the future for shares of our common
stock.

You will pay a much higher price per share than the book value of our common
stock.

If you purchase our common stock in this offering, you will incur immediate
and substantial dilution, which means that:

. you will pay a price per share that exceeds by $8.19 the per share pro
forma net tangible book value of our assets immediately following the
offering (on a pro forma basis as of September 30, 2001) after giving
effect to the conversion of our preferred stock into common stock and the
exercise of all outstanding warrants to acquire common stock; and

. the purchasers in the offering will have contributed 70.0% of the total
amount to fund us but will own only 30.0% of our outstanding shares.

In the past, we issued options to acquire common stock at prices
significantly below the public offering price of this offering. To the extent
these outstanding options are ultimately exercised, you will experience further
dilution.

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FORWARD-LOOKING STATEMENTS

This prospectus contains forward-looking statements that relate to future
events or our future financial performance. We have attempted to identify these
statements by terminology including "believe," "anticipate," "plan," "expect,"
"estimate," "intend," "seek," "goal," "may," "will," "should," "can,"
"continue" or the negative of these terms or other comparable terminology.
These statements include statements about our market opportunity, our growth
strategy, competition, expected activities and future acquisitions and
investments, and the adequacy of our available cash resources. These statements
may be found in the sections of this prospectus entitled "Prospectus Summary,"
"Risk Factors," "Use of Proceeds," "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and "Business." Investors are
cautioned that matters subject to forward-looking statements involve known and
unknown risks and uncertainties, including economic, regulatory, competitive
and other factors that may cause our or our industry's actual results, levels
of activity, performance or achievements to be materially different from any
future results, levels of activity, performance or achievements expressed or
implied by these forward-looking statements. These statements are not
guarantees of future performance and are subject to risks, uncertainties and
assumptions.

Actual results may differ from projections or estimates due to a variety of
important factors. Our results of operations and projections of future earnings
depend in large part on accurately predicting and effectively managing health
benefits and other operating expenses. A variety of factors, including
competition, changes in health care practices, changes in federal or state laws
and regulations or their interpretations, inflation, provider contract changes,
new technologies, government-imposed surcharges, taxes or assessments,
reduction in provider payments by governmental payors, major epidemics,
disasters and numerous other factors affecting the delivery and cost of
healthcare, such as major healthcare providers' inability to maintain their
operations, may in the future affect our ability to control our medical costs
and other operating expenses. Governmental action or business conditions could
result in premium revenues not increasing to offset any increase in medical
costs and other operating expenses. Once set, premiums are generally fixed for
one year periods and, accordingly, unanticipated costs during such periods
cannot be recovered through higher premiums. The expiration, cancellation or
suspension of our Medicaid managed care contracts by the state governments
would also negatively impact us. Due to these factors and risks, we cannot
assure you with respect to our future premium levels or our ability to control
our future medical costs.

424B1 19th Page of 86 TOC 1st Previous Next ↓Bottom Just 19th
USE OF PROCEEDS

We estimate that our net proceeds of our sale of the 3,250,000 shares of
common stock offered by us will be approximately $41.5 million, after deducting
underwriting discounts and commissions and estimated offering expenses payable
by us. We will not receive any of the proceeds of the sale of 250,000 shares by
the Elizabeth A. Brinn Foundation or of 525,000 shares of common stock by the
other selling stockholders to the underwriters to cover over-allotments, if any.

The principal purposes of this offering are to obtain additional capital,
to create a public market for our common stock and to facilitate future access
to public debt and equity markets. We expect to use $4.0 million of our net
proceeds to repay all of the principal amount of our outstanding subordinated
notes at or shortly after the closing of this offering. The subordinated notes
bear interest at a fixed rate of 8.5% per year and mature in two equal
installments in September 2003 and 2004. We can repay the notes at any time
without premium or penalty. We issued these notes in September 1998 to
refinance notes that had been issued in 1993 to fund expansion opportunities
and statutory net worth requirement needs. An aggregate of $2.5 million of the
subordinated notes are held by Greylock Limited Partnership, which owns 31.4%
of our common stock and is an affiliate of our director, Howard E. Cox, Jr.;
$660,746 of the notes are held by the Elizabeth A. Brinn Foundation, which is
an affiliate of our directors Samuel E. Bradt, Claire W. Johnson and Richard P.
Wiederhold; and $235,499, $205,352 and $7,980 of the notes, respectively, are
held by Mr. Johnson, Mr. Wiederhold and Michael F. Neidorff, each of whom is
one of our directors. Mr. Neidorff is also our President and Chief Executive
Officer.

We intend to use the remainder of our net proceeds for working capital and
other general corporate purposes, which may include acquisitions of businesses,
assets and technologies that are complementary to our business. For example, we
may use proceeds to acquire Medicaid and SCHIP contract rights and related
assets to increase our membership and to expand our business into new service
areas. Although we have evaluated possible acquisitions from time to time, we
currently have no commitments or agreements to make any acquisitions, and we
cannot assure you that we will make any acquisitions in the future. We also may
apply proceeds to fund working capital to:

. increase market penetration within our current service areas;

. pursue opportunities for the development of new markets;

. expand services and products available to our members; and

. strengthen our capital base by increasing the statutory capital of our
health plan subsidiaries.

We have not determined the amount of net proceeds to be used specifically
for the foregoing purposes, other than for repayment of our subordinated notes.
As a result, our management will have broad discretion to allocate our net
proceeds of this offering. Pending application of our net proceeds, we intend
to invest our net proceeds in short-term, investment-grade, interest-bearing
instruments, repurchase agreements and high-grade corporate notes.

DIVIDEND POLICY

We have never declared or paid any cash dividends on our capital stock. We
currently anticipate that we will retain any future earnings for the
development, operation and expansion of our business. Accordingly, we do not
anticipate declaring or paying any cash dividends in the foreseeable future.
Also, we expect to enter into a credit facility that will prohibit us from
paying dividends without the consent of our lender.

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CAPITALIZATION

The following table shows our capitalization as of September 30, 2001:

. on an actual basis;

. on a pro forma basis to reflect (a) the conversion of our outstanding
classes of preferred and common stock into a single class of common stock
at the closing of this offering, (b) the exercise of outstanding warrants
before the closing of this offering and (c) our reincorporation in
Delaware effected in November 2001; and

. on a pro forma as adjusted basis to also reflect our sale of the 3,250,000
shares of common stock offered by us, after deducting underwriting
discounts and commissions and estimated offering expenses payable by us,
and the application of our estimated net proceeds.

You should read this table in conjunction with the consolidated financial
statements and related notes and "Management's Discussion and Analysis of
Financial Condition and Results of Operations" appearing elsewhere in this
prospectus.

[Enlarge/Download Table]

September 30, 2001
-----------------------------
Pro Forma
Actual Pro Forma As Adjusted
------- --------- -----------
(in thousands)

Long-term debt, net of current portion:
Subordinated debt....................................................... $ 4,000 $ 4,000 $ --
------- ------- -------
Series D redeemable convertible preferred stock, $.167 par value; 4,000,000
shares authorized and 3,716,000 shares issued and outstanding, actual; no
shares authorized, issued or outstanding, pro forma and pro forma as
adjusted................................................................. 19,231 -- --
------- ------- -------
Stockholders' equity:
Series A, B and C convertible preferred stock, $.167 par value;
4,300,000 shares authorized and 2,156,340 shares issued and
outstanding, actual; no shares authorized, issued or outstanding,
pro forma or pro forma as adjusted.................................... 360 -- --
Undesignated preferred stock, $.001 par value; no shares authorized,
issued or outstanding, actual or pro forma; 10,000,000 shares
authorized and no shares issued or outstanding, pro forma as adjusted. -- -- --
Series A and B common stock, $.003 par value; 17,000,000 shares
authorized and 901,526 shares issued and outstanding, actual; no
shares authorized, issued or outstanding, pro forma or pro forma as
adjusted.............................................................. 3 -- --
Common stock, $.001 par value; no shares authorized, issued or
outstanding, actual; 40,000,000 shares authorized and 6,819,869
shares issued and outstanding, pro forma; 40,000,000 shares
authorized and 10,069,869 shares issued and outstanding, pro forma as
adjusted.............................................................. -- 7 10
Additional paid-in capital.............................................. -- 19,605 61,117
Net unrealized gain on investments, net of tax.......................... 584 584 584
Accumulated deficit..................................................... (735) (735) (735)
------- ------- -------
Total stockholders' equity.......................................... 212 19,461 60,976
------- ------- -------
Total capitalization............................................... $23,443 $23,461 $60,976
======= ======= =======

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DILUTION

Our historical net tangible book value as of September 30, 2001 was $(2.3)
million, or $(2.51) per share of common stock. Net tangible book value per
share represents the amount of our total tangible assets less our total
liabilities and our preferred stock, divided by the number of shares of common
stock outstanding. Our pro forma net tangible book value as of September 30,
2001 was $17.0 million, or $2.49 per share of common stock. Pro forma net
tangible book value per share represents the amount of our total tangible
assets less our total liabilities, divided by the pro forma number of shares of
common stock outstanding after giving effect to the conversion of our preferred
stock into common stock and the exercise of all outstanding warrants to acquire
common stock to occur before the closing of this offering. After giving effect
to our sale of 3,250,000 shares of common stock in this offering and after
deducting underwriting discounts and commissions and estimated offering
expenses payable by us, our adjusted pro forma net tangible book value as of
September 30, 2001 would have been $58.5 million, or $5.81 per share. This
represents an immediate increase in pro forma net tangible book value of $3.32
per share to our existing stockholders and an immediate dilution in pro forma
net tangible book value of $8.19 per share to new investors purchasing shares
in this offering. The following table illustrates this dilution on a per share
basis:

[Enlarge/Download Table]

Public offering price per share.................................................. $14.00
Historical net tangible book value as of September 30, 2001................... $(2.51)
Increase per share attributable to conversion of preferred stock and warrants. 5.00
------
Pro forma net tangible book value per share as of September 30, 2001.......... 2.49
Increase per share attributable to new investors.............................. 3.32
------
Adjusted pro forma net tangible book value per share after this offering......... 5.81
------
Dilution per share to new investors.............................................. $ 8.19
======

The following table summarizes on a pro forma basis as of September 30,
2001, after giving effect to the conversion of our preferred stock into common
stock and the exercise of warrants to acquire common stock to occur before the
closing of this offering, the number of shares of common stock purchased from
us, the total consideration paid to us and the average price per share paid by
existing stockholders and by new investors, before deducting the underwriting
discounts and commissions and estimated offering expenses payable by us:

[Download Table]

Shares Purchased Total Consideration
------------------ ------------------- Average Price
Number Percent Amount Percent Per Share
---------- ------- ----------- ------- -------------

Existing stockholders 6,819,869 67.7% $19,461,000 30.0% $ 2.85
New investors........ 3,250,000 32.3 45,500,000 70.0 14.00
---------- ------ ----------- ------
Total............. 10,069,869 100.0% $64,961,000 100.0%
========== ====== =========== ======

The above discussion and tables assume no exercise of stock options, except
as described above, after September 30, 2001. As of September 30, 2001, we had
outstanding options to purchase a total of 1,379,040 shares of common stock at
a weighted average exercise price of $2.06 per share. To the extent any of
these options are exercised, there will be further dilution to new investors.

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SELECTED CONSOLIDATED FINANCIAL DATA

The following selected consolidated financial data should be read in
connection with, and are qualified by reference to, the consolidated financial
statements and related notes and "Management's Discussion and Analysis of
Financial Condition and Results of Operations" appearing elsewhere in this
prospectus. The data for the years ended December 31, 1998, 1999 and 2000 and
the nine months ended September 30, 2001 and as of December 31, 1999 and 2000
and September 30, 2001 are derived from consolidated financial statements
audited by Arthur Andersen LLP and included elsewhere in this prospectus. The
data for the years ended December 31, 1996 and 1997 and as of December 31,
1996, 1997 and 1998 are derived from audited consolidated financial statements
not included in this prospectus. The data for the nine months ended September
30, 2000 are derived from unaudited consolidated financial statements appearing
elsewhere in this prospectus. The unaudited consolidated financial statements
have been prepared on the same basis as the audited consolidated financial
statements and, in the opinion of our management, include all adjustments,
consisting only of normal recurring adjustments, necessary for a fair
presentation of the information set forth therein. Operating results for the
nine months ended September 30, 2001 are not necessarily indicative of
operating results to be expected for the full year. The pro forma share
information included in the consolidated statement of operations data have been
computed as described in note 22 of the notes to consolidated financial
statements included elsewhere in this prospectus.

[Enlarge/Download Table]

Year Ended December 31,
--------------------------------------------------------
1996 1997 1998 1999 2000
---------- ---------- ---------- -------- ----------
(in thousands, except share data)

Statement of Operations Data:
Revenues:
Premiums....................................................... $ 72,595 $ 114,531 $ 149,577 $200,549 $ 216,414
Administrative services fees................................... -- 719 861 880 4,936
---------- ---------- ---------- -------- ----------
Total revenues................................................ 72,595 115,250 150,438 201,429 221,350
---------- ---------- ---------- -------- ----------
Operating expenses:
Medical services costs......................................... 59,532 95,994 132,199 178,285 182,495
General and administrative expenses............................ 11,041 19,799 25,066 29,756 32,335
---------- ---------- ---------- -------- ----------
Total operating expenses...................................... 70,573 115,793 157,265 208,041 214,830
---------- ---------- ---------- -------- ----------
Income (loss) from operations................................. 2,022 (543) (6,827) (6,612) 6,520
Other income (expense):
Investment and other income, net............................... 898 1,207 1,794 1,623 1,784
Interest expense............................................... (592) (854) (771) (498) (611)
Equity in income (losses) from joint ventures.................. -- (356) (477) 3 (508)
---------- ---------- ---------- -------- ----------
Income (loss) from continuing operations before income taxes.. 2,328 (546) (6,281) (5,484) 7,185
Income tax expense (benefit)..................................... 821 (39) (1,542) -- (543)
---------- ---------- ---------- -------- ----------
Income (loss) from continuing operations...................... 1,507 (507) (4,739) (5,484) 7,728
Loss from discontinued operations, net........................... -- (808) (2,223) (3,927) --
---------- ---------- ---------- -------- ----------
Net income (loss)............................................. 1,507 (1,315) (6,962) (9,411) 7,728
Accretion of redeemable preferred stock.......................... -- -- (122) (492) (492)
---------- ---------- ---------- -------- ----------
Net income (loss) attributable to common stockholders......... $ 1,507 $ (1,315) $ (7,084) $ (9,903) $ 7,236
========== ========== ========== ======== ==========
Net income (loss) from continuing operations per common share:
Basic.......................................................... $ 1.47 $ (0.48) $ (4.65) $ (6.63) $ 8.03
Diluted........................................................ $ 0.45 $ (0.48) $ (4.65) $ (6.63) $ 1.06
Net income (loss) per common share:
Basic.......................................................... $ 1.47 $ (1.23) $ (6.78) $ (10.99) $ 8.03
Diluted........................................................ $ 0.45 $ (1.23) $ (6.78) $ (10.99) $ 1.06
Weighted average common shares outstanding:
Basic.......................................................... 1,023,363 1,066,068 1,044,434 900,944 901,526
Diluted........................................................ 3,337,554 1,066,068 1,044,434 900,944 6,819,595
Pro forma net income per common share:
Basic.......................................................... $ 1.13
Diluted........................................................ $ 1.13
Pro forma weighted average common shares outstanding:
Basic.......................................................... 6,819,869
Diluted........................................................ 6,819,595
[Enlarge/Download Table]

Nine Months Ended
September 30,
----------------------
2000 2001
---------- ----------

Statement of Operations Data:
Revenues:
Premiums....................................................... $ 157,994 $ 235,995
Administrative services fees................................... 3,543 283
---------- ----------
Total revenues................................................ 161,537 236,278
---------- ----------
Operating expenses:
Medical services costs......................................... 133,575 195,512
General and administrative expenses............................ 24,133 27,992
---------- ----------
Total operating expenses...................................... 157,708 223,504
---------- ----------
Income (loss) from operations................................. 3,829 12,774
Other income (expense):
Investment and other income, net............................... 1,611 2,806
Interest expense............................................... (505) (285)
Equity in income (losses) from joint ventures.................. (329) --
---------- ----------
Income (loss) from continuing operations before income taxes.. 4,606 15,295
Income tax expense (benefit)..................................... 100 6,320
---------- ----------
Income (loss) from continuing operations...................... 4,506 8,975
Loss from discontinued operations, net........................... -- --
---------- ----------
Net income (loss)............................................. 4,506 8,975
Accretion of redeemable preferred stock.......................... (369) (369)
---------- ----------
Net income (loss) attributable to common stockholders......... $ 4,137 $ 8,606
========== ==========
Net income (loss) from continuing operations per common share:
Basic.......................................................... 4.59 $ 9.47
Diluted........................................................ $ 0.61 $ 1.11
Net income (loss) per common share:
Basic.......................................................... $ 4.59 $ 9.47
Diluted........................................................ $ 0.61 $ 1.11
Weighted average common shares outstanding:
Basic.......................................................... 901,526 908,918
Diluted........................................................ 6,793,208 7,787,653
Pro forma net income per common share:
Basic.......................................................... $ 1.31
Diluted........................................................ $ 1.15
Pro forma weighted average common shares outstanding:
Basic.......................................................... 6,827,261
Diluted........................................................ 7,787,653

[Enlarge/Download Table]

December 31,
------------------------------------------ September 30,
1996 1997 1998 1999 2000 2001
------- ------- ------- -------- ------- -------------
(in thousands)

Balance Sheet Data:
Cash, cash equivalents and short-term investments $ 9,759 $17,976 $21,525 $ 23,663 $26,423 $ 62,023
Total assets..................................... 25,313 39,330 45,727 52,207 66,017 103,971
Long-term debt, net of current portion........... 4,000 4,000 4,000 4,000 4,000 4,000
Redeemable convertible preferred stock........... -- -- 17,700 18,386 18,878 19,231
Total stockholders' equity (deficit)............. 3,765 2,495 (6,196) (16,367) (8,834) 212

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MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion contains forward-looking statements based upon
current expectations and related to future events and our future financial
performance that involve risks and uncertainties. Our actual results and timing
of events could differ materially from those anticipated in these
forward-looking statements as a result of many factors, including those set
forth under "Risk Factors," "Forward-Looking Statements," "Business" and
elsewhere in this prospectus.

Overview

Revenues

We generate revenues primarily from premiums we receive from the states in
which we operate to provide health benefits to our members. We receive a fixed
premium per member per month pursuant to our state contracts. We generally
receive premiums in advance of providing services and recognize premium revenue
during the period in which we are obligated to provide services to our members.
We also generate administrative services fees for providing services to SSI
members on a non-risk basis.

The primary driver of our increasing revenues has been membership growth.
We have increased our membership through both internal growth and acquisitions.
From December 31, 1998 to September 30, 2001, we have grown our membership by
66%. The following table sets forth our membership by service area, excluding
members related to the commercial operations that we discontinued in 1999:

[Download Table]

December 31,
----------------------- September 30,
1998 1999 2000 2001
------- ------- ------- -------------

Wisconsin 37,600 36,600 60,200 108,100
Indiana.. 93,500 102,200 108,000 61,800
Texas.... -- 3,500 26,000 54,900
Illinois. 4,500 -- -- --
------- ------- ------- -------
Total. 135,600 142,300 194,200 224,800
======= ======= ======= =======

In the first nine months of 2001, our membership in Indiana declined due to
a subcontracting provider organization terminating a percent-of-premium
arrangement, which was our only contract of that type. Separately, we entered
into agreements with Humana that resulted in the transfer to us of 35,000
members in Wisconsin and 30,000 members in Texas.

In 2000, a competitor in our Wisconsin market terminated its participation
in the Medicaid program benefiting our enrollment growth. Our membership growth
in the northern and central regions of Indiana was offset by our decision to
reduce our participation in the less profitable southern region. Our El Paso
health plan achieved sizable growth because we were named the default health
plan in this area and enrolled a majority of the members who failed to select a
specific plan.

In 1999, we terminated our commercial operations in Wisconsin and Indiana
to further concentrate our efforts in government supported health care. Changes
effected by the Balanced Budget Act of 1997 enabled

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us to terminate these operations. Our El Paso market became operational as the
state of Texas converted the fee-for-service market to a mandatory Medicaid
managed care market. Also, we sold our Illinois operation to focus our business
on states where Medicaid enrollment in managed care is mandatory.

Operating Expenses

Our operating expenses include medical services costs and general and
administrative expenses.

Our medical services costs include payments to physicians, hospitals, and
other providers for healthcare and specialty product claims. Medical service
costs also include estimates of medical expenses incurred but not yet reported,
or IBNR. Monthly, we estimate our IBNR based on a number of factors, including
inpatient hospital utilization data and prior claims experience. As part of
this review, we also consider the costs to process medical claims, and
estimates of amounts to cover uncertainties related to fluctuations in
physician billing patterns, membership, products and inpatient hospital trends.
These estimates are adjusted as more information becomes available. We utilize
the services of independent actuarial consultants who are contracted to review
our estimates periodically. While we believe that our process for estimating
IBNR is actuarily sound, we cannot assure you that healthcare claim costs will
not exceed our estimates.

Our results of operations depend on our ability to manage expenses related
to health benefits and to accurately predict costs incurred. The table below
depicts our medical loss ratio, which represents medical services costs as a
percentage of premium revenues and reflects the direct relationship between the
premium received and the medical services provided. Our stabilization in the
ratio primarily reflects member reductions in our southern Indiana market,
improved provider contract terms and premium rate increases in our markets
served.

[Download Table]

Nine Months Ended
Year Ended December 31, September 30,
---------------------- ----------------
1998 1999 2000 2000 2001
---- ---- ---- ---- ----

Medical loss ratio 88.4% 88.9% 84.3% 84.5% 82.8%

Our general and administrative expenses primarily reflect wages and
benefits and other administrative costs related to our employee base, including
those fees incurred to provide services to our members. These expenses are
funded by our management contract fees. Some of these services are provided
locally, while others are delivered to our health plans from a centralized
location. This approach provides the opportunity to control both direct and
indirect costs. The major centralized functions are claims processing,
information systems, finance and administration. The following table sets forth
the general and administrative expense ratio, which represents general and
administrative expenses as a percent of total revenues and reflects the
relationship between revenues earned and the costs necessary to drive those
revenues. The improvement in the ratio reflects growth in membership and
leveraging of our overall infrastructure.

[Download Table]

Nine Months Ended
Year Ended December 31, September 30,
---------------------- ----------------
1998 1999 2000 2000 2001
---- ---- ---- ---- ----

General and administrative expenses ratio 16.7% 14.8% 14.6% 14.9% 11.8%

Other Income

Other income consists principally of investment and other income, interest
expense, and equity in income (loss) from joint ventures.

. Investment income is derived from our cash, cash equivalents and
investments. Information about our investments is presented below under
"Liquidity and Capital Resources."

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. Interest expense primarily reflects interest paid on our subordinated
notes, which we intend to repay in full from our net proceeds of this
offering.

. Equity in income (loss) from joint ventures principally represents our
share of operating results from Superior HealthPlan, which we formed with
Community Health Centers Network in 1997. From 1998 through 2000, we owned
39% of Superior, and therefore accounted for the investment under the
equity method of accounting. Effective January 1, 2001, we entered into an
agreement to purchase an additional 51% of Superior. We also agreed to
purchase from TACHC GP, Inc. a term note pursuant to which Superior owed
TACHC $160,000. As a result of entering into this agreement, we began
accounting for our investment in Superior using consolidation accounting.
We therefore no longer reflect any operations of Superior in equity in
income (loss) from joint ventures and we eliminate in consolidation all
administrative fees from Superior. Under the agreement, Community Health
Centers Network has the right to require that, within 20 days after
completion of this offering, we acquire the remaining 10% equity interest
in Superior for $100,000 in cash or in shares of our common stock, based
on the public offering price.

Results of Operations

Nine Months Ended September 30, 2001 Compared to Nine Months Ended September
30, 2000

Revenues

Premiums for the nine months ended September 30, 2001 increased $78.0
million, or 49.4%, to $236.0 million from $158.0 million for the nine months
ended September 30, 2000. This increase was due to the Humana contract
purchases, the consolidation of our El Paso market and membership growth, net
of the termination of our Indiana sub-contract arrangement.

Administrative services fees for the nine months ended September 30, 2001
decreased $3.3 million, or 92.0%, to $283,000 from $3.5 million for the nine
months ended September 30, 2000 as a result of our acquisition of a majority
share of Superior HealthPlan, as described above.

Operating Expenses

Medical services costs. Medical services costs for the nine months ended
September 30, 2001 increased $61.9 million, or 46.4%, to $195.5 million from
$133.6 million for the nine months ended September 30, 2000. This increase was
due to the Humana contract purchases, the consolidation of our El Paso market
and membership growth, net of the termination of our Indiana sub-contract
arrangement.

General and administrative expenses. General and administrative expenses
for the nine months ended September 30, 2001 increased $3.9 million, or 16.0%,
to $28.0 million from $24.1 million for the nine months ended September 30,
2000. The increase was primarily due to a higher level of wages and related
expenses for additional staff to support our membership growth.

Other income

Other income for the nine months ended September 30, 2001 increased $1.7
million, or 224%, to $2.5 million from $777,000 for the nine months ended
September 30, 2000. This primarily reflects a significant increase in
investment income due to an increase in cash, cash equivalents and investments.
This increase was offset in part by a change in our method of accounting for
our investment in Superior HealthPlan, as described above.

424B1 26th Page of 86 TOC 1st Previous Next ↓Bottom Just 26th
Income tax expense

In the first nine months of 2001, we recorded $6.3 million of income tax
expense based on a 41.3% effective tax rate. In the first nine months of 2000,
we recorded tax expense of $100,000 as the change in our valuation allowance
related to deferred tax assets significantly offset the income tax provision.

Year Ended December 31, 2000 Compared to Year Ended December 31, 1999

Revenues

Premiums for the year ended December 31, 2000 increased $15.9 million, or
7.9%, to $216.4 million from $200.5 million in 1999. This increase was
primarily due to membership growth in our Wisconsin market and rate increases
in Wisconsin and Indiana.

Administrative services fees for the year ended December 31, 2000 increased
$4.0 million, or 460.9%, to $4.9 million from $880,000 in 1999 due to
membership increases in our El Paso market.

Operating expenses

Medical services costs. Medical services increased $4.2 million, or 2.4%,
to $182.5 million for the year ended December 31, 2000 from $178.3 million in
1999. The increase was primarily due to the net increase in membership.

General and administrative expenses. General and administrative expenses
for the year ended December 31, 2000 increased $2.6 million, or 8.7%, to $32.3
million from $29.8 million in 1999. The increase was primarily due to a higher
level of wages and related expenses for additional staff to support our
membership growth.

Other Income

Other income for the year ended December 31, 2000 decreased $463,000, or
41.0%, to $665,000 from $1.1 million in 1999. This decrease primarily reflects
an increase in equity in losses from our El Paso start-up market.

Income tax benefit

In 2000, we recorded an income tax benefit of $543,000 as a result of the
reversal of our valuation allowance related to deferred tax assets, as it
became apparent that it was more likely than not that the benefits of our net
operating losses would be realized. In 1999, we recorded a tax benefit offset
by a valuation allowance, resulting in no benefit or provision for the year.

Year Ended December 31, 1999 Compared to Year Ended December 31, 1998

Revenues

Premiums for the year ended December 31, 1999 increased $51.0 million, or
34.1%, to $200.5 million from $149.6 million in 1998. The increase was due to
increases in membership that occurred in Indiana during the second half of 1998.

Administrative services fees remained relatively flat year over year.

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Operating expenses

Medical services costs. Medical services costs for the year ended December
31, 1999 increased $46.1 million, or 34.9%, to $178.3 million from $132.2
million in 1998. The increase was primarily due to a full year of increased
membership that had occurred in Indiana in the latter half of 1998.

General and administrative expenses. General and administrative expenses
for the year ended December 31, 1999 increased $4.7 million, or 18.7%, to $29.8
million from $25.1 million in 1998. The increase was primarily due to a higher
level of wages and related expenses for additional staff to support our
membership growth.

Other Income

Other income for the year ended December 31, 1999 increased $582,000, or
107%, to $1.1 million in 1998 primarily due to a reduction in equity in losses
from joint ventures as a result of the sale of our Illinois plan.

Income tax expense (benefit)

For the year ended December 31, 1999, we recorded a tax benefit offset by a
valuation allowance resulting in no benefit or provision for the year. For the
year ended December 31, 1998, we recorded a tax benefit of $1.5 million as a
result of our loss from operations.

Liquidity and Capital Resources

Historically, we have financed our operations and growth through private
equity and debt financings and internally generated funds. Since 1993, we have
raised $22.4 million, consisting of $18.4 million through the issuance of
equity securities and $4.0 million through subordinated debt financing. Our
liquidity requirements have arisen primarily from statutory capital
requirements in the states in which we operate.

Our operating activities used cash of $7.5 million in 1998 and provided
cash of $5.1 million in 1999, $13.5 million in 2000 and $39.6 million in the
nine months ended September 30, 2001. The increased cash flow in 1999 was due
to an increase in average monthly membership. The growth in 2000 was due to
increased membership and improved profitability. The increase in cash provided
by operating activities in 2001 was due to the timing of capitation payments,
as well as an increase in membership.

Our investing activities used cash of $2.2 million in 1998, $2.9 million in
1999 and $14.6 million in 2000, and provided cash of $2.9 million in the nine
months ended September 30, 2001. Our investment policies are designed to
provide liquidity, preserve capital and maximize total return on invested
assets. As of September 30, 2001, our investment portfolio consisted primarily
of fixed-income securities with an average maturity of 3.5 years. Cash is
invested in investment vehicles such as municipal bonds, commercial paper, 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 was 7.3% as of December 31, 2000
and 7.4% as of September 30, 2001.

Our financing activities provided cash of $9.5 million in 1998 and $2.5
million in 1999 and used cash of $2.4 million in 2000 and $85,000 in the nine
months ended September 30, 2001. Financing cash flows consisted of borrowings
under a credit facility and issuances of preferred stock.

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In addition, we have raised capital from time to time to fund planned
geographic and product expansion, necessary regulatory reserves, and
acquisitions of healthcare contracts. In the nine months ended September 30,
2001, we purchased the rights to the Humana Medicaid contracts with the states
of Texas and Wisconsin for $1.2 million and spent $2.5 million on purchases of
furniture, equipment and leasehold improvements due to the addition of the
Austin and San Antonio markets and the expansion of the Wisconsin market. For
the three months ended December 31, 2001, and the year ended December 31, 2002,
we anticipate purchasing $800,000 and $3.0 million, respectively, of new
software, software and hardware upgrades, and furniture, equipment and
leasehold improvements related to office and market expansions.

At September 30, 2001, we had working capital of $(6.8) million as compared
to $7.3 million at December 31, 1998, $(7.2) million at December 31, 1999 and
$(5.3) million at December 31, 2000. Our working capital is often negative due
to our efforts to increase investment returns through purchases of long-term
investments, which have maturities of greater than one year. Our investment
policies are also designed to provide liquidity and preserve capital. We manage
our short-term and long-term investments to ensure that a sufficient portion is
held in investments that are highly liquid and can be sold to fund working
capital as needed.

Cash, cash equivalents and short term investments were $26.4 million at
December 31, 2000 and $62.0 million at September 30, 2001. Long-term
investments were $14.5 million at December 31, 2000 and $24.1 million at
September 30, 2001. Based on our operating plan, we expect that our available
cash, cash equivalents and investments, net proceeds of this offering, and cash
from our operations will be sufficient to finance our operations and capital
expenditures for at least 12 months from the date of this prospectus.

Regulatory Capital and Dividend Restrictions

Our operations are conducted through our subsidiaries. As managed care
organizations, our subsidiaries 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 us.

Our subsidiaries are required to maintain minimum capital requirements
prescribed by various regulatory authorities in each of the states in which we
operate. As of September 30, 2001, our subsidiaries had aggregate statutory
capital and surplus of $13.8 million, compared with the required minimum
aggregate statutory capital and surplus requirements of $7.6 million.

In 1998, the National Association of Insurance Commissioners adopted
guidelines which, to the extent that they are implemented by the states, will
set new minimum capitalization requirements for insurance companies, managed
care organizations and other entities bearing risk for healthcare coverage. New
risk-based capital rules for managed care organizations, which may vary from
state to state, are currently being considered for adoption. Wisconsin and
Texas adopted various forms of the rules as of December 31, 1999. The managed
care organization rules, if adopted by other states in their proposed form, may
increase the minimum capital required for our subsidiaries.

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Recent Accounting Pronouncements

In July 2001, SFAS No. 141, Business Combinations, was issued which
requires that the purchase method of accounting be used for all business
combinations completed after June 30, 2001.

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 annually for
impairment. We will adopt SFAS No. 142 effective January 1, 2002.

Quantitative and Qualitative Disclosures About Market Risk

Investments

As of September 30, 2001, we had short-term investments of $625,000 and
long-term investments of $24.1 million. The short-term investments consist of
highly liquid securities with maturities between three and 12 months. The
long-term investments consist of municipal bonds, commercial paper, U.S.
government-backed agencies and U.S. Treasury instruments, and have original
maturities greater than one year. These investments are subject to interest
rate risk and will decrease in value if market rates increase. We have the
ability to hold these short-term 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. Assuming a hypothetical and
immediate 1% increase in market interest rates at September 30, 2001, the fair
value of our fixed income investments would decrease by approximately $1.5
million. Similarly, a 1% decrease in market interest rates at September 30,
2001 would result in an increase of the fair value of our investments of
approximately $1.5 million. Declines in interest rates over time will reduce
our investment income.

Long Term Debt

At September 30, 2001, we had $4.0 million of subordinated debt, which
bears interest at a rate of 8.5% per year. This debt is subject to interest
rate risk. Assuming a hypothetical and immediate 1% increase in market interest
rates at September 30, 2001, the fair value of our subordinated debt would
decrease by approximately $85,000. Similarly, a 1% decrease in market interest
rates at September 30, 2001 would result in an increase in the fair value of
our debt of approximately $85,000.

Inflation

Although the general rate of inflation has remained relatively stable and
healthcare cost inflation has stabilized in recent years, the national
healthcare cost inflation rate still exceeds the general inflation rate. We use
various strategies to mitigate the negative effects of healthcare cost
inflation. Specifically, our health plans try to control medical and hospital
costs through contracts with independent providers of healthcare services.
Through these contracted care providers, our health plans emphasize preventive
healthcare and appropriate use of specialty and hospital services.

While we currently believe our strategies to mitigate healthcare cost
inflation will continue to be successful, competitive pressures, new healthcare
and pharmaceutical product introductions, demands from healthcare providers and
customers, applicable regulations or other factors may affect our ability to
control the impact of healthcare cost increases.

Compliance Costs

Federal and state regulations governing standards for electronic
transactions, data security and confidentiality of patient information have
been issued recently and are subject to change and conflicting interpretation,
making certainty of compliance impossible at this time. Due to the uncertainty
surrounding the regulatory requirements, we cannot be sure that the systems and
programs that we plan to implement will comply adequately with the regulations
that are ultimately adopted. Implementation of additional systems and programs
may be required, the cost of which is unknown to us at this time. Further,
compliance with these regulations would require changes to many of the
procedures we currently use to conduct our business, which may lead to
additional costs that we have not yet identified. We do not know whether, or
the extent to which, we will be able to recover our costs of complying with
these new regulations from the states.

424B1 30th Page of 86 TOC 1st Previous Next ↓Bottom Just 30th
BUSINESS

Overview

We provide managed care programs and related services to individuals
receiving benefits under Medicaid, including Supplemental Security Income or
SSI, and the State Children's Health Insurance Program or SCHIP. We have health
plans in Wisconsin, Indiana and Texas. In each of our service areas, we have
more Medicaid members than any other managed care entity.

Medicaid Managed Care Market

From the 1930s until the 1970s, healthcare in the United States generally
was provided on a fee-for-service basis, with financial support from private
health insurance. By the early 1970s, however, there was concern that indemnity
insurance could not contain costs or support benefits required by the U.S.
population. In 1973, Congress passed the Federal Health Maintenance
Organization Act in order to encourage the creation of managed care
organizations, such as health maintenance organizations, that might address the
shortcomings of the indemnity insurance system. Managed care organizations
finance and deliver healthcare services for their members through contracts
with selected physicians, hospitals and other providers.

After additional federal legislation in 1976 and 1979, the number and size
of managed care organizations began to grow dramatically. The federal Centers
for Medicare and Medicaid Services, or CMS, reports that U.S. healthcare costs
grew from $73.0 billion in 1970 to $1.2 trillion in 1999, and projects that
those costs will continue to grow at a rate that is in excess of 7% per year to
$2.6 trillion in 2010. In light of this significant growth in membership and
healthcare spending, many managed care organizations have chosen to narrow
their focus to enable them to tailor appropriate programs to meet members'
medical needs. Some organizations have chosen to offer a limited range of
services, such as dental care or behavioral healthcare. Other managed care
organizations have chosen to focus on targeted populations by, for example,
offering commercial and Medicare plans and leaving the Medicaid market.

Medicaid provides health insurance to low-income families and individuals
with disabilities. Each state establishes its own eligibility standards,
benefit packages, payment rates and program administration within federal
standards. As a result, there are 56 Medicaid programs - one for each state,
each territory and the District of Columbia. Medicaid eligibility is based on a
combination of income and asset requirements subject to federal guidelines.
Financial requirements are most often determined by an income level relative to
the federal poverty level. Medicaid covered 15% of the total U.S. population in
1998. The number of persons covered by Medicaid increased from 23.5 million in
1989 to 40.6 million in 1998, including 18.7 million children. Historically,
children have represented the largest eligibility group, and in 1995, 39% of
all births in the United States were covered by Medicaid.

SSI covers low-income aged, blind and disabled persons. SSI beneficiaries
represent a growing portion of all Medicaid recipients, with the proportion of
disabled enrollees increasing from 11% of recipients in 1973 to 18% in 1998. In
addition, SSI recipients typically utilize more services because of their more
critical health issues. In 1998, average expenditures for disabled SSI
recipients were $9,558, compared to $1,892 for other adult Medicaid recipients.
Since the late 1980s Medicaid has been used by the federal and state
governments as the vehicle for providing coverage to uninsured persons. These
efforts culminated in the Balanced Budget Act of 1997 which created SCHIP to
help states expand coverage primarily to children whose families earn too much
to qualify for Medicaid, yet not enough to afford private health insurance.

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SCHIP is the single largest expansion of health insurance coverage for
children since the enactment of Medicaid and some states are expanding their
SCHIP coverage to include adults. States can use SCHIP funds to provide
coverage through three options: separate health programs, expansion of Medicaid
coverage, or a combination of both of these strategies. In the federal fiscal
year ended September 30, 2000, 2.3 million of the 3.3 million SCHIP recipients
were served through separate SCHIP programs.

Unlike Medicare, which is financed entirely by the federal government, the
states and the federal government jointly finance the Medicaid and SCHIP
programs. For Medicaid, the level of federal matching funds is based on the
average per capita income in each state and must exceed 50%. For SCHIP, the
federal matching percentage is higher.

While Medicaid programs have directed funds to many individuals who could
not afford or otherwise maintain health insurance coverage, they did not
initially address the inefficient and costly manner in which the Medicaid
population tends to access healthcare. Medicaid recipients typically have not
sought preventive care or routine treatment for chronic conditions, such as
asthma and diabetes. Rather, they have sought healthcare in hospital emergency
rooms, which tend to be more expensive. As a result, many states have found
that the costs of providing Medicaid benefits have increased while the medical
outcomes for the recipients remained unsatisfactory.

In the early 1980s, states began pursuing Medicaid managed care initiatives
when the combination of rising Medicaid costs and national recession put
pressure on states to control spending growth. Throughout the 1990's, states
significantly expanded enrollment in Medicaid managed care programs. In 1991,
less than 10% of all Medicaid enrollees were covered under managed care plans.
By 1998, nearly 54% (21.9 million) of the Medicaid population was enrolled in
some type of managed care plan. Medicaid's premium payments to Medicaid managed
care plans rose from $700 million in 1988 to $13.2 billion in 1998. A growing
number of states have mandated that their Medicaid recipients enroll in managed
care plans. While some states have included SSI beneficiaries in their managed
care programs, others are planning to do so in the near future.

Historically, commercial managed care organizations contracted with states
to provide healthcare benefits to Medicaid enrollees. Many of these
organizations encountered difficulties in adapting their commercial approaches
and infrastructures to address the Medicaid market in a cost-effective manner.
Some commercial plans have chosen to exit all or a portion of their Medicaid
markets. As a result, a significant market opportunity exists for managed care
organizations with operations and programs focused on the distinct
socio-economic, cultural and healthcare needs of the Medicaid and SCHIP
populations.

The Centene Approach

We provide managed care programs and related services to individuals
receiving benefits under Medicaid, including SSI, and SCHIP. We operate in
Wisconsin, Indiana and Texas. In each of our service areas, we have more
Medicaid members than any other managed care organization. Unlike many managed
care organizations that attempt to serve the general commercial population, as
well as Medicare and Medicaid populations, we are focused exclusively on the
Medicaid, including SSI, and SCHIP populations.

Our approach to managed care is based on the following key attributes:

. Medicaid Expertise. Over the last 17 years, we have developed a
specialized Medicaid expertise that has helped us establish and maintain
strong relationships with our constituent communities of members,
providers and state governments. Based on our experience in care
coordination, we have implemented programs which are designed to allow us
to achieve savings by reducing inappropriate emergency room use, inpatient
days and high cost interventions, as well as by managing care of

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chronic illnesses. We do this primarily by providing nurse case managers
who support our physicians in implementing disease management programs and
by providing incentives for our physicians to provide preventive care on a
regular basis. We recruit and train staff and providers who are attentive
to the needs of our members and who are experienced in working with
culturally diverse, low income Medicaid populations. Our experience in
working with state regulators helps us to efficiently implement and
deliver our programs and services and affords us opportunities to provide
input on Medicaid industry practices and policies in the states in which
we operate.

. Localized Services, Support and Branding. We provide access to healthcare
services through local networks of providers and staff who focus on the
cultural norms of their individual communities. Our systems and procedures
have been designed to address these community-specific challenges through
outreach, education, transportation and other member support activities.
For example, our community outreach program employs former Medicaid
recipients to work with our members and their communities to promote
health, and to promote self-improvement through employment and higher
education. We use locally recognized plan names, and we tailor our
materials and processes to meet the needs of the communities and state
programs which we serve. Our approach to community-based service results
in local accountability and solidifies our decentralized management and
operational structure.

. Physician-Driven Approach. We have implemented a physician-driven approach
in which our physicians are actively engaged in developing and
implementing our healthcare delivery policies and strategies and are
instrumental in supporting our member services. Our local boards of
directors, which help shape the character and quality of our organization,
have significant provider representation in each of our principal
geographic markets. This approach is designed to eliminate unnecessary
costs, improve service to our members and simplify the administrative
burdens on our providers. It has enabled us to strengthen our provider
networks through improved physician recruitment and retention that, in
turn, have helped to increase our membership base.

. Efficiency of Business Model. We designed our business model to allow us
to readily add new members in our existing markets and expand into new
regions in which we may choose to operate. The combination of our
decentralized local approach to operating our health plans and our
centralized finance, information systems, claims processing and medical
management support functions allows us to seek additional business
opportunities without being impaired by many of the logistical and
financial obstacles customarily faced by growing companies. For example,
we integrated 65,000 former Humana members within 75 days after acquiring
Humana's Medicaid contracts in Wisconsin and Texas. Because of our
business model, we believe we would be able to quickly recover from a
disaster in one of our plan locations by moving member and physician
services to one of our other locations.

. Specialized Systems and Technology. Through our specialized information
systems, we are able to strengthen our relationships with providers and
states, which helps us to grow our membership base. These systems also
help us identify needs for new healthcare programs. These systems allow us
to provide the physicians with claims information, timely and accurate
payment, utilization data, and membership eligibility which enables
providers to more efficiently manage their practices and focuses them on
specific patient needs. Our information systems also closely track and
manage utilization data for the state which demonstrates that their
Medicaid populations are receiving quality healthcare in an efficient
manner. This information enables us to accommodate the expansion of our
membership base.

. Complementary Business Lines. We have begun to broaden our service
offerings to address areas we believe have been traditionally underserved
by Medicaid managed care organizations. We believe other business lines,
such as our NurseWise triage program, will allow us to provide expanded
services and diversify our sources of revenue.

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Strategy

Our objective is to become the leading national Medicaid managed care
organization. We intend to achieve this objective by implementing the following
key components of our strategy:

. Increase penetration of existing state markets. We intend to increase our
membership in states in which we currently operate through development and
implementation of community-specific products, alliances with key
providers, outreach efforts and acquisitions. For example, in Indiana,
where the state assigns members to physicians, we have increased our
membership by recruiting additional physicians. We may also increase
membership by acquiring Medicaid contracts and other related assets from
our competitors in our existing markets. In Texas, we recently completed
the acquisition of Humana's Medicaid contracts in Austin and San Antonio,
which resulted in the addition of 30,000 new members.

. Develop and acquire additional state markets. We intend to leverage our
experience in identifying and developing new markets by seeking both to
acquire existing businesses and to build our own operations. We expect to
focus our expansion on states where Medicaid recipients are mandated to
enroll in managed care organizations and in which we believe we can be the
market leader.

. Diversify our business lines. We seek to broaden our business lines into
areas that complement our business to enable us to grow our revenue stream
and decrease our dependence on Medicaid reimbursement. In addition to
NurseWise, we are considering services such as behavioral health,
transportation and dental care. We believe we may have opportunities to
offer these services to other managed care organizations and states.

. Leverage our information technologies to enhance operating efficiencies.
We intend to continue to invest in our centralized information systems to
further streamline our processes and drive efficiencies in our operations
and to add functionality to improve the service we provide to our members.
Our information systems enable us to add members and markets quickly and
economically.

Member Programs and Services

We recognize the importance of member-focused services in the delivery of
quality managed care services. Our locally based staff assists members in
accessing care, coordinating referrals to related health and social services,
and addressing member concerns and questions. Our health plans provide the
following services:

. primary and specialty physician care;

. inpatient and outpatient hospital care;

. emergency and urgent care;

. prenatal care;

. laboratory and x-ray services;

. home health and durable medical equipment;

. behavioral health and substance abuse services;

. after hours nurse advice line;

. transportation assistance;

. health status calls to coordinate care;

. vision care; and

. prescriptions and limited over-the-counter drugs and inoculations.

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We also provide the following education and outreach programs to inform and
assist members in accessing quality, appropriate healthcare services in an
efficient manner.

. CONNECTIONS is designed to create a link between the member and the
provider and help identify potential challenges or risk elements to a
member's health, such as abuse risks, nutritional challenges and health
education shortcomings. CONNECTIONS representatives, many of whom are
former Medicaid enrollees, also contact new members by phone or mail to
discuss managed care, the Medicaid program and our services. They make
home visits, conduct educational programs and represent the plan at
community events such as health fairs.

. NurseWise provides a toll-free nurse triage line between the hours of 5:00
p.m. and 8:00 a.m. each weekday and 24 hours on weekends and holidays. Our
members can call one number and reach a bilingual nursing staff who can
provide triage advice and referrals, and if necessary, arrange for
treatment and transportation and contact qualified behavioral health
professionals for assessments.

. START SMART For Your Baby is a prenatal and infant health program designed
to increase the percentage of pregnant women receiving early prenatal
care, reduce the incidence of low birth weight babies, identify high risk
pregnancies, increase participation in the federal Women, Infant, and
Children program, and increase well-child visits. The program includes
risk assessments, education through face-to-face meetings and materials,
behavior modification plans and assistance in selecting a provider for the
infant and scheduling newborn follow-up visits.

. EPSDT Case Management is a preventive care program designed to educate our
members on the benefits of Early and Periodic Screening, Diagnosis and
Treatment, or EPSDT, services. We have a systematic program of
communication, tracking, outreach, reporting, and follow-through that
promotes state EPSDT programs.

. Disease Management Programs are designed to help members understand their
disease and treatment plan, and improve or maintain their quality of life.
These programs address medical conditions that are common within the
Medicaid population such as asthma, diabetes and prenatal care.

Providers

For each of our service areas, we establish a provider network consisting
of primary and specialty care physicians, hospitals and ancillary providers. As
of November 9, 2001, our health plans had the following numbers of physicians
and hospitals:

[Download Table]

Wisconsin Indiana Texas Total
--------- ------- ----- -----

Primary Care Physicians.. 1,984 197 679 2,860
Specialty Care Physicians 2,319 307 1,791 4,417
Hospitals................ 54 14 35 103

The primary care physician is a critical component in care delivery, and
also in the management of costs and the attraction and retention of new
members. Primary care physicians include family and general practitioners,
pediatricians, internal medicine physicians and OB/GYNs. Specialty care
physicians provide medical care to members generally upon referral by the
primary care physicians.

We work closely with physicians to help them operate efficiently by
providing financial and utilization information, physician and patient
educational programs and disease and medical management programs, as well as
adhering to a prompt payment policy. Our programs are also designed to help the
physicians coordinate care outside of their offices.

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We believe our collaborative approach with physicians gives us a
competitive advantage in entering new markets. Our physicians serve on local
committees that assist us in implementing preventive care methods, managing
costs and improving the overall quality of care delivered to our members, while
assuming responsibility for medical policy decision-making. The following are
among the services we provide to support physicians.

. Customized Utilization Reports provide our contracted physicians with
information that enables them to run their practices more efficiently and
focuses them on specific patient needs. For example, quarterly fund-detail
reports update physicians on their status within their risk pools.
Equivalency reports provide physicians with financial comparisons of
capitated versus fee-for service arrangements.

. Case Management Support helps the physician coordinate specialty care and
ancillary services for patients with complex conditions and direct members
to appropriate community resources to address both their health and
socio-economic needs.

. Web-based Claims and Eligibility Resources are being tested in selected
markets to provide physicians with on-line access to perform claims and
eligibility inquiries.

Our physicians also benefit from several of the services offered to our
members, including the CONNECTIONS program, EPSDT case management and disease
management programs.

We provide access to healthcare services for our members primarily through
non-exclusive contracts with our providers. The majority of our primary care
physicians share in our Medicaid reimbursement risk as well as in the success
of efficient and appropriate management of care.

Our contracts with primary and specialty care physicians and hospitals
usually are for one to two year periods and automatically renew for successive
one year terms, but generally are subject to termination by either party upon
90 to 120 days' prior written notice. In the absence of a contract, we
typically pay providers at state Medicaid reimbursement levels. We pay
physicians under a capitated or fee-for-service arrangement.

. Under our capitated contract, primary care physicians are paid a monthly
capitation rate for each of our members assigned to his or her practice
and are at risk for all costs related to primary and specialty physician
and emergency room services. In return for this payment, these physicians
provide all requested, covered primary care and preventive services,
including EPSDT services, and primary care office visits. If these
physicians also provide non-capitated services to their assigned members,
they may bill and be paid under fee-for-service arrangements at Medicaid
rates.

. Under our fee-for-service contracts with physicians, particularly
specialty care physicians, we pay the physicians a negotiated fee for
covered services. This model is characterized as having no financial risk
for the physician.

We also contract with ancillary providers on a negotiated fee arrangement
for physical therapy, mental health and chemical dependency care, home
healthcare, vision care, diagnostic laboratory tests, x-ray examinations,
ambulance services and durable medical equipment. Additionally, we contract
with dental vendors in markets where routine dental care is a covered benefit.
We have a capitated arrangement with a national pharmacy vendor that provides a
pharmacy network in our markets where prescription and limited over-the-counter
drugs are a covered benefit.

Health Plans

We have three health plan subsidiaries offering healthcare services in
Wisconsin, Indiana and Texas. We have never been denied a contract renewal from
the states in which we do business. The table below provides certain highlights
to the markets we currently serve.

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[Enlarge/Download Table]

Wisconsin Indiana Texas
----------------------- ----------------------- -------------------

Local Health Plan Name Managed Health Services Managed Health Services Superior HealthPlan
First Year of Operations 1984 1995 1999
Counties Licensed 19 92 17
Membership at September 30,
2001 108,100 61,800 54,900
Ownership 100% 100% 90%

States

Our ability to establish and maintain our position as a leader in the
markets we serve results primarily from our demonstrated success in providing
quality care while reducing and managing costs for, and our customer-focused
approach to working with, state governments. Among the benefits we are able to
provide to the states with which we contract are:

. timely and accurate reporting;

. responsible collection and dissemination of encounter data;

. cost saving outreach and disease management programs;

. improved medical outcomes; and

. expertise in Medicaid managed care.

Quality Management

Our medical management program focuses on improving quality of care in
areas that have the greatest impact on our members. We employ strategies
including disease management and complex case management that are fine-tuned
for implementation in our individual markets by a system of physician
committees chaired by local physician leaders. This process promotes physician
participation and support, both critical factors in the success of any clinical
quality improvement program.

We have implemented specialized information systems to support our medical
quality management activities. Information is drawn from our data warehouse,
AMISYS and the clinical databases as sources to identify opportunities to
improve care and to track the outcomes of the interventions implemented to
achieve those improvements. Some examples of these intervention programs
include:

. a prenatal case management program to help women with high-risk
pregnancies deliver full-term, healthy infants;

. a program to reduce the number of inappropriate emergency room visits; and

. a disease management program to decrease the need for emergency room
visits and hospitalizations for asthma patients.

Additionally, we provide extensive quality reporting on a regular basis
using our data warehouse. State and Health Employer Data and Information Set,
or HEDIS, reporting constitutes the core of the information base that drives
our clinical quality performance efforts. This reporting is monitored by Plan
Quality Improvement Committees and our corporate medical management team.

In order to ensure the quality of our provider networks, we verify the
credentials and background of our providers using standards that are supported
by the National Committee for Quality Assurance.

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Additionally, we provide feedback and evaluations to our providers on quality
and medical management in order to improve the quality of care, increase their
support of our programs and enhance our ability to attract and retain providers.

Management Information Systems

The ability to access data and translate them into meaningful information
is essential to operating across a multi-state service area in a cost-effective
manner. Our centralized information systems located in Saint Louis, Missouri,
support our core processing functions under a set of integrated databases and
are designed to be both replicable and scalable to accommodate internal growth
and growth from acquisitions. We have the ability to leverage the platform we
have developed for one state for configuration into new states or health plan
acquisitions. This integrated approach helps to assure that consistent sources
of claim and member information are provided across all of our health plans.
The system is currently configured and is supporting claims auto adjudication
rates of approximately 85% in all markets. Our current AMISYS production system
is capable of supporting over a million members.

The following table summarizes our information systems and their functions:

[Enlarge/Download Table]

System/Program Platform Function
-------------- -------- --------

AMISYS HP3000 Series 997/400 Core Managed Care Functions: Claims;
IMAGE Eligibility; Claims Payable
Clinical Case Management Systems HP Netserver/SQL2000 Core Medical Management: Case
Management; Authorizations; Medical
Records
InterQual HP Netserver/SQL2000 Clinical Guideline Assessment
Distributed Reporting System ASP/Oracle Data Warehouse: HEDIS; Provider
Profiling; Member Profiling
E-Commerce HP Netserver/SQL2000 Internet Inquiry: Claims Payment Status;
Member Eligibility; Authorization Status
NurseWise HP Netserver/SQL 2000 Nurse Triage; After Hours Authorizations
Scanning/Imaging HP Netserver/SQL2000 Hospital Claims Scanning; Medical
Claims Scanning; Workflow

We have a disaster recovery and business resumption plan developed and
implemented in conjunction with Sungard Planning. This plan allows us complete
access to the business resumption centers and hot-site facilities provided by
Sungard. We have contracted with Sungard to provide us with annual plan updates
through 2005.

Competition

In the Medicaid business, our principal competitors for state contracts,
members and providers consist of the following types of organizations:

Primary Care Case Management Programs are programs established by the
states through contracts with primary care providers. Under these programs,
physicians provide primary care services to the Medicaid recipient, as well as
limited oversight over other services.

National And Regional Commercial Managed Care Organizations have Medicaid
and Medicare members in addition to members in private commercial plans.

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Medicaid managed care organizations focus solely on providing healthcare
services to Medicaid recipients, the vast majority of which operate in one city
or state. Many of these plans are owned by providers, especially hospitals.
Their membership is small relative to the infrastructure that is required for
them to do business. There are a few multi-state Medicaid-only organizations
that tend to be larger in size and therefore are able to leverage their
infrastructure over larger membership.

We will continue to face varying levels of competition as we expand in our
existing service areas or enter new markets. Healthcare reform proposals may
cause a number of commercial managed care organizations already in our service
areas to decide to enter or exit the Medicaid market. However, the licensing
requirements and bidding and contracting procedures in some states present
barriers to entry into the Medicaid managed healthcare industry.

We compete with other managed care organizations for state contracts. In
order to win a bid for or be awarded a state contract, state governments
consider many factors, which include providing quality care, satisfying
financial requirements, demonstrating an ability to deliver services, and
establishing networks and infrastructure. Some of the factors may be outside
our control. For example, state regulators may prefer competitors with
substantial local ownership or entities formed as not-for-profit organizations.

We also compete to enroll new members and retain existing members. People
who wish to enroll in a managed healthcare plan or to change healthcare plans
typically choose a plan based on the quality of care and service offered, ease
of access to services, a specific provider being part of the network and the
availability of supplemental benefits.

We also compete with other managed care organizations to enter into
contracts with physicians, physician groups and other providers. We believe the
factors that providers consider in deciding whether to contract with us include
existing and potential member volume, reimbursement rates, medical management
programs, timeliness of reimbursement and administrative service capabilities.

Regulation

Our healthcare operations are regulated at both state and federal levels.
Government regulation of the provision of healthcare products and services is a
changing area of law that varies from jurisdiction to jurisdiction. Regulatory
agencies generally have discretion to issue regulations and interpret and
enforce laws and rules. Changes in applicable laws and rules also may occur
periodically.

Managed Care Organizations

Our three health plan subsidiaries are licensed to operate as health
maintenance organizations in each of Wisconsin, Indiana and Texas. In each of
the jurisdictions in which we operate, we are regulated by the relevant health,
insurance and/or human services departments that oversee the activities of
managed care organizations providing or arranging to provide services to
Medicaid enrollees.

The process for obtaining authorization to operate as a managed care
organization is a lengthy and involved process and requires demonstration to
the regulators of the adequacy of the health plan's organizational structure,
financial resources, utilization review, quality assurance programs and
complaint procedures. Under both state managed care organization statutes and
state insurance laws, our health plan subsidiaries must comply with minimum net
worth requirements and other financial requirements, such as minimum capital,
deposit and reserve requirements. Insurance regulations may also require the
prior state approval of acquisitions of other managed care organizations'
businesses and the payment of dividends, as well as notice requirements for
loans or the transfer of funds. Our subsidiaries are also subject to periodic
reporting requirements. In addition, each health plan must meet numerous
criteria to secure the approval of state regulatory authorities before
implementing operational changes, including the development of new product
offerings and, in some states, the expansion of service areas.

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Medicaid

In order to be a Medicaid managed care organization in each of the states
in which we operate, we must operate under a contract with the state's Medicaid
agency. States generally use either a formal proposal process, reviewing a
number of bidders, or award individual contracts to qualified applicants that
apply for entry to the program.

We have entered into a contract with the Wisconsin Department of Health and
Family Services to provide Medicaid services. The contract commenced January 1,
2000 and has a scheduled termination of December 31, 2001. We expect to renew
this contract for an additional one-year term prior to its expiration. The
contract can be terminated if a change in state or federal laws, rules or
regulations materially affects either party's rights or responsibilities under
the contract. We receive monthly payments under the contract based on specified
capitation rates calculated on an actuarial basis.

We have also entered into an agreement with Network Health Plan of
Wisconsin, Inc. pursuant to which Network Health Plan subcontracts to us their
Medicaid services under their contracts with the State of Wisconsin. The
agreement commenced January 1, 2001 and has a scheduled termination of January
1, 2007. The agreement automatically renews for successive five-year terms and
can be terminated by either party upon two years notice prior to the end of the
then current term. The agreement may also be terminated if a change in state or
federal laws, rules or regulations materially affects either party's rights or
responsibilities under the contract, or if Network Health Plan's contract with
the State of Wisconsin is terminated. We receive a fee for services based on a
percentage of all premium and supplemental payments and other compensation
received by Network Health Plan from the State of Wisconsin.

We have entered into a contract with the State of Indiana to provide
Indiana Medicaid and Indiana Children's Health Insurance Program services. The
contract commenced January 1, 2001 and has a scheduled termination of December
31, 2002. The agreement is renewable, at the option of the state, for up to two
additional one-year terms. This contract may be terminated by the state without
cause upon sixty days prior written notice. We are paid based on specified
capitation rates for our services.

We presently are party to three contracts with the Texas Department of
Health to provide Medicaid managed care services in our Texas markets through
our subsidiary, Superior Health Plan, Inc. Each of our Texas contracts
commenced August 30, 1999 and has a scheduled termination of August 31, 2002.
Each contract is renewable for an additional one year period. The contracts
generally may be terminated upon any event of default or in the event state or
federal funding for Medicaid programs is no longer available. We receive
monthly payments under each of our Texas contracts based on specified
capitation rates calculated on an actuarial basis.

Our contracts with the states and regulatory provisions applicable to us
generally set forth in great detail the requirements for operating in the
Medicaid sector including provisions relating to:

. eligibility, enrollment and disenrollment processes;

. covered services;

. eligible providers;

. subcontractors;

. record-keeping and record retention;

. periodic financial and informational reporting;

. quality assurance;

. marketing;

. financial standards;

. timeliness of claims payment;

. health education and wellness and prevention programs;

. safeguarding of member information;

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. fraud and abuse detection and reporting;

. grievance procedures; and

. organization and administrative systems.

A health plan's compliance with these requirements is subject to monitoring
by state regulators and by CMS. A health plan is subject to periodic
comprehensive quality assurance evaluation by a third party reviewing
organization and generally by the insurance department of the jurisdiction that
licenses the health plan. A health plan must also submit many reports to
various regulatory agencies, including quarterly and annual statutory financial
statements and utilization reports.

HIPAA

In 1996, Congress enacted the Health Insurance Portability and
Accountability Act of 1996, or HIPAA. The Act is designed to improve the
portability and continuity of health insurance coverage and simplify the
administration of health insurance claims. One of the main requirements of
HIPAA is the implementation of standards for the processing of health insurance
claims and for the security and privacy of individually identifiable health
information.

In August 2000, the Department of Health and Human Services, or HHS, issued
new standards for submitting electronic claims and other administrative
healthcare transactions. The new standards were designed to streamline the
processing of claims, reduce the volume of paperwork and provide better
service. The administrative and financial healthcare transactions covered
include:

. health claims and equivalent encounter information;

. enrollment and disenrollment in a health plan;

. eligibility for a health plan;

. healthcare payment and remittance advice;

. health plan premium payments;

. healthcare claim status; and

. referral certification and authorization.

In general, healthcare organizations will be required to comply with the
new standards by October 2002. The regulation's requirements apply only when a
transaction is transmitted using "electronic media." Because "electronic media"
is defined broadly to include "transmissions that are physically moved from one
location to another using magnetic tape, disk or compact disk media," many
communications will be considered electronically transmitted. In addition,
health plans will be required to have the capacity to accept and send all
standard transactions in a standardized electronic format. The regulation sets
forth other rules that apply specifically to health plans as follows:

. a plan may not delay processing of a standard transaction (that is, it
must complete transactions using the new standards at least as quickly as
it had prior to implementation of the new standards);

. there should be "no degradation in the transmission of, receipt of,
processing of, and response to" a standard transaction as compared to the
handling of a non-standard transaction;

. if a plan uses a healthcare clearinghouse to process a standard request,
the other party to the transaction may not be charged more or otherwise
disadvantaged as a result of using the clearinghouse;

. a plan may not reject a standard transaction on the grounds that it
contains data that is not needed or used by the plan;

. a plan may not adversely affect (or attempt to adversely affect) the other
party to a transaction for requesting a standard transaction; and

. if a plan coordinates benefits with another plan, then upon receiving a
standard transaction, it must store the coordination of benefits data
required to forward the transaction to the other plan.

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On December 28, 2000, HHS published a final regulation setting forth new
standards for protecting the privacy of individually identifiable health
information in any medium. Compliance with these rules will be required by
April 2003. The new regulation is designed to protect medical records and other
personal health information maintained and used by healthcare providers,
hospitals, health plans and health insurers, and healthcare clearinghouses.
Among numerous other requirements, the new standards:

. limit both the routine and non-routine non-consensual use and release of
private health information, and require patient authorizations for most
uses and disclosures of such information;

. give patients new rights to access their medical records and to know who
else has accessed them;

. limit most disclosure of health information to the minimum needed for the
intended purpose;

. establish procedures to ensure the protection of private health
information;

. establish new criminal and civil sanctions for improper use or disclosure
of health information; and

. establish new requirements for access to records by researchers and others.

The preemption provisions of the regulation provide that the federal
standards will generally preempt contrary state law. However, a state (or any
person) may submit a request to the Secretary of HHS that a provision of state
law be excepted from the preemption rules. The Secretary may grant an exception
if one or more of a number of conditions are met, including:

. the state law is necessary to prevent fraud and abuse related to the
provision of and payment for healthcare;

. the state law will ensure appropriate state regulation of insurance and
health plans or the state law is necessary to state reporting on
healthcare delivery or costs; or

. the state law related to the privacy of health information is more
stringent than the federal requirement.

In addition, on August 12, 1998, HHS published proposed regulations
relating to the security of individually identifiable health information. These
rules would require healthcare providers, health plans and healthcare
clearinghouses to ensure the privacy and confidentiality of such information
when it is electronically stored, maintained or transmitted through such
devices as user authentication mechanisms and system activity audits. These
regulations have not been finalized.

We are in the process of assessing the impact that these new regulations
will have on us, given their complexity and the likelihood that they will be
subject to changing, and perhaps conflicting, interpretations.

New Medicaid Managed Care Regulations

On January 19, 2001, HHS issued final Medicaid managed care regulations to
implement certain provisions of the Balanced Budget Act of 1997, or BBA. Since
the publication of this final rule, CMS delayed the rule's effective date three
times, the most recent of which delays the effective date of the final rule to
August 16, 2002. In addition, on August 20, 2001, CMS proposed a new Medicaid
managed care rule that is intended to eventually replace the final rule
published on January 19, 2001.

The proposed rule would implement BBA provisions intended to (1) give
states the flexibility to enroll certain Medicaid recipients in managed care
plans without a federal waiver if the state provides the recipients with a
choice of managed care plans; (2) establish protections for members in areas
such as quality assurance, grievance rights and coverage of emergency services;
and (3) eliminate certain requirements viewed by the states as impediments to
the growth of managed care programs, such as the enrollment composition
requirement, the right to disenroll without cause at any time, and the
prohibition against enrollee cost-sharing. The rule would also establish
requirements intended to ensure that state Medicaid managed care capitation
rates are actuarially sound. According to HHS, this requirement would eliminate
the generally outdated regulatory ceiling on what states may pay managed care
plans, a

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particularly important provision as more state Medicaid programs include people
with chronic illnesses and disabilities in managed care. CMS accepted comments
on the proposed rule until October 16, 2001, and the Secretary of HHS has
indicated an intent to finalize the regulations by early 2002.

Because the final content of the rule has not yet been determined, we
cannot predict what requirements it will ultimately entail, nor when such
requirements will become effective. Changes to the regulations affecting our
business, including these proposed regulations, could increase our healthcare
costs and administrative expenses, reduce our reimbursement rates, and
otherwise adversely affect our business, results of operations, and financial
condition.

Patients' Rights Legislation

The United States Senate and House of Representatives passed different
versions of patients' rights legislation in June and August 2001, respectively.
Both versions include provisions that specifically apply protections to
participants in federal healthcare programs, including Medicaid beneficiaries.
Either version of this legislation could expand our potential exposure to
lawsuits and increase our regulatory compliance costs. Congress will need to
reconcile the differences between the two proposals before it can become law.
Depending on the final form of any patients' rights legislation, such
legislation could, among other things, expose us to liability for economic and
punitive damages for making determinations that deny benefits or delay
beneficiaries' receipt of benefits as a result of our medical necessity or
other coverage determinations. The differences include such matters as the
amount of allowable damages, whether cases would be governed by federal or
state law, and whether such actions could be brought in federal or state
courts. We cannot predict whether patients' rights legislation will be enacted
into law or, if enacted, what final form such legislation might take.

Other Fraud and Abuse Laws

Investigating and prosecuting healthcare fraud and abuse became a top
priority for law enforcement entities in the last decade. The focus of these
efforts has been directed at participants in public government healthcare
programs such as Medicaid. The laws and regulations relating to Medicaid fraud
and abuse and the contractual requirements applicable to plans participating in
these programs are complex and changing and will require substantial resources.

Properties

Our headquarters occupy approximately 36,000 square feet of office space in
Saint Louis, Missouri under a lease expiring in 2010. We currently are
subleasing approximately 4,000 square feet of this space. Our claims center
occupies approximately 14,000 square feet of office space in Farmington,
Missouri under a lease expiring in 2009. We also lease space in Wisconsin,
Indiana and Texas where our health plans are located. We are required by
various insurance and Medicaid regulatory authorities to have offices in the
service areas where we provide Medicaid benefits. We believe our current
facilities are adequate to meet our operational needs for the foreseeable
future.

Employees

As of November 9, 2001, we had 413 employees, of whom 90 were employed at
our Saint Louis headquarters, 91 at our Farmington claims center, 56 by our
Indiana plan, 87 by our Wisconsin plan and 89 by our Texas plans. Our employees
are not represented by a union. We believe our relationships with our employees
are good.

Legal Proceedings

In the normal course of our business, we may be a party to legal
proceedings. We are not currently a party to any material legal proceedings.

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MANAGEMENT

The following table sets forth information regarding our executive
officers, key employees and directors, including their ages as of September 30,
2001:

[Enlarge/Download Table]

Name Age Position
---- --- --------

Executive Officers and Directors
Michael F. Neidorff............. 58 President, Chief Executive Officer and Director
Joseph P. Drozda, Jr., M.D...... 56 Senior Vice President, Medical Affairs
Catherine M. Halverson.......... 52 Senior Vice President, Business Development
Mary O'Hara..................... 51 Senior Vice President, Operations Services
Brian G. Spanel................. 46 Senior Vice President and Chief Information Officer
Karey L. Witty.................. 37 Senior Vice President, Chief Financial Officer, Secretary and
Treasurer
Claire W. Johnson (1)........... 59 Chairman of the Board of Directors
Samuel E. Bradt (1)............. 63 Director
Walter E. Burlock, Jr........... 38 Director
Edward L. Cahill (2)............ 48 Director
Howard E. Cox, Jr. (2).......... 57 Director
Robert K. Ditmore (2)........... 67 Director
Richard P. Wiederhold (1)....... 58 Director

Key Employees
Kathleen R. Crampton............ 57 President and Chief Executive Officer, Managed Health
Services Wisconsin
Rita Johnson-Mills.............. 42 President and Chief Executive Officer, Managed Health
Services Indiana

--------
(1) Member of the Audit Committee.
(2) Member of the Compensation Committee.

Michael F. Neidorff has served as our President and Chief Executive Officer
and as a member of our board of directors since May 1996. From May 1996 to
November 2001, Mr. Neidorff also served as our Treasurer. From 1995 to 1996,
Mr. Neidorff served as a Regional Vice President of Coventry Corporation, a
publicly traded managed care organization, and as the President and Chief
Executive Officer of one of its subsidiaries, Group Health Plan, Inc. From 1985
to 1995, Mr. Neidorff served as the President and Chief Executive Officer of
Physicians Health Plan of Greater St. Louis, a subsidiary of United Healthcare
Corp., a publicly traded managed care organization now known as UnitedHealth
Group Incorporated.

Joseph P. Drozda, Jr., M.D. has served as our Senior Vice President,
Medical Affairs since November 2000 and served as our part-time Medical
Director from January 2000 through October 2000. From June 1999 to October
2000, Dr. Drozda was self-employed as a consultant to managed care
organizations, physician groups, hospital networks and employer groups on a
variety of managed care delivery and financing issues. From 1996 to April 1999,
Dr. Drozda served as the Vice President of Medical Management of SSM Health
Care, a health services network. From 1994 to 1996, Dr. Drozda was the Vice
President and Chief Medical Officer of PHP, Inc., a health maintenance
organization based in North Carolina. From 1987 until 1994, Dr. Drozda served
as Medical Director of Physicians Health Plan of Greater St. Louis, a health
plan that he co-founded.

Catherine M. Halverson has served as our Senior Vice President, Business
Development since September 2001. From March 2001 to September 2001, Ms.
Halverson was self-employed as a consultant to a pharmaceutical benefit
management company and Medicaid managed care plans. From 1993 to March

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2001, Ms. Halverson was the Vice President and Director of Medicaid Programs of
UnitedHealth Group Incorporated.

Mary O'Hara has served as our Senior Vice President, Operations Services
since January 1999. From December 1998 to January 1999, Ms. O'Hara served as
our Chief Contracting Officer. From March 1997 to October 1998, Ms. O'Hara was
the Chief Contracting Officer of Unity Health Network, a network of hospitals
and physicians in Missouri and Illinois. From 1990 to February 1997, Ms. O'Hara
was the Director of Managed Care for Virginia Mason Medical Center, an
integrated healthcare delivery system, in Seattle, Washington.

Brian G. Spanel has served as our Senior Vice President and Chief
Information Officer since December 1996. From 1988 to 1996, Mr. Spanel served
as President of GBS Consultants, a healthcare consulting and help desk software
developer. From 1987 to 1988, Mr. Spanel was Director of Information Services
for CompuCare, a managed care organization. From 1984 to 1987, Mr. Spanel was
Director of Information Services for Peak Health Care, a managed care
organization.

Karey L. Witty has served as our Senior Vice President and Chief Financial
Officer since August 2000, our Secretary since February 2000 and our Treasurer
since November 2001. From March 1999 to August 2000, Mr. Witty served as our
Vice President of Health Plan Accounting. From 1996 to March 1999, Mr. Witty
was Controller of Heritage Health Systems, Inc., a healthcare company in
Nashville, Tennessee. From 1994 to 1996, Mr. Witty served as Director of
Accounting for Healthwise of America, Inc., a publicly traded managed care
organization.

Claire W. Johnson has served as a member of our board of our directors
since 1987 and served as our Acting President and Chief Executive Officer from
1995 to April 1996. Mr. Johnson served as the Chief Executive Officer of Group
Health Cooperative of Eau Claire, Wisconsin, a health maintenance organization,
from 1972 to 1994.

Samuel E. Bradt has served as a member of our board of directors since 1993
and served as our Secretary from 1993 to July 2000. Mr. Bradt is President of
Merganser Corporation, a business advisory and venture capital firm he founded
in 1980.

Walter E. Burlock, Jr. has served as a member of our board of directors
since September 1998. Mr. Burlock has been a Managing Director of Origin
Capital Management, a private venture capital firm located in San Francisco,
California, since July 2000. From 1990 to June 2000, Mr. Burlock was a Managing
Director of Soros Fund Management LLC, a hedge fund manager.

Edward L. Cahill has served as a member of our board of directors since
September 1998. Mr. Cahill has been a partner of HLM Management Company, a
private venture capital firm located in Boston, Massachusetts, since May 2000.
From 1995 to April 2000, Mr. Cahill was a founding partner at Camden Partners,
LLC, a venture capital firm. From 1981 to 1995, Mr. Cahill was employed by
Alex. Brown & Sons, an investment banking and brokerage firm where he headed
the firm's Health Care Group. Mr. Cahill also serves as a director of
Occupational Health & Rehabilitation, Inc. and MedPlus, Inc.

Howard E. Cox, Jr. has served as a member of our board of directors since
1993. Mr. Cox is a partner of Greylock Limited Partnership, a national venture
capital firm headquartered in Waltham, Massachusetts and San Mateo, California,
with which he has been associated since 1971. Mr. Cox also currently serves as
a director of Stryker Corporation in Michigan and Landacorp, Inc. in Atlanta.

Robert K. Ditmore has served as a member of our board of directors since
April 1996. From 1985 to 1991, Mr. Ditmore was the President and Chief
Operating Officer of United Healthcare Corp., a publicly traded managed care
organization now known as UnitedHealth Group Incorporated.

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Richard P. Wiederhold has served as a member of our board of directors
since 1993. Mr. Wiederhold has served since 1992 as President of Managed Health
Services, Inc. d/b/a the Elizabeth A. Brinn Foundation, a charitable
foundation. From 1973 to 1985, Mr. Wiederhold held several positions, most
recently Corporate Treasurer, with Allen-Bradley Company, a manufacturer of
industrial motor controls and electronic and magnetic components.

Kathleen R. Crampton has served as the President and Chief Executive
Officer of Managed Health Services Insurance Corp., our health plan in
Wisconsin, since June 2000. From November 1999 to May 2000, Ms. Crampton was a
Senior Consultant for PricewaterhouseCoopers LLC. From June 1996 to October
1999, Ms. Crampton served as Vice President of the Patterson Group, a private
consulting firm serving health maintenance organizations and their service
providers and medical manufacturers. From 1993 to 1996, Ms. Crampton served as
Vice President of Marketing for Healthtech Services Corporation, a home care
robotics and telemedicine information systems company.

Rita Johnson-Mills has served as the President and Chief Executive Officer
of Managed Health Services Indiana, Inc., our health plan in Indiana, since
April 2001. From March 2000 to April 2001, Ms. Johnson-Mills served as the
Chief Operating Officer of Managed Health Services Indiana, Inc. From July 1999
to March 2000, Ms. Johnson-Mills was a Senior Vice President and the Chief
Operating Officer of Medical Diagnostic Management. From 1995 to March 1999,
Ms. Johnson-Mills served as Senior Vice President and Chief Operating Officer
of DC Chartered Health Plan, Inc., a health maintenance organization.

Classified Board of Directors

We currently have eight directors, four of whom were elected as directors
under a stockholders' agreement that will automatically terminate upon the
closing of this offering. At our request, all directors elected to the board of
directors pursuant to the stockholders' agreement have orally agreed to remain
on the board for an indefinite period following this offering. There are no
family relationships among any of our directors or executive officers.

Our charter includes a provision establishing a classified board of
directors. Upon the closing of this offering, our board will be divided into
three classes, each of whose members will serve for a staggered three-year
term. The division of the three classes, the initial directors and their
respective election dates are as follows:

. the class 1 directors will be Samuel E. Bradt, Walter E. Burlock, Jr. and
Michael F. Neidorff, and their term will expire at the annual meeting of
stockholders to be held in 2002;

. the class 2 directors will be Edward L. Cahill, Howard E. Cox, Jr. and
Robert K. Ditmore, and their term will expire at the annual meeting of
stockholders to be held in 2003; and

. the class 3 directors will be Claire W. Johnson and Richard P. Wiederhold,
and their term will expire at the annual meeting of stockholders to be
held in 2004.

At each annual meeting of stockholders after the initial classification, a
class of directors will be elected to serve for a three-year term to succeed
the directors of the same class whose terms are then expiring. The authorized
number of directors may be changed only by resolution of the board of
directors. Any additional directorships resulting from an increase in the
number of directors will be distributed among the three classes so that, as
early as possible, each class will consist of one-third of the directors. This
classification of our board of directors may have the effect of delaying or
preventing changes in control or management of our company. See "Description of
Capital Stock-Anti-Takeover Effects of Provisions of Delaware Law and Our
Charter and By-Laws."

424B1 46th Page of 86 TOC 1st Previous Next ↓Bottom Just 46th
Board Committees

We have established an audit committee and a compensation committee of our
board of directors.

Audit Committee. Our audit committee consists of Samuel E. Bradt, Claire W.
Johnson and Richard P. Wiederhold. The audit committee assists the board in
fulfilling its oversight responsibilities by reviewing all audit processes and
fees, the financial information that will be provided to our stockholders and
our systems of internal financial controls. The audit committee shares with the
board the authority and responsibility to select, evaluate and, where
appropriate, replace the independent public accountants.

Compensation Committee. Our compensation committee consists of Edward L.
Cahill, Howard E. Cox, Jr., and Robert K. Ditmore. The compensation committee
reviews, and makes recommendations to the board of directors regarding, the
compensation and benefits of our executive officers and key managers. The
compensation committee also administers the issuance of stock options and other
awards under our stock plans and establishes and reviews policies relating to
the compensation and benefits of our employees and consultants.

Director Compensation

Our non-employee directors receive an annual fee from us of $4,000 and a
fee of $1,000 for each meeting of the board of directors he or she attends in
person and $250 for each meeting attended by means of conference telephone
call. In addition, each member of our audit and compensation committees
receives $500 from us for each committee meeting he or she attends in person
and $200 for each meeting attended by means of conference telephone call.
Directors are reimbursed for expenses incurred in connection with their service.

In addition, we may, in our discretion, grant stock options and other
equity awards to our employee and non-employee directors under our stock plans.

We have granted the following non-qualified stock options shares to our non
employee directors:

. In January 1996, we granted options to purchase 17,000 shares at an
exercise price of $2.56 per share to Claire W. Johnson.

. In September 1997, we granted options to purchase 10,000 shares at an
exercise price of $2.40 per share to each of Samuel E. Bradt, Howard E.
Cox, Jr., Mr. Johnson and Richard P. Wiederhold.

. In January 2000, we granted options to purchase 10,000 shares to each of
Mr. Bradt, Walter E. Burlock, Edward L. Cahill, Mr. Cox, Mr. Johnson and
Mr. Wiederhold at an exercise price of $1.00 per share. In October 2000,
we granted options to purchase 20,000 shares to Mr. Johnson, and 10,000
shares to each of Messrs. Bradt, Burlock, Cahill, Cox and Wiederhold at
$1.33 per share.

All of the above options vest ratably over five years from the date of
grant.

Compensation Committee Interlocks And Insider Participation

None of our executive officers serves as a member of the board of directors
or compensation committee, or other committee serving an equivalent function,
of any other entity that has one or more of its executive officers serving as a
member of our board of directors or compensation committee. None of the current
members of our compensation committee has ever been an employee of Centene.

424B1 47th Page of 86 TOC 1st Previous Next ↓Bottom Just 47th
Executive Compensation

Compensation Earned

The following summarizes the compensation earned during the fiscal year
ended December 31, 2000 by our chief executive officer and our four other most
highly compensated executive officers who were serving as executive officers on
December 31, 2000 and whose total compensation exceeded $100,000. We refer to
these individuals as our "named executive officers."

Summary Compensation Table

[Download Table]

Long-Term
Compensation
------------
Annual Compensation Securities
------------------- Underlying
Name and Principal Position Salary Bonus Options
--------------------------- -------- -------- ------------

Michael F. Neidorff........................... $300,000 $160,000 40,000
President and Chief Executive Officer

Mary O'Hara................................... 230,000 60,000 3,000
Senior Vice President, Operations Services

Karey L. Witty................................ 149,615 75,000 20,000
Senior Vice President and Chief
Financial Officer

Brian G. Spanel............................... 148,249 43,000 5,000
Senior Vice President and Chief
Information Officer

Joseph P. Drozda, Jr., M.D.................... 97,981 35,000 35,000
Senior Vice President, Medical Affairs

Option Grants

The following table sets forth information concerning the individual grants
of stock options to each of the named executive officers who received grants
during the fiscal year ended December 31, 2000. The exercise price per share of
each option was equal to the fair market value of the common stock on the date
of grant, as determined by the board of directors. Our board of directors
determined the fair market value of our common stock based on periodic
independent valuations. We have never granted any stock appreciation rights.
The potential realizable value is calculated based on the term of the option at
its time of grant, which is ten years. This value is based on assumed rates of
stock appreciation of 5% and 10% compounded annually from the date the options
were granted until their expiration date and assumes an initial value of $14.00
per share. These numbers are calculated based on the requirements of the SEC
and do not reflect our estimate of future stock price growth. Actual gains, if
any, on stock option exercises will depend on the future performance of the
common stock and the date on which the options are exercised.

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Option Grants In Year Ended December 31, 2000

[Enlarge/Download Table]

Individual Grants Value
-----------------------
Potential Realizable
Value at Assumed
Number of Percent of Annual Rates of Stock
Securities Total Options Price Appreciation
Underlying Granted to Exercise for Option Term
Options Employees in Price Per Expiration ---------------------
Name Granted Fiscal Year Share Date 5% 10%
---- ---------- ------------- --------- ---------- -------- ----------

Michael F. Neidorff........ 40,000 7.5% $1.33 10/20/10 $912,181 $1,452,496
Mary O'Hara................ 3,000 0.6 1.33 10/20/10 68,414 108,937
Karey L. Witty............. 20,000 3.8 1.33 10/20/10 456,090 726,248
Brian G. Spanel............ 5,000 0.9 1.33 10/20/10 114,023 181,562
Joseph P. Drozda, Jr., M.D. 35,000 6.6 1.33 01/03/10 798,158 1,270,934

Option Exercises and Holdings

None of our named executive officers exercised options during 2000. The
following table sets forth certain information regarding the number and value
of unexercised options held by each of the named executive officers as of
December 31, 2000. There was no public market for our common stock as of
December 31, 2000. Accordingly, amounts described in the following table under
the heading "Value of Unexercised In-The-Money Options at Year End" are
determined by multiplying the number of shares underlying the options by the
difference between the public offering price of $14.00 per share and the per
share option exercise price.

Aggregated 2000 Year-End Option Values

[Download Table]

Number of Securities
Underlying Unexercised Value of Unexercised
Options at In-The-Money Options at
Fiscal Year End Year End
------------------------- -------------------------
Name Exercisable Unexercisable Exercisable Unexercisable
---- ----------- ------------- ----------- -------------

Michael F. Neidorff........ 129,760 109,940 $1,816,640 $1,539,160
Mary O'Hara................ 20,000 58,000 280,000 812,000
Karey L. Witty............. 12,000 68,000 168,000 952,000
Brian G. Spanel............ 26,000 34,000 364,000 476,000
Joseph P. Drozda, Jr., M.D. -- 35,000 -- 490,000

Stock options that are otherwise unvested may be exercised for shares which
are subject to vesting and a repurchase option at the exercise price. Except
for 65,000 shares subject to an option granted to Mr. Neidorff in 1997, all
shares subject to options vest ratably over 5 years. The option granted to Mr.
Neidorff in 1997 will vest in full on the fifth anniversary of the date of
grant. Fifty percent of shares underlying options granted under our 1994 Stock
Plan, 1996 Stock Plan and 1998 Stock Plan vest automatically upon a change of
control. Shares underlying options granted under our 1999 Stock Plan and 2000
Stock Plan vest automatically in full upon a change in control.

Employee Benefit Plans

Stock Plans

We have five stock plans: the 1994 Stock Plan, 1996 Stock Plan, 1998 Stock
Plan, 1999 Stock Plan and 2000 Stock Plan. The stock plans have the same basic
terms.

General. We have reserved for issuance under the plans an aggregate maximum
of 2,200,000 shares of common stock. As of November 21, 2001, options to
purchase 1,380,040 shares of our common stock

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were outstanding and 87,775 shares of common stock had been issued upon the
exercise of options under the plans. If an award granted under the plan expires
or is terminated, the shares of common stock underlying the award will be
available for issuance under the plans.

Types of Awards. The following awards may be granted under the plans:

. stock options, including incentive stock options and non-qualified stock
options;

. stock bonuses; and

. the opportunity to make direct purchases of stock.

Administration. The plans are administered by the board of directors, which
may designate a committee to administer the plans. The board or committee may,
subject to the provisions of the plans, determine the persons to whom awards
will be granted, the type of award to be granted, the number of shares to be
made subject to awards, the exercise price and other terms and conditions of
the awards, and interpret the plans and prescribe, amend and rescind rules and
regulations relating to the plans.

Eligibility. Awards may be granted under the plans to our employees,
directors and consultants or employees, directors and consultants of any of our
subsidiaries, as selected by the board of directors or committee.

Terms and Conditions of Options. Stock options may be either "incentive
stock options," as that term is defined in Section 422 of the Internal Revenue
Code, or non-qualified stock options. The exercise price of a stock option
granted under the plan is determined by the board or committee at the time the
option is granted, but the exercise price of an incentive stock option may not
be less than the fair market value per share of common stock on the date of
grant. Stock options are exercisable at the times and upon the conditions that
the board or committee may determine, as reflected in the applicable option
agreement. The exercise period may not extend beyond ten years from the date of
grant.

The option exercise price must be paid in full at the time of exercise, and
is payable by any one of the following methods or a combination thereof:

. in cash or cash equivalents or, at the discretion of the board or
committee;

. by surrender of previously acquired shares of our common stock with a fair
market value, as determined by the board of directors, equal to the
exercise price;

. by delivery of the optionee's personal recourse promissory note with
interest payable at a rate approved by the board of directors; or

. through a specified "broker cashless exercise" procedure.

Stock Bonuses. The plans provide that the board or committee, in its
discretion, may award shares of common stock to plan participants.

Purchase Opportunity. The plans provide that the board or committee, in its
discretion, may authorize plan participants to purchase shares of common stock.

Director Awards. The board or committee, in its discretion, may grant
awards under the plan to both employee and nonemployee directors. The terms of
the awards granted to directors are to be generally consistent with the terms
of awards granted to other participants under the plan.

Termination of Employment. If a participant ceases to be an employee or
perform services for us or one of our affiliates for any reason other than
death or disability, his or her option will expire one month

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after the date of termination or such lesser period, or greater period in the
case of nonqualified options, as the board or committee shall determine. If
such termination is as a result of death or disability, the options will be
terminate three months after the date of termination, unless the board or
committee determines a shorter period. No option may, however, be exercised
after the date of its expiration, and may be exercised after termination only
to the extent it was exercisable on the date of termination. The options
granted to date each provide that options are fully exercisable on the date of
grant, but shares subject to the options vest ratably over five years. Fifty
percent of shares underlying options granted under our 1994 Stock Plan, 1996
Stock Plan and 1998 Stock Plan vest automatically upon a "change of control" as
defined in the option agreements. Shares underlying options granted under our
1999 Stock Plan and 2000 Stock Plan vest automatically in full upon a "change
in control" as defined in the option agreements. If an option holder leaves our
employ for any reason or, in the case of an option holder who is a non-employee
director, ceases to be a member of our board of directors, we may repurchase
from such holder all unvested shares acquired by him or her at the option
exercise price.

Amendment and Termination of Plans. The board of directors may modify or
terminate the plans or any portion of the plans at any time, except that
shareholder approval is required for any amendment that would increase the
total number of shares reserved for issuance under a plan, materially increase
the plan benefits available to participants, materially modify the plan
eligibility requirements, or otherwise as required to comply with applicable
law. No awards may be granted under any plan after the day prior to the tenth
anniversary of its adoption date.

Employment Agreements

Joseph P. Drozda serves as our Senior Vice President, Medical Affairs
pursuant to an employment agreement dated October 30, 2000. We have agreed to
pay Dr. Drozda an annual salary of $180,000, which may be adjusted by our
President. Dr. Drozda may also receive an annual bonus in the discretion of our
President. Dr. Drozda has agreed not to disclose confidential information about
our business, and not to compete with us during the term of his employment and
for nine months thereafter. Dr. Drozda's employment may be terminated by us for
cause or permanent disability. If we terminate Dr. Drozda without cause, he
will be entitled to receive one year's salary continuation, and we will be
obligated to pay premiums for the health and dental coverage to which he would
be entitled under the Consolidated Omnibus Budget Reconciliation Act of 1985,
or COBRA, for 12 months. If, after a change in control, Dr. Drozda's position
is eliminated, his salary is reduced or he is asked and refuses to relocate
outside of the Saint Louis metropolitan area, he will, upon termination, be
entitled to the above benefits, but his one year salary will be paid either in
a lump sum or as salary continuance, at his option.

Mary O'Hara serves as our Senior Vice President, Operations Services
pursuant to an employment agreement dated December 16, 1998. This agreement had
an initial term of one year and renews automatically on an annual basis unless
we provide 30 days' prior written notice of non-renewal. We have agreed to pay
Ms. O'Hara an annual salary of $200,000, which may be adjusted by our
President. Ms. O'Hara may also receive an annual bonus in an amount to be
determined by the board of directors. Ms. O'Hara has agreed not to disclose
confidential information about our business or, during the term of her
employment and for a period of one year thereafter, solicit any of our
customers, suppliers, employees or agents. Ms. O'Hara has also agreed not to
compete with us during the term of her employment or for a period of six months
thereafter. Ms. O'Hara's employment may be terminated by us for cause or
permanent disability. If we terminate Ms. O'Hara without cause, Ms. O'Hara will
be entitled to receive one year's salary continuation and COBRA coverage for 12
months.

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Brian G. Spanel serves as our Senior Vice President and Chief Information
Officer pursuant to an employment agreement dated August 6, 2001. This
agreement has an initial term of one year and renews automatically on an annual
basis unless we provide 30 days' prior written notice of non-renewal. We have
agreed to pay Mr. Spanel an annual salary of $175,000, which may be adjusted by
our President. Mr. Spanel may also receive an annual bonus in the discretion of
our President. Mr. Spanel has agreed not to disclose confidential information
about our business. Mr. Spanel has also agreed not to compete with us during
the term of his employment and for nine months thereafter. Mr. Spanel's
employment may be terminated by us for cause or permanent disability. If we
terminate Mr. Spanel without cause, he will be entitled to receive 39 weeks
salary continuation and COBRA coverage for nine months. If, within 24 months
after a change in control, Mr. Spanel is involuntarily terminated or
voluntarily resigns due to a reduction in his compensation, a material adverse
change in his position with us or the nature or scope of his duties or a
request that he relocate outside of the Saint Louis metropolitan area, he will
be entitled to receive one year's salary, either in a lump sum or as salary
continuance, at his option, COBRA coverage for 18 months and the use of an
outplacement service.

Karey L. Witty serves as our Senior Vice President and Chief Financial
Officer pursuant to an employment agreement dated as of January 1, 2001. This
agreement has an initial term of one year and renews automatically unless we
provide 30 days' prior written notice of non-renewal. We have agreed to pay Mr.
Witty an annual salary of $175,000, which may be adjusted by our President. Mr.
Witty may also receive an annual bonus to be determined by our President. Mr.
Witty has agreed not to disclose confidential information about our business
or, during the term of his employment and for a period of six months
thereafter, not to compete with us. Mr. Witty's employment may be terminated by
us for cause or permanent disability. If we terminate Mr. Witty without cause,
Mr. Witty will be entitled to receive one year's salary continuation and COBRA
coverage for 12 months. If, after a change in control, Mr. Witty is
involuntarily terminated or voluntarily resigns due to a reduction in his
compensation, a material adverse change in his position with us or the nature
or scope of his duties or a request that he relocate outside of the Saint Louis
metropolitan area, he will be entitled to receive one year's salary, either in
a lump sum or as salary continuance, at his option, COBRA coverage for 18
months and the use of an outplacement service.

Limitation of Liability of Directors and Indemnification of Directors and
Officers

As permitted by the Delaware General Corporation Law, our charter provides
that our directors shall not be liable to us or our stockholders for monetary
damages for breach of fiduciary duty as a director to the fullest extent
permitted by Delaware law as it now exists or as it may be amended. As of the
date of this prospectus, Delaware law permits limitations of liability for a
director's breach of fiduciary duty other than liability for (1) any breach of
the director's duty of loyalty to us or our stockholders, (2) acts or omissions
not in good faith or which involve intentional misconduct or a knowing
violation of law, (3) unlawful payments of dividends or unlawful stock
repurchases or redemptions, or (4) any transaction from which the director
derived an improper personal benefit. In addition, our by-laws provide that we
will indemnify all of our directors, officers, employees and agents for acts
performed on our behalf in such capacity.

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RELATED PARTY TRANSACTIONS

Since January 1, 1998, we have engaged in the following transactions with
our directors, officers and holders of more than five percent of our voting
securities and affiliates of our directors, officers and five percent
stockholders.

Issuances of Series D Convertible Preferred Stock

In September 1998, we sold 3,680,000 shares of series D preferred stock at
a price of $5.00 per share for gross proceeds of $18,400,000.

. We sold 2,000,000 of the shares to Strategic Investment Partners, Ltd. for
a total price of $10,000,000. Strategic Investment Partners, Ltd. is a
five percent stockholder.

. We sold 947,500 of the shares to Cahill Warnock Strategic Partners Fund,
L.P. for a total price of $4,737,500. Cahill Warnock Strategic Partners
Fund, L.P. is a five percent stockholder with which Edward L. Cahill, one
of our directors, is affiliated.

. We sold 600,000 of the shares to Greylock Limited Partnership for a total
price of $3,000,000. Greylock Limited Partnership is a five percent
stockholder.

. We sold 52,500 of the shares to Strategic Associates, L.P. for a total
price of $262,500. Mr. Cahill, one of our directors, is affiliated with
Strategic Associates, L.P.

. We sold 40,000 of the shares to D.L. Associates for a total price of
$200,000. Robert K. Ditmore, one of our directors, is affiliated with D.L.
Associates.

. We sold 20,000 of the shares to Claire W. Johnson for a total price of
$100,000. Mr. Johnson is one of our directors.

. We sold 5,000 of the shares to a trust for the benefit of Richard P.
Wiederhold for a total price of $25,000. Mr. Wiederhold is one of our
directors.

In May 1999, we sold 40,000 shares of series D preferred stock at a price
of $5.00 per share for gross proceeds of $200,000. We sold 25,000 of the shares
to Michael F. Neidorff and 5,000 of the shares to Brian G. Spanel, both of whom
are our executive officers.

Registration Rights

The holders of 5,593,247 shares of our common stock are entitled to rights
to register their shares under the Securities Act. These rights are provided
under the terms of an agreement between us and the holders of registrable
securities, who are former holders of some series of our common and preferred
stock. These holders include:

. Greylock Limited Partnership, which has registration rights covering
2,009,640 shares of common stock;

. Strategic Investment Partners, Ltd., which has registration rights
covering 2,000,000 shares of common stock;

. Cahill Warnock Strategic Partners Fund, L.P., which has registration
rights covering 947,500 shares of common stock;

. Mr. Johnson, who has registration rights covering 20,000 shares of common
stock;

. Mr. Neidorff, who has registration rights covering 75,300 shares of common
stock;

. Strategic Associates, L.P., which has registration rights covering 52,500
shares of common stock;

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. D.L. Associates, which has registration rights covering 50,000 shares of
common stock; and

. Mr. Spanel, who has registration rights covering 5,000 shares of common
stock.

The registration rights:

. are held by all persons and entities that purchased series A common stock
and series A, series B and series D preferred stock;

. allow holders to require us to register their shares under the Securities
Act; and

. allow holders to include their shares in registration statements filed by
us.

For a more detailed description of the registration rights, see
"Description of Capital Stock--Registration Rights."

Employment Agreements

We have entered into employment agreements with Joseph P. Drozda, Mary
O'Hara, Brian G. Spanel and Karey L. Witty. For a more detailed description of
these employment agreements, including severance provisons, see
"Management--Employment Agreements."

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PRINCIPAL AND SELLING STOCKHOLDERS

The following table sets forth information regarding the beneficial
ownership of our common stock as of November 21, 2001, as adjusted to reflect
the sale of the shares of common stock offered in this offering, for:

. each person, entity or group of affiliated persons or entities known by us
to own beneficially more than 5% of our outstanding common stock;

. each of our named executive officers and directors;

. all of our executive officers and directors as a group; and

. each of the selling stockholders.

Managed Health Services, Inc. d/b/a Elizabeth A. Brinn Foundation, a
501(c)(3) organization (the "Elizabeth A. Brinn Foundation"), is offering
250,000 of the shares covered by this prospectus. The other selling
stockholders have granted the underwriters an option, exercisable not later
than 30 days after the date of this prospectus, to purchase up to an aggregate
of 525,000 shares to cover over-allotments. If the underwriters exercise their
options, shares will be purchased from the selling stockholders on a pro-rata
basis at the public offering price. Information in the following table assumes
that the underwriters exercise their over-allotment option in full.

Beneficial ownership is determined in accordance with the rules of the SEC.
These rules generally attribute beneficial ownership of securities to persons
who possess sole or shared voting power or investment power with respect to
those securities and include shares of common stock issuable upon the exercise
of stock options or warrants that are immediately exercisable or exercisable
within 60 days. Unless otherwise indicated, the persons or entities identified
in this table have sole voting and investment power with respect to all shares
shown as beneficially owned by them, subject to applicable community property
laws. The address of our officers and directors is in care of Centene
Corporation, 7711 Carondelet Avenue, Suite 800, Saint Louis, Missouri 63105.

Percentage ownership calculations are based on 6,775,366 shares outstanding
as of November 21, 2001. All of the following information gives effect to the
conversion of all of our outstanding convertible preferred stock into common
stock upon the closing of this offering. The information as to beneficial
ownership after the offering also gives effect to the exercise of all
outstanding warrants to purchase a total of 46,003 shares of common stock
before the closing of this offering.

To the extent that any shares are exercised on exercise of options to
acquire shares of our capital stock, there may be further dilution to new
public investors.

424B1 55th Page of 86 TOC 1st Previous Next ↓Bottom Just 55th
[Enlarge/Download Table]

Beneficial Ownership Prior to Offering
---------------------------------------------------

Shares Issuable
Pursuant to
Options
Number of and Warrants Number of
Shares Exercisable Shares of
Beneficially within 60 days of Common Stock
Name of Beneficial Owner Owned November 21, 2001 Percentage Being Offered
------------------------ ------------ ----------------- ---------- -------------

5% Stockholders:
Greylock Limited Partnership 2,127,799 -- 31.4%
One Federal Street, 26th Floor Boston,
Massachusetts 02110
Strategic Investment Partners, Ltd............. 2,000,000 -- 29.5
c/o Soros Fund Management LLC
888 Seventh Avenue, 33rd Floor
New York, New York 10016
Cahill Warnock Strategic Partners Fund, L.P.... 947,500 -- 14.0
c/o Cahill, Warnock & Company
One South Street, Suite 2150
Baltimore, Maryland 21202
Named Executive Officers and Directors:
Michael F. Neidorff............................ 75,340 304,700 5.4 --
Mary O'Hara.................................... -- 78,000 1.1 --
Karey L. Witty................................. -- 80,000 1.2 --
Brian Spanel................................... 5,000 60,000 * --
Joseph P. Drozda, Jr., M.D..................... -- 35,000 * --
Claire W. Johnson.............................. 549,723(1) 43,305(2) 8.7 (3)
Samuel E. Bradt................................ 310,320(1) 33,305(2) 5.0 (3)
Walter E. Burlock, Jr.......................... -- 20,000 * --
Edward L. Cahill............................... 1,000,000(5) 20,000 15.0 --
Howard E. Cox, Jr.............................. 2,127,799(6) 30,000 31.7 --
Robert K. Ditmore.............................. 50,000(7) 35,000(8) 1.2 --
Richard P. Wiederhold.......................... 481,411(1) 33,305(2) 7.6 (3)
All directors and executive officers as a group
(13 persons).................................. 4,099,593(1)(5)(6)(7) 796,005(2)(8) 64.6 (3)
Selling Stockholder:
Elizabeth A. Brinn Foundation.................. 250,000 3,305 3.7 250,000
Over-allotment Selling Stockholders:
William P. Jollie.............................. 450,100(1) 3,305(2) 6.7 434,138(3)
Raymond C. Brinn............................... 305,073(1) 3,305(2) 4.6 300,680(3)
Thomas M. Gazzana.............................. 130,000 -- 1.9 119,630
Jerome M. Fritsch.............................. 103,133 -- 1.5 94,906
Leon K. Rusch.................................. 56,484 -- * 51,978
Kathleen A. Tordik............................. 11,719 -- * 10,784
Tracey Klein................................... 11,250(9) -- * 10,353(9)
Richard S. Nemitz.............................. 2,000 -- * 1,841
Elaine E. Laverenz............................. 750 -- * 690
[Download Table]

Beneficial Ownership After
Offering
-----------------------------------
Number of
Shares
Beneficially
Name of Beneficial Owner Owned Percentage
------------------------ ------------ ----------

5% Stockholders:
Greylock Limited Partnership 2,127,799 21.1%
One Federal Street, 26th Floor Boston,
Massachusetts 02110
Strategic Investment Partners, Ltd............. 2,000,000 19.8
c/o Soros Fund Management LLC
888 Seventh Avenue, 33rd Floor
New York, New York 10016
Cahill Warnock Strategic Partners Fund, L.P.... 947,500 9.4
c/o Cahill, Warnock & Company
One South Street, Suite 2150
Baltimore, Maryland 21202
Named Executive Officers and Directors:
Michael F. Neidorff............................ 380,040 3.7
Mary O'Hara.................................... 78,000 *
Karey L. Witty................................. 80,000 *
Brian Spanel................................... 65,000 *
Joseph P. Drozda, Jr., M.D..................... 35,000 *
Claire W. Johnson.............................. 343,028(4) 3.4
Samuel E. Bradt................................ 93,625(4) *
Walter E. Burlock, Jr.......................... 20,000 *
Edward L. Cahill............................... 1,020,000(5) 9.9
Howard E. Cox, Jr.............................. 2,157,799(6) 21.4
Robert K. Ditmore.............................. 85,000(7)(8) *
Richard P. Wiederhold.......................... 264,716(4) 2.6
All directors and executive officers as a group
(13 persons).................................. 4,645,598(4)(5)(6)(7)(8) 42.7
Selling Stockholder:
Elizabeth A. Brinn Foundation.................. 3,305 *
Over-allotment Selling Stockholders:
William P. Jollie.............................. 19,267(4) *
Raymond C. Brinn............................... 7,698(4) *
Thomas M. Gazzana.............................. 10,370 *
Jerome M. Fritsch.............................. 8,227 *
Leon K. Rusch.................................. 4,506 *
Kathleen A. Tordik............................. 935 *
Tracey Klein................................... 897(9) *
Richard S. Nemitz.............................. 159 *
Elaine E. Laverenz............................. 60 *

--------
* Represents less than 1% of outstanding shares of common stock.
(1) Includes 250,000 shares owned of record by the Elizabeth A. Brinn
Foundation. Messrs. Johnson, Bradt, Wiederhold, Jollie and Brinn are
directors of the Elizabeth A. Brinn Foundation. Messrs. Bradt and
Wiederhold are also executive officers of the Elizabeth A. Brinn
Foundation. These persons share voting and investment power with respect to
these shares, but these individuals disclaim beneficial ownership.
(2) Includes 3,305 shares issuable to the Elizabeth A. Brinn Foundation upon
exercise of a warrant.
(3) Includes 250,000 shares being offered by the Elizabeth A. Brinn Foundation
in this offering.
(4) Includes 3,305 shares owned of record by the Elizabeth A. Brinn Foundation.
(5) Includes 947,500 shares owned of record by Cahill Warnock Strategic
Partners Fund, L.P. and 52,500 shares owned of record by Strategic
Associates, L.P. Mr. Cahill is a partner of Cahill, Warnock Strategic
Partners, L.P., the general partner of Cahill Warnock Strategic Partners
Fund, L.P. and Strategic Associates, L.P., and he shares voting and
investment power with respect to these shares.
(6) Includes 2,127,799 shares owned of record by Greylock Limited Partnership.
Mr. Cox is a partner of Greylock Limited Partnership and shares voting and
investment power with respect to these shares.
(7) Includes 50,000 shares owned of record by D.L. Associates. Mr. Ditmore is a
managing general partner of D.L. Associates and shares voting and
investment power with respect to these shares.
(8) Includes 35,000 shares issuable pursuant to options granted to D.L.
Associates.
(9) Consists of shares held in trust for the benefit of Ms. Klein.

424B1 56th Page of 86 TOC 1st Previous Next ↓Bottom Just 56th
DESCRIPTION OF CAPITAL STOCK

We are authorized to issue 40,000,000 shares of common stock and 10,000,000
shares of undesignated preferred stock. Shares of each class have a par value
of $0.001 per share. The following description summarizes information about our
capital stock. You can obtain more comprehensive information about our capital
stock by consulting our charter and by-laws, as well as the Delaware General
Corporation Law.

Common Stock

As of the date of this prospectus, our charter provides for two series of
common stock, which are held as follows:

. Series A voting common stock, of which 278,747 shares were issued and
outstanding held by ten holders of record; and

. Series B non-voting common stock, of which 624,279 shares were issued and
outstanding held by seven holders of record.

Each share of Series A and Series B common stock will convert into one
share of common stock immediately upon the closing of this offering.

Each share of our common stock entitles the holder to one vote on all
matters submitted to a vote of stockholders, including the election of
directors. Subject to any preference rights of holders of preferred stock, the
holders of common stock are entitled to receive dividends, if any, declared
from time to time by the directors out of legally available funds. See
"Dividend Policy." In the event of our liquidation, dissolution or winding up,
the holders of common stock are entitled to share ratably in all assets
remaining after the payment of liabilities, subject to any rights of holders of
preferred stock to prior distribution.

The common stock has no preemptive or conversion rights or other
subscription rights. No redemption or sinking fund provisions apply to the
common stock. All outstanding shares of common stock are fully paid and
nonassessable, and the shares of common stock to be issued upon the completion
of this offering will be fully paid and nonassessable.

Preferred Stock

As of the date of this prospectus, our charter provides for four series of
preferred stock, which are held as follows:

. Series A preferred stock, of which 733,850 shares were issued and
outstanding held by nine holders of record;

. Series B preferred stock, of which 864,640 shares were issued and
outstanding held by one holder of record;

. Series C preferred stock, of which 557,850 shares were issued and
outstanding held by five holders of record; and

. Series D preferred stock, of which 3,716,000 shares were issued and
outstanding held by 15 holders of record.

Each share of preferred stock will convert into one share of common stock
immediately upon the closing of this offering.

The board of directors will have the authority, without action by the
stockholders, to designate and issue up to an aggregate of 10,000,000 shares of
preferred stock, in one or more series, each series to have

424B1 57th Page of 86 TOC 1st Previous Next ↓Bottom Just 57th
the voting rights, dividend rights, conversion rights, liquidation preferences
and redemption privileges as shall be determined by the board of directors. The
rights of the holders of common stock will be affected by, and may be adversely
affected by, the rights of holders of any preferred stock that may be issued in
the future. It is not possible to state the actual effect of the issuance of
any shares of preferred stock on the rights of holders of common stock until
the board of directors determines the specific rights attached to that
preferred stock. The effects of issuing preferred stock could include one or
more of the following:

. restricting dividends on the common stock;

. diluting the voting power of the common stock;

. impairing the liquidation rights of the common stock; or

. delaying or preventing changes in control or management of Centene.

Anti-Takeover Effects of Provisions of Delaware Law and Our Charter and By-Laws

Delaware law and our charter and by-laws could make it more difficult to
acquire us by means of a tender offer, a proxy contest, open market purchases,
removal of incumbent directors and otherwise. These provisions, summarized
below, are expected to discourage types of coercive takeover practices and
inadequate takeover bids and to encourage persons seeking to acquire control of
us to first negotiate with us. We believe that the benefits of increased
protection of our potential ability to negotiate with the proponent of an
unfriendly or unsolicited proposal to acquire or restructure us outweigh the
disadvantages of discouraging takeover or acquisition proposals because
negotiation of these proposals could result in an improvement of their terms.

We must comply with Section 203 of the Delaware General Corporation Law, an
anti-takeover law. In general, Section 203 prohibits a publicly held Delaware
corporation from engaging in a "business combination" with an "interested
stockholder" for a period of three years following the date the person became
an interested stockholder, unless the business combination or the transaction
in which the person became an interested stockholder is approved in a
prescribed manner. Generally, a "business combination" includes a merger, asset
or stock sale, or other transaction resulting in a financial benefit to an
interested stockholder. An "interested stockholder" includes a person who,
together with affiliates and associates, owns, or did own within three years
prior to the determination of interested stockholder status, 15% or more of the
corporation's voting stock. The existence of this provision generally will have
an anti-takeover effect for transactions not approved in advance by the board
of directors, including discouraging attempts that might result in a premium
over the market price for the shares of common stock held by stockholders.

Upon the closing of this offering, our charter and by-laws will require
that any action required or permitted to be taken by our stockholders must be
effected at a duly called annual or special meeting of the stockholders and may
not be effected by a consent in writing. In addition, upon the completion of
this offering, special meetings of our stockholders may be called only by the
board of directors or some of our officers. Our charter and by-laws also
provide that, effective upon the completion of this offering, our board of
directors will be divided into three classes, with the classes serving
staggered three-year terms. These provisions may have the effect of deterring
hostile takeovers or delaying or preventing changes in our control or
management.

Transfer Agent and Registrar

The transfer agent and registrar for our common stock is Mellon Investor
Services LLC.

Nasdaq National Market Listing

Our common stock has been approved for trading and quotation on the Nasdaq
National Market under the symbol "CNTE."

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SHARES ELIGIBLE FOR FUTURE SALE

Prior to this offering, there has been no market for our common stock. We
cannot provide any assurance that an active public market for our common stock
will develop or be sustained after the closing of this offering.

Future sales in the public markets of substantial amounts of our common
stock, including shares issued on the exercise of outstanding options, could
adversely affect the prevailing market price of our common stock. It could also
impair our ability to raise additional capital through future sales of equity
securities.

Upon the closing of this offering, a total of 10,071,369 shares of our
common stock will be outstanding assuming (1) no exercise of options
outstanding after November 21, 2001, (2) the exercise of all warrants
outstanding on November 21, 2001 and (3) the conversion of all of our
outstanding preferred stock into common stock upon the closing of this
offering. Of these shares, all of the shares of common stock sold in this
offering will be freely transferable without restriction or further
registration under the Securities Act, except for any shares acquired by
"affiliates" as that term is defined in Rule 144 under the Securities Act.

Shares acquired by affiliates and the remaining shares held by existing
stockholders are "restricted securities" as that term is defined in Rule 144
under the Securities Act. Restricted securities may be sold in the public
market only if registered or if they qualify for an exemption from registration
under Rule 144, which is summarized below.

Lock-Up Agreements

Our executive officers, directors and substantially all of our other
stockholders have entered into lock-up agreements pursuant to which they have
agreed, with limited exceptions, not to dispose of or hedge any of their common
stock for 180 days following the date of this prospectus without the written
consent of SG Cowen Securities Corporation. The persons who have delivered
lock-up agreements will hold a total of 6,528,898 of the 6,571,369 shares of
common stock that will be outstanding as of the closing of this offering,
excluding the 3,500,000 shares being offered. We have also agreed that, without
the prior written consent of SG Cowen Securities Corporation, we will not,
directly or indirectly, offer, sell or otherwise dispose of any shares of
common stock or any securities that may be converted into or exchanged for
shares of common stock for a period of 180 days from the date of this
prospectus. However, our agreement with SG Cowen Securities Corporation
provides that we may, without such consent, (a) grant options and sell shares
pursuant to our stock plans, (b) issue shares to Community Health Centers
Network in the event that it exercises its right to cause us to acquire its 10%
equity interest in Superior HealthPlan in exchange for shares of our common
stock, as described under "Management's Discussion and Analysis of Financial
Condition and Results of Operations--Overview--Other Income," and (c) issue up
to an aggregate of 500,000 shares of our common stock in connection with one or
more acquisitions or collaborative arrangements, provided that each recipient
of those shares enters into a lock-up agreement substantially equivalent to
those delivered by substantially all of our stockholders in connection with
this offering.

Upon the closing of this offering, options to purchase 1,380,040 shares of
common stock will be held by existing optionees, based on options outstanding
on November 21, 2001. Under the terms of their option agreements, holders of
all of these options have agreed to be bound by the 180-day lock-up.

We intend to file with the SEC a registration statement on Form S-8 as soon
as practicable after the closing of this offering registering shares of common
stock reserved for future issuance under our stock plans or subject to
presently outstanding options. This registration statement will allow holders
of shares of common stock issued under our stock plans to resell those shares
in the public market, without restriction under the Securities Act, subject to
the lock-up agreements and, in the case of affiliates, Rule 144 limitations.

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As a result of the lock-up agreements, the Form S-8 registration statement,
the provisions of Rule 144 and Rule 701 under the Securities Act, the common
shares outstanding upon the closing of this offering, including shares subject
to presently outstanding options, will be eligible for resale in the public
market in the United States as follows, subject in some cases to Rule 144
limitations:

[Enlarge/Download Table]

Number of Shares Date
---------------- ----

3,542,471 After completion of this offering, (a) freely tradable shares sold in this offering and (b) shares
eligible for sale in the public market under Rule 144(k) that are not subject to 180-day lock-up
agreements

6,519,966 After 180 days from the closing of this offering, the 180-day lock-up will be released, and
these shares will be eligible for sale in the public market under Rule 144 (subject, in some
cases, to volume limitations), Rule 144(k) or Rule 701

8,932 After 180 days from the closing of this offering, restricted securities that have been held for
less than one year and are not eligible for sale in the public market under Rule 144

Rule 144

In general, under Rule 144, as in effect on the date of this prospectus,
any person, including any of our affiliates, who has beneficially owned
restricted common shares for at least one year, would be entitled to sell,
within any three-month period, a number of shares that, together with sales of
any common shares with which such person's sales must be aggregated, does not
exceed the greater of:

. 1% of the total number of shares of common stock then outstanding, or

. the average weekly trading volume of the common stock on the Nasdaq
National Market during the four calendar weeks preceding the date on which
the notice of the sale on Form 144 is filed with the SEC.

Sales of restricted securities under Rule 144 are also subject to certain
manner of sale provisions and notice requirements and to the availability of
current public information about us. Persons who are our affiliates must also
comply with the restrictions and requirements of Rule 144, other than the
one-year holding period requirement, in order to sell common shares in the
public market that are not restricted securities. We are unable to estimate the
number of shares that will be sold under Rule 144, as this will depend on the
market price for our common stock, the personal circumstances of the sellers
and other factors.

Rule 144(k)

Under Rule 144(k), a person who is not deemed to have been one of our
affiliates at any time during the 90 days preceding a sale, and who has
beneficially owned the shares proposed to be sold for at least two years,
including the holding period of any prior owner that was not an affiliate, is
entitled to sell the shares without complying with the manner of sale, public
information, volume limitation or notice provisions of Rule 144.

Rule 701

In general, under Rule 701, as in effect on the date of this prospectus,
our employees, directors, officers, consultants or advisors who purchase shares
from us in connection with a compensatory stock or option plan or other written
agreement before the effective date of this prospectus may rely on Rule 701 to
resell those shares 90 days after the effective date of this prospectus.

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Rule 701 permits non-affiliates to sell their Rule 701 shares in reliance
on Rule 144 without having to comply with the holding period, public
information, volume limitation or notice provisions of Rule 144. Rule 701
permits affiliates to sell their Rule 701 shares under Rule 144 without
complying with the holding period requirements of Rule 144. All holders of Rule
701 shares are required to wait until 90 days after the date of this prospectus
before selling those shares.

Registration Rights

After the closing of this offering, pursuant to a shareholders' agreement
dated September 23, 1998, the holders of approximately 5,343,247 shares of
common stock will be entitled to require us to register their shares under the
Securities Act. Under this agreement, if we propose to register any of our
securities under the Securities Act for our account, other than for employee
benefit plans and business acquisitions or corporate restructurings, the
holders of the registration rights are entitled to written notice of the
registration and to include their shares of common stock in the registration.
In addition, such holders may on up to two occasions, or three occasions under
some circumstances, require us to register their shares of common stock under
the Securities Act, and we are required to use our best efforts to effect any
such registration. These registration rights are subject to conditions and
limitations, including (1) the right of the underwriters of an offering to
limit the number of shares included in such registration and (2) the right of
the underwriters to lock-up the shares of such holders for a period of 120 days
after the effective date of any registration statement filed by us. We have the
right to defer the filing of any registration statement for up to 180 days if
our board of directors determines that the filing would be seriously
detrimental to us and our stockholders. We are responsible for paying the
expenses of any registration pursuant to the shareholders' agreement, other
than any underwriters' discounts and commissions.

424B1 61st Page of 86 TOC 1st Previous Next ↓Bottom Just 61st
UNDERWRITING

We, the selling stockholders and the underwriters named below have entered
into an underwriting agreement with respect to the shares being offered.
Subject to the terms and conditions of the underwriting agreement, the
underwriters named below have severally agreed to purchase from the Elizabeth
A. Brinn Foundation and us the number of shares set forth opposite their names
on the table below at the public offering price, less the underwriting
discounts and commissions, as set forth on the cover page of this prospectus.
SG Cowen Securities Corporation, Thomas Weisel Partners LLC and CIBC World
Markets Corp. are acting as the representatives of the several underwriters
named below.

[Download Table]

Number of
Name Shares
---- ---------

SG Cowen Securities Corporation............. 1,106,250
Thomas Weisel Partners LLC.................. 1,106,250
CIBC World Markets Corp..................... 737,500
Deutsche Banc Alex. Brown Inc............... 100,000
A.G. Edwards & Sons, Inc.................... 100,000
Edward D. Jones & Co., L.P.................. 50,000
Kenny Securities Corp....................... 50,000
McDonald Investments Inc., a KeyCorp Company 50,000
Morgan Keegan & Company, Inc................ 50,000
Raymond James & Associates, Inc............. 50,000
Stifel, Nicolaus & Company, Incorporated.... 50,000
C.E. Unterberg, Towbin...................... 50,000
---------
Total.................................... 3,500,000
=========

The underwriting agreement provides that the obligations of the several
underwriters to purchase the shares of common stock offered hereby are
conditional and may be terminated at their discretion based on their assessment
of the state of the financial markets. The obligations of the underwriters may
also be terminated upon the occurrence of other events specified in the
underwriting agreement. The underwriters are severally committed to purchase
all of the shares of common stock being offered by the Elizabeth A. Brinn
Foundation and us if any shares are purchased.

The underwriters propose to offer the shares of common stock to the public
at the public offering price set forth on the cover of this prospectus. The
underwriting fee is an amount equal to the offering price to the public less
the amount paid per share by the underwriters to us. The underwriters may offer
the common stock to securities dealers at the price to the public less a
concession not in excess of $0.57 per share. Securities dealers may reallow a
concession not in excess of $0.10 per share to other dealers. After the shares
of common stock are released for sale to the public, the underwriters may vary
the offering price and other selling terms from time to time.

Selling stockholders have granted to the underwriters an option,
exercisable not later than 30 days after the date of this prospectus, to
purchase up to an aggregate of 525,000 additional shares of common stock at the
public offering price set forth on the cover page of this prospectus less the
underwriting discounts and commissions. The underwriters may exercise this
option only to cover over-allotments, if any, made in connection with the sale
of the common stock offered hereby. If the underwriters exercise their
over-allotment option, the underwriters have severally agreed to purchase
shares from these selling stockholders in approximately the same proportion as
shown in the table above.

We estimate that our share of the total expenses of this offering,
excluding underwriting discounts and commissions, will be approximately
$800,000.

424B1 62nd Page of 86 TOC 1st Previous Next ↓Bottom Just 62nd
We and the selling stockholders have agreed to indemnify the underwriters
against certain civil liabilities, including liabilities under the Securities
Act and liabilities arising from breaches of representations and warranties
contained in the underwriting agreement, and to contribute to payments the
underwriters may be required to make in respect of any such liabilities.

Our directors, executive officers, optionholders and substantially all of
our stockholders have agreed with the underwriters that for a period of 180
days following the date of this prospectus, they will not dispose of or hedge
any shares of common stock or any securities convertible into or exchangeable
for shares of common stock. SG Cowen Securities Corporation may, in its sole
discretion, at any time without prior notice, release all or any portion of the
shares from the restrictions in any such agreement to which SG Cowen Securities
Corporation is a party. We have entered into a similar agreement with the
representatives of the underwriters, provided we may, without such consent, (a)
grant options and sell shares pursuant to our stock plans, (b) issue shares to
Community Health Centers Network in the event that it exercises its right to
cause us to acquire its 10% equity interest in Superior HealthPlan in exchange
for shares of our common stock, as described under "Management's Discussion and
Analysis of Financial Condition and Results of Operations--Overview--Other
Income," and (c) issue up to an aggregate of 500,000 shares of our common stock
in connection with one or more acquisitions or collaborative arrangements,
provided that each recipient of those shares enters into a lock-up agreement
substantially equivalent to those delivered by substantially all of our
stockholders in connection with this offering. There are no agreements between
SG Cowen Securities Corporation and any of our stockholders or affiliates
releasing them from these lock-up agreements prior to the expiration of the
180-day period.

The representatives of the underwriters have advised us that the
underwriters do not intend to confirm sales to any account over which they
exercise discretionary authority. The underwriters are delivering this
prospectus only in printed form.

The representatives of the underwriters may engage in over-allotment,
stabilizing transactions, syndicate covering transactions, penalty bids and
passive market making in accordance with Regulation M under the Securities
Exchange Act. Over-allotment involves syndicate sales in excess of the offering
size, which creates a syndicate short position. Stabilizing transactions permit
bids to purchase the underlying security so long as the stabilizing bids do not
exceed a specified maximum. Syndicate covering transactions involve purchases
of the shares of common stock in the open market after the distribution has
been completed in order to cover syndicate short positions. Penalty bids permit
the representatives to reclaim a selling concession from a syndicate member
when the shares of common stock originally sold by such syndicate member is
purchased in a syndicate covering transaction to cover syndicate short
positions. Penalty bids may have the effect of deterring syndicate members from
selling to people who have a history of quickly selling their shares. In
passive market making, market makers in the shares of common stock who are
underwriters or prospective underwriters may, subject to certain limitations,
make bids for or purchases of the shares of common stock until the time, if
any, at which a stabilizing bid is made. These stabilizing transactions,
syndicate covering transactions and penalty bids may cause the price of the
shares of common stock to be higher than it would otherwise be in the absence
of these transactions. These transactions may be effected on the Nasdaq
National Market or otherwise and, if commenced, may be discontinued at any time.

Prior to this offering, there has been no public market for shares of our
common stock. Consequently, the initial public offering price has been
determined by negotiations between us and the underwriters. The various factors
considered in these negotiations included prevailing market conditions, the
market capitalizations and the states of development of other companies that we
and the underwriters believed to be comparable to us, estimates of our business
potential, our results of operations in recent periods, the present state of
our development and other factors deemed relevant.

424B1 63rd Page of 86 TOC 1st Previous Next ↓Bottom Just 63rd
At our request, the underwriters have reserved for sale, at the initial
public offering price, up to 175,000 of the offered shares for employees,
family members of employees, business associates and other third party vendors.
The number of shares of our common stock available for sale to the general
public will be reduced to the extent these reserved shares are purchased. Any
reserved shares not purchased will be offered by the underwriters to the
general public on the same terms as the other shares in this offering.

Thomas Weisel Partners LLC, one of the representatives of the underwriters,
was organized and registered as a broker-dealer in December 1998. Since
December 1998, Thomas Weisel Partners LLC has been named as a lead or
co-manager on numerous public offerings of equity securities.

SG Cowen Securities Corporation provides financial advisory services to us
from time to time in the ordinary course of its business.

LEGAL MATTERS

The validity of the common stock offered by this prospectus will be passed
upon for us by Armstrong Teasdale LLP, Saint Louis, Missouri. Legal matters in
connection with the offering will be passed upon for the underwriters by Hale
and Dorr LLP, Boston, Massachusetts.

EXPERTS

The consolidated financial statements and schedule included in this
prospectus and elsewhere in the registration statement to the extent and for
the periods indicated in their reports, have been audited by Arthur Andersen
LLP, independent public accountants, and are included herein in reliance upon
the authority of said firm as experts in giving said reports.

WHERE YOU CAN FIND ADDITIONAL INFORMATION

This prospectus constitutes a part of a registration statement on Form S-1
(together with all amendments, supplements, schedules and exhibits to the
registration statement, referred to as the registration statement) that we have
filed with the SEC under the Securities Act . This prospectus does not contain
all the information that is in the registration statement. We refer you to the
registration statement for further information about our company and the
securities offered by this prospectus. Statements contained in this prospectus
concerning the provisions of documents filed as exhibits are not necessarily
complete, and reference is made to the copy filed, each such statement being
qualified in all respects by such reference. You can inspect and copy the
registration statement and the reports and other information on file with the
SEC at the SEC's public reference room at Judiciary Plaza, 450 Fifth Street,
N.W., Washington, D.C. 20549. You can obtain information on the operation of
the public reference room by calling the SEC at 1-800-SEC-0330. The SEC also
maintains a Web site which provides on-line access to reports, proxy and
information statements and other information regarding registrants that file
electronically with the SEC at the address http://www.sec.gov.

We are subject to the information requirements of the Securities Exchange
Act and file reports, proxy statements and other information under the
Securities Exchange Act with the SEC. You can inspect and copy these reports
and other information of our company at the locations set forth above or
download these reports from the SEC's Web site.

424B1 64th Page of 86 TOC 1st Previous Next ↓Bottom Just 64th
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

[Enlarge/Download Table]

Page
----

Centene Corporation and Subsidiaries:

Report of Independent Public Accountants............................................................ F-2

Consolidated Balance Sheets at December 31, 1999 and 2000, and September 30, 2001................... F-3

Consolidated Statements of Operations for the Years Ended December 31, 1998, 1999 and 2000 and the
Nine Months Ended September 30, 2000 (Unaudited) and 2001......................................... F-4

Consolidated Statements of Stockholders' Equity for the Years Ended December 31, 1998, 1999 and 2000
and the Nine Months Ended September 30, 2001...................................................... F-5

Consolidated Statements of Cash Flows for the Years Ended December 31, 1998, 1999 and 2000 and the
Nine Months Ended September 30, 2000 (Unaudited) and 2001......................................... F-6

Notes to Consolidated Financial Statements.......................................................... F-7

F-1

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REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

To Centene Corporation:

We have audited the accompanying consolidated balance sheets of Centene
Corporation (a Delaware corporation) and subsidiaries as of December 31, 1999,
and 2000 and September 30, 2001, and the related consolidated statements of
operations, stockholders' equity and cash flows for each of the three years in
the period ended December 31, 2000 and the nine month period ended September
30, 2001. 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 audits.

We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards 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. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial presentation. We believe that our audits provide a reasonable basis
for our opinion.

In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Centene Corporation
and subsidiaries as of December 31, 1999 and 2000 and September 30, 2001, and
the results of their operations and their cash flows for each of the three
years in the period ended December 31, 2000 and the nine month period ended
September 30, 2001, in conformity with accounting principles generally accepted
in the United States.

ARTHUR ANDERSEN LLP
St. Louis, Missouri
November 13, 2001

F-2

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CENTENE CORPORATION AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)

[Enlarge/Download Table]

December 31,
----------------- September 30,
1999 2000 2001
-------- ------- -------------

ASSETS
CURRENT ASSETS:
Cash and cash equivalents...................................................... $ 22,532. $19,023. $ 61,398.
Premium and related receivables, net of allowances of $1,245, $1,866 and
$2,737, respectively.......................................................... 11,451. 15,538. 8,153.
Short-term investments, at fair value (amortized cost $1,131, $7,404 and $625,
respectively)................................................................. 1,131. 7,400. 625
Other current assets........................................................... 2,854. 2,170. 1,416.
Deferred income taxes.......................................................... 1,010. 2,585. 2,179.
-------- ------- --------
Total current assets......................................................... 38,978 46,716 73,771
LONG-TERM INVESTMENTS, at fair value (amortized cost $7,898, $14,326
and $23,217, respectively)...................................................... 7,593 14,459 24,143
INVESTMENTS IN JOINT VENTURES.................................................... 1,833 2,422 --
FURNITURE, EQUIPMENT AND LEASEHOLD IMPROVEMENTS, net............................. 1,528 1,360 3,092
INTANGIBLE ASSETS................................................................ 571 347 2,478
DEFERRED INCOME TAXES............................................................ 1,704 713 487
-------- ------- --------
Total assets................................................................. $ 52,207 $66,017 $103,971
======== ======= ========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Medical claims liabilities..................................................... $ 37,339. $45,805. $ 63,979.
Unearned premiums.............................................................. 3,601. -- --
Accounts payable and accrued expenses.......................................... 2,898. 6,168. 16,549.
Note payable................................................................... 2,350. -- --
-------- ------- --------
Total current liabilities.................................................... 46,188 51,973 80,528
SUBORDINATED DEBT................................................................ 4,000 4,000 4,000
-------- ------- --------
Total liabilities............................................................ 50,188 55,973 84,528
-------- ------- --------
SERIES D REDEEMABLE PREFERRED STOCK, $.167 par value; authorized
4,000,000 shares; 3,718,000, 3,718,000 and 3,716,000 shares at December 31,
1999 and 2000, and September 30, 2001 issued and outstanding historical,
respectively, and no shares pro forma (liquidation value of $18,590, $18,590
and $18,580, respectively)...................................................... 18,386 18,878 19,231
-------- ------- --------
STOCKHOLDERS' EQUITY:
Preferred stock, $.167 par value; authorized 4,300,000
Series A convertible, authorized 2,400,000 shares; 733,850 shares issued and
outstanding historical, and no shares pro forma.............................. 123 123 123
Series B convertible, authorized 1,050,000 shares; 864,640 shares issued and
outstanding historical, and no shares pro forma.............................. 144 144 144
Series C convertible, authorized 850,000 shares; 557,850 shares issued and
outstanding historical, and no shares pro forma.............................. 93 93 93
Common stock, $.003 par value; authorized 17,000,000 shares--
Series A, authorized 16,000,000 shares; 277,247 shares issued and
outstanding historical, and 6,149,587 shares pro forma....................... 1 1 1
Series B, authorized 1,000,000 shares; 624,279 shares issued and outstanding
historical and pro forma..................................................... 2 2 2
Common stock, $.001 par value; authorized 40,000,000 shares; 6,819,869
issued and outstanding pro forma.............................................. -- -- --
Additional paid-in capital..................................................... 7 7 --
Net unrealized gain (loss) on investments, net of tax.......................... (216) 81 584
Accumulated deficit............................................................ (16,521) (9,285) (735).
-------- ------- --------
Total stockholders' equity (deficit)......................................... (16,367) (8,834) 212
-------- ------- --------
Total liabilities and stockholders' equity................................... $ 52,207 $66,017 $103,971
======== ======= ========
[Enlarge/Download Table]

Pro Forma
September 30,
2001
-------------
(Unaudited)

ASSETS
CURRENT ASSETS:
Cash and cash equivalents...................................................... $ 61,416.
Premium and related receivables, net of allowances of $1,245, $1,866 and
$2,737, respectively..........................................................
Short-term investments, at fair value (amortized cost $1,131, $7,404 and $625,
respectively).................................................................
Other current assets...........................................................
Deferred income taxes..........................................................
--------
Total current assets......................................................... 73,789
LONG-TERM INVESTMENTS, at fair value (amortized cost $7,898, $14,326
and $23,217, respectively)......................................................
INVESTMENTS IN JOINT VENTURES....................................................
FURNITURE, EQUIPMENT AND LEASEHOLD IMPROVEMENTS, net.............................
INTANGIBLE ASSETS................................................................
DEFERRED INCOME TAXES............................................................
--------
Total assets................................................................. $103,989
========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Medical claims liabilities.....................................................
Unearned premiums..............................................................
Accounts payable and accrued expenses..........................................
Note payable...................................................................

Total current liabilities....................................................
SUBORDINATED DEBT................................................................

Total liabilities............................................................

SERIES D REDEEMABLE PREFERRED STOCK, $.167 par value; authorized
4,000,000 shares; 3,718,000, 3,718,000 and 3,716,000 shares at December 31,
1999 and 2000, and September 30, 2001 issued and outstanding historical,
respectively, and no shares pro forma (liquidation value of $18,590, $18,590
and $18,580, respectively)...................................................... $ --
--------
STOCKHOLDERS' EQUITY:
Preferred stock, $.167 par value; authorized 4,300,000
Series A convertible, authorized 2,400,000 shares; 733,850 shares issued and
outstanding historical, and no shares pro forma.............................. --
Series B convertible, authorized 1,050,000 shares; 864,640 shares issued and
outstanding historical, and no shares pro forma.............................. --
Series C convertible, authorized 850,000 shares; 557,850 shares issued and
outstanding historical, and no shares pro forma.............................. --
Common stock, $.003 par value; authorized 17,000,000 shares--
Series A, authorized 16,000,000 shares; 277,247 shares issued and
outstanding historical, and 6,149,587 shares pro forma....................... --
Series B, authorized 1,000,000 shares; 624,279 shares issued and outstanding
historical and pro forma..................................................... --
Common stock, $.001 par value; authorized 40,000,000 shares; 6,819,869
issued and outstanding pro forma.............................................. 7
Additional paid-in capital..................................................... 19,605.
Net unrealized gain (loss) on investments, net of tax.......................... 584
Accumulated deficit............................................................ (735).
--------
Total stockholders' equity (deficit)......................................... 19,461
--------
Total liabilities and stockholders' equity................................... $103,989
========

The accompanying notes are an integral part of these balance sheets.

F-3

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CENTENE CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except share data)

[Enlarge/Download Table]

Nine Months
Ended
Year Ended December 31, September 30,
-------------------------------- ----------------------
1998 1999 2000 2000 2001
---------- -------- ---------- ----------- ----------
(Unaudited)

REVENUES:
Premiums....................................................... $ 149,577 $200,549 $ 216,414 $ 157,994 $ 235,995
Administrative services fees................................... 861 880 4,936 3,543 283
---------- -------- ---------- ---------- ----------
Total revenues................................................ 150,438 201,429 221,350 161,537 236,278
---------- -------- ---------- ---------- ----------
EXPENSES:
Medical services costs......................................... 132,199 178,285 182,495 133,575 195,512
General and administrative expenses............................ 25,066 29,756 32,335 24,133 27,992
---------- -------- ---------- ---------- ----------
Total operating expenses...................................... 157,265 208,041 214,830 157,708 223,504
---------- -------- ---------- ---------- ----------
Income (loss) from operations................................. (6,827) (6,612) 6,520 3,829 12,774
OTHER INCOME (EXPENSE):
Investment and other income, net............................... 1,794 1,623 1,784 1,611 2,806
Interest expense............................................... (771) (498) (611) (505) (285)
Equity in income (losses) from joint ventures.................. (477) 3 (508) (329) --
---------- -------- ---------- ---------- ----------
Income (loss) from continuing operations before income taxes.. (6,281) (5,484) 7,185 4,606 15,295
INCOME TAX EXPENSE (BENEFIT)..................................... (1,542) -- (543) 100 6,320
---------- -------- ---------- ---------- ----------
Income (loss) from continuing operations...................... (4,739) (5,484) 7,728 4,506 8,975
LOSS FROM DISCONTINUED OPERATIONS, net........................... (2,223) (3,927) -- -- --
---------- -------- ---------- ---------- ----------
Net income (loss)............................................. (6,962) (9,411) 7,728 4,506 8,975
ACCRETION OF REDEEMABLE PREFERRED STOCK.......................... (122) (492) (492) (369) (369)
---------- -------- ---------- ---------- ----------
Net income (loss) attributable to common stockholders......... $ (7,084) $ (9,903) $ 7,236 $ 4,137 $ 8,606
========== ======== ========== ========== ==========
INCOME (LOSS) PER COMMON SHARE, BASIC:
Continuing operations.......................................... $ (4.65) $ (6.63) $ 8.03 $ 4.59 $ 9.47
Discontinued operations........................................ (2.13) (4.36) -- -- --
Net income (loss) per common share............................. (6.78) (10.99) 8.03 4.59 9.47
INCOME (LOSS) PER COMMON SHARE, DILUTED:
Continuing operations.......................................... $ (4.65) $ (6.63) $ 1.06 $ 0.61 $ 1.11
Discontinued operations........................................ (2.13) (4.36) -- -- --
Net income (loss) per common share............................. (6.78) (10.99) 1.06 0.61 1.11
SHARES USED IN COMPUTING PER SHARE AMOUNTS:
Basic.......................................................... 1,044,434 900,944 901,526 901,526 908,918
Diluted........................................................ 1,044,434 900,944 6,819,595 6,793,208 7,787,653

[Enlarge/Download Table]

Nine Months
Year Ended Ended
December 31, September 30,
2000 2001
------------ -------------
(Unaudited)

PRO FORMA NET INCOME PER COMMON SHARE INFORMATION (Note 22):
Net income attributable to common stockholders................. $ 7,236 $ 8,606
Pro forma adjustment to eliminate Series D preferred accretion. 492 369
---------- ----------
Pro forma net income.......................................... $ 7,728 $ 8,975
========== ==========
Basic pro forma net income per share........................... $ 1.13 $ 1.31
Diluted pro forma net income per share......................... $ 1.13 $ 1.15
Shares used in computing pro forma per common share amounts--
Basic......................................................... 6,819,869 6,827,261
Diluted....................................................... 6,819,595 7,787,653

The accompanying notes are an integral part of these statements.

F-4

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CENTENE CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(In thousands, except share data)

[Enlarge/Download Table]

Preferred Stock Common Stock
---------------------------------------------- --------------------------------

Additional
Series A Series B Series C Series A Series B Paid-in
-------------- -------------- --------------- ---------------- --------------- Capital
Shares Amount Shares Amount Shares Amount Shares Amount Shares Amount
------- ------ ------- ------ -------- ------ -------- ------ ------- ------ ----------

BALANCE, December 31, 1997 796,350 $ 133 864,640 $ 144 664,950 $ 111 406,363 $ 1 676,472 $ 2 $ 962
Net loss -- -- -- -- -- -- -- -- -- -- --
Net unrealized gain during
the year on investments
available for sale -- -- -- -- -- -- -- -- -- -- --

Comprehensive loss
Issuance of common stock and
warrants -- -- -- -- -- -- 1,000 -- 12,499 -- 80
Redemption of stock (20,000) (3) -- -- -- -- (15,000) -- -- -- --
Purchase of stock (42,500) (7) -- -- (107,100) (18) (118,511) -- (64,766) -- (1,041)
Series D preferred stock
accretion -- -- -- -- -- -- -- -- -- -- --
------- ----- ------- ----- -------- ----- -------- --- ------- --- -------
BALANCE, December 31, 1998 733,850 123 864,640 144 557,850 93 273,852 1 624,205 2 1
Net loss -- -- -- -- -- -- -- -- -- -- --
Net unrealized loss during
the year on investments
available for sale -- -- -- -- -- -- -- -- -- -- --

Comprehensive loss
Issuance of common stock -- -- -- -- -- -- 3,395 -- 74 -- 6
Series D preferred stock
accretion -- -- -- -- -- -- -- -- -- -- --
------- ----- ------- ----- -------- ----- -------- --- ------- --- -------
BALANCE, December 31, 1999 733,850 123 864,640 144 557,850 93 277,247 1 624,279 2 7
Net income -- -- -- -- -- -- -- -- -- -- --
Net unrealized gain during
the year on investments
available for sale -- -- -- -- -- -- -- -- -- -- --

Comprehensive earnings
Series D preferred stock
accretion -- -- -- -- -- -- -- -- -- -- --
------- ----- ------- ----- -------- ----- -------- --- ------- --- -------
BALANCE, December 31, 2000 733,850 123 864,640 144 557,850 93 277,247 1 624,279 2 7
Net income -- -- -- -- -- -- -- -- -- -- --
Net unrealized gain during
the period on investments
available for sale -- -- -- -- -- -- -- -- -- -- --

Comprehensive earnings
Issuance of common stock -- -- -- -- -- -- 11,000 -- -- -- 17
Purchase of common stock -- -- -- -- -- -- (11,000) -- -- -- (30)
Stock compensation expense -- -- -- -- -- -- -- -- -- -- 6
Series D preferred stock
accretion -- -- -- -- -- -- -- -- -- -- --
------- ----- ------- ----- -------- ----- -------- --- ------- --- -------
BALANCE, September 30, 2001 733,850 $ 123 864,640 $ 144 557,850 $ 93 277,247 $ 1 624,279 $ 2 $ --
======= ===== ======= ===== ======== ===== ======== === ======= === =======
[Download Table]

Net
Unrealized Accumulated
Gain (Loss) Earnings
on Investments (Deficit) Total
-------------- ----------- --------

----------- --------

BALANCE, December 31, 1997 $ 12 $ 1,130 $ 2,495
Net loss -- (6,962) (6,962)
Net unrealized gain during
the year on investments
available for sale 46 -- 46
--------
Comprehensive loss (6,916)
Issuance of common stock and
warrants -- -- 80
Redemption of stock -- -- (3)
Purchase of stock -- (664) (1,730)
Series D preferred stock
accretion -- (122) (122)
----- -------- --------
BALANCE, December 31, 1998 58 (6,618) (6,196)
Net loss -- (9,411) (9,411)
Net unrealized loss during
the year on investments
available for sale (274) -- (274)
--------
Comprehensive loss (9,685)
Issuance of common stock -- -- 6
Series D preferred stock
accretion -- (492) (492)
----- -------- --------
BALANCE, December 31, 1999 (216) (16,521) (16,367)
Net income -- 7,728 7,728
Net unrealized gain during
the year on investments
available for sale 297 -- 297
--------
Comprehensive earnings 8,025
Series D preferred stock
accretion -- (492) (492)
----- -------- --------
BALANCE, December 31, 2000 81 (9,285) (8,834)
Net income -- 8,975 8,975
Net unrealized gain during
the period on investments
available for sale 503 -- 503
--------
Comprehensive earnings 9,478
Issuance of common stock -- -- 17
Purchase of common stock -- (56) (86)
Stock compensation expense -- -- 6
Series D preferred stock
accretion -- (369) (369)
----- -------- --------
BALANCE, September 30, 2001 $ 584 $ (735) $ 212
===== ======== ========

The accompanying notes are an integral part of these statements.

F-5

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CENTENE CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)

[Enlarge/Download Table]

Year Ended December 31,
----------------------------
1998 1999 2000
-------- -------- --------

CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)........................................................ $ (6,962) $ (9,411) $ 7,728
Adjustments to reconcile net income (loss) to net cash provided by (used
in) operating activities--
Depreciation and amortization........................................... 1,107 1,142 1,034
Stock compensation expense.............................................. -- -- --
Loss on disposal of equipment........................................... -- 10 --
(Gain) loss on sale of investments...................................... (276) (55) 40
Equity in (income) losses from joint ventures........................... 477 (3) 508
Changes in assets and liabilities--
(Increase) decrease in premium and related receivables.................. (2,244) 35 (4,087)
(Increase) decrease in other current assets............................. (1,835) (212) 684
Decrease (increase) in deferred income taxes............................ 835 -- (584)
Increase in medical claims liabilities.................................. 3,797 13,815 8,466
Increase (decrease) in unearned premiums................................ 244 (1,144) (3,601)
(Decrease) increase in accounts payable and accrued expenses............ (2,643) 950 3,270
-------- -------- --------
Net cash provided by (used in) operating activities.................... (7,500) 5,127 13,458
-------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of equipment.................................................... (610) (861) (642)
Proceeds from sale of equipment.......................................... -- 34 --
Purchase of investments.................................................. (11,848) (11,286) (20,260)
Sales and maturities of investments...................................... 8,652 9,019 7,382
Contract acquisition..................................................... (58) -- --
Investments in joint ventures............................................ 1,658 178 (1,097)
-------- -------- --------
Net cash used in investing activities.................................. (2,206) (2,916) (14,617)
-------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of note payable................................... -- 2,500 --
Payment of note payable.................................................. (6,467) (150) (2,350)
Proceeds from sale of common stock and warrants.......................... 80 -- --
Proceeds from sale of preferred stock.................................... 17,578 200 --
Purchase/redemption of stock............................................. (1,727) (6) --
Deferred financing costs................................................. 43 -- --
-------- -------- --------
Net cash provided by (used in) financing activities.................... 9,507 2,544 (2,350)
-------- -------- --------
Net increase (decrease) in cash and cash equivalents................... (199) 4,755 (3,509)
-------- -------- --------
CASH AND CASH EQUIVALENTS, beginning of period............................. 17,976 17,777 22,532
-------- -------- --------
CASH AND CASH EQUIVALENTS, end of period................................... $ 17,777 $ 22,532 $ 19,023
======== ======== ========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Interest paid............................................................ $ 684 $ 80 $ 531
Income taxes paid........................................................ $ 827 $ 146 $ 310
[Enlarge/Download Table]

Nine Months
Ended
September 30,
--------------------
2000 2001
----------- --------
(Unaudited)

CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)........................................................ $ 4,506 $ 8,975
Adjustments to reconcile net income (loss) to net cash provided by (used
in) operating activities--
Depreciation and amortization........................................... 740 1,274
Stock compensation expense.............................................. -- 6
Loss on disposal of equipment........................................... -- --
(Gain) loss on sale of investments...................................... 72 (72)
Equity in (income) losses from joint ventures........................... 329 --
Changes in assets and liabilities--
(Increase) decrease in premium and related receivables.................. (4,794) 8,285
(Increase) decrease in other current assets............................. 1,291 810
Decrease (increase) in deferred income taxes............................ (64) 338
Increase in medical claims liabilities.................................. 7,629 13,100
Increase (decrease) in unearned premiums................................ 3,773 --
(Decrease) increase in accounts payable and accrued expenses............ 2,016 6,850
------- --------
Net cash provided by (used in) operating activities.................... 15,498 39,566
------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of equipment.................................................... (499) (2,540)
Proceeds from sale of equipment.......................................... -- --
Purchase of investments.................................................. (5,964) (17,459)
Sales and maturities of investments...................................... 4,812 16,148
Contract acquisition..................................................... -- (1,250)
Investments in joint ventures............................................ (597) 7,995
------- --------
Net cash used in investing activities.................................. (2,248) 2,894
------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of note payable................................... -- --
Payment of note payable.................................................. (2,350) --
Proceeds from sale of common stock and warrants.......................... -- 17
Proceeds from sale of preferred stock.................................... -- --
Purchase/redemption of stock............................................. -- (102)
Deferred financing costs................................................. -- --
------- --------
Net cash provided by (used in) financing activities.................... (2,350) (85)
------- --------
Net increase (decrease) in cash and cash equivalents................... 10,900 42,375
------- --------
CASH AND CASH EQUIVALENTS, beginning of period............................. 22,532 19,023
------- --------
CASH AND CASH EQUIVALENTS, end of period................................... $33,432 $ 61,398
======= ========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Interest paid............................................................ $ 531 $ 817
Income taxes paid........................................................ $ 100 $ 2,107

The accompanying notes are an integral part of these statements.

F-6

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CENTENE CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except share data)

1. Organization and Operations:

Centene Corporation (Centene or the Company) provides managed care programs
and related services to individuals receiving benefits under Medicaid,
including Supplemental Security Income (SSI) and State Children's Health
Insurance Program, (SCHIP). Centene operates under its own state licenses in
Wisconsin, Indiana and Texas and contracts with other managed care
organizations to provide risk and nonrisk management services.

Centene's managed care organization (MCO) subsidiaries include Managed
Health Services Insurance Corp. (MHSIC), a wholly owned Wisconsin corporation;
Coordinated Care Corporation Indiana, Inc. (CCCI), a wholly owned Indiana
corporation; and Superior HealthPlan, Inc. (Superior), a 90% owned Texas
corporation (39% before January 1, 2001).

2. Summary of Significant Accounting Policies:

The accompanying consolidated financial statements include the accounts of
Centene Corporation and all majority owned subsidiaries. All material
intercompany balances and transactions have been eliminated. The investments in
minority owned joint ventures are accounted for under the equity method.

The accompanying statements of operations and cash flows for the nine
months ended September 30, 2000, are unaudited but, in the opinion of
management, reflect all adjustments, consisting solely of normal recurring
adjustments, necessary for a fair presentation of results for this interim
period.

Cash and Cash Equivalents

Investments with original maturities of three months or less at the date of
acquisition are considered to be cash equivalents. Cash equivalents consist of
commercial paper, money market mutual funds and bank insured savings accounts.

Investments

Short-term and long-term investments available for sale are carried at
market value. Any changes in fair value due to market conditions are reflected
as a separate component of equity, net of any tax benefit or expense.

Short-term investments include securities with original maturities between
three months and one year. Long-term investments include securities with
original maturities greater than one year.

Furniture, Equipment and Leasehold Improvements

Furniture, equipment and leasehold improvements are carried at cost less
accumulated depreciation. Depreciation for furniture and equipment, other than
computer equipment, is calculated using the straight-line method based on the
estimated useful lives of the assets ranging between five and seven years.
Depreciation for computer equipment is calculated using the straight-line
method based on a three-year life. Software is stated at cost in accordance
with Statement of Position 98-1, Accounting for the Costs of Software Developed
or Obtained for Internal Use. Software is amortized over its estimated useful
life of

F-7

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CENTENE CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Dollars in thousands, except share data)

three years using the straight-line method. Depreciation for leasehold
improvements is calculated using the straight-line method based on the shorter
of the estimated useful lives of the asset or the term of the respective
leases, ranging between three and ten years.

Intangible Assets

Intangible assets consist primarily of purchased contract rights and
goodwill. Goodwill represents the excess of aggregate purchase price over the
estimated fair value of net assets acquired and is amortized using a
straight-line method over a 60 month period. Accumulated amortization of
intangibles as of December 31, 1999 and 2000 and September 30, 2001, was $530,
$754 and $1,295, respectively. Amortization expense was $221, $235, $224 and
$466 for the years ended December 31, 1998, 1999, 2000 and the nine months
ended September 30, 2001, respectively.

The Company reviews goodwill and other long-lived assets for impairment
whenever events and changes in business circumstances indicate the carrying
value of the assets may not be recoverable. The Company recognizes impairment
losses if expected undiscounted future cash flows from 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.

Medical Claims Liabilities

Medical services costs include claims paid, claims adjudicated but not yet
paid, estimates for claims received but not yet adjudicated, estimates for
claims incurred but not yet received and estimates for the costs necessary to
process unpaid claims.

The estimates of medical claims liabilities are developed using actuarial
methods based upon historical data for payment patterns, cost trends, product
mix, seasonality, utilization of healthcare services and other relevant factors
including product changes. These estimates are continually reviewed and
adjustments, if necessary, are reflected in the period known.

Premium Revenue

Premium revenue is received monthly based on fixed rates per member as
determined by the state contracts. The revenue is recognized as earned over the
covered period of services. Premiums collected in advance are recorded as
unearned premiums. There are no contractual allowances related to Centene's
premium revenue.

Significant Customers

Centene receives the majority of its revenues under contracts or
subcontracts with state Medicaid managed care programs. The contracts which
expire on various dates between December 31, 2001, and December 31, 2002, are
expected to be renewed.

Reinsurance

Centene's MCO subsidiaries have purchased reinsurance to cover eligible
healthcare services. The current reinsurance agreements generally cover 80% of
healthcare expenses in excess of an annual deductible of $50 to $100 per
member, up to a lifetime maximum of $2,000. The subsidiaries are responsible
for inpatient charges in excess of an average daily per diem.

F-8

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CENTENE CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Dollars in thousands, except share data)

Reinsurance recoveries were approximately $1,484, $1,182, $1,454 and $3,553
in 1998, 1999, 2000 and the first nine months of 2001, respectively.
Reinsurance expenses were approximately $2,030, $2,708, $3,391 and $6,845 in
1998, 1999, 2000 and the first nine months of 2001, respectively. Reinsurance
recoveries, net of expenses, are included in medical services costs.

Income Taxes

Centene recognizes deferred tax assets and liabilities for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases. Deferred tax assets and liabilities are measured using enacted tax rates
expected to apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled. The effect on deferred tax
assets and liabilities of a change in tax rates is recognized in income in the
period that includes the enactment date of the tax rate change.

Estimates

The preparation of financial statements in conformity with generally
accepted accounting principles 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
reporting period. Actual results could differ from those estimates.

Risks and Uncertainties

The Company's profitability depends in large part on accurately predicting
and effectively managing medical services costs. The Company continually
reviews its premium and benefit structure to reflect its underlying claims
experience and revised actuarial data; however, several factors could adversely
affect the medical services costs. Certain of these factors, which include
changes in healthcare practices, inflation, new technologies, major epidemics,
natural disasters and malpractice litigation, are beyond any health plan's
control and could adversely affect the Company's ability to accurately predict
and effectively control healthcare costs. Costs in excess of those anticipated
could have a material adverse effect on the Company's results of operations.

Recent Accounting Pronouncements

In July 2001, Statement of Financial Accounting Standards (SFAS) No. 141,
Business Combinations, was issued which requires that the purchase method of
accounting be used for all business combinations completed after June 30, 2001.
The Company has adopted SFAS 141.

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 annually for
impairment. The Company will adopt SFAS No. 142 effective January 1, 2002.

F-9

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CENTENE CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Dollars in thousands, except share data)

3. Discontinued Operations:

During 1999, the Company decided to exit its commercial line of business.
The results of these activities have been reflected as discontinued operations
in the accompanying consolidated financial statements for all periods
presented. The operating results of discontinued operations are as follows:

[Download Table]

1998 1999
------- -------

Total revenues.......................... $21,534 $15,054
Pretax loss from discontinued operations (2,390) (3,927)
Income tax benefit...................... (167) --
Net loss from discontinued operations... (2,223) (3,927)
Basic and diluted net loss per share.... (2.13) (4.36)

There were no assets attributable to the commercial line of business as of
December 31, 1999.

4. Investments:

Investments available for sale by investment type consist of the following:

[Enlarge/Download Table]

December 31, 1999
-----------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
--------- ---------- ---------- ---------

U.S. Treasury securities and obligations of U.S. government
corporations and agencies................................ $7,798 $-- $(295) $7,503
Commercial paper........................................... 931 -- -- 931
State/municipal securities and other....................... 300 -- (10) 290
------ --- ----- ------
Total................................................... $9,029 $-- $(305) $8,724
====== === ===== ======
[Enlarge/Download Table]

December 31, 2000
-----------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
--------- ---------- ---------- ---------

U.S. Treasury securities and obligations of U.S. government
corporations and agencies................................ $14,041 $133 $-- $14,174
Commercial paper........................................... 7,211 2 (6) 7,207
State/municipal securities and other....................... 478 -- -- 478
------- ---- --- -------
Total................................................... $21,730 $135 $(6) $21,859
======= ==== === =======

[Enlarge/Download Table]

September 30, 2001
-----------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
--------- ---------- ---------- ---------

U.S. Treasury securities and obligations of U.S. government
corporations and agencies................................ $22,940 $926 $-- $23,866
State/municipal securities and other....................... 902 -- -- 902
------- ---- --- -------
Total................................................... $23,842 $926 $-- $24,768
======= ==== === =======

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CENTENE CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Dollars in thousands, except share data)

The contractual maturity of investments as of September 30, 2001, is as
follows:

[Download Table]

Estimated
Amortized Market
Cost Value
--------- ---------

One year or less............ $ 625 $ 625
One year through five years. 2,332 2,468
Five years through ten years 20,885 21,675
------- -------
$23,842 $24,768
======= =======

Following is a summary of net investment income:

[Enlarge/Download Table]

Year Ended December 31, Nine Months Ended
---------------------- September 30,
1998 1999 2000 2001
------ ------ ------ -----------------

Commercial paper........................... $ 179 $ 217 $ 759 $ 748
U.S. Treasury securities and obligations of
U.S. government corporation and agencies. 573 243 370 902
States/municipal securities and other...... 10 13 (2) --
Money market and other..................... 813 951 1,035 1,063
------ ------ ------ ------
$1,575 $1,424 $2,162 $2,713
====== ====== ====== ======

Various state statutes require MCO's to deposit or pledge minimum amounts
of investments to state agencies. Securities with a book value of $713, $693
and $1,125 were deposited or pledged to state agencies by Centene's MCO
subsidiaries at December 31, 1999 and 2000, and September 30, 2001,
respectively.

5. Furniture, Equipment and Leasehold Improvements:

Furniture, equipment and leasehold improvements consist of the following:

[Download Table]

December 31,
---------------- September 30,
1999 2000 2001
------- ------- -------------

Furniture and office equipment...................... $ 2,891 $ 3,014 $ 4,520
Computer software................................... 938 1,293 1,972
Leasehold improvements.............................. 307 287 584
Construction in process............................. 11 -- 48
Land................................................ -- -- 10
------- ------- -------
4,147 4,594 7,134
Less--Accumulated depreciation and amortization..... (2,619) (3,234) (4,042)
------- ------- -------
Furniture, equipment and leasehold improvements, net $ 1,528 $ 1,360 $ 3,092
======= ======= =======

6. Income Taxes:

Centene files a consolidated federal income tax return while Centene and
each subsidiary file separate state income tax returns.

F-11

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CENTENE CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Dollars in thousands, except share data)

The consolidated income tax expense (benefit) consists of the following:

[Download Table]

Nine Months
Year Ended December 31, Ended
---------------------- September 30,
1998 1999 2000 2001
------- ---- ------- -------------

Current:
Federal......................... $ (869) $-- $ 629 $5,716
State........................... 227 -- 625 1,280
------- --- ------- ------
Total current............... (642) -- 1,254 6,996
Deferred........................... (1,067) -- (1,797) (676)
------- --- ------- ------
Total expense (benefit)..... $(1,709) $-- $ (543) $6,320
======= === ======= ======

For the year ended December 31, 1998, the income tax benefit was $1,542 for
continuing operations and $167 for discontinued operations.

The following is a reconciliation of the expected income tax expense
(benefit) as calculated by multiplying pretax income by federal statutory rates
and Centene's actual income tax benefit:

[Enlarge/Download Table]

Nine Months
Year Ended December 31, Ended
------------------------- September 30,
1998 1999 2000 2001
------- ------- ------- -------------

Expected federal income tax expense (benefit).................. $(2,948) $(3,199) $ 2,443 $5,200
State income taxes, net of federal income tax expense (benefit) 150 160 412 845
Equity in (income) losses of joint ventures, net of tax........ 161 (1) 175 --
Change in valuation allowance.................................. 833 2,926 (3,764) --
Other, net..................................................... 95 114 191 275
------- ------- ------- ------
Income tax expense (benefit)................................ $(1,709) $ -- $ (543) $6,320
======= ======= ======= ======

Temporary differences that give rise to deferred tax assets and liabilities
are presented below:

[Download Table]

December 31,
--------------- September 30,
1999 2000 2001
------- ------ -------------

Medical claims liabilities and other accruals $ 342 $1,539 $2,355
Net operating loss carryforward.............. 5,167 1,132 --
Allowance for doubtful accounts.............. 461 690 1,013
Unearned premiums............................ 266 -- --
Depreciation................................. 51 246 332
Other........................................ 244 189 28
------- ------ ------
Total deferred tax assets................. 6,531 3,796 3,728
------- ------ ------
Prepaid asset................................ 44 -- --
Other........................................ 9 498 1,062
------- ------ ------
Total deferred tax liabilities............ 53 498 1,062
------- ------ ------
Valuation allowance.......................... (3,764) -- --
------- ------ ------
Net deferred tax assets and liabilities... $ 2,714 $3,298 $2,666
======= ====== ======

F-12

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CENTENE CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Dollars in thousands, except share data)

The Company is required to record a valuation allowance when it is more
likely than not that some portion or all of the deferred tax assets will not be
realized. Management believes that a valuation allowance is no longer necessary
for its federal net operating loss carryforward as of December 31, 2000. As a
result, the income tax benefit recorded for 2000 includes the reversal of
$3,764 of deferred tax valuation allowance.

7. Note Payable and Subordinated Debt:

In September 2000, the Company entered into a $1,500 unsecured revolving
credit agreement with a bank. The agreement bears interest at a rate of prime
due and payable monthly. Direct borrowings under this agreement total $-0- at
December 31, 2000 and September 30, 2001. The prime rate was 9.5% and 6.0% at
December 31, 2000 and September 30, 2001. The average prime rate was 9.2% and
7.7% for the year ended December 31, 2000 and for the nine months ended
September 30, 2001.

Note payable at December 31, 1999, consisted of a term note payable to a
bank in the amount of $2,350 bearing interest at a rate of prime plus 1%. The
note was paid in full in September 2000.

Subordinated debt consists of the following:

[Enlarge/Download Table]

December 31,
------------- September 30,
1999 2000 2001
------ ------ -------------

$4,000 subordinated promissory notes dated September 1998. Interest is due
and payable annually in September at a rate of 8.5% and a default rate of
10.5%. Principal on this note is due and payable in two equal installments
September 2003 and September 2004......................................... $4,000 $4,000 $4,000

During 1999 and 2000 the Company was in default due to late interest
payments and, therefore, recorded interest at the 10.5% rate. In February 2001,
all accrued interest was paid and the interest rate reverted back to 8.5%.

Current subordinated debt holders include stockholders, directors and past
and present employees.

8. Redeemable Preferred Stock:

Series D preferred stock is redeemable for cash at the option of the holder
for up to 50% of that holder's Series D preferred stock outstanding on each of
September 1, 2003, and September 1, 2004, at a price equal to the sum of (1)
$5.50 per share plus (2) an amount equal to any dividends declared or accrued
but unpaid on such shares. The number of shares of Series D preferred stock to
be redeemed from each holder on a redemption date shall be equal to 50% of the
total number of shares initially held by such holder less the number of shares
of Series D preferred stock for which the holder has exercised its conversion
right.

Series D preferred stock is convertible, at the option of the holder, into
Series A common stock at an initial conversion rate of one common share for
each preferred share and is automatically converted at an initial public
offering. Series D preferred stock is entitled to an initial liquidation
preference in the amount of $5.00 per share and then participates on an
as-converted basis.

F-13

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CENTENE CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Dollars in thousands, except share data)

Redeemable preferred stock is summarized as follows:

[Download Table]

Series D
Shares Amount
--------- -------

Balance, December 31, 1997...... -- $ --
Issuance of preferred stock.. 3,680,000 17,578
Preferred stock accretion.... -- 122
--------- -------
Balance, December 31, 1998...... 3,680,000 17,700
Issuance of preferred stock.. 40,000 200
Purchase of stock............ (2,000) (6)
Preferred stock accretion.... -- 492
--------- -------
Balance, December 31, 1999...... 3,718,000 18,386
Preferred stock accretion.... -- 492
--------- -------
Balance, December 31, 2000...... 3,718,000 18,878
Purchase of stock............ (2,000) (16)
Preferred stock accretion.... -- 369
--------- -------
Balance, September 30, 2001..... 3,716,000 $19,231
========= =======

9. Stockholders' Equity:

Holders of Series A common stock are entitled to one vote for each share of
Series A common stock held. The holders of Series A preferred stock are
entitled, for each share of Series A preferred stock held, to the number of
votes equal to the number of shares of Series A common stock into which each
share of Series A preferred stock could be converted on the record date.
Holders of Series B common stock and Series B and C preferred stock are not
entitled to vote.

Series A and Series B preferred stock is convertible, at the option of the
holder or on the date at which the Company effects an initial public offering,
into Series A common stock at an initial conversion rate of one common share
for each preferred share. Series C preferred stock is mandatorily convertible
upon a change of ownership or at an initial public offering. In addition, each
share of Series B preferred stock is convertible into one share of Series A
preferred stock. Series A, Series B and Series C preferred stock are entitled
to a liquidation preference in the amount of $.44 per share.

Effective November 2001, the Company changed its state of incorporation
from Wisconsin to Delaware. The new certificate of incorporation changed the
authorized number of shares of Series A and B common stock to 39,000,000 and
1,000,000, respectively, and changed the par value from $.003 to $.001. The new
certificate also changed the par value of the Series A, B, C and D preferred
stock from $.167 to $.001. In addition, the new certificate increased the
authorized preferred stock by 1,700,000 shares which will remain available for
future designation and issuance. Upon an initial public offering all
outstanding Series A and B common stock are convertible to one class of common
stock and all outstanding shares of preferred stock are convertible into Series
A or B common stock.

10. Statutory Net Worth Requirements:

Various state laws require Centene's MCO subsidiaries to maintain a minimum
statutory net worth. At December 31, 1999, 2000 and September 30, 2001,
Centene's MCO subsidiaries are in compliance with the various required minimum
statutory net worth requirements.

11. Dividend Restrictions:

Under the laws of the states of which the Company operates, our managed
care subsidiaries are required to obtain approval for dividends from the
appropriate state regulatory body. No dividends were declared in 1998, 1999,
2000 or the nine months ended September 30, 2001.

12. Warrants:

Centene currently has 60,000 Series D preferred warrants outstanding. Each
warrant entitles the holder to purchase one share of the Company's Series D
preferred stock at an exercise price of $5.00 per share. These warrants will
expire upon the earliest of the following: 1) September 23, 2003, 2) a date of
"change in control" or 3) the date on which the Company effects an initial
public offering.

F-14

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CENTENE CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Dollars in thousands, except share data)

There are currently 7,432 warrants outstanding to purchase shares of the
Company's Series B common stock on a one-to-one basis at an exercise price of
$2.40 per share. These warrants will expire upon the earliest of the following:
1) September 7, 2002, 2) a date of "change in control" or 3) the date on which
the Company effects an initial public offering.

13. Stock Option Plans:

As of September 30, 2001, Centene has five stock option plans (the Plans)
for issuance of common stock. The Plans allow for the granting of options to
purchase either Series A common stock and/or Series B common stock at the
market price at the date of grant for key employees, consultants, and other
individual contributors of or to Centene. Both incentive options and
nonqualified stock options can be awarded under the Plans. Each option awarded
under the Plans is exercisable as determined by the Board of Directors upon
grant. Further, depending on the type of grant, no option will be exercisable
for longer than either five (incentive options) or ten (all other options)
years after date of grant. The Plans have reserved 2,200,000 shares for option
grants. Options outstanding generally vest over a five year period. Vesting
generally begins on the anniversary of the date of grant and quarterly or
annually thereafter.

Option activity follows:

[Enlarge/Download Table]

Year Ended December 31, Nine Months
-------------------------------------------------------- Ended
1998 1999 2000 September 30, 2001
----------------- ------------------ ------------------- -------------------
Weighted Weighted Weighted Weighted
Average Average Average Average
Exercise Exercise Exercise Exercise
Shares Price Shares Price Shares Price Shares Price
------- -------- -------- -------- --------- -------- --------- --------

Options outstanding,
beginning of period..... 478,249 $2.54 522,249 $2.50 955,992 $1.91 1,410,040 $1.68
Granted................... 82,000 2.24 583,500 1.49 531,000 1.26 82,000 8.02
Exercised................. (1,000) 2.40 (3,395) 1.39 -- (11,000) 1.55
Canceled.................. (37,000) 2.40 (146,362) 2.34 (76,952) 1.69 (102,000) 1.65
-------- --------- --------- ---------
Options outstanding,
end of period........... 522,249 2.50 955,992 1.91 1,410,040 1.68 1,379,040 2.06
======= ======= ========= =========
Weighted average
remaining life.......... 5.9 years 7.3 years 7.7 years 7.7 years
Weighted average fair
value of options granted $0.47 $0.37 $0.37 $3.68

The Company accounts for the Plans in accordance with the intrinsic value
based method of Accounting Principles Board Opinion No. 25 as permitted by SFAS
No. 123. Accordingly, compensation cost related to stock options issued to
employees is calculated on the date of grant only if the current market price
of the underlying stock exceeds the exercise price. Compensation expense is
then recognized on a straight-line basis over the years the employees' services
are received (over the vesting period), generally five years. No compensation
cost related to the Plans has been charged against income during 1998, 1999 or
2000. During the period ended September 30, 2001, the Company recognized $6 in
noncash compensation expense related to the issuance of stock options to
employees. Had compensation cost for the Plans been determined based on the
fair value method at the grant dates as specified in SFAS No. 123, Centene's
net income would have decreased $69, $76, $110 and $151 in 1998, 1999, 2000 and
the nine months ended

F-15

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CENTENE CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Dollars in thousands, except share data)

September 30, 2001, respectively. Diluted net income (loss) per common share
would have been $(6.85), $(11.08), $1.04 and $1.08 in 1998, 1999, 2000 and the
nine months ended September 30, 2001, respectively.

The fair value of each option grant is estimated on the date of grant using
an option pricing model with the following assumptions: no dividend yield and
expected volatility of 1% for all years, risk-free interest rates of 4.5%,
6.4%, 5.3% and 4.5% and expected lives of 5.9, 7.3, 7.7 and 7.7 for the years
1998, 1999 and 2000 and the nine months ended September 30, 2001, respectively.

14. Retirement Plan:

Centene has a defined contribution plan (Retirement Plan) which covers
substantially all employees who work at least 1,000 hours in a twelve
consecutive month period and are at least twenty-one years of age. Under the
Retirement Plan, eligible employees may contribute a percentage of their base
salary, subject to certain limitations. Centene may elect to match a portion of
the employee's contribution. In addition, Centene may make a profit sharing
contribution to the Retirement Plan covering all eligible employees. Expenses
under the Retirement Plan were $112, $144, $203 and $215 during the years ended
December 31, 1998, 1999, and 2000 and the nine months ended September 30, 2001,
respectively.

15. Related-Party Transactions:

Certain members of Centene's Board of Directors performed consulting
services for the Company. Consulting fees paid in 1998, 1999, 2000 and the nine
months ended September 30, 2001, totaled $7, $5, $36 and $0, respectively.
Legal fees of $242, $50, $48 and $82 were paid in 1998, 1999, 2000 and the nine
months ended September 30, 2001, respectively, to a law firm affiliated through
a stockholder of the Company.

16. Commitments:

Centene and its subsidiaries lease office facilities and various equipment
under noncancellable operating leases. In addition to base rental costs,
Centene and its subsidiaries are responsible for property taxes and maintenance
for both facility and equipment leases. Rental expense included in the
accompanying consolidated financial statements is $1,662, $1,268, $1,383 and
$1,592 for the years ended December 31, 1998, 1999, and 2000 and the nine
months ended September 30, 2001, respectively. The significant annual
noncancelable lease payments over the next five years and thereafter are as
follows:

[Download Table]

2001 (October 1 - December 31, only) $ 538
2002................................ 2,166
2003................................ 2,090
2004................................ 2,003
2005................................ 1,988
Thereafter.......................... 7,261
-------
$16,046
=======

17. Contingencies:

The Company is a party to various legal actions normally associated with
the managed care industry, the aggregate effect of which, in management's
opinion after consultation with legal counsel, will have no material adverse
impact on the financial position or results of operations of Centene.

F-16

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CENTENE CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Dollars in thousands, except share data)

Financial instruments which potentially subject the Company to
concentrations of credit risk consist primarily of cash and cash equivalents,
investments in marketable securities and accounts receivable. The Company
invests its excess cash in interest bearing deposits with major banks,
commercial paper, government and agency securities, and money market funds.
Investments in marketable securities are managed within guidelines established
by the Company's Board of Directors. The Company carries these investments at
fair value.

Concentrations of credit risk with respect to accounts receivable is
limited due to the significant customers paying as services are rendered.
Significant customers include the federal government and the states in which
Centene operates. The Company has a risk of incurring loss if its allowance for
doubtful collections is not adequate.

As discussed in Note 2 to the consolidated financial statements, the
Company has reinsurance agreements with insurance companies. The Company
monitors the insurance companies' financial ratings to determine compliance
with standards set by state law. The Company has a credit risk associated with
these reinsurance agreements to the extent the reinsurers are unable to pay
valid reinsurance claims of the Company.

18. Joint Ventures:

From 1998 through 2000, Centene owned 39% of Superior, and, therefore,
accounted for the investment under the equity method of accounting. Superior
participates in the state of Texas medical assistance program. Superior had no
enrolled membership during 1998, but became fully operational on December 1,
1999. Centene has provided surplus notes to Superior to fund its initial
operations and meet the net worth requirements of the state of Texas. Surplus
notes outstanding to Superior at December 31, 1999 and 2000, totaled $2,041 and
$3,000, respectively, and are included in investment in joint venture. Interest
accrues on the surplus notes at a rate of the greater of Prime + 2% or 10%, and
is payable to Centene quarterly upon regulatory approval. Interest receivable
is included in accrued investment income and totaled $52 and $352 at December
31, 1999 and 2000, respectively. Under the terms of a management agreement, a
wholly owned subsidiary of Centene performs third-party administrative services
for Superior. This agreement generated $-0-, $72 and $4,936 of administrative
service fees during 1998, 1999 and 2000, respectively.

Summary financial information for Superior as of and for the years ended
December 31 follows:

[Download Table]

1999 2000
------ -------

Total assets................ $1,821 $ 7,284
Stockholders' deficit....... (536) (1,481)
Revenues.................... 346 34,102
Net loss.................... (457) (1,303)
Company's equity in net loss (178) (508)

On January 1, 2001, Centene purchased an additional 51% of Superior,
increasing Centene's ownership to 90%, for $290 in cash and stock and began
consolidating Superior's operations from that point forward. When the change in
ownership occurred, the assets and liabilities were revalued resulting in
$1,200 of goodwill. The goodwill is being amortized on a straight-line basis
over five years. At September 30, 2001, all intercompany transactions between
Centene and Superior have been eliminated in consolidation.

F-17

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CENTENE CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Dollars in thousands, except share data)

The following unaudited pro forma summary information presents the
consolidated income statement information as if the aforementioned transaction
had been consummated on January 1, 2000, and does not purport to be indicative
of what would have occurred had the acquisition been made at that date or of
the results which may occur in the future.

[Download Table]

Year Ended
December 31,
2000
------------

Total revenues................................ $250,516
Net income attributable to common stockholders 6,441
Diluted net income per common share........... .94

Centene sold its interest in another joint venture, Community Health Choice
of Illinois, Inc. (Choice) to American HealthCare Providers (AHCP) on August
10, 1999. Choice was a participant in the state of Illinois medical assistance
program. Choice contracted directly with healthcare providers on a
fee-for-service, per diem and capitation basis. Centene maintained a 49% equity
interest in Choice and accounted for the venture using the equity method. Under
the terms of a management agreement, a wholly owned subsidiary of Centene
performed third-party administrative services for Choice which generated $861,
$808, $-0- and $-0- of administrative service fees during 1998, 1999, 2000 and
the first nine months of 2001, respectively. Centene retained the risk for
claims incurred prior to May 1, 1999, and consequently established an escrow
account for the estimated claims. At September 30, 2001, there is no remaining
claims exposure. Centene reflected a net loss on the sale of Choice totaling
$377 in 1999, which is included in equity income from joint ventures.

F-18

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CENTENE CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Dollars in thousands, except share data)

19. Earnings Per Share:

The following table sets forth the calculation of basic and diluted net
income (loss) per share:

[Enlarge/Download Table]

Nine Months Ended
Year Ended December 31, September 30,
-------------------------------- ----------------------
1998 1999 2000 2000 2001
---------- -------- ---------- ----------- ----------
(Unaudited)

Income (loss) from continuing operations......... $ (4,739) $ (5,484) $ 7,728 $ 4,506 $ 8,975
Accretion of redeemable preferred stock.......... (122) (492) (492) (369) (369)
---------- -------- ---------- ---------- ----------
Income (loss) from continuing operations
attributable to common stockholders............ (4,861) (5,976) 7,236 4,137 8,606
Loss from discontinued operations, net........... (2,223) (3,927) -- -- --
---------- -------- ---------- ---------- ----------
Net income (loss) attributable to common
stockholders................................ $ (7,084) $ (9,903) $ 7,236 $ 4,137 $ 8,606
========== ======== ========== ========== ==========
Shares used in computing per share amounts:
Weighted average number of common shares
outstanding................................. 1,044,434 900,944 901,526 901,526 908,918
Dilutive effect of stock options and warrants
(as determined by applying the treasury
stock method) and convertible preferred
stock....................................... -- -- 5,918,069 5,891,682 6,878,735
---------- -------- ---------- ---------- ----------
Weighted average number of common shares
and potential dilutive common shares
outstanding................................. 1,044,434 900,944 6,819,595 6,793,208 7,787,653
========== ======== ========== ========== ==========
INCOME (LOSS) PER COMMON SHARE,
BASIC:
Continuing operations......................... $ (4.65) $ (6.63) $ 8.03 $ 4.59 $ 9.47
Discontinued operations....................... (2.13) (4.36) -- -- --
Net income (loss) per common share............ (6.78) (10.99) 8.03 4.59 9.47
INCOME (LOSS) PER COMMON SHARE,
DILUTED:
Continuing operations......................... $ (4.65) $ (6.63) $ 1.06 $ 0.61 $ 1.11
Discontinued operations....................... (2.13) (4.36) -- -- --
Net income (loss) per common share............ (6.78) (10.99) 1.06 0.61 1.11

F-19

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CENTENE CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Dollars in thousands, except share data)

20. Segment Reporting:

[Download Table]

For the Year Ended For the Year Ended
December 31, 1998 December 31, 1999
------------------- -------------------
Medicaid Commercial Medicaid Commercial
-------- ---------- -------- ----------

Total revenues.............. $150,438 $21,534 $201,429 $15,054
Segment loss from operations (4,739) (2,223) (5,484) (3,927)
Segment assets.............. 45,727 -- 52,207 --

Segment information has been prepared in accordance with SFAS No. 131,
Disclosure about Segments of an Enterprise and Related Information. Centene has
two reportable segments: Medicaid and commercial. The segments were determined
based upon types of services provided by each segment. Segment performance is
evaluated based upon operating income after income taxes. Accounting policies
of the segments are the same as those described in the Summary of Significant
Accounting Policies (Note 2).

The Medicaid segment includes operations to provide healthcare services to
Medicaid eligible recipients through various federal and state supported
programs.

The commercial segment includes group accident and health managed care
coverage. Effective December 31, 1999, the commercial line of business was
discontinued.

21. Contract Acquisitions:

In December 2000, MHSIC and Superior entered into agreements with Humana
Inc. to transfer Humana's Medicaid contract with the state of Wisconsin to
MHSIC and Humana's Medicaid contract with the state of Texas to Superior.
Effective February 1, 2001, the state of Wisconsin approved the agreement,
thereby allowing MHSIC to serve approximately 35,000 additional members in the
state. Effective February 1, 2001, the state of Texas approved a management
agreement between Superior and Humana Inc., thereby allowing Superior to manage
approximately 30,000 additional members in Texas.

As a result of the above transactions, $1,250 (the purchase price) was
recorded as an intangible, purchased contract rights. Centene is amortizing the
contract rights on a straight-line basis over five years, the period expected
to be benefited.

22. Common Stock Pro Forma Information (Unaudited):

On October 4, 2001, the Board of Directors authorized the Company to file a
Registration Statement with the U.S. Securities and Exchange Commission for an
initial public offering of its common stock. The unaudited September 30, 2001,
pro forma consolidated stockholders' equity and pro forma net income per common
share information for the year ended December 31, 2000, and the nine months
ended September 30, 2001, give effect to the conversion of all of the
outstanding warrants and preferred stock into 5,918,343 shares of common stock
upon the completion of the proposed offering. For purposes of the unaudited pro
forma stockholders' equity, the transactions have been assumed to have occurred
on September 30, 2001. For purposes of the unaudited pro forma net income per
common share information, the transactions were assumed to have occurred as of
January 1, 2000. The unaudited pro forma information presented does not purport
to represent the financial position or net income per common share of the
Company if such transactions had occurred on such dates or to project the
Company's financial position or net income per common share as of any future
date or for any future period.

F-20

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CENTENE CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Dollars in thousands, except share data)

The table below provides supporting calculations for the unaudited pro
forma net income per common share.

[Enlarge/Download Table]

Nine Months
Year Ended Ended
December 31, September 30,
2000 2001
------------ -------------

Computation of pro forma weighted average number of common shares
outstanding:
Historical............................................................ 901,526 908,918
Common shares issued on conversion of warrants and convertible
preferred stock....................................................... 5,918,343 5,918,343
---------- ----------
Basic.................................................................... 6,819,869 6,827,261
========== ==========
Computation of pro forma weighted average number of common shares and
potentially dilutive common shares outstanding:
Historical............................................................ 6,819,595 7,787,653
Common shares issued on conversion of warrants and convertible
preferred stock....................................................... 5,918,343 5,918,343
Elimination of effect of warrants and convertible preferred shares in
historical amount..................................................... (5,918,343) (5,918,343)
---------- ----------
Diluted.................................................................. 6,819,595 7,787,653
========== ==========

F-21

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[Graphic depicting a doctor holding a child accompanied by the following
text:
"Centene Corporation, Creating a better future in government services
healthcare."]

424B1 Last Page of 86 TOC 1st Previous Next ↓Bottom Just 86th
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------

3,500,000 Shares

[LOGO] Centene Logo

Common Stock

--------------------
PROSPECTUS

--------------------

SG COWEN

THOMAS WEISEL PARTNERS LLC

CIBC WORLD MARKETS

December 12, 2001

--------------------------------------------------------------------------------
--------------------------------------------------------------------------------

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Dates Referenced Herein and Documents Incorporated by Reference

		Referenced-On Page
This ‘424B1’ Filing	Date	First	Last	Other Filings

	1/1/07	39		8-K
	9/1/04	76		4
	9/23/03	77
	9/1/03	76
	4/14/03	10
	12/31/02	9	71	10-K, 5
	10/16/02	10
	9/7/02	78
	8/31/02	39
	8/16/02	10	41
	1/6/02	3
	1/1/02	29	72
	12/31/01	9	71	10-K405, 4
Filed on:	12/13/01
	12/12/01	1	86
	11/21/01	6	58
	11/13/01	65		S-1/A
	11/9/01	34	42
	10/16/01	42
	10/4/01	83
	9/30/01	4	83
	9/11/01	15
	8/20/01	41
	8/6/01	51
	6/30/01	29	72
	4/14/01	10
	2/1/01	83
	1/19/01	41
	1/1/01	25	80
	12/31/00	22	83
	12/28/00	41
	10/30/00	50
	9/30/00	22	70
	1/1/00	39	83
	12/31/99	22	83
	12/1/99	80
	8/30/99	39
	8/10/99	81
	5/1/99	81
	12/31/98	22	83
	12/16/98	50
	9/23/98	60
	8/12/98	41
	1/1/98	52
	12/31/97	22	77
	12/31/96	22
				List all Filings

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Filing Submission 0000950131-01-504490 – Alternative Formats (Word / Rich Text, HTML, Plain Text, et al.)

Centene Corp – IPO: ‘424B1’ on 12/13/01

On: Thursday, 12/13/01 · Accession #: 950131-1-504490 · File #: 333-71258

Initial Public Offering (IPO): Prospectus — Rule 424(b)(1)Filing Table of Contents

Document Table of Contents

Dates Referenced Herein and Documents Incorporated by Reference

Initial Public Offering (IPO): Prospectus — Rule 424(b)(1)
Filing Table of Contents