10-K

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-K

x ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE YEAR ENDED DECEMBER 31, 2001

COMMISSION FILE NO. 000-23087

AMERIGROUP CORPORATION

4425 Corporation Lane

Virginia Beach, VA 23462

(757) 490-6900

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

Securities registered pursuant to Section 12(b) of the Act:

Title of each class	Name of each exchange on which registered
Common Stock, $.01 par value (19,904,039 shares outstanding as of February 28, 2002)	Nasdaq National Market

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

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this  10-K.    ¨

The aggregate market value of common stock held by non-affiliates at February 28, 2002 was $281,843,055.

            Document Incorporated by Reference            

Part III of this Report incorporates by reference information from the definitive

Proxy Statement for the Registrant’s 2002 Annual Meeting of Stockholders

TABLE OF CONTENTS

		Page No.
PART I.
Item 1.	Business	1
Item 2.	Properties	19
Item 3.	Legal Proceedings	19
Item 4.	Submission of Matters to a Vote of Security Holders	19
PART II.
Item 5.	Market for our Common Equity and Related Stockholder Matters	21
Item 6.	Selected Financial Data	23
Item 7.	Management’s Discussion and Analysis of Results of Operations and Financial Condition	24
Item 7A.	Quantitative and Qualitative Disclosures About Market Risk	32
Item 8.	Financial Statements and Supplementary Data	42
Item 9.	Changes in and Disagreements with Accountants on Accounting and Financial Disclosure	62
PART III.
Item 10.	Directors and Executive Officers of the Company	62
Item 11.	Executive Compensation	62
Item 12.	Security Ownership of Certain Beneficial Owners and Management	62
Item 13.	Certain Relationships and Related Transactions	62
PART IV.
Item 14.	Exhibits, Financial Statement Schedules and Reports on Form 8-K	63

i

PART I

ITEM 1.     Business

Overview

We are a multi-state managed health care company focused on serving people who receive health care benefits through state-sponsored programs, including Medicaid, State Children’s Health Insurance Program, or SCHIP, and FamilyCare. We believe that we are better qualified and positioned than many of our competitors to meet the unique needs of our target populations because of our single focus on providing managed care to these populations, our strong government relationships, medical management programs, and our community-based education and outreach programs. 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, SCHIP and FamilyCare populations. We do not offer Medicare or commercial products. In general, as compared to commercial or Medicare populations, our target population is younger, accesses health care in an inefficient manner, and has a greater percentage of medical expenses related to obstetrics, diabetes and respiratory conditions. We design our programs to address the particular needs of our members, for whom we provide Medicaid benefits pursuant to an agreement with the applicable regulatory authority. We combine medical, social and behavioral health services to help our members obtain quality health care in an efficient manner.

Our success in establishing and maintaining strong relationships with state governments, providers, and members has enabled us to win new contracts and to establish a leading market position in many of the markets we serve. Providers are hospitals, physicians and ancillary medical programs which provide medical services to our members. Members are said to be “enrolled” with our health plans to receive benefits. Accordingly, our total membership is generally referred to as our enrollment. We provide an array of products to members in Texas, New Jersey, Maryland, the District of Columbia and Illinois. As of December 31, 2001, we had approximately 472,000 members.

We were incorporated in Delaware on December 9, 1994 as AMERICAID Community Care by a team of experienced senior managers led by Jeffrey L. McWaters, our Chairman and Chief Executive Officer. During 1994 through 1995, we were involved primarily in financial planning, recruiting and training personnel, developing products and markets, and negotiating contracts with various state governments. During 1996, we began enrolling Medicaid members in our Fort Worth, Texas, New Jersey and Illinois plans and in 1997, we won a bid to enroll members in our Houston, Texas plan. In 1998, we acquired the New Jersey Medicaid contract rights and other related assets from Oxford Health Plans (NJ), Inc. In 1999, we began operating in Maryland and the District of Columbia, and won a bid to enroll members in our Dallas plan. Our operations in Maryland and the District of Columbia are the result of acquiring contract rights from Prudential Health Care.

Market Opportunity

Emergence of managed care

Health care in the United States has grown from a $27 billion industry in 1960 to a highly-regulated market of approximately $1.4 trillion in 2001, according to the federal government’s Centers for Medicare & Medicaid Services, or CMS (formerly the Health Care Financing Administration). CMS projects total U.S. health care spending will grow by 7.1% annually over the next seven years, implying that health care expenditures will reach approximately $2.6 trillion by 2010. In response to the dramatic increases in health care-related costs in the late 1960s, Congress enacted the Federal Health Maintenance Organization Act of 1973, a statute designed to encourage the establishment and expansion of care and cost management. The private sector responded to this legislation by forming health maintenance organizations, or HMOs. HMOs were intended to address the needs of employers, insurers, government entities and health care providers who sought a cost-effective alternative to traditional indemnity insurance. Since the establishment of HMOs, enrollment has increased more than thirteen-fold from 6 million in 1976 to nearly 79.5 million in 2001. Over that time, many HMOs have been formed to

1

focus on a specific or specialty population of health care such as commercial plans for employees, Medicare, Medicaid, dental care and behavioral health care. Additionally, HMOs have been formed in a variety of sizes, from small community-based plans to multi-state organizations.

Despite these efforts to organize care delivery, the costs associated with medical care have continued to increase. As a result, it has become increasingly important for HMOs to know the populations they serve in order to develop an infrastructure and programs tailored to the medical and social profiles of their members.

Medicaid, SCHIP and FamilyCare Programs

Medicaid, a state administered program, was enacted in 1965 to make federal matching funds available to all states for the delivery of health care benefits to eligible individuals, principally those with incomes below specified levels who meet other state specified requirements. Medicaid is structured to allow each state to establish its own eligibility standards, benefits package, payment rates and program administration under broad federal guidelines. By contrast, Medicare, in which we do not participate, is a program administered by the federal government and is made available to the aged and disabled. Some of the differences between Medicaid and Medicare are set forth below:

Medicaid

• state administered

• state and matching federal funds

• average age of our members is 15

• 19.6 million people in managed care in 2001

• government funded prescription drug coverage

• mandatory managed care in most states

Medicare

• federally operated

• federal funds only

• average age of members is over 70

• 5.5 million people in managed care in 2001

• no government funded prescription drug coverage

• no mandatory managed care

Most states determine threshold Medicaid eligibility by reference to other federal financial assistance programs including:

• Temporary Assistance to Needy Families, or TANF, and

• Supplemental Security Income, or SSI.

TANF provides assistance to low-income families with children and was adopted to replace the Aid to Families with Dependent Children program. SSI is a federal program that provides assistance to low-income aged, blind or disabled individuals. However, states can broaden eligibility criteria.

SCHIP, developed in 1997, is a federal/state matching program which provides health care coverage to children not otherwise covered by Medicaid or other insurance programs. SCHIP enables a segment

2

of the large uninsured population in the United States to receive health care benefits. States have the option of administering SCHIP through their Medicaid programs. SCHIP enrollment reached 4.6 million in 2001, an approximate 39% increase over 2000 enrollment figures.

FamilyCare programs have been established in New Jersey and the District of Columbia. The New Jersey FamilyCare Health Coverage Act is a Medicaid expansion program intended to provide health care access to an estimated 125,000 previously uninsured or underinsured New Jersey residents. New Jersey FamilyCare is a voluntary federal and state funded health insurance program created to help uninsured families, single adults and couples without dependent children obtain affordable health coverage. New Jersey is investing approximately $100 million in its Medicaid and FamilyCare programs from tobacco settlement funds. When fully implemented, the program is expected to continue to draw on tobacco settlement funds. The FamilyCare program in the District of Columbia provides services to approximately 78,000 primarily low-income pregnant women, children and adults.

In 2001, according to information published by CMS, Medicaid covered more than 40 million individuals, as follows:

Number	Category	Federal assistance program reference
20.7 million	children (1 in 4 U.S. children)	TANF
8.6 million	adults, mostly women	TANF
7.2 million	disabled	SSI
4.1 million	individuals over 64	SSI

Nationally, approximately 59% of Medicaid spending is directed toward hospital, physician and other acute care services, and the remaining approximately 41% is for nursing home and other long-term care. In general, inpatient and emergency room utilization tends to be higher within the Medicaid population than among the general population because of the inability to afford access to a primary care physician leading to the postponement of treatment until acute care is required.

The highest health care expenses for the non-elderly Medicaid population include:

• obstetrics,

• respiratory illness,

• diabetes,

• neonatal care, and

• HIV/AIDS.

In 2001, the federal government spent $129 billion on Medicaid and states spent an additional $94 billion. Government estimates indicate that total Medicaid outlays may reach $280 billion by fiscal year 2003, with an additional $11.2 billion spent on SCHIP programs. Key factors driving Medicaid spending include:

• number of eligible individuals who enroll,

• price of medical and long-term care services,

• use of covered services,

• state decisions regarding optional services and optional eligibility groups, and

• effectiveness of programs to reduce costs of providing benefits, including managed care.

3

In addition, we expect that spending for SCHIP will increase as a result of funds becoming available to the states from settlements of government litigation with tobacco companies and the federal government’s current initiative to decrease the number of uninsured individuals. In the states in which we operate, Texas and New Jersey have made final determinations to use a portion of the funds from tobacco litigation settlements for SCHIP programs. In addition, New Jersey is allocating a portion of the tobacco litigation settlement funds to the New Jersey FamilyCare program, which includes parents of Medicaid and SCHIP children and low income, childless adults. In 2000, Maryland used a portion of the tobacco settlement funds to offset a one-time deficit in its Medicaid budget. At this time, we do not expect the other states in which we operate to use tobacco settlement funds for SCHIP or Medicaid. However, it is too soon to know how states will allocate their tobacco settlement dollars in future years.

Medicaid Funding

The federal government pays a share of the medical assistance expenditures under each state’s Medicaid program. That share, known as the Federal Medical Assistance Percentage, or FMAP, is determined annually by a formula that compares the state’s average per capita income level with the national average per capita income level. Thus, states with higher per capita income levels are reimbursed a smaller share of their costs than states with lower per capita income levels. The FMAP cannot be lower than 50% or higher than 83%. In 2002 the FMAPs varied from 50% in 11 states to 76.1% in Mississippi, and averaged 57.0% overall. In addition, the Balanced Budget Act of 1997 permanently raised the FMAP for the District of Columbia from 50% to 70%. The states’ fiscal 2002 FMAPs for the markets in which we have contracts are:

State	FMAP
New Jersey	50.0	%
Texas	60.2	%
Maryland	50.0	%
Illinois	50.0	%
District of Columbia	70.0	%

The federal government also matches administrative costs, generally about 50%, although higher percentages are paid for certain activities and functions, such as development of automated claims processing systems. Federal payments have no set limits (other than for SCHIP programs) but rather are made on a matching basis. In 1999, 43.6% of total federal funds provided to states were spent on Medicaid, the highest category of federal funds provided to states.

State governments pay the share of Medicaid and SCHIP costs not paid by the federal government. Some states require counties to pay part of the state’s share of Medicaid costs. In 2000, Medicaid was the second largest category of state spending, following spending on elementary and secondary education, and made up 19.5% of total state spending.

Federal law establishes general rules governing how states administer their Medicaid and SCHIP programs. Within those rules, states have considerable flexibility, including flexibility in how they set most provider prices and service utilization controls. Generally, state Medicaid budgets are developed and approved annually by the state governor and the legislature and Medicaid expenditures are monitored during the year against budgeted amounts. Federal law requires states to offer at least two HMOs in any urban market with mandatory HMO enrollment. If Medicaid HMO market departures result in only one or no HMOs in an urban area, the affected state must also offer the fee-for-service Medicaid program.

Medicaid Managed Care

Historically, the traditional Medicaid programs made payments directly to providers after delivery of care. Under this approach, recipients received care from disparate sources, as opposed to being cared for in a systematic way. As a result, care for routine needs was often accessed through emergency rooms or not at all.

4

The delivery of episodic health care under the traditional Medicaid program limited the ability of the states to provide quality care, implement preventive measures and control health care costs. Federal Medicaid spending grew at an average annual rate of 19.6% between 1988 and 1993, prior to the widespread use of managed care for Medicaid benefits.

Over the past decade, in response to rising health care costs and in an effort to ensure quality health care, the federal government has expanded the ability of state Medicaid agencies to explore, and, in some cases, mandate the use of managed care for Medicaid beneficiaries. If Medicaid managed care is not mandatory, individuals entitled to Medicaid may choose either the traditional Medicaid program or a managed care plan, if available. According to information published by CMS, from 1993 to 1998, managed care enrollment among Medicaid beneficiaries increased more than three-fold. All of the markets in which we operate, except Illinois, have a state-mandated Medicaid managed care program in place.

The AMERIGROUP Approach

Unlike many managed care organizations that attempt to serve the general population, as well as Medicare and Medicaid populations, we are focused exclusively on serving people who receive health care benefits through state-sponsored programs. We do not offer Medicare or commercial products. Our success in establishing and maintaining strong relationships with state governments, providers, and members has enabled us to obtain new contracts and to establish a strong market position in the markets we serve. We have been able to accomplish this by addressing the various needs of these three constituent groups.

State Governments

We have been successful in bidding for contracts and implementing new products because of our ability to provide quality health care services in a cost-effective manner. Our education and outreach programs, our disease and medical management programs and our information systems benefit the communities we serve while providing the state governments with predictability of cost. Our education and outreach programs are designed to decrease the use of emergency care services as the primary access to health care through the provision of programs like member health education seminars and system-wide 24-hour on-call nurses. Our information systems are designed to measure and track our performance enabling us to demonstrate the effectiveness of our programs to the government. While we promote ourselves directly in applying for new contracts or seeking to add new benefit plans, such as SCHIP programs, we believe that our ability to obtain additional contracts and expand our service areas within a state results primarily from our demonstrating prior success in providing quality care while reducing and managing costs and our customer-focused approach to working with state governments. We believe we will also benefit from this experience when bidding for and acquiring contracts in new state markets.

Providers

In each of the communities where we operate, we have established extensive provider networks and have been successful in continuing to establish new provider relationships. We have accomplished this by working closely with physicians to help them operate efficiently by providing financial, statistical and utilization information, physician and patient educational programs and disease and medical management programs, as well as adhering to a prompt payment policy. In addition, as we increase our market penetration, we provide our physicians with a growing base of potential patients in the markets they serve. This network of providers and relationships assists us in implementing preventive care methods, managing costs and improving the overall quality of care delivered to our members. We believe that our experience working and contracting with Medicaid providers will give us a competitive advantage in entering new markets. While we do not directly market to or through our providers, they are also instrumental in helping us attract new members and retain existing members.

Members

In both signing up new and retaining existing members, we focus on our understanding of the unique needs of the Medicaid, SCHIP and FamilyCare populations. Many of our employees, including the sales force and

5

outreach staff, are a part of the communities we serve. In addition, we have developed a system that provides our members with easy access to appropriate care. We supplement this care with community-based education and outreach programs designed to improve the well-being of our members. We often provide the programs in our members’ homes, churches and community centers. These programs not only help our members control and manage their medical care, but also have been proven to decrease the incidence of emergency room care, which is traumatic for the individual and expensive and inefficient for the health care system. Upon entering a new market, we use these programs and other advertising to create brand awareness. We also help our members access prenatal care which improves outcomes for our members and is less costly than unmanaged care. As our presence in a market matures, these programs, and other value added services, help us build and maintain membership levels.

Strategy

Our objective is to become the leading managed care organization in the United States focused on serving people who receive health care benefits through state–sponsored programs. To achieve this objective we intend to:

Increase our membership in existing markets through internal growth and acquisitions.    We intend to increase our membership in existing markets through development and implementation of community-specific products, alliances with key providers, sales and marketing efforts and acquisitions. We provide a broad continuum of health care supported by numerous services such as neonatal intensive care and high-risk pregnancy programs. These products and services are developed and administered by us but are also designed to attract and retain our providers, who are critical to our overall success. Through strategic and selective contracting with providers, we are able to customize our service delivery systems to meet the unique clinical, cultural and socio-economic needs of our members. Our providers often are located in the inner city neighborhoods where our members live, thereby providing accessability to, and an understanding of, the needs of the member. In our voluntary market we have a sales force to recruit potential members who are currently in the traditional Medicaid system. The overall effect of this comprehensive approach reinforces our broad brand-name recognition as a leading managed health care company serving people who receive state-sponsored health care benefits, while complying with state mandated marketing guidelines. We may also choose to increase membership by acquiring Medicaid contracts and other related assets from competitors in our existing markets.

Expand into new markets for our services through acquisitions and development of new operations.    Since 1996, we have developed markets in Texas, New Jersey and Illinois and acquired businesses in New Jersey, Maryland, Texas, and the District of Columbia. We intend to evaluate potential new markets using our established government relationships and our historical experience in managing Medicaid populations. Our management team is experienced in identifying markets for development of new operations, including complementary businesses, identifying and executing acquisitions and integrating these businesses into our existing operations. Furthermore, our information technology systems and processes are designed to be scalable and replicable, which will enable us to access the critical information needed to effectively manage a new market. In December 2001, we submitted an application for the potential establishment of a plan in New York. We expect that it will take between 12 and 18 months to obtain the necessary approvals to begin operating a New York plan. We have not yet made a final decision to enter the New York market and will continue to monitor the New York market opportunity during this time period to ensure that it continues to meet our market criteria.

Capitalize on our experience working with state governments.    We continually strive to be an industry-recognized leader in government relations and an important resource to our state government customers. For example, we have a dedicated legislative affairs team. We are, and intend to continue to be, an active and leading participant in the formulation and development of new policies and programs for state-sponsored health care benefits. This also enables us to competitively bid to expand our service areas and to implement new products.

Focus on our “medical home” concept to provide quality, cost-effective health care.    We believe that the care the Medicaid population has historically received can be characterized as uncoordinated, episodic and short-term focused. In the long term, this approach is less desirable for the patient and more expensive for the state.

6

Our approach to serving the Medicaid and historically uninsured populations is based on offering a comprehensive range of medical and social services intended to improve the well-being of the member while lowering the overall cost of providing benefits. Unlike traditional Medicaid, each of our members has a primary contact, usually a primary care physician, to coordinate and administer the provision of care, as well as enhanced benefits, such as 24-hour on-call nurses. We refer to this coordinated approach as a medical home.

Utilize population specific disease management programs and related techniques to improve quality and reduce costs.    An integral part of our medical home concept is continual quality management. To help the physician improve the quality of care and improve the health status of our members, we have developed a number of programs and procedures to address high frequency, chronic or high-cost conditions, such as pregnancy, respiratory conditions, diabetes and congestive heart failure. Our procedures include case and disease management, pre-admission certification, concurrent review of hospital admissions, discharge planning, retrospective review of claims, outcome studies and management of inpatient, ambulatory and alternative care. These policies and programs are designed to consistently provide high quality care and cost-effective service to our members.

Products

We have developed several products through which we offer a range of health care services. These products are also community-based and seek to address the social and economic issues faced by the populations we serve. Additionally, we seek to establish strategic relationships with prestigious medical centers, children’s hospitals and federally qualified health centers to assist in implementing our products and medical management programs within the communities we serve. Our health plans cover various services that vary by state and may include:

• 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 services and substance abuse,

• long-term and nursing home care,

• 24-hour on-call nurses,

• vision care and exam allowances,

• dental care,

• prescriptions and limited over the counter drugs,

• assistance with obtaining transportation for office or health education visits,

• memberships in the Boys’ and Girls’ Clubs, and

• welcome calls and health status calls to coordinate care.

Our products, which we may offer under different names in different markets, focus on specific populations within the Medicaid, FamilyCare and SCHIP programs. The average premiums for our products vary significantly due to differences in the benefits offered and underlying medical conditions in the populations covered.

AMERICAID, our principal product, is our family-focused Medicaid managed health care product designed for the TANF population that consists primarily of low-income children and their mothers. Historically, most of

7

our members used the AMERICAID product. We currently offer our AMERICAID product in all markets we serve. As of December 31, 2001, we had approximately 294,000 AMERICAID members.

AMERIKIDS is our managed health care product for uninsured children not eligible for Medicaid. This product is designed for children in the SCHIP initiative. As states fully implement their SCHIP program, we expect use of this product to increase. We began offering AMERIKIDS in Maryland and Washington, D.C. when we acquired Prudential’s contract rights and other related assets in those areas in 1999. We also recently began offering AMERIKIDS in New Jersey and Texas. As of December 31, 2001, we had approximately 112,000 members in our AMERIKIDS product.

AMERIPLUS is our managed health care product for SSI recipients. This population consists of the low-income aged, blind and disabled. We began offering this product in 1998 and currently offer it in New Jersey, Maryland and Houston. We expect our AMERIPLUS membership to grow as more states include SSI benefits in mandatory managed care programs. As of December 31, 2001, we had approximately 43,000 AMERIPLUS members.

AMERIFAM is our newly developed FamilyCare managed health care product designed for uninsured segments of the population other than SCHIP eligibles. AMERIFAM’s current focus is the families of our SCHIP and Medicaid children. We offer this product in the District of Columbia and New Jersey where the program covers parents of SCHIP and Medicaid children. As of December 31, 2001, we had approximately 23,000 AMERIFAM members.

As of December 31, 2001, of our 472,000 members, 90.9% were enrolled in TANF, SCHIP and FamilyCare programs. The remaining 9.1% were enrolled in SSI programs. Of these SSI enrollees, approximately 5,000 were members to whom we provided limited administrative services but did not provide health benefits.

Disease and Medical Management Programs

We provide specific disease and medical management programs designed to meet the special health care needs of our members with chronic illnesses, to manage excessive costs and to improve the overall health of our members. We currently offer disease and medical management programs in areas such as high-risk pregnancy, respiratory conditions, congestive heart failure, sickle cell disease and HIV. These programs focus on preventing acute occurrences associated with chronic conditions by identifying at risk members, monitoring their conditions and pro-actively managing their care. We also employ tools such as utilization review and pre-certification to reduce the excessive costs often associated with uncoordinated health care programs.

Marketing and Educational Programs

An important aspect of our comprehensive approach to health care delivery is our marketing and educational programs, which we administer system-wide for our providers and members. We often provide these programs in members’ homes, churches and community centers. The programs we have developed are specifically designed to increase awareness of various diseases, conditions and methods of prevention in a manner that supports the providers, while meeting the unique needs of our members. For example, we conduct health promotion events in physicians’ offices that target respiratory conditions, immunization and other health issues. Direct provider marketing is supported by traditional marketing venues such as direct mail, telemarketing, and television, radio and cooperative advertising with participating medical groups.

We believe that we can also increase and retain membership through marketing and education initiatives. We have a dedicated staff who actively support and educate prospective and existing members and community organizations. Through programs such as Safe Kids and our sponsorship of the National Theatre for Children’s production of 2Smart 2Smoke, we promote a healthy lifestyle, safety and good nutrition to our youngest members. In addition to these personal health-related programs, we remain committed to the communities we

8

serve. We have developed specific strategies for building relationships with key community organizations, which helps enhance community support for our products and improve service to members. We regularly participate in local events and festivals and organize community health fairs to promote healthy lifestyle practices. In several markets, we also provide free memberships to the local Boys’ and Girls’ Clubs. We believe that our comprehensive approach to health care positions us well to serve our members, their providers and the communities in which they both live and work.

Community Partners

We believe community focus and understanding are important to attracting and retaining members. To assist in establishing our community presence in a new market, we seek to establish relationships with prestigious medical centers, children’s hospitals and federally qualified health centers to offer our products and programs. We have strategic relationships with Cook Children’s Health Care System in Fort Worth, Texas and Memorial Hermann Healthcare System in Houston, Texas granting us the right to actively market their names and logos in advertising of our Medicaid products. A Cook Children’s affiliate, the Cook Children’s Physician Network, is our exclusive provider of pediatric health care services to members age 15 and under in this service delivery area.

Provider Network

We provide health care services to our members through mutually non-exclusive contracts with primary care physicians, specialists, ancillary providers and hospitals. Either prior to or concurrently with bidding for new contracts, we establish a provider network in each of our service areas. The following table shows the total approximate number of primary care physicians, specialists and hospitals participating in our network for December 2001:

	Service Areas
	Texas	New Jersey	Mid-Atlantic (Maryland and D.C.)	Illinois	Total
Primary care physicians	1,300	1,700	1,300	400	4,700
Specialists	5,000	4,400	6,400	500	16,300
Hospitals	70	70	40	20	200
Ancillary providers	1,500	1,100	1,100	600	4,300

The primary care physician, or PCP, is a critical component in care delivery, and also in the management of costs and the attraction and retention of new members. PCPs include family and general practitioners, pediatricians, internal medicine physicians and OB/GYNs. These physicians provide preventive and routine health care services and are responsible for making referrals to specialists, hospitals and other providers. Health care services provided directly by primary care physicians include the treatment of illnesses not requiring referrals, periodic physician examinations, routine immunizations, well child care and other preventive health care services.

Specialists provide medical care to members generally upon referral by the primary care physicians. However, we have identified specialists that are part of the ongoing care of our members, such as allergists, oncologists and surgeons, which our members may access directly without first obtaining a PCP referral. Our contracts with both the primary care physicians and specialists usually are for one- to two-year periods and automatically renew for successive one year terms subject to termination for cause by us if necessary based on provider conduct or other appropriate reasons. The contracts generally can be cancelled by either party upon 90 to 120 days prior written notice.

Our contracts with hospitals are usually for a one- to two-year period and automatically renew for successive one-year periods. Generally, our hospital contracts may be terminated by either party without cause

9

with 90 to 150 days prior written notice. Pursuant to the contract, the hospital is paid for all pre-authorized medically necessary inpatient and outpatient services and all covered emergency and medical screening services provided to members. With the exception of emergency services, most inpatient hospital services require advance approval from the member’s primary care physician and our medical department. We require hospitals to participate in utilization review and quality assurance programs.

We have also contracted with other ancillary providers for physical therapy, mental health and chemical dependency care, home health care, vision care, diagnostic laboratory tests, x-ray examinations, ambulance services and durable medical equipment. Additionally, we have contracted with dental vendors that provide routine dental care in markets where routine dental care is a covered benefit and with a national pharmacy vendor that provides a local pharmacy network in our markets where pharmacy is a covered benefit.

In order to ensure the quality of our medical care providers, we credential and re-credential our providers using standards that are supported by the National Committee for Quality Assurance. Additionally, we provide feedback and evaluations on quality and medical management to them in order to improve the quality of care provided, increase their support of our programs and enhance our ability to attract and retain providers.

Provider Payment Methods

Fee-for-Service.    This is a reimbursement mechanism which pays providers based upon services performed. For the year ended December 31, 2001, 84.8% of our payments for direct health benefits were on a fee-for-services reimbursement basis. The primary fee-for-service arrangements are maximum allowable fee schedule, per diem, percent of charges or any combination thereof. The following is a description of each of these mechanisms:

Maximum Allowable Fee Schedule.    Providers are paid the lesser of billed charges or a specified fixed payment for a covered service. The maximum allowable fee schedule is developed using, among other indicators, the state fee-for-service Medicaid program fee schedule, Medicare fee schedules, medical costs trends and market conditions. Adjustments to the fee schedules are not mandated in the provider contracts, but adjusted at our discretion, using the above indicators.

Per Diem and Case Rates.    Hospital facility costs are typically reimbursed at negotiated per diem or case rates, which vary by level of care within the hospital setting. Lower rates are paid for lower intensity services, such as a low birth weight newborn baby who stays in the hospital a few days longer than the mother, compared to higher rates for a neo-natal intensive care unit stay for a baby born with severe developmental disabilities.

Percent of Charges.    We contract with providers to pay them an agreed-upon percent of their standard charges for covered services. This is typically done where hospitals are reimbursed under the state fee-for-service Medicaid program on a percent of charges basis.

Capitation.    Some of our primary care physicians and specialists are paid on a fixed-fee per member basis, also known as capitation. Our arrangements with other providers for vision, dental, home health, laboratory, durable medical equipment, mental health and chemical dependency services may also be capitated.

We review the fees paid to providers periodically and make adjustments as necessary. Generally, the contracts with the providers do not allow for automatic annual increases in payments. Among the factors generally considered in adjustments are changes to state Medicaid fee schedules, competitive environment, current market conditions, anticipated utilization patterns and projected medical expenses. In order to enable us to better monitor quality and meet our state contractual encounter reporting obligations, it is our intention to increase the number of providers we pay on a fee-for-service basis and reduce the number of capitation contracts we have. States use the encounter data to monitor quality of care to members and to set premium rates.

10

Our Health Plans

We have four health plan subsidiaries offering health care services in Texas, New Jersey, Maryland, the District of Columbia and Illinois. We have never been denied a contract renewal from the jurisdictions in which we do business and we expect our relationship with these jurisdictions to continue. Each of our health plans have one or more contracts that expire at various times, as set forth below:

MARKET	PRODUCT	TERM END DATE
Texas	TANF, SSI	August 31, 2002
	SCHIP	April 30, 2003
New Jersey	TANF, SSI, SCHIP, FamilyCare	June 30, 2002
Maryland(a)	TANF, SSI, SCHIP	—
District of Columbia(b)	TANF, SCHIP, FamilyCare	April 30, 2002
Illinois	TANF	March 31, 2003

(a) Our Maryland contract does not have a set term. It can be terminated by either party upon 60 days notice.

(b) The expiration date has been extended in connection with the current re-bid process and may be extended again.

Texas

Our Texas health plan, AMERIGROUP Texas, Inc., is licensed as an HMO and became operational in September 1996. Our current service areas include the cities of Fort Worth, Dallas and Houston and the surrounding counties. For December 2001, we had approximately 214,000 members in Texas, consisting of approximately 100,000 members in Houston, approximately 64,000 members in Dallas and approximately 50,000 members in Fort Worth. Effective August 1, 2001, we acquired the Medicaid line of business of Humana Inc. (“Humana”) in the Houston area. In November 2001, we entered into an agreement to purchase the Houston, Texas Medicaid line of business of MethodistCare, Inc. The acquisition became effective January 1, 2002 and an additional 17,000 members joined our plan. We have the largest Medicaid membership in each of our Fort Worth and Houston markets. We have the second largest Medicaid membership in our Dallas market. We offer AMERICAID in each of our Texas markets and AMERIPLUS in Houston. In May 2000, we began offering AMERIKIDS in Dallas and Houston. Our TANF contracts in Dallas, Fort Worth and our TANF and SSI contracts in Houston expire on August 31, 2002. Our SCHIP contracts in Houston and Dallas expires on April 30, 2003.

New Jersey

Our New Jersey health plan, AMERIGROUP New Jersey, Inc., is licensed as an HMO and became operational in February 1996. Our current service areas include 20 of the 21 counties in New Jersey. For December 2001, we had approximately 88,000 members in New Jersey. We have the third largest Medicaid membership in New Jersey. We offer AMERICAID, AMERIPLUS, AMERIKIDS and AMERIFAM in New Jersey. Our contract with New Jersey expires on June 30, 2002.

Maryland

AMERIGROUP Maryland, Inc. is authorized to operate as a managed care organization in Maryland and became operational in June 1999. Our current service areas include Baltimore City and surrounding counties. For December 2001, we had approximately 118,000 members in Maryland. Effective May 1, 2001, the state of Maryland transitioned to us approximately 17,000 additional members from another Medicaid MCO in receivership. We have the largest Medicaid membership in Maryland. We offer AMERICAID, AMERIPLUS and AMERIKIDS in Maryland. Our contract in Maryland does not have a set term. It can be terminated by either party upon 60 days prior notice.

11

District of Columbia

AMERIGROUP Maryland, Inc. is also licensed as an HMO in the District of Columbia and became operational there in August 1999. For December 2001, we had approximately 13,000 members in the District of Columbia. We have the third largest Medicaid membership in the District of Columbia. We offer AMERICAID, AMERIKIDS and AMERIFAM in the District of Columbia. In the fall of 2000, the District issued a Request For Proposals for a new contract. We submitted our bid on December 27, 2000. In February 2002, we signed a new contract. The District is currently reviewing the contract for final approval and during this process has extended our contract to April 30, 2002.

Illinois

Our Illinois health plan, AMERIGROUP Illinois, Inc., is licensed as an HMO and became operational in April 1996. Our current service area includes the counties of Cook and DuPage in the Chicago area. In Illinois, enrollment in a Medicaid managed care plan is voluntary. For December 2001, we had approximately 39,000 members in Illinois. We have the largest Medicaid health plan membership in Cook County. We offer AMERICAID in the Chicago area. Our contract in Illinois expires on March 31, 2003.

Quality Management

We have a comprehensive quality management plan designed to improve access to cost-effective quality care. We have developed policies and procedures to ensure that the health care services provided by our health plans meet the professional standards of care established by the industry and the medical community. These procedures include:

• Analysis of health care utilization data.    To avoid duplication of services or medications, in conjunction with the primary care physicians, health care utilization data is analyzed and, through comparative provider data and periodic meetings with physicians, we identify areas in which a physician’s utilization rate differs significantly from the rates of other physicians. On the basis of this analysis, we suggest opportunities for improvement and following up with the primary care physician to monitor utilization.

• Medical care satisfaction studies.    We evaluate the quality and appropriateness of care provided to our health plan members by reviewing health care utilization data and responses to member and physician questionnaires and grievances.

• Clinical care oversight.    Each of our health plans has a medical advisory committee comprised of physician representatives and chaired by the plan’s medical director. This committee reviews credentialing, approves clinical protocols and practice guidelines and evaluates new physician group candidates. Based on regular reviews, the medical directors who head these committees develop recommendations for improvements in the delivery of medical care.

• Quality improvement plan.    A quality improvement plan is implemented in each of our health plans and is governed by a quality management committee. The quality management committee is comprised of senior management at our health plans, who review and evaluate the quality of our health services and are responsible for the development of quality improvement plans spanning both clinical quality and customer service quality. These plans are developed from provider and membership feedback, satisfaction surveys and results of action plans. Our corporate quality improvement council oversees and meets regularly with our health plan quality management committees to help ensure that we have a coordinated, quality-focused approach relating to our members, providers and state governments.

Management Information Systems

The ability to access data and translate it into meaningful information is essential to our being able to operate across a multi-state service area in a cost effective manner. Our centralized computer-based information

12

systems 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. This integrated approach helps to assure that consistent sources of claim and member information are provided across all of our health plans. We use these systems for billing, claims processing, utilization management, marketing and sales tracking, financial and management accounting, medical cost trending, reporting, planning and analysis. The systems also support our internal member and provider service functions, including on-line access to member eligibility verification, primary care physician membership roster and claims status.

Competition

Our principal competitors for state contracts, members and providers consist of the following types of organizations:

• Primary Care Case Management Programs, or PCCMs—Programs established by the states through contracts with primary care providers to provide primary care services to the Medicaid recipient, as well as provide limited oversight over other services.

• Commercial HMOs—National and regional commercial managed care organizations that have Medicaid and Medicare members in addition to members in private commercial plans.

• Medicaid HMOs—Managed care organizations that focus solely on serving people who receive health care benefits through Medicaid.

We will continue to face varying levels of competition as we expand in our existing service areas or enter new markets. In those of our markets in which enrollment in a managed care plan is voluntary, we also compete for members with the traditional means for accessing care, including hospitals and other health care providers. Health care 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 health care industry.

We have two competitors in Fort Worth, seven competitors in Houston and two competitors in Dallas. In each of our Fort Worth and Houston markets, we have the largest Medicaid membership. In our Dallas market, we have the second largest Medicaid membership. We have four competitors and the third largest Medicaid membership in New Jersey. We have five competitors and the largest Medicaid membership in Maryland. We have four competitors and the third largest Medicaid membership in the District of Columbia. We have four competitors and the largest Medicaid health plan membership in Cook County, Illinois.

We compete with other managed care organizations for state contracts, as well as to attract new members and retain existing members. States generally use either a formal proposal process reviewing many bidders or award individual contracts to qualified applicants that apply for entry to the program. 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. People who wish to enroll in a managed health care plan or to change health care 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.

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

Regulation

Our health care operations are regulated at both state and federal levels. Government regulation of the provision of health care products and services is a changing area of law that varies from jurisdiction to

13

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.

    HMOs and managed care organizations

Our four health plan subsidiaries are authorized to operate as an HMO in each of Texas, New Jersey, the District of Columbia and Illinois, and as a managed care organization, or MCO, in Maryland. 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 HMOs and MCOs providing or arranging to provide services to Medicaid enrollees.

The process for obtaining the authorization to operate as an HMO or MCO is lengthy and complicated, 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. Both under state HMO and MCO 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. Each of our subsidiaries is 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.

    Medicaid

Medicaid was established under the U.S. Social Security Act. It is state-operated and implemented. Each state:

• establishes its own eligibility standards,

• determines the type, amount, duration and scope of services,

• sets the rate of payment for services, and

• administers its own program.

Medicaid policies for eligibility, services, rates and payment are complex, and vary considerably among states, and the state policies change from time to time.

States are also permitted by the federal government to seek waivers from requirements of the Social Security Act. The waivers most relevant to us are the Section 1915(b) freedom of choice waivers that enable:

• mandating Medicaid enrollment into managed care,

• the utilization of a central broker for enrollment into plans,

• the use of cost savings to provide additional services, and

• limiting the number of providers for additional services.

Waivers are approved for two-year periods and can be renewed on an ongoing basis if the state applies. A 1915(b) waiver cannot negatively impact beneficiary access or quality of care and must be cost-effective. Managed care initiatives may be state-wide and required for all classes of Medicaid eligible recipients, or can be limited to service areas and classes of recipients. All jurisdictions in which we operate, except Illinois, have some sort of mandatory Medicaid program. However, under the waivers pursuant to which the mandatory programs have been implemented, there must be at least two managed care plans operating from which Medicaid eligible recipients may choose.

14

Many states, including Maryland, operate under a Section 1115 demonstration rather than a 1915(b) waiver. This is a more expansive form of waiver that enables the state to have a Medicaid program that is more broad than typically permitted under the Social Security Act. For example, Maryland’s 1115 waiver allows it to include more individuals in its managed care program than typically allowed under Medicaid.

In all the states in which we operate, we must enter into a contract with the state’s Medicaid regulator in order to be a Medicaid managed care organization. States generally use either a formal proposal process, reviewing many bidders, or award individual contracts to qualified applicants that apply for entry to the program. Although other states have done so in the past and may do so in the future, currently Texas and the District of Columbia are the only jurisdictions in which we operate that use competitive bidding processes.

The contractual relationship with the state is generally for a period of one to two years and renewable on an annual or bi-annual basis. The 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,

• 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 the state regulator 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 quarterly and annual statutory financial statements and utilization reports, as well as many other reports.

Federal Regulation

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. Among other things, HIPAA’s administrative simplification provisions entail new regulations relating to standards for electronic transactions and code sets; privacy of health information; security of health care information; national provider identifiers; and national employer identifiers. The rules relating to transactions and privacy have been issued in final form, and compliance with these rules will be required by October, 2002 and April, 2003, respectively. These rules are described in more detail below. Regulations relating to security and provider and employer identifiers were issued in proposed form in 1998, but have not yet been finalized.

In August 2000, the Department of Health and Human Services, or HHS, issued new standards for submitting electronic claims and other administrative health care transactions. The new standards were designed

15

to streamline the processing of claims, reduce the volume of paperwork and provide better service. The administrative and financial health care transactions covered include:

• health claims and equivalent encounter information,

• enrollment and disenrollment in a health plan,

• eligibility for a health plan,

• health care payment and remittance advice,

• health plan premium payments,

• health care claim status, and

• referral certification and authorization.

In general, health care 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 health care 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.

One of our early concerns regarding how this regulation directly affects the manner in which we conduct business is the inconsistency between the regulation’s requirements and the widespread use of non-standard, non-national codes (generally referred to as “local codes”) in health care transactions. The use of local codes is particularly prevalent in Medicaid transactions. We cannot be sure that this will be resolved before the regulation’s implementation date. In order to prepare for our compliance with the regulatory requirements we have prepared a “gap analysis” that consists of:

• an inventory of existing applications that either produce or process transactions that are within the scope of the regulation,

• identification of the data elements currently used by these applications,

• a comparison of these legacy data elements to the standard data elements for the same transaction and an analysis of the differences between the two, and

• a determination of the impact of the gaps and differences identified.

As a result of this study, we have developed a remediation plan to eliminate the gaps and differences, which we are currently implementing.

16

On December 28, 2000, HHS published a regulation setting forth new standards for protecting the privacy of personal health records. The regulation became effective on April 14, 2001 and compliance will be required by April 2003. The new regulation is designed to protect medical records and other personal health information kept and used by health care providers, hospitals, health plans and health insurers, and health care clearinghouses. The new standards:

• limit the routine and non-routine non-consensual use and release of private health 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, and

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

The preemption provisions of the regulation provide that the federal law will preempt a 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 health care,

• the state law will ensure appropriate state regulation of insurance and health plans,

• the state law is necessary to state reporting on health care delivery or costs, or

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

The fact that either state or federal rules may supersede the other depending on the nature of the particular requirement will require interpretations for which there is likely to be little precedent. We have completed an assessment of the programs and systems that we will need to implement in order to comply with the new regulations by April 2003. In order to comply with the requirements, we will be required to employ additional or different programs and systems. We expect to spend approximately $5 million on HIPAA compliance in 2002. Further, compliance with these regulations will 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.

New Medicaid Managed Care Regulations

On January 19, 2001, HHS issued new Medicaid managed care regulations to implement certain provisions of the Balanced Budget Act of 1997, or BBA. These provisions would permit states to require certain Medicaid beneficiaries to enroll in managed care programs, give states more flexibility to develop their managed care programs, and provide certain new protections for Medicaid beneficiaries. CMS delayed the rule’s effective date three times. The most recent of these delays set the effective date of the final rule to August 16, 2002.

On August 20, 2001, however, CMS proposed a new Medicaid managed care rule. The proposed rule sets forth regulations that would replace those set forth in the January 19, 2001 final rule. Because both rules implement the statutory BBA provisions, the proposed rule is similar in many respects to the final rule.

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

17

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 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 19, 2001, and the Secretary of HHS has indicated an intent to finalize the regulations by early 2002. To date, the proposed rules have not been finalized. Although some of the states in which we operate have already implemented requirements similar to those provided for in the proposed rule, because the rule has not been finalized, 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 health care 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 two versions of patients’ rights legislation in May and August 2001, respectively. Both versions include provisions that specifically apply protections to participants in federal health care programs, including Medicaid beneficiaries. Either version of this legislation could expand our potential exposure to lawsuits and increase our regulatory compliance costs. 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. Negotiations are ongoing to resolve differences between the Senate and House bills, including 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 health care fraud and abuse has become a top priority for law enforcement entities. The funding of such law enforcement efforts has increased in the past few years and these increases are expected to continue. The focus of these efforts has been directed at participants in public government health care programs such as Medicaid. These regulations and contractual requirements applicable to participants in these programs are complex and changing. We have re-emphasized our regulatory compliance efforts for these programs, but ongoing vigorous law enforcement and the highly technical regulatory scheme mean that compliance efforts in this area will continue to require substantial resources.

Customers

At December 31, 2001, we served members who received health care benefits through our nine contracts with the regulatory entities in the jurisdictions in which we operate, five of which individually accounted for 10% or more of our revenues for the year ended December 31, 2001, with the largest of these contracts representing approximately 30% of our revenues. We have contracts with the states of Texas, Maryland and New Jersey which individually account for 10% or more of our revenues.

Employees

As of December 31, 2001, we had approximately 1,400 employees. Our employees are not represented by a union. We believe our relationships with our employees are good.

18

ITEM 2.     Properties

We do not own any real property. We lease office space in Virginia Beach, Virginia, where our headquarters are located, and in each of the health plan locations. We are obligated by various insurance and Medicaid regulatory authorities to have offices in the service areas where we provide Medicaid benefits.

ITEM 3.     Legal Proceedings

In the normal course of our business, we may be a party to legal proceedings. However, we are not currently a party to any material legal proceedings nor, to our knowledge, is any material legal proceeding threatened against us.

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

None.

Executive Officers of the Company

Our executive officers, their ages and positions as of February 28, 2002, are as follows:

Name	Age	Position
Jeffrey L. McWaters	45	Chairman of the Board of Directors and Chief Executive Officer
Scott M. Tabakin	43	Senior Vice President, Chief Financial Officer
Lorenzo Childress, Jr., M.D.	55	Senior Vice President, Chief Medical Officer
Theodore M. Wille, Jr.	54	Senior Vice President, Chief Operating Officer
Sherri E. Lee	50	Senior Vice President, Treasurer
Stanley F. Baldwin	53	Senior Vice President, General Counsel and Secretary
James E. Hargroves	59	Senior Vice President, Corporate Development
Herman Wright	48	Senior Vice President, Chief Marketing Officer
Catherine S. Callahan	44	Senior Vice President, Administrative Services
Kathleen K. Toth	40	Senior Vice President, Chief Accounting Officer
Scott S. Pickens	48	Senior Vice President, Chief Information Officer
Nancy L. Grden	50	Senior Vice President, Planning and Development
John E. Littel	37	Vice President, Government Relations

Jeffrey L. McWaters has been our Chairman of the Board of Directors and Chief Executive Officer since he founded our company in December 1994. From 1991 to 1994, Mr. McWaters served as President and Chief Executive Officer of Options Mental Health, a national managed behavioral health care company and prior to that, in various senior operating positions with EQUICOR-Equitable HCA Corporation and CIGNA HealthCare. Mr. McWaters has served as a director of America Service Group Inc. since 1999. Mr. McWaters is a member of the Board of Visitors of the College of William and Mary and a director of the American Association of Health Plans.

Scott M. Tabakin joined us as our Chief Financial Officer on May 15, 2001. Prior to joining us, Mr. Tabakin was Executive Vice President and Chief Financial Officer of Beverly Enterprises, Inc. from 1996 to 2001. Mr. Tabakin served in various other senior officer positions at Beverly Enterprises from 1992 to 1996. Mr. Tabakin is a certified public accountant.

19

Lorenzo Childress, Jr., M.D. has served as our Chief Medical Officer since 1995. From 1992 to 1995, Dr. Childress was the Chief Operating Officer and Medical Director of Metro Medical Group, an indirect wholly-owned subsidiary of the Henry Ford Health System.

Theodore M. Wille, Jr. has served as our Chief Operating Officer since 1996. Mr. Wille served as Chief Operating Officer for the managed care division of Sentara Health System, a private managed care facility in Virginia, from 1991 until 1994 and President of Optima Health Plan from 1988 to 1996.

Stanley F. Baldwin has served as our General Counsel and Secretary since 1997. From 1994 to 1997, Mr. Baldwin was a Managing Director for Covington Group L.C., a private company that provided legal, management and other consulting services to indemnity insurance, managed care and health care provider clients. Prior to that, Mr. Baldwin held senior officer and General Counsel positions with EPIC Healthcare Group, Inc., EQUICOR-Equitable HCA Corporation and CIGNA Healthplans, Inc. Mr. Baldwin is a member of the Bar of Tennessee and the Bar of Texas.

Sherri E. Lee joined us in 1998 as our Chief Financial Officer and Treasurer. Effective May 15, 2001, Ms. Lee resigned her position as Chief Financial Officer, but continues to serve as Treasurer. Prior to joining us, Ms. Lee was an adjunct instructor with Front Range Community College in Colorado from 1995 to 1998. Ms. Lee served as Executive Vice President-Finance of Pharmacy Corporation of America from 1991 to 1995. Prior to that, Ms. Lee was Senior Vice President and Controller for Beverly Enterprises, Inc. Ms. Lee is a certified public accountant.

James E. Hargroves has served as our head of Corporate Development since joining us in 1996. From 1994 to 1996, Mr. Hargroves was the President, founder and principal of Waterline Advisory Group, Inc., a corporate intermediary firm that provided merger and acquisition advisory services to health-related businesses, insurers, physicians and others.

Herman Wright is our Chief Marketing Officer. Prior to joining us in 1998, Mr. Wright served as the Vice President, Sales and Marketing for United Healthcare, Central Region, from 1995 to 1998.

Catherine S. Callahan joined us in 1999 and serves as our head of Administrative Services. From 1991 to 1999, Ms. Callahan was Chief Administrative Officer of FHC Health System.

Kathleen K. Toth joined us in 1995 and serves as our Chief Accounting Officer. Prior to joining us, Ms. Toth was the Vice President of Service Operations at Options Mental Health from 1992 to 1995. Ms. Toth also worked for CIGNA Healthplan of Texas, Inc. as Director of Financial Services and for EQUICOR Health Plan of Florida as a Controller from 1987 to 1992. Ms. Toth is a certified public accountant.

Scott S. Pickens is our Chief Information Officer. Prior to joining us in June 2000, he served as Corporate Chief Information Officer of Health Answers, Inc. from April 1999 to June 2000, and as Chief Operating Officer for Consortium Health Plans from January 1995 to April 1999.

Nancy L. Grden joined us as our head of Planning and Development in October 2001. Prior to joining us, Ms. Grden served as President and Founder of Avenir, LLC, a consulting firm specializing in new ventures, and as Chief Executive Officer for Lifescape, LLC, a web-based workplace services company, from 1998 to 2000. She previously served as Executive Vice President and Chief Marketing Officer for ValueOptions, a national managed behavioral health care company, from 1992 to 1998.

John E. Littel joined us as our Vice President for Government Relations on August 27, 2001. Mr. Littel has served in a variety of positions in federal and state governments, including as Deputy Secretary of Health and Human Resources for the Commonwealth of Virginia, where he was responsible for the state’s welfare reform initiative. Mr. Littel is a member of the Bar of Pennsylvania.

20

PART II

ITEM 5.    Market for Our Common Equity and Related Stockholder Matters.

The Common Stock of AMERIGROUP is traded on the Nasdaq National Market under the symbol “AMGP.” Prior to November 6, 2001, there was no established public trading market for any of the Company’s securities.

The following table sets forth, for the periods indicated, the range of high and low closing sales price for the Common Stock as reported on the Nasdaq National Market.

Fiscal 2001	High		Low
First Quarter		—		—
Second Quarter		—		—
Third Quarter		—		—
Fourth Quarter (from November 6, 2001)	$	21.80	$	18.10
December 31, 2000 Closing Sales Price	$21.80

On February 28, 2002, the last reported sale price of the Common Stock was $23.40 per share. As of February 28, 2002, the Company had approximately 130 shareholders of record.

The Company has never paid or declared any cash dividends on its Common Stock and does not expect to pay cash dividends in the foreseeable future.

In the past year, the Company has issued options to purchase 637,366 shares of common stock to employees in 2001. All of these options were granted under AMERIGROUP’s 2000 Equity Incentive Plan, and were issued in reliance on Rule 701 under the Securities Act.

Use of Proceeds from Initial Public Offering

On November 9, 2001, the Company completed its initial public offering of 4,985,000 shares of common stock, including an over-allotment issuance of 585,000 shares. In addition, Jeffrey McWaters, as selling stockholder, sold 75,000 shares upon exercise of the over-allotment option. The shares of common stock sold in the offering were registered under the Securities Act of 1933, as amended, on a Registration Statement on Form S-1, Registration number 333-37410, which was declared effective by the Securities and Exchange Commission on November 5, 2001. All of the 4,985,000 shares sold by the Company, and the 75,000 shares sold by Mr. McWaters, were sold at a price of $17.00 per share. The Company did not receive any of the proceeds from the sale of Mr. McWaters’ shares. The Company received proceeds from the offering of approximately $77.2 million, net of $7.5 million in fees and expenses. The Company used proceeds from the offering to repay the balance of its long-term debt facility of approximately $4.4 million and to redeem the Series E mandatorily redeemable preferred stock for approximately $13.3 million. The Company has subsequently used proceeds from the offering to purchase certain assets of MethodistCare, Inc.’s Houston, Texas Medicaid line of business for approximately $1.6 million. The balance of approximately $57.9 million has been and will be used for general corporate purposes, including potential acquisitions.

Banc of America Securities LLC, UBS Warburg LLC, CIBC World Markets Corp. and Stephens Inc. acted as representatives of the underwriters for the offering. Simultaneous with the consummation of the offering, each outstanding share of the Company’s Series A convertible preferred stock, Series B convertible preferred stock, Series C convertible preferred stock and Series D convertible preferred stock automatically converted into common stock, resulting in an additional 12,607,880 shares of common stock. Additionally, 1,123,823 shares of common stock were issued upon the exercise of all of the outstanding Series E warrants.

21

Forward-looking Statements

This Annual Report on Form 10-K, and other information we provide from time to time, contains certain ‘‘forward-looking’’ statements as that term is defined by Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. All statements regarding our expected future financial position, results of operations or cash flows, our continued performance improvements, our ability to service and refinance our debt obligations, our ability to finance growth opportunities, our ability to respond to changes in government regulations and similar statements including, without limitation, those containing words such as “believes,” “anticipates,” “expects,” “may,” “will,” “should,” “estimates,” “intends,” “plans,” and other similar expressions are forward-looking statements.

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

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

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

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

• liabilities and other claims asserted against the Company;

• our ability to attract and retain qualified personnel;

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

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

• the competitive environment in which we operate;

• our ability to maintain and increase membership levels; and

• demographic changes.

Investors should also refer to the section entitled “Management’s Discussion and Analysis of Results of Operations and Financial Condition—Risk Factors” for a discussion of risk factors. Given these risks and uncertainties, we can give no assurances that any forward-looking statements will, in fact, transpire and, therefore, caution investors not to place undue reliance on them.

22

ITEM 6.     Selected Financial Data

The following selected consolidated financial data should be read in connection with the financial statements and related notes and Management’s Discussion and Analysis of Financial Condition and Results of Operations appearing elsewhere in this Form 10-K. Selected financial data as of and for each of the years in the five-year period ended December 31, 2001 are derived from our consolidated financial statements, which have been audited by KPMG LLP, independent certified public accountants.

	Year ended December 31,
	2001			2000			1999(a)			1998(b)			1997
	(Dollars in thousands, except per share data)
Statements of Operations Data:
Revenues:
Premium	$	880,510		$	646,408		$	392,296		$	186,790		$	64,878
Investment income		10,664			13,107			6,404			3,389			2,184
Total revenues		891,174			659,515			398,700			190,179			67,062
Expenses:
Health benefits		709,034			523,566			334,192			155,877			55,340
Selling, general and administrative		109,822			85,114			52,846			29,166			19,920
Depreciation and amortization		9,348			6,275			3,635			1,197			652
Interest		763			781			811			483			—
Total expenses		828,967			615,736			391,484			186,723			75,912
Income (loss) before income taxes		62,207			43,779			7,216			3,456			(8,850	)
Income tax (expense) benefit		(26,127	)		(17,687	)		4,100			—			—
Net income (loss)		36,080			26,092			11,316			3,456			(8,850	)
Accretion of redeemable preferred stock dividends		(6,228	)		(7,284	)		(7,284	)		(6,126	)		(5,740	)
Net income (loss) attributable to common stockholders	$	29,852		$	18,808		$	4,032		$	(2,670	)	$	(14,590	)
Basic net income (loss) per share	$	8.08		$	23.62		$	7.11		$	(5.07	)	$	(28.29	)
Weighted average number of shares outstanding		3,694,844			796,409			567,146			526,651			515,750
Diluted net income (loss) per share	$	2.08		$	1.55		$	0.66		$	(5.07	)	$	(28.29	)
Weighted average number of shares and potential dilutive common shares outstanding		16,649,721			15,818,175			14,695,324			526,651			515,750
	December 31,
	2001			2000			1999(a)			1998(b)			1997
	(Dollars in thousands)
Balance Sheet Data:
Cash and cash equivalents and short and long-term investments	$	301,837		$	189,325		$	166,218		$	86,987		$	35,904
Total assets		406,942			268,126			222,321			101,369			40,498
Long-term debt (including current portion)		—			6,177			8,010			10,000			—
Total liabilities		223,426			185,191			166,426			78,551			25,992
Redeemable preferred stock		—			78,190			70,906			59,422			49,096
Stockholders’ equity (deficit)		183,516			4,745			(15,011	)		(36,604	)		(34,590	)

(a) Membership increased from 113,000 at December 31, 1998 to 268,000 at December 31, 1999 due to the purchase of the Maryland and the District of Columbia Medicaid contract rights and related assets from Prudential Health Care, adding approximately 91,000 members (which was accounted for as a purchase) with the balance of the increase due to internal growth from existing contracts.

(b) Membership increased from 41,000 at December 31, 1997 to 113,000 at December 31, 1998 primarily due to the purchase of the New Jersey Medicaid contract rights and related assets from Oxford Health Plans (which was accounted for as a purchase), adding approximately 27,000 members and an increase of 40,000 members in Houston due to the commencement of two new contracts with the balance of the increase due to internal growth from existing contracts.

23

ITEM 7.    Management’s Discussion and Analysis of Results of Operations and Financial Condition

Overview

We are a multi-state managed health care company focused on serving people who receive health care benefits through state-sponsored programs, including Medicaid, SCHIP and FamilyCare. We were founded in December 1994 with the objective to become the leading managed care organization in the United States focused on serving people who receive these types of benefits.

The following table sets forth the approximate number of our members in each of our service areas for the periods presented.

	December
Market	2001	2000	1999	1998	1997
Fort Worth	50,000	40,000	33,000	23,000	24,000
Houston	100,000	57,000	40,000	42,000	2,000
Dallas	64,000	42,000	34,000	—	—
New Jersey	88,000	57,000	46,000	38,000	10,000
Maryland	118,000	95,000	83,000	—	—
District of Columbia	13,000	13,000	12,000	—	—
Illinois	39,000	29,000	20,000	10,000	5,000
Total	472,000	333,000	268,000	113,000	41,000

Discussion of Critical Accounting Policies

In the ordinary course of business, we have made a number of estimates and assumptions relating to the reporting of results of operations and financial condition in the preparation of our financial statements in conformity with accounting principles generally accepted in the United States of America. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances. Actual results could differ significantly from those estimates under different assumptions and conditions. We believe that the following discussion addresses our most critical accounting policies, which are those that are most important to the portrayal of our financial condition and results and require management’s most difficult, subjective and complex judgments, often as a result of the need to make estimates about the effect of matters that are inherently uncertain.

Revenue recognition

We generate revenues primarily from premiums we receive from the states in which we operate to provide health benefits to our members. 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 consistent with industry standards. We also generate revenues from investments. We generally receive a fixed premium per member per month to provide health care benefits to our members pursuant to our contracts with four states and the District of Columbia.

Estimating health benefits expense and claims payable

Our results of operations depend on our ability to effectively manage expenses related to health benefits as well as our ability to accurately predict costs incurred in recording the amounts in our consolidated financial statements. Expenses related to health benefits have two components: direct medical expenses and medically related administrative costs. Direct medical expenses include fees paid to hospitals, physicians and providers of ancillary medical services, such as pharmacy, laboratory, radiology, dental and vision. Medically related administrative costs include expenses related to services such as health promotion, quality assurance, case management, disease management and 24-hour on-call nurses. Direct medical expenses also include estimates of medical expenses incurred but not yet reported, or IBNR. For the year ended December 31, 2001, approximately 84.8% of our direct medical payments related to fees paid on a fee-for-service basis to our primary care

24

physicians, specialist physicians and ancillary providers. The balance related to fees paid on a capitation, or per member, basis. Primary care and specialist physicians not paid on a capitated basis are paid on a maximum allowable fee schedule set forth in the contracts with our providers. We reimburse hospitals on a negotiated fixed dollar amount per day or an agreed upon percent of their standard charges. In Maryland, the state sets the amount reimbursed to hospitals.

Monthly, we estimate our IBNR based on a number of factors, including authorization data and prior claims experience. Authorization data is information captured in the Company’s medical management system, which identifies services requested by providers or members and approved by medical management. The medical cost related to these authorizations is estimated by pricing the approved services using contractual or historical amounts adjusted for known variables such as historical claims trends. These estimated costs are included as a component of IBNR. 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 claims payment patterns, membership, products, and authorization trends. In addition, claims processing costs are accrued based on an estimate of the costs necessary to process unpaid claims. These estimates are adjusted as more information becomes available, and as adjustments are made, differences are included in current operations. We utilize the services of independent actuarial consultants who are contracted to review our estimates quarterly. The balance of claims payable is significant in relation to the consolidated financial statements. Judgements are made based on knowledge and experience about past and current events and assumptions about future events. There is a likelihood that actual results could be materially different if different assumptions or conditions prevail.

Our other operating expenses include expenses related to selling, general and administrative costs, interest, and depreciation and amortization. Selling, general and administrative costs include direct and indirect expenses. Direct expenses are those incurred to ensure delivery of services to our members. Most of these services involve replicable processes that can be delivered to all of our health plans more efficiently and effectively from our Virginia service center. The major centralized functions that are considered to generate direct expenses are member and provider services, claims processing and enrollment. Staffing in these areas is directly related to the number of members we are managing. Direct costs are also incurred in the field at the local health plan. Indirect expenses are generated by corporate governance for strategic direction, quality assurance, medical oversight, national branding, product development, mergers and acquisitions, legal, regulatory compliance, human resources, information technology, finance and network development. These functions are located in Virginia and the costs associated with them do not increase directly as membership increases.

Results of Operations

The following table sets forth selected operating ratios for each year in the three year period ending December 31, 2001. All ratios, with the exception of the health benefits ratio, are shown as a percentage of total revenues.

	2001		2000		1999
Premium revenue	98.8	%	98.0	%	98.4	%
Investment income	1.2		2.0		1.6
Total revenues	100.0	%	100.0	%	100.0	%
Health benefits(1)	80.5	%	81.0	%	85.2	%
Selling, general and administrative expenses	12.3		12.9		13.3
Income before income taxes	7.0		6.6		1.8
Income tax (expense) benefit	(3.0	)	(2.6	)	1.0
Net income	4.0	%	4.0	%	2.8	%

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

25

Year Ended December 31, 2001 Compared to the Year Ended December 31, 2000

Revenues

Premium revenue for the year ended December 31, 2001 increased $234.1 million, or 36.2% to $880.5 million from $646.4 million for the year ended December 31, 2000. The increase was principally due to internal growth in overall membership and to a lesser extent, the acquisition of the Medicaid contracts and related assets of Humana’s Houston, Texas business in August 2001 (15,000 members). Total membership increased 41.7% to 472,000 as of December 31, 2001 from 333,000 as of December 31, 2000.

Investment income decreased $2.4 million to $10.7 million for the year ended December 31, 2001. The decrease in investment income is primarily due to the continued decline in market interest rates partially offset by an increase in overall cash levels. Cash levels have primarily increased due to proceeds from our initial public offering and increases in the amount of premiums received versus the timing of the payment of the related health benefits.

Health Benefits

Expenses relating to health benefits for the year ended December 31, 2001 increased $185.4 million, or 35.4% to $709.0 million from $523.6 million for the year ended December 31, 2000. The increase was primarily due to the increase in membership. The health benefits ratio, as a percentage of premium revenue, for the year ended December 31, 2001 was 80.5% compared to 81.0% in 2000. The decrease in the health benefits ratio is primarily the result of a favorable impact of shifting high cost cases from managed care to fee-for-service in Illinois ($2.8 million expense savings related to health benefits), an increase in revenues resulting from the receipt of an HIV/AIDS supplemental payment from the State of Maryland as well as a change in our membership by product to include more SCHIP members than in prior years. This favorable impact was substantially offset by a normal incidence of respiratory conditions and influenza in the first quarter of 2001 as compared to a lower incidence in the first quarter of 2000.

Selling, general and administrative expenses

Selling, general and administrative expenses increased $24.7 million to $109.8 million for the year ended December 31, 2001 compared to $85.1 million in 2000. The increase in selling, general and administrative expenses was primarily due to an increase in wages and related expenses for additional staff to support our increased membership. Our selling, general and administrative expense ratio to revenue was 12.3% and 12.9% for the year ended December 31, 2001 and 2000, respectively. The decrease in the ratio was a result of economies of scale and of fixed costs being spread over a larger membership base.

Interest expense

Interest expense was $763,000 and $781,000 for the years ended December 31, 2001 and 2000, respectively.

Provision for income taxes

Income tax expense for 2001 was $26.1 million with an effective tax rate of 42.0% as compared to $17.7 million in 2000 and an effective tax rate of 40.4%. The effective tax rate increased in 2001 due primarily to an increase in non-deductible expenses.

Net income

Net income for 2001 was $36.1 million, or $2.08 per diluted common share, compared to $26.1 million, or $1.55 per diluted common share for 2000.

26

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

Revenues

Premium revenue in 2000 increased 64.8% to $646.4 million from $392.3 million in 1999. The $254.1 million increase was due to a 24.3% increase in membership. Membership increased to 333,000 as of December 31, 2000 from 268,000 as of December 31, 1999. The increase in premium revenue in 2000 was due to the inclusion for the full year of premium revenues from the acquisition of the Medicaid contracts and related assets from Prudential Health Care in June and August 1999 ($109.0 million in premium revenue) and the commencement of service in Dallas in July 1999 ($48.8 million in premium revenue). The balance of the increase was due to internal membership growth.

Investment income increased 104.7% to $13.1 million in 2000 from $6.4 million in 1999. The $6.7 million increase was due to a 32.2% increase in cash and investments as of December 31, 2000 compared to December 31, 1999. The higher cash levels resulted from increases in the amount of premiums received during 2000 versus the timing of the payment of the related health benefits.

Health benefits

Expenses relating to health benefits increased 56.7% to $523.6 million in 2000 from $334.2 million in 1999. The $189.4 million increase was primarily due to the 24.3% increase in membership. The health benefits ratio in 2000 decreased to 81.0% from 85.2% in 1999. The year ended December 31, 2000 reflects a $1.6 million decrease in health benefit expenses due to a provider contract amendment which, among other things, more equitably allocates the risk among the parties.

The incidence of respiratory conditions and influenza reported in the first quarter of 2000 was less than in the first quarter of 1999. This reduction, together with the contract amendment described above and other factors, contributed to the 4.2% improvement in our health benefits ratio in 2000 from 1999. We consider the provider contract amendment and the reduced incidence of respiratory conditions and influenza to be atypical.

Selling, general and administrative expenses

Selling, general and administrative expenses in 2000 increased 61.1% to $85.1 million from $52.8 million in 1999. The $32.3 million increase was primarily due to an increase in wages and related expenses of $17.5 million for additional staff, and fees for additional third party contractors of $9.6 million to support our increased membership. The increase was also due in part to an increase in the experience rebate expense to $3.9 million where our profits exceeded specified levels in Texas for the contract period commencing September 1, 1999. The experience rebate payable is estimated and recorded monthly on a contract-to-date basis. However, our selling, general and administrative expenses ratio decreased to 12.9% in 2000 from 13.3% for 1999. This decrease in the ratio was a result of economies of scale and of fixed costs being spread over a larger membership base.

Interest expense

Interest expense decreased 3.7% to $781,000 in 2000 from $811,000 in 1999. This $30,000 decrease was due to the repayment of $1.8 million of our long-term debt. Our long-term debt, including the current portion, was $6.2 million as of December 31, 2000 compared to $8.0 million as of December 31, 1999.

Provision for income taxes

In 2000, we recorded $17.7 million of income tax expense as a result of an effective 40.4% tax rate compared to a tax benefit of $4.1 million in 1999.

27

Net income

Net income for 2000 was $26.1 million, or $1.55 per diluted common share, compared to $11.3 million, or $0.66 per diluted common share for 1999.

Selected Quarterly Operating Results

The following table sets forth unaudited quarterly results of our operations for each of the quarters in the years ended December 31, 2001 and 2000. This information has been prepared on the same basis as the consolidated financial statements and, in the opinion of our management, reflects adjustments, consisting only of normal recurring adjustments, necessary for a fair presentation of the information for the periods presented. The unaudited quarterly operating results are not necessarily indicative of future results of operations. This data should be read in conjunction with our consolidated financial statements and related notes included in this prospectus.

	Three Months Ended
2001	March 31		June 30		September 30		December 31
Premium revenue	$	185,685	$	209,145	$	236,642	$	249,038
Investment income		3,321		2,784		2,445		2,114
Health benefits		150,692		163,703		192,485		202,154
Selling, general and administrative expenses		24,098		28,112		27,442		30,170
Income before income taxes		12,001		17,594		16,543		16,069
	Three Months Ended
2000	March 31		June 30		September 30		December 31
Premium revenue	$	147,654	$	157,478	$	166,061	$	175,215
Investment income		2,710		3,089		3,640		3,668
Health benefits		118,332		125,768		135,038		144,428
Selling, general and administrative expenses		17,088		23,409		22,270		22,347
Income before income taxes		13,383		9,656		10,590		10,150

Liquidity and Capital Resources

Our primary sources of liquidity are cash and cash equivalents, short and long-term investments, cash flow from operations and borrowings under our credit facility. As of December 31, 2001 we had cash and cash equivalents of $183.9 million, short and long-term investments of $117.9 million and restricted investments on deposit for licensure of $18.5 million. As of December 31, 2001, there were no amounts outstanding under our credit facility.

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

Cash from operations was $70.5 million for the year ended December 31, 2001 compared to $42.1 million for the year ended December 31, 2000. The increase in cash from operations is primarily due to increases in membership, improvements to operating margins and the impact of a prepayment of revenue received in 1999 attributable to operations in 2000. As of December 31, 2001, we had working capital of $59.8 million as compared to $36.7 million at December 31, 2000. Our minimum lease payments under all noncancelable operating leases are $3.8 million for 2002.

28

Cash used in investing activities increased to $78.1 million for the year ended December 31, 2001 from $8.4 million for the year ended December 31, 2000. The increase in cash used in investing activities was primarily due to the net purchases of held-to-maturity investments of $61.3 million from the net proceeds of the offering and purchases of property and equipment and software of $4.5 million and $4.1 million, respectively. Our property and equipment and software budgets are $12.5 million and $10.2 million for 2002.

Our investment policies are designed to provide liquidity, preserve capital and maximize total return on invested assets. As of December 31, 2001, our investment portfolio consisted primarily of fixed-income securities. The average maturity is under nine months. We utilize 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 as of December 31, 2001 was approximately 2.47%.

Effective August 1, 2001, the Company purchased certain assets of Humana’s Houston, Texas Medicaid line of business for approximately $1.0 million. The assets purchased primarily consisted of Humana’s rights to provide managed care services to its Medicaid members.

On November 15, 2001, the Company purchased certain assets of MethodistCare, Inc.’s (‘‘MethodistCare’’) Houston, Texas Medicaid line of business for approximately $1.6 million. The assets purchased primarily consisted of MethodistCare’s rights to provide managed care services to its Medicaid members. The acquisition took effect January 1, 2002.

Cash provided by financing activities was $58.9 million for the year ended December 31, 2001 compared to cash used in financing activities of $1.5 million for the year ended December 31, 2000. Cash provided by financing activities consisted primarily of proceeds from the offering partially offset by principal payments on our long-term debt facility and the redemption of our Series E preferred stock.

On December 14, 2001, we entered into a $60 million revolving credit facility, which may be increased to $75 million, with Bank of America, N.A., UBS Warburg LLC and CIBC World Markets Corp. The proceeds of the facility will be available for general corporate purposes, including, without limitation, permitted acquisitions. The facility will accrue interest at one of the following rates, at our option: LIBOR plus the applicable margin or an alternate bank rate plus the applicable margin. The applicable margin for LIBOR borrowings is between 2.00% and 2.50% and the applicable margin for alternate base rate borrowings is between 1.00% and 1.50%. The applicable margin will vary depending on our leverage ratio. The facility is secured by substantially all of the assets of AMERIGROUP Corporation, including the stock of its subsidiaries. There is a commitment fee of 0.50% on the unused portion of the credit facility. The credit facility matures December 14, 2004. As of December 31, 2001, there were no amounts outstanding under the credit facility.

Our subsidiaries are required to maintain minimum statutory capital requirements prescribed by various jurisdictions, including the departments of insurance in each of the states in which we operate. As of December 31, 2001, our subsidiaries were in compliance with all minimum statutory capital requirements. We believe that we will continue to be in compliance with these requirements at least through the end of 2002.

At December 31, 2001, we served members who received health care benefits through nine contracts with the regulatory entities in the jurisdictions in which we operate, five of which individually accounted for 10% or more of our revenues for the year ended December 31, 2001, with the largest of these contracts representing approximately 30% of our revenues. If any of our contracts were not renewed or were terminated for cause or if we were to lose a contract in a re-bidding process, our business would suffer.

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

29

Recent Accounting Pronouncements

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

In July 2001, Statement of Financial Accounting Standards No. 142, Goodwill and Other Intangible Assets (SFAS No. 142), was issued which requires that goodwill and intangible assets with indefinite useful lives no longer be amortized, but instead tested annually for impairment. We have adopted SFAS No. 142 and have determined that our goodwill and intangible assets are not impaired. As of December 31, 2001, we had unamortized goodwill in the amount of approximately $19.4 million, which will be subject to the transition provisions of SFAS Nos. 141 and 142. Amortization expense was approximately $1.0 million for the year ended December 31, 2001.

Regulatory Capital and Dividend Restrictions

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

As of December 31, 2001, our subsidiaries had aggregate statutory capital and surplus of approximately $58.0 million, compared with the required minimum aggregate statutory capital and surplus requirements of approximately $20.0 million.

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

Inflation

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

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

Compliance Costs

The new federal and state regulations promulgated under HIPAA mandating uniform standards for electronic transactions and confidentiality requirements of patient information are currently unsettled, making

30

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 approved. We have completed an assessment of the programs and systems that we will need to implement in order to comply with the new regulations. In order to comply with the regulatory requirements, we will be required to employ additional or different programs and systems. We expect to spend approximately $5 million on HIPAA compliance in 2002. Further, compliance with these regulations will 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.

Subsequent Events

In February 2002, Uwe E. Reinhardt, Ph.D. was appointed to fill a vacant seat on our board of directors. Dr. Reinhardt fills the vacancy created by the resignation of Kay Coles James. Ms. James resigned from our board of directors in order to accept the position of Director of Office of Personnel Management of the Federal Government, reporting directly to President George W. Bush. Dr. Reinhardt will join the board as a Class III director and his term will expire at our annual meeting in 2004.

31

ITEM 7A.     Quantitative and Qualitative Disclosures About Market Risk

As of December 31, 2001 we had short-term investments of $55.2 million and long-term investments of $62.7 million. These investments consist of highly liquid investments with maturities between three and twenty-four months. These investments are subject to interest rate risk and will decrease in value if market rates increase. We have the ability to hold these investments to maturity, and as a result, we would not expect the value of these investments to decline significantly as a result of a sudden change in market interest rates. Declines in interest rates over time will reduce our investment income.

RISK FACTORS

Risks related to being a regulated entity

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. These laws and regulations are generally intended to benefit and protect providers and health plan members rather than stockholders. Congress is currently considering legislation commonly known as the Patients’ Bill of Rights. We cannot predict what impact such legislation, if adopted, would have on our business. 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 change how we do business,

• restrict revenue and enrollment growth,

• increase our health care and administrative costs,

• impose additional capital requirements, and

• increase or change our liability.

If state regulators do not approve payments of dividends and distributions by our subsidiaries to us, it may negatively affect our business strategy.

We principally operate through our health plan subsidiaries. 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 the regulators were to deny our subsidiaries’ requests 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.

Regulations may limit the extent to which we can increase our profits as a percentage of revenues.

Our New Jersey and Maryland subsidiaries are subject to minimum medical expense levels as a percentage of premium revenue. In New Jersey, contractual sanctions may be imposed if these levels are not met. In addition, our Texas plans are required to pay a rebate to the state in the event profits exceed established levels. These regulatory requirements, changes in these requirements and additional requirements by our other regulators may limit our ability to increase our overall profits as a percentage of revenues, which may harm our operating results. We have been required, and may in the future be required, to make payments to the states as a result of not meeting these expense and profit levels.

Our failure to comply with government regulations could subject us to civil and criminal penalties and limitations on our profitability.

Violation of the laws or regulations governing our operations could result in the imposition of sanctions, the cancellation of our contracts to provide services, or in the extreme case, the suspension or revocation of our

32

licenses. For example, in two markets in which we operate we are required to spend a minimum percentage of our premium revenue on medical expenses. In one market, if we fail to comply with this requirement, we could be required to pay monetary damages. Additionally, we could be required to file a corrective plan of action with the state and we could be subject to further fines and additional corrective measures if we did not comply with the corrective plan of action. In the other market, our failure to comply could affect future rate determinations. These regulations may limit the profits we can obtain.

In the past we have been subject to sanctions as a result of violations of marketing regulations and timeliness of payment requirements. For example, in August 2000, our Illinois plan was notified by the Illinois Department of Public Aid, or IDPA, that its Office of Inspector General had commenced an investigation of allegations of misrepresentation and fraud by marketing representatives employed by our plan. We developed a corrective action plan to identify and correct past marketing improprieties and to reduce the likelihood of future violations, which has been approved by IDPA and is being implemented. Under our contract with IDPA, sanctions could be imposed, ranging from $5,000 to $25,000, and/or our right to enroll members could be suspended for some period of time, if the allegations are substantiated. We do not know if we will be informed as to when the investigation has been completed.

While we have not been subject to any fines or violations that were material, we cannot assure you that we will not become subject to material fines or other sanctions in the future. If we became subject to material fines or if other sanctions or other corrective actions were imposed upon us, our ability to continue to operate our business could be materially and adversely affected.

The State of Maryland recently adopted a statute that requires managed care organizations, or MCOs, to develop plans to guard against the financial insolvency of providers within the MCO’s network who accept financial risk from the MCO. These insolvency plans must be filed with and approved by the Commissioner of Insurance. Our Maryland health plan is engaged in the filing and approval process, which at this time is not yet complete. In the event a plan is ultimately disapproved, we could be required to terminate or restructure the relationship with the provider or face penalties and sanctions.

On October 12, 2001, we responded to a Civil Investigative Demand, or CID, of the HMO industry by the Office of the Attorney General of the State of Texas relating to processing of provider claims. We understand from the Office of the Attorney General that responses were required from the nine largest HMOs in Texas, of which we are the ninth. The other eight are HMOs that primarily provide commercial products. The CID is being conducted in connection with allegations of unfair contracting, delegating and payment practices and violations of the Texas Deceptive Trade Practices—Consumer Protection Act and article 21.21 of the Texas Insurance Code by HMOs. In meetings with representatives of the Attorney General, they agreed that our required response would be limited to providing information relating to our payment of hospital claims only. In addition, based upon our discussions with the Office of the Attorney General, it is our understanding that we are not currently the target of any investigation by that Office. On October 19, 2001 we filed our response to the CID including all information that we believed was required to be produced. On October 26, 2001, we received a request from the Office of the Attorney General that we clarify and supplement certain of our responses. We responded with a second filing on December 21, 2001. The Office of the Attorney General could request additional information or clarification which could be costly and time consuming for us to produce.

The Health Insurance Portability and Accountability Act of 1996, or HIPAA, broadened the scope of fraud and abuse laws applicable to health care companies. HIPAA created civil penalties for, among other things, billing for medically unnecessary goods or services. HIPAA establishes 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 health records privacy standards set forth in the regulation. The Department of Health and Human Services’, or HHS’, press release related to the new regulation calls on Congress to enact legislation to “fortify” penalties and to create a private right of action under HIPAA. The preamble to the new privacy regulation indicates that HHS intends to issue an enforcement rule

33

related to the Administrative Simplification provisions of HIPAA. Enforcement of the privacy regulations is handled under the office of Civil Rights.

The federal government has enacted, and state governments are enacting, other fraud and abuse laws as well. Our failure to comply with HIPAA or these other laws could result in criminal or civil penalties and exclusion from Medicaid or other governmental health care programs and could lead to the revocation of our licenses. These penalties or exclusions, were they to occur, would negatively impact our ability to operate our business.

Compliance with new federal and state rules and regulations may require us to make unanticipated expenditures.

In August 2000, HHS issued a new regulation under HIPAA requiring the use of uniform electronic data transmission standards for health care claims and payment transactions submitted or received electronically. We are required to comply with the new regulation by October 16, 2002, although Texas and New Jersey have indicated that they may impose an earlier compliance deadline. Also in August 2000, 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 which became effective on April 14, 2001. The Bush administration announced that the regulation may be revised in the future. If the regulation is not revised, compliance with it will be required by April 2003. However, states may seek exemptions from the requirements of the privacy regulation for state laws that impose stricter privacy standards with more timely compliance requirements.

In January 2001, the Centers for Medicare & Medicaid Services, or CMS (then the Health Care Financing Administration), published new federal regulations regarding Medicaid managed care. Since then, CMS has delayed the effective date of these regulations until August 16, 2002, and, on August 20, 2001, published new proposed regulations that would replace the January regulations in their entirety. If enacted, the proposed regulations would implement 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 certain new patient protections for Medicaid managed care enrollees, and require states’ rates to meet new actuarial soundness requirements.

The Bush administration’s review of the HIPAA and other newly published regulations, the states’ ability to promulgate stricter rules, and uncertainty regarding many aspects of the regulations make compliance with the relatively new regulatory landscape difficult. Our existing programs and systems will not enable us to comply in all respects with these new regulations. We have completed an assessment of the programs and systems that we will need to implement in order to comply with the new regulations. In order to comply with the regulatory requirements, we will be required to employ additional or different programs and systems. We expect to spend approximately $5 million on HIPAA compliance in 2002. Further, compliance with these pervasive regulations will 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 costs to comply with the new regulations could have a material adverse effect on our business.

Changes in health care law may reduce our profitability.

Numerous proposals relating to changes in health care 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. Although some of the recent changes in government regulations, such as the

34

removal of the requirements on the enrollment mix between commercial and public sector membership, have encouraged managed care participation in public sector programs, we are unable to predict whether new laws or proposals will continue to favor or hinder the growth of managed health care.

A recent example is state and federal legislation which would enable physicians to collectively bargain with managed health care organizations. The legislation, as currently proposed, generally contains an exemption for public sector managed health care organizations. If legislation of this type were passed without this 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, nor the effect which they might have on us. Legislation or regulations which 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.

Reductions in Medicaid funding by the states could substantially reduce our profitability.

Most of our revenues come from state government Medicaid premiums. The base premium rate paid by each state differs, depending on a combination of various factors such as defined upper payment limits, a member’s health status, age, sex, 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 health care costs under such 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 in the event of unavailability of state funds. In some jurisdictions, such cancellation may be immediate and in other jurisdictions a notice period is required.

If state governments do not renew our contracts with them, our business will suffer.

At December 31, 2001, we served members who received health care benefits through nine contracts with the regulatory entities in the jurisdictions in which we operate. Five of these contracts individually accounted for 10% or more of our revenues for the year ended December 31, 2001, with the largest of these contracts representing approximately 30% of our revenues. Some of our contracts are subject to a re-bidding process. For example, we are subject to a re-bidding process in each of our three Texas markets every six years. The first re-bidding in our Texas markets is scheduled to occur in 2002. Also, the District of Columbia has put its contracts out to bid. We submitted our bid to the District of Columbia on December 27, 2000 and entered into contract discussions with the District in March 2001. The District’s contract discussions with all plans are ongoing. All current contracts with the District have been extended through April 30, 2002. If any of our contracts were not renewed or were terminated for cause or if we were to lose a contract in a re-bidding process, our business would suffer. Most of our contracts expire in 2002 and have renewal provisions. Termination or non-renewal of any one contract could materially impact our revenues and operating results.

If a state fails to renew its federal waiver application for mandated Medicaid enrollment into managed care or such application is denied, our membership in that state will likely decrease.

States may only mandate Medicaid enrollment into managed care under federal waivers or demonstrations. Waivers and programs under demonstrations are approved for two-year periods and can be renewed on an ongoing basis if the state applies. We have no control over this renewal process. If a state does not renew its mandated program or the federal government denies the state’s application for renewal, our business would suffer as a result of a likely decrease in membership.

35

Our inability to participate in SCHIP programs may limit our growth rate.

SCHIP is a relatively new federal initiative designed to provide coverage for low-income children not otherwise covered by Medicaid or other insurance programs. Most states have adopted SCHIP programs but are just beginning to implement them. The programs vary significantly from state to state and it is not clear how they will be implemented. 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.

Risks related to our business

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

Most 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 period to provide health care services as established by the state governments. We have less control over costs related to the provision of health care than we do over our selling, general and administrative expenses. Historically, our expenses related to health benefits as a percentage of premium revenue have fluctuated. For example, our expenses related to health benefits were 80.5% of our premium revenue in 2001, and 81.0% of our premium revenue in 2000. If premiums are not increased and expenses related to health benefits rise, our earnings could be impacted negatively. In addition, our actual health benefits costs may exceed our estimated costs. The premiums we receive under our current contracts may therefore be inadequate to cover all claims, which may cause our profits to decline.

Maryland sets the rates which must be paid to hospitals by all payors. It is possible for the state to increase rates payable to the hospitals without granting a corresponding increase in premiums to us. If this were to occur, or if other states were to take similar actions, our profitability would be harmed.

Our inability to manage medical costs effectively would reduce our profitability.

Our profitability depends, to a significant degree, on our ability to predict and effectively manage medical costs. Changes in health care regulations and practices, level of use of health care 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 health care services. Although we have been able to manage medical costs through a variety of techniques, including various payment methods to primary care physicians and other providers, advance approval for hospital services and referral requirements, medical management and quality management programs, our information systems and reinsurance arrangements, we may not be able to continue to manage costs effectively in the future. It is possible that claims previously denied and claims previously paid to non-network providers will be appealed and subsequently reprocessed at different amounts. This would result in an adjustment to claims expense. If our costs for medical services increase, our profits could be reduced, or we may not remain profitable.

Our limited ability to predict our incurred medical expenses accurately could negatively impact our reported results.

Our medical expenses include estimates of IBNR. We estimate our IBNR medical expenses based on a number of factors, including prior claims experience, maturity of markets, complexity of products and stability of provider networks. 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 utilize the services of independent actuaries who are contracted on a regular basis to calculate and review the adequacy of our medical liabilities, in addition to using our internal resources. We cannot be sure that our IBNR estimates are adequate or that adjustments to such IBNR estimates will not harm our results of operations. Further, our inability to accurately estimate IBNR may also affect our ability to take timely corrective actions, further exacerbating the extent of the harm on our results.

36

We maintain reinsurance to protect us against severe or catastrophic medical claims, but we cannot assure you that such reinsurance coverage will be adequate or available to us in the future or that the cost of such reinsurance will not limit our ability to obtain it.

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, of the $254.1 million increase in our premium revenue from 1999 to 2000, approximately $109.0 million was attributable to our acquisition of contract rights and related assets from Prudential Health Care. Although we cannot predict our rate of growth as the result of acquisitions with any accuracy, we believe that acquisitions similar in nature to those we have historically executed will be important to our growth strategy. Many of the other potential purchasers of these assets have greater financial resources than we have. In addition, many of the sellers are interested in either (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 just the assets of the ongoing business. Therefore, we cannot be sure that we will be able to complete acquisitions on terms favorable to us or that we can obtain the necessary financing for these acquisitions.

We are currently evaluating proposals to acquire additional businesses. These proposals are at various stages of consideration and we may enter into letters of intent or other agreements relating to these proposals at any time. However, we cannot predict when or whether we will actually acquire these businesses.

We are generally 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, although we may already operate in a state in which we acquire a new business, we will be required to obtain additional regulatory approval if, as a result of the acquisition, we will operate in an area of the state in which we did not operate previously. There can be no assurance that we would be able to comply with these regulatory requirements for an acquisition in a timely manner, or at all.

Our current credit facility imposes certain restrictions on acquisitions. We may not be able to meet these restrictions.

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

• additional employees who are not familiar with our operations,

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

• existing members, who may decide to switch to another health care provider, and

• disparate information and recordkeeping systems.

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. There can be no assurance that incurring expenses to acquire a business will result in the acquisition being consummated. These expenses could impact our selling, general and administrative expense ratio. If we are unable to effectively execute our acquisition strategy, our future growth will suffer and our results of operations could be harmed.

Failure of a new business of ours would negatively impact 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 be able to obtain a state contract and process claims. If we were unsuccessful in

37

obtaining the necessary license, winning the bid to provide service or attracting members in numbers sufficient to cover our costs, the new business 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. The loss of the costs associated with starting up the business could have a significant impact on our results of operations.

Ineffective management of our growth may negatively affect our results of operations, financial condition and business.

We have experienced rapid growth. In 1996, our first full year of operations, we had $22.9 million of premium revenue. In 2001, we had $880.5 million in premium revenue. This increase represents a compound annual growth rate of 107.4%.

Depending on acquisition and other opportunities, we expect to continue to grow rapidly. Continued growth could place a significant strain on our management and on other resources. We anticipate that continued growth, if any, will require us to continue to recruit, hire, train and retain a substantial number of new and highly-skilled medical, administrative, information technology, finance and other support personnel. Our ability to compete effectively depends upon our ability to implement and improve operational, financial and management information systems on a timely basis and to expand, train, motivate and manage our work force. If we continue to experience rapid growth, our personnel, systems, procedures and controls may be inadequate to support our operations, and our management may fail to anticipate adequately all demands that growth will place on our resources. In addition, due to the initial costs incurred upon the acquisition of new businesses, rapid growth could adversely affect our short-term profitability. If we are unable to manage growth effectively, our business, operating results and financial condition could suffer.

We are subject to competition which impacts our ability to increase our penetration of the markets that we service.

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. Some of the health plans with which we compete have substantially larger enrollments, greater financial and other resources and offer a broader scope of products than we do.

While many states mandate health plan enrollment for Medicaid eligible participants, the programs are voluntary in other states, such as Illinois. Subject to limited exceptions by federally approved state applications, the federal government requires that there be choice for Medicaid recipients among managed care programs. Voluntary programs and mandated competition will impact our ability to increase our market share.

In addition, in most states in which we operate we are not allowed to market directly to potential members, and therefore, we rely on creating name brand recognition through our community-based programs. Where we have only recently entered a market or compete with health plans much larger than we are, we may be at a competitive disadvantage unless and until our community-based programs and other promotional activities create brand awareness.

Restrictions and covenants in our new credit facility may limit our ability to take actions.

During 2001, the Company entered into a Credit and Guaranty Agreement with three banks to obtain a $60 million revolving credit facility, which may be increased to $75 million upon syndication. The credit facility is secured by the assets of AMERIGROUP Corporation and by the common stock of its wholly-owned subsidiaries. There are currently no draws on the facility.

38

Events beyond our control, such as prevailing economic conditions and changes in the competitive environment, could impair our operating performance, which could affect our ability to comply with the terms of the credit facility. Breaching any of the covenants or restrictions could result in the unavailability of the facility or a default under the credit facility. We cannot assure you that our assets or cash flow will be sufficient to fully repay outstanding borrowings under the credit facility or that we would be able to restructure such indebtedness on terms favorable to us. If we were unable to repay, refinance or restructure our indebtedness under the credit facility, the lenders could proceed against the collateral securing the indebtedness.

The loss of the services of our Chairman of the Board of Directors and Chief Executive Officer would harm our operations.

We are highly dependent on the efforts of Mr. Jeffrey McWaters, our Chairman of the Board of Directors and Chief Executive Officer. Mr. McWaters, as our founder, has been instrumental in developing our mission and forging our relationships with our government client-customers and the communities we serve. We cannot assure you that we will be able to retain Mr. McWaters or attract a suitable replacement or additional personnel if required. We have an employment agreement with Mr. McWaters with an initial expiration of October 2002 with automatic one year renewals from that point forward. Pursuant to this agreement, if Mr. McWaters were to voluntarily terminate his employment with us, he would lose his entitlement to severance benefits. We cannot be sure that the employment agreement creates sufficient incentives for Mr. McWaters to continue his employment with us. While we believe that we could find a replacement for Mr. McWaters if he were to leave, the loss of his services could harm our operations.

Our inability to maintain satisfactory relationships with our provider networks would harm our profitability.

Our profitability depends, in large part, upon our ability to contract favorably with hospitals, physicians and other health care providers. Our provider arrangements with our primary care physicians and specialists usually are for one- to two-year periods and automatically renew for successive one year terms, subject to termination for cause by us based on provider conduct or other appropriate reasons. The contracts generally may be cancelled by either party upon 90 to 120 days prior written notice. Our contracts with hospitals are usually for one- to two-year periods and automatically renew for successive one year periods, subject to termination for cause due to provider misconduct or other appropriate reasons. Generally, our hospital contracts may be canceled by either party without cause on 90 to 150 days prior written notice. There can be no assurance that we will be able to continue to renew such 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. Although we have established long-term relationships with many of our providers, 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 are dependent on our relationship with Cook Children’s Physician Network. Any material modification or discontinuation of this relationship could harm our results of operations.

Cook Children’s Physician Network is our exclusive provider network for pediatric services in Fort Worth, Texas, where we had approximately 50,000 members as of December 2001. If the terms of our contract with Cook Children’s were to change significantly or Cook Children’s were to terminate its agreement with us, our costs to provide health care in this area could increase. We could lose members if Cook Children’s chose to associate with another HMO or if it obtained its own contract with the state to provide health care services to Medicaid recipients.

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 factors may adversely affect our ability to market our services, require us to change our services and increase the

39

regulatory burdens under which we operate, further increasing the costs of doing business and adversely affecting our operating results.

We may be subject to claims relating to medical malpractice, which could cause us to incur significant expenses.

Our providers and employees involved in medical care decisions may be exposed to the risk of medical malpractice claims. In addition, states are beginning to adopt 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.

In addition, we may be subject to other litigation that may adversely affect our business or results of operations. We maintain errors and omissions insurance and such other lines of coverage as we believe is reasonable in light of our experience to date. However, this insurance may not be sufficient or available at a reasonable cost to protect us from liabilities which might adversely affect our business or results of operations. Even if any claims brought against us were unsuccessful or without merit, we would still have to defend ourselves against such claims. Any such defenses may be time-consuming and costly, and may distract our management’s attention. As a result, we may incur significant expenses and may be unable to effectively operate our business.

Changes in the number of Medicaid eligibles as a result of state and federal budgets decreasing or not increasing, or during a period of general economic improvement, could cause our operating results to suffer.

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. However, during such economic downturns, state and federal budgets could decrease, causing states to attempt to cut health care programs, benefits and rates. If this were to happen while our membership was increasing, our results of operations could suffer. Conversely, the number of persons eligible to receive Medicaid benefits may grow more slowly or even decline if economic conditions improve, thereby causing our operating results to suffer.

Our inability to integrate and manage our information systems effectively could disrupt our operations.

Our operations are significantly dependent 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.

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 are continually upgrading and expanding 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.

40

INDEPENDENT AUDITORS’ REPORT

The Board of Directors

AMERIGROUP Corporation and Subsidiaries:

We have audited the accompanying consolidated balance sheets of AMERIGROUP Corporation and subsidiaries as of December 31, 2001 and 2000, and the related consolidated income statements and statements of stockholders’ equity (deficit) and cash flows for each of the years in the three-year period ended December 31, 2001. These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.

We conducted our audits in accordance with auditing standards generally accepted in the United States of America. 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 statement 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 AMERIGROUP Corporation and subsidiaries as of December 31, 2001 and 2000, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 2001 in conformity with accounting principles generally accepted in the United States of America.

As discussed in note 1 to the consolidated financial statements, effective July 1, 2001, AMERIGROUP Corporation adopted the provisions of Statement of Financial Accounting Standards No. 141, “Business Combinations” and certain provisions of Statement of Financial Accounting Standards No. 142, “Goodwill and Other Intangible Assets”, as required for goodwill resulting from business combinations consummated after June 30, 2001.

February 8, 2002

Norfolk, Virginia

/s/ KPMG LLP

41

ITEM 8.     Financial Statements and Supplementary Data

AMERIGROUP CORPORATION AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

DECEMBER 31, 2001 and 2000

(Dollars in thousands)

	2001			2000
Assets
Current assets:
Cash and cash equivalents	$	183,900		$	132,662
Short-term investments		55,230			56,663
Premium receivables		29,301			15,722
Deferred income taxes		4,518			4,575
Prepaid expenses and other current assets		7,416			7,162
Total current assets		280,365			216,784
Property and equipment, net		15,014			10,064
Software, net of accumulated amortization of $4,738 and $1,775 at December 31, 2001 and 2000, respectively		9,581			9,139
Goodwill, net of accumulated amortization of $5,873 and $4,896 at December 31, 2001 and 2000, respectively		19,407			17,767
Long-term investments		62,707			—
Investments on deposit for licensure.		18,501			12,864
Other long-term assets		1,367			1,508
	$	406,942		$	268,126
Liabilities, Redeemable Preferred Stock and Stockholders’ Equity
Current liabilities:
Claims payable	$	180,346		$	150,462
Accounts payable		6,295			5,281
Accrued expenses and other current liabilities		33,918			22,294
Current portion of long-term debt		—			2,000
Total current liabilities		220,559			180,037
Long-term debt		—			4,177
Deferred income taxes and other long-term liabilities		2,867			977
Total liabilities		223,426			185,191
Redeemable preferred stock:
Series E mandatorily redeemable preferred stock, $0.01 par value. Authorized 2,000,000 shares; issued and outstanding 2,000,000 shares as of December 31, 2000		—			11,874
Series A convertible preferred stock, $.01 par value. Authorized 8,000,000 shares; issued and outstanding 8,000,000 shares as of December 31, 2000		—			15,464
Series B convertible preferred stock, $.01 par value. Authorized 7,025,000 shares; issued and outstanding 7,025,000 shares as of December 31, 2000		—			25,324
Series C convertible preferred stock, $.01 par value. Authorized 6,480,000 shares; issued and outstanding 6,480,000 shares as of December 31, 2000		—			25,528
Total redeemable preferred stock		—			78,190
Stockholders’ equity (note 1):
Series D convertible preferred stock, $0.01 par value. Authorized 10,000,000 shares; issued and outstanding 3,710,775 shares as of December 31, 2000		—			37
Common stock, $.01 par value. Authorized 100,000,000 shares; issued and outstanding 19,851,690 and 907,782 at December 31, 2001 and 2000, respectively		207			16
Additional paid-in capital		168,668			20,263
Retained earnings (accumulated deficit)		15,416			(14,436	)
Deferred compensation		(775	)		(1,135	)
Total stockholders’ equity		183,516			4,745
	$	406,942		$	268,126

See accompanying notes to consolidated financial statements.

42

AMERIGROUP CORPORATION AND SUBSIDIARIES

CONSOLIDATED INCOME STATEMENTS

(Dollars in thousands, except for per share data)

	Years ended December 31,
	2001			2000			1999
Revenues:
Premium	$	880,510		$	646,408		$	392,296
Investment income		10,664			13,107			6,404
Total revenues		891,174			659,515			398,700
Expenses:
Health benefits		709,034			523,566			334,192
Selling, general and administrative		109,822			85,114			52,846
Depreciation and amortization		9,348			6,275			3,635
Interest		763			781			811
Total expenses		828,967			615,736			391,484
Income before income taxes		62,207			43,779			7,216
Income tax (expense) benefit		(26,127	)		(17,687	)		4,100
Net income		36,080			26,092			11,316
Accretion of redeemable preferred stock dividends		(6,228	)		(7,284	)		(7,284	)
Net income attributable to common stockholders	$	29,852		$	18,808		$	4,032
Net income per share:
Basic net income per share	$	8.08		$	23.62		$	7.11
Weighted average number of common shares outstanding		3,694,844			796,409			567,146
Diluted net income per share	$	2.08		$	1.55		$	0.66
Weighted average number of common shares and     potential dilutive common shares outstanding		16,649,721			15,818,175			14,695,324

See accompanying notes to consolidated financial statements.

43

AMERIGROUP CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (DEFICIT)

(Dollars in thousands)

	Common stock			Series D convertible preferred stock
	Shares	Amount		Shares		Amount			Additional paid-in capital			Retained earnings (deficit)			Deferred compensation			Total stockholders’ equity (deficit)
Balances at December 31,1998	529,136	$	10	—		$	—		$	662		$	(37,276	)	$	—		$	(36,604	)
Warrants issued in conjunction with Series E mandatorily redeemable preferred stock	—		—	—			—			800			—			—			800
Common stock issued upon exercise of stock options	111,496		1	—			—			99			—			—			100
Series D convertible preferred stock issued in conjunction with acquisition	—		—	3,710,775			37			16,624			—			—			16,661
Accreted dividends on redeemable preferred stock	—		—	—			—			—			(7,284	)		—			(7,284	)
Net income	—		—	—			—			—			11,316			—			11,316
Balances at December 31, 1999	640,632		11	3,710,775			37			18,185			(33,244	)		—			(15,011	)
Common stock issued upon exercise of stock options	267,150		5	—			—			245			—			—			250
Accreted dividends on redeemable preferred stock	—		—	—			—			—			(7,284	)		—			(7,284	)
Issuance of common stock options at below market value	—		—	—			—			1,833			—			(1,833	)		—
Amortization of deferred compensation	—		—	—			—			—			—			698			698
Net income	—		—	—			—			—			26,092			—			26,092
Balances at December 31, 2000	907,782		16	3,710,775			37			20,263			(14,436	)		(1,135	)		4,745
Common stock issued upon exercise of stock options and warrants	227,205		4	—			—			236			—			—			240
Common stock issued upon initial public offering (note 1)	4,985,000		50	—			—			77,168			—			—			77,218
Conversion of convertible preferred stock (note 1)	12,607,880		126	(3,710,775	)		(37	)		71,009			—			—			71,098
Common stock issued upon exercise of Series E mandatorily redeemable preferred stock warrants (note 1)	1,123,823		11	—			—			(8	)		—			—			3
Accreted dividends on redeemable preferred stock	—		—	—			—			—			(6,228	)		—			(6,228	)
Amortization of deferred compensation	—		—	—			—			—			—			360			360
Net income	—		—	—			—			—			36,080			—			36,080
Balances at December 31, 2001	19,851,690	$	207	—		$	—		$	168,668		$	15,416		$	(775	)	$	183,516

See accompanying notes to consolidated financial statements.

44

AMERIGROUP CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Dollars in thousands)

	Years ended December 31,
	2001			2000			1999
Cash flows from operating activities:
Net income	$	36,080		$	26,092		$	11,316
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization		9,348			6,275			3,635
Deferred tax (benefit) expense		(124	)		1,204			(5,294	)
Amortization of deferred compensation		360			698			—
Changes in assets and liabilities increasing (decreasing) cash flows from operations:
Premium receivables		(13,579	)		(8,476	)		(7,246	)
Prepaid expenses and other current assets		(254	)		(3,659	)		(953	)
Deferred income taxes and other assets		72			415			(1,588	)
Claims payable		29,884			36,090			59,978
Accounts payable and accrued expenses and other current liabilities		11,725			12,817			6,619
Unearned revenue		—			(27,960	)		27,960
Deferred income taxes and other long-term liabilities		(3,015	)		(1,390	)		1,450
Net cash provided by operating activities		70,497			42,106			95,877
Cash flows from investing activities:
Proceeds from redemption of held-to-maturity securities		196,267			226,555			73,422
Purchase of held-to-maturity investments		(257,541	)		(217,379	)		(138,008	)
Purchase of property and equipment		(4,502	)		(5,098	)		(4,647	)
Purchase of software		(4,106	)		(8,570	)		(1,176	)
Proceeds from sale of investments on deposit for licensure		29,318			8,502			1,677
Purchase of investments on deposit for licensure		(34,955	)		(12,374	)		(9,002	)
Purchase of contract rights and related assets		(2,617	)		—			(500	)
Net cash used in investing activities		(78,136	)		(8,364	)		(78,234	)
Cash flows from financing activities:
Proceeds from issuance of debt, net of issuance costs		—			—			8,137
Change in bank overdrafts		913			124			(5,900	)
Payment of debt		(6,177	)		(1,833	)		(10,333	)
Proceeds from exercise of common stock options and warrants		243			250			100
Proceeds from issuance of common stock upon the initial public offering, net of issuance costs		77,218			—			—
Redemption of Series E mandatorily redeemable preferred stock		(13,320	)		—			—
Proceeds from issuance of Series E mandatorily redeemable preferred stock and related warrants		—			—			5,000
Net cash provided by (used in) financing activities		58,877			(1,459	)		(2,996	)
Net increase in cash and cash equivalents		51,238			32,283			14,647
Cash and cash equivalents at beginning of period		132,662			100,379			85,732
Cash and cash equivalents at end of period	$	183,900		$	132,662		$	100,379

In 1999, AMERIGROUP Corporation issued 3,710,775 shares of Series D convertible preferred stock, valued at $16,661, to The Prudential Insurance Company of America (Prudential) in exchange for certain assets of Prudential’s Medicaid line of business in the District of Columbia and the State of Maryland (note 5).

See accompanying notes to consolidated financial statements.

45

AMERIGROUP CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2001, 2000 and 1999

(Dollars in thousands, except for per share data)

(1)    Corporate Organization and Principles of Consolidation

(a)    Corporate Organization

AMERIGROUP Corporation, a Delaware corporation, is a multi-state managed health care company focused on serving people who receive health care benefits through state-sponsored programs, including Medicaid, State Children’s Health Insurance Program, or SCHIP, and FamilyCare.

During 1995, we incorporated wholly-owned subsidiaries in New Jersey, Illinois and Texas to develop, own and operate health maintenance organizations (HMOs) in those states. During 1996, we began enrolling Medicaid members in HMOs: AMERIGROUP New Jersey, Inc., AMERIGROUP Illinois, Inc. and AMERIGROUP Texas, Inc. During 1999, we incorporated a wholly-owned subsidiary in Delaware, AMERIGROUP Maryland, Inc., a Managed Care Organization, to develop, own and operate a managed care organization (MCO) in Maryland and an HMO in the District of Columbia. This subsidiary purchased certain contracts and related assets from The Prudential Insurance Company of America and the Prudential Health Care Plan, Inc. (Prudential) relating to its Medicaid lines of business in the State of Maryland and the District of Columbia during 1999 (note 5).

On November 9, 2001, we completed our initial public offering of 4,985,000 shares of common stock including an over-allotment issuance of 585,000 shares at a price per share of $17.00. We received net proceeds from the offering of $77,218. In conjunction with the offering, all Series A, B, C and D preferred stock in the aggregate was converted into 12,607,880 shares of common stock. The proceeds from the offering were used to repay the balance of our long-term debt facility of $4,352 and to redeem the Series E mandatorily redeemable preferred stock for $13,320. In addition, 1,123,823 shares of common stock were issued upon the exercise of all outstanding Series E warrants.

(b)    Principles of Consolidation

The consolidated financial statements include the financial statements of AMERIGROUP Corporation and our four wholly-owned subsidiaries: AMERIGROUP New Jersey, Inc., AMERIGROUP Illinois, Inc., AMERIGROUP Texas, Inc. and AMERIGROUP Maryland, Inc., a Managed Care Organization. All significant intercompany balances and transactions have been eliminated in consolidation.

(2)    Summary of Significant Accounting Policies and Practices

(a)    Cash Equivalents

We consider all highly liquid temporary investments with original maturities of three months or less to be cash equivalents. We had cash equivalents of $121,941 and $120,305 at December 31, 2001 and 2000, respectively, which consist of money market funds, U.S. Treasury securities, certificates of deposit, asset-backed securities and debt securities of government sponsored entities.

(b)    Short and Long-Term Investments and Investments on Deposit for Licensure

Short and long-term investments and investments on deposit for licensure at December 31, 2001 and 2000 consist of money market funds, U.S. Treasury securities, certificates of deposit, asset-backed securities, debt

46

securities of government sponsored entities and municipal bonds. We consider all investments with maturities greater than three months but less than twelve months to be short-term investments. We classify our debt and equity securities in one of three categories: trading, available-for-sale or held-to-maturity. Trading securities are bought and held principally for the purpose of selling them in the near term. Held-to-maturity securities are those securities in which we have the ability and intent to hold the security until maturity. All other securities not included in trading or held-to-maturity are classified as available-for-sale. At December 31, 2001 and 2000, all of our securities are classified as held-to-maturity.

Held-to-maturity securities are recorded at amortized cost, adjusted for the amortization or accretion of premiums or discounts. A decline in the market value of any held-to-maturity security below cost that is deemed other than temporary results in a reduction in carrying amount to fair value. The impairment is charged to earnings and a new cost basis for the security is established. Premiums and discounts are amortized or accreted over the life of the related held-to-maturity security as an adjustment to yield using the effective-interest method. Dividend and interest income is recognized when earned.

(c)    Property and Equipment

Property and equipment are stated at cost. Depreciation on property and equipment is calculated on the straight-line method over the estimated useful lives of the assets. Property and equipment held under leasehold improvements are amortized on the straight-line method over the shorter of the lease term or estimated useful life of the asset. The estimated useful lives are as follows:

Leasehold improvements	length of lease
Furniture and fixtures	5-7 years
Equipment	3-5 years

(d)    Software

Software is stated at cost and 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 three years, using the straight-line method.

(e)    Goodwill

Goodwill represents the excess of aggregate purchase price over the estimated fair value of net assets acquired. Goodwill acquired prior to July 1, 2001, was amortized on a straight-line basis over 18 months to 20 years, the expected periods to be benefited. In accordance with Statement of Financial Accounting Standards No. 142, Goodwill and Other Intangible Assets (SFAS No. 142), goodwill acquired subsequent to July 1, 2001 is not amortized. In addition, all existing goodwill will no longer be amortized effective January 1, 2002. We assess the recoverability of goodwill by determining whether the goodwill balance can be recovered through undiscounted future operating cash flows of the acquired operation. The amount of goodwill impairment, if any, is measured based on projected discounted future operating cash flows using a discount rate reflecting our average cost of funds. The assessment of the recoverability of goodwill will be impacted if estimated future operating cash flows are not achieved. No impairment of goodwill was recorded in 2001, 2000 and 1999.

(f)    Other Assets

Other assets include deposits, restricted cash (see note 3) and debt issuance costs.

(g)    Income Taxes

Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying

47

amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carryforwards. 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.

(h)    Stock-Based Compensation

As permitted under Statement of Financial Accounting Standards No. 123, Accounting for Stock-Based Compensation (SFAS No. 123), the Company has chosen to account for stock-based compensation using the intrinsic value method prescribed in Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees (APB Opinion No. 25), and related interpretations. Accordingly, compensation cost for stock options is measured as the excess, if any, of the estimated fair value of our stock at the date of grant over the amount an employee must pay to acquire the stock.

(i)    Premium Revenue

We record premium revenue based on membership and premium information from each state. Premiums are due monthly and are recognized as revenue during the period in which we are obligated to provide service to members.

(j)    Experience Rebate Payable

Experience rebate payable, included in accrued expenses and other current liabilities, consists of estimates of amounts due under contracts with a state government. These amounts are computed based on a percentage of the contract profits, as defined, of each contract with the state. The profitability computation includes premium revenue received from the state less actual medical and administrative costs incurred and paid and less estimated unpaid claims payable for the applicable membership. The unpaid claims payable estimates are based on historical payment patterns using actuarial techniques. A final settlement is made 334 days after the contract period ends using paid claims data. Any adjustment made to the experience rebate payable as a result of final settlement is included in current operations.

(k)    Claims Payable

Accrued medical expenses for inpatient, outpatient surgery, emergency room, specialist, pharmacy and ancillary medical claims include amounts billed and not paid and an estimate of cost incurred for unbilled services provided. These liabilities are principally based on historical payment patterns using actuarial techniques. In addition, claims processing costs are accrued based on an estimate of the costs necessary to process unpaid claims. Claims payable are reviewed and adjusted periodically and, as adjustments are made, differences are included in current operations. Claims payable also includes estimates of amounts due to or from contracted providers under risk-sharing arrangements. The arrangements are based upon quality measures as well as medical results. Estimates relating to risk-sharing arrangements are calculated as a percentage, typically 25% to 50%, of the differences between actual results and specified targets of medical expense as well as a sharing of profits in excess of the targeted medical and administrative expenses, typically 7% to 10% of total premiums covered under the contract.

(l)    Stop-loss Coverage

Stop-loss premiums, net of recoveries, are included in health benefits expense in the accompanying Consolidated Income Statements.

(m)    Impairment of Long-Lived Assets

We review long-lived assets and certain identifiable intangibles for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to

48

be held and used is measured by a comparison of the carrying amount of an asset to future undiscounted net cash flows expected to be generated by the asset. If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the assets exceed the fair value of the assets, determined based upon discounted future cash flows or if available, other readily determinable evidence of fair value. Assets to be disposed of are reported at the lower of the carrying amount or fair value less costs to sell. No impairment of long-lived assets was recorded in 2001, 2000 and 1999.

(n)    Net Income Per Share

Basic net income per share has been computed by dividing net income attributable to common stockholders by the weighted average number of common shares outstanding. Diluted net income per share reflects the potential dilution that could occur assuming the inclusion of dilutive potential common shares and has been computed by dividing net income attributable to common stockholders by the weighted average number of common shares and dilutive potential common shares outstanding. Dilutive potential common shares include all outstanding stock options and warrants after applying the treasury stock method and convertible redeemable preferred stock to the extent it is dilutive.

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

(o)    Use of Estimates

Our management has made a number of estimates and assumptions relating to the reporting of assets and liabilities and the 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 to prepare these consolidated financial statements in conformity with generally accepted accounting principles. Actual results could differ from those estimates.

(p)     Risks and Uncertainties

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

At December 31, 2001, we served members who received health care benefits through nine contracts with the regulatory entities in the jurisdictions in which we operate. Five of these contracts individually accounted for 10% or more of our revenues for the year ended December 31, 2001, with the largest of these contracts representing approximately 30% of our revenues.

(q)     Recent Accounting Pronouncements

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

In July 2001, Statement of Financial Accounting Standards No. 142, Goodwill and Other Intangible Assets (SFAS No. 142), was issued which requires that goodwill and intangible assets with indefinite useful lives no longer be amortized, but instead be tested annually for impairment. We have adopted SFAS No. 142 and have determined that our goodwill and other intangible assets are not impaired. As of December 31, 2001, we had

49

unamortized goodwill in the amount of $19,407, which will be subject to the transition provisions of SFAS Nos. 141 and 142. Goodwill amortization expense was $977 in 2001.

(3)    Short and Long-Term Investments, Investments on Deposit for Licensure and Restricted Cash

The amortized cost, gross unrealized holding gains, gross unrealized holding losses and fair value for held-to-maturity short-term investments are as follows at December 31, 2001 and 2000:

	Amortized cost		Gross unrealized holding gains		Gross unrealized holding losses		Fair value
2001:
Debt securities of government sponsored entities	$	55,230	$	90	$	44	$	55,276
2000:
Money market funds	$	4,434	$	—	$	23	$	4,411
U.S. Treasury securities		290		2		—		292
Asset-backed securities		4,700		—		18		4,682
Debt securities of government sponsored entities		47,239		—		18		47,221
Total	$	56,663	$	2	$	59	$	56,606

The amortized cost, gross unrealized holding gains, gross unrealized holding losses and fair value for held-to-maturity long-term investments are as follows at December 31, 2001:

	Amortized cost		Gross unrealized holding gains		Gross unrealized holding losses		Fair value
2001:
Municipal bonds	$	11,232	$	—	$	57	$	11,175
Debt securities of government sponsored entities		51,475		83		36		51,522
Total	$	62,707	$	83	$	93	$	62,697

As a condition for licensure by various state governments to operate HMOs or MCOs, we are required to maintain certain funds on deposit with or under the control of the various departments of insurance. Accordingly, at December 31, 2001 and 2000, the amortized cost, gross unrealized holding gains, gross unrealized holding losses and fair value for these held-to-maturity securities are summarized as follows:

	Amortized cost		Gross unrealized holding gains		Gross unrealized holding losses		Fair value
2001:
U.S. Treasury securities, mature within one year	$	6,016	$	2	$	34	$	5,984
Debt securities of government sponsored entities, mature within one year		11,793		23		—		11,816
Cash escrow account		692		—		—		692
Total	$	18,501	$	25	$	34	$	18,492
2000:
U.S. Treasury securities, mature within one year	$	7,954	$	10	$	—	$	7,964
Debt securities of government sponsored entities, mature within one year		4,218		—		1		4,217
Cash escrow account		692		—		—		692
Total	$	12,864	$	10	$	1	$	12,873

50

The state governments in which we operate require us to maintain investments on deposit in specific dollar amounts based on either formulas or set amounts as determined by state regulations. We purchase interest-based investments with a fair value equal to or greater than the required dollar amount. The interest that accrues on these investments is not restricted and is available for withdrawal.

As a condition of our Loan and Security Agreement (note 7), we were required to maintain cash in an account maintained with the lender equal to at least 25% of the total debt outstanding under the agreement. The restricted cash on deposit is subject to a lien in favor of the lender. At December 31, 2000, we maintained $1,553 in an account with the lender’s Agent. Of this amount, $509 was included in other current assets and $1,044 was included in other long-term assets in the accompanying 2000 Consolidated Balance Sheet.

(4)    Property and Equipment, Net

Property and equipment, net at December 31, 2001 and 2000 is summarized as follows:

	2001			2000
Leasehold improvements	$	3,992		$	3,224
Furniture and fixtures		4,858			3,779
Equipment		16,009			8,381
		24,859			15,384
Less accumulated depreciation and amortization		(9,845	)		(5,320	)
	$	15,014		$	10,064

(5)    Contracts Purchased

(a)     Prudential

Effective June 1, 1999, we purchased certain assets and provider contracts of Prudential’s Medicaid line of business in Maryland. Additionally, effective August 1, 1999, we purchased certain assets and provider contracts of Prudential’s Medicaid line of business in the District of Columbia. The assets purchased consist of Prudential’s rights to provide managed care services to its Maryland and District of Columbia HMO members and the assignment of Prudential’s contracts with health care providers. We utilized the purchase method of accounting. For consideration of these assets received, we issued 3,710,775 shares of Series D two-to-one (giving effect to the reverse stock split—note 13a) convertible preferred stock at a fair value of $16,661. We recorded goodwill of $17,161 based on the fair value of the assets received and the transaction costs of $500 related to the acquisition. Prudential’s provider contracts were assigned to us for approximately one year, during which time we actively recontracted with the providers. Although acquiring the Prudential provider contracts was necessary to meet certain Maryland and District of Columbia network requirements, we kept the Prudential provider contracts for a limited period, therefore, no value was assigned to the acquired provider contracts. The goodwill is amortized on a straight-line basis over 20 years, except for $3,021 of goodwill related to a component of the Medicaid line of business in Maryland which is amortized over 18 months. This component relates to members served by a major provider under a renewable contract with an initial term of 18 months. This provider contract was extended and expired December 31, 2001.

The following unaudited pro forma summary information presents the consolidated income statement information for the year ended December 31, 1999, as if the aforementioned transaction had been consummated on January 1, 1999, and do 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. Full year results for the aforementioned transaction is included in the accompanying 2001 and 2000 Consolidated Income Statements.

51

	1999
Premium revenue	$	479,545
Net income	$	7,008
Diluted net income per share	$	0.36

The unaudited pro forma summary information reflects adjustments made to our historical statements by including the applicable results of operations of Prudential’s Medicaid lines of business in Maryland and the District of Columbia prior to the acquisition.

Amortization of goodwill associated with this acquisition that has been included in the determination of pro forma net income and diluted net income per share for the year ended December 31, 1999 was $2,991. In accordance with SFAS No. 142, goodwill will no longer be amortized effective January 1, 2002.

(b)    Humana

Effective August 1, 2001, we purchased certain assets of Humana Inc.’s (“Humana”) Houston, Texas Medicaid line of business. The assets purchased consisted of Humana’s rights to provide managed care services to its Medicaid members. We utilized the purchase method of accounting. We paid $1,048 in cash including transaction costs, resulting in goodwill of the same amount. We operated as a Medicaid HMO in Houston, Texas prior to this acquisition.

(c)    MethodistCare

On November 15, 2001, we entered into a purchase agreement for certain assets of MethodistCare, Inc.’s (MethodistCare) Houston, Texas Medicaid line of business. The assets purchased consisted of MethodistCare’s rights to provide managed care services to its Medicaid members. The acquisition was effective January 1, 2002. We utilized the purchase method of accounting. We paid $1,569 in cash including transaction costs, resulting in goodwill of the same amount.

(6)    Income Taxes

Income tax expense (benefit) for the years ended December 31, 2001, 2000 and 1999 consists of the following:

	Current		Current benefit of net operating loss carryforwards			Deferred			Total
Year ended December 31, 2001:
U.S. federal	$	22,685	$	—		$	(222	)	$	22,463
State and local		3,566		—			98			3,664
	$	26,251	$	—		$	(124	)	$	26,127
Year ended December 31, 2000:
U.S. federal	$	13,843	$	—		$	1,012		$	14,855
State and local		2,640		—			192			2,832
	$	16,483	$	—		$	1,204		$	17,687
Year ended December 31, 1999:
U.S. federal	$	5,972	$	(4,939	)	$	(4,584	)	$	(3,551	)
State and local		925		(764	)		(710	)		(549	)
	$	6,897	$	(5,703	)	$	(5,294	)	$	(4,100	)

52

Income tax expense (benefit) was $26,127, $17,687 and $(4,100) for the years ended December 31, 2001, 2000 and 1999, respectively. These amounts differed from the amounts computed by applying the U.S. federal income tax rate to income before income taxes as a result of the following:

	Years ended December 31,
	2001				2000				1999
	Amount		%		Amount		%		Amount			%
Tax expense at statutory rate	$	21,772	35.0	%	$	15,323	35.0	%	$	2,453		34.0	%
Increase (reduction) in income taxes resulting from:
Change in the beginning of the year balance of the valuation allowance for deferred tax assets allocated to federal income tax expense		—	—			—	—			(6,764	)	(93.7	)
State and local income taxes, net of federal income tax effect		2,382	3.8			1,841	4.2			(362	)	(5.0	)
Effect of nondeductible expenses and other, net		1,973	3.2			523	1.2			573		7.9
Total income tax expense (benefit)	$	26,127	42.0	%	$	17,687	40.4	%	$	(4,100	)	(56.8	)%

The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and deferred tax liabilities at December 31, 2001 and 2000 are presented below:

	December 31,
	2001			2000
Deferred tax assets:
Estimated claims incurred but not reported, deductible as paid for tax purposes	$	1,994		$	2,365
Vacation and bonus accruals, deductible as paid for tax purposes		603			513
Contractual allowances, deductible as written off for tax purposes		689			298
Other expenses, deductible in future periods for tax purposes		1,554			1,457
Goodwill, due to timing differences in book and tax amortization		857			846
Unearned revenue, included in income as received for tax purposes		18			—
Total deferred tax assets		5,715			5,479
Deferred tax liabilities:
Property and equipment, due to timing differences in book and tax depreciation		(1,411	)		(924	)
Other		(90	)		(465	)
Total deferred tax liabilities		(1,501	)		(1,389	)
Net deferred tax assets and liabilities	$	4,214		$	4,090

A valuation allowance is provided when it is more likely than not that some portion of the deferred tax asset will not be realized. As of December 31, 1998, due to historic losses and the uncertainty of future income, we recorded a valuation allowance to defer recognition of the income tax benefit until it was deemed more likely than not the benefit would be realized. During 1999, we removed the valuation allowance as it considered that the benefits of the deferred tax assets would more than likely be realized. The change in the valuation allowance for deferred tax assets during 1999 was a decrease of $7,368 and was reflected as a decrease to deferred income tax expense.

Income taxes payable were $2,239 and $287 at December 31, 2001 and 1999 and were included in accrued expenses. Prepaid income taxes were $3,171 at December 31, 2000.

53

Cash paid for income taxes for the years ended December 31, 2001, 2000, and 1999, were $20,841, $19,941, and $751, respectively.

(7)    Long-Term Debt

During 2001, we entered into a Credit and Guaranty Agreement with three banks to obtain a $60,000 revolving credit facility. The facility is secured by the assets of AMERIGROUP Corporation and by the common stock of its wholly-owned subsidiaries.            

At December 31, 2001, no amounts were outstanding under the facility. Any outstanding amounts under the facility accrue interest at one of the following rates, at our option: LIBOR plus the applicable margin or an alternate bank rate plus the applicable margin. The applicable margin for LIBOR borrowings is between 2.0% and 2.5%. The applicable margin for alternate bank rate borrowings is between 1.0% and 1.5%. The applicable margin will vary depending on our leverage ratio. At December 31, 2001, the interest rate on the facility would have been 3.9%. We also pay a 0.50% commitment fee on the unused portion of the facility. Any principal balance on the facility is due December 14, 2004.

Pursuant to the Credit and Guaranty Agreement, we must meet certain financial covenants. At December 31, 2001, we were in compliance with such covenants. These financial covenants include meeting certain financial ratios, a limit on annual capital expenditures, and a minimum net worth requirement.

During 1999, we entered into a Loan and Security Agreement with two banks to obtain debt financing of $16,500, consisting of a term loan of $9,000 and a revolver commitment of $7,500. We repaid this long-term debt financing in its entirety with proceeds from the Offering.

Cash paid for interest expense for the years ended December 31, 2001, 2000 and 1999, was $822, $722 and $878, respectively.

(8)    Redeemable Preferred Stock

Redeemable preferred stock is summarized as follows:

	Series A					Series B					Series C					Series E
	Shares		Amount			Shares		Amount			Shares		Amount			Shares		Amount
Balances at December 31, 1998	8,000,000		$	12,924		7,025,000		$	21,022		6,480,000		$	20,890		1,000,000		$	4,586
Issuance of Series E mandatorily redeemable preferred stock	—			—		—			—		—			—		1,000,000			4,200
Accreted dividends	—			1,270		—			2,151		—			2,319		—			1,544
Balances at December 31, 1999	8,000,000			14,194		7,025,000			23,173		6,480,000			23,209		2,000,000			10,330
Accreted dividends	—			1,270		—			2,151		—			2,319		—			1,544
Balances at December 31, 2000	8,000,000			15,464		7,025,000			25,324		6,480,000			25,528		2,000,000			11,874
Accreted dividends	—			1,058		—			1,792		—			1,932		—			1,446
Conversion of Series A, B and C preferred stock to common shares	(8,000,000	)		(16,522	)	(7,025,000	)		(27,116	)	(6,480,000	)		(27,460	)	—			—
Redemption of Series E mandatorily redeemable preferred stock	—			—		—			—		—			—		(2,000,000	)		(13,320	)
Balances at December 31, 2001	—		$	—		—		$	—		—		$	—		—		$	—

Series A, B and C

The Series A, B and C preferred stock was converted to common shares on a two-for-one basis, at the option of the preferred stockholder. The Series A, B and C preferred stock carried a noncumulative 10% dividend

54

payable upon approval by the Board of Directors. We accreted dividends on Series A, B and C using the interest method and added the accrued dividends to the applicable redeemable preferred stock issue balance.

The Series A, B and C preferred stock was converted into 10,752,493 shares of common stock concurrent with the offering.

Series E

During July 1998, we issued 1,000,000 units of its Series E Mandatorily Redeemable Preferred Stock and Warrants (Series E) at a price of $5.00 per unit (the first tranche). During January 1999, we issued an additional 1,000,000 units of the Series E at a price of $5.00 per unit (the second tranche). Each unit included a share of Series E preferred stock and an unattached warrant to purchase 0.5625 shares of common stock at a price of $0.02 per share. Of the gross proceeds of $5.00, $0.80 has been allocated to the warrants issued based on fair value. The fair value of the warrants sold was determined by our Board of Directors and was consistent with the exercise price of our stock options at the time of issuance. Concurrent with the offering, the warrants were exercised for 1,123,823 shares of common stock. The remaining amount of $4.20 is attributable to Series E stock. The redeemable preferred stock was recorded at its original fair value of $4.20 per share, plus accreted dividends. In accordance with the terms of the Series E mandatorily redeemable preferred stock, dividends per share accrued as follows:

	First Tranche		Second Tranche
September 30, 1998	$	2.05	$	—
December 31, 1998		—		—
March 31, 1999		—		2.05
June 30, 1999		—		—
September 30, 1999		—		—
December 31, 1999		—		—
March 31, 2000		—		—
June 30, 2000		—		—
September 30, 2000		—		—
December 31, 2000		0.10		—
March 31, 2001		0.15		—
June 30, 2001		0.16		0.10
September 30, 2001		0.16		0.15

The total of these dividends was charged to retained earnings on the interest method.

The Series E stock, with cumulative dividends, was redeemed pursuant to the Offering for $13,320.

(9)     Stock Option Plan

In July 2000, we adopted the 2000 Equity Incentive Plan (2000 Plan), which provides for the granting of either stock options, restricted stock, phantom stock and stock bonuses to employees, directors and consultants. We reserved for issuance a maximum of 2,064,000 shares of common stock under the 2000 Plan. In addition, shares remaining available for issuance under the 1994 Stock Plan (1994 Plan) will be available for issuance under the 2000 Plan, resulting in a total of 4,313,500 shares available for grant under the 2000 Plan. Under both plans, an option's maximum term is ten years. Twenty percent of the options vest upon grant date or at an employee's hiring anniversary date, whichever is later, and five percent at the end of each three-month period thereafter.

In 1994, we established the 1994 Stock Plan (1994 Plan), which provides for the granting of either incentive stock options or nonqualified options to purchase shares of our common stock by employees, directors and

55

consultants of the company for up to 2,099,500 shares of common stock as of December 31, 1999. On February 9, 2000, we increased the number of options available for grant to 2,249,500.

A summary of stock plans at December 31, 2001, 2000, and 1999 and the changes during the years then ended follows:

	2001			2000			1999
	Shares	Weighted-average exercise price		Shares	Weighted-average exercise price		Shares	Weighted-average exercise price
Outstanding at beginning of year	1,776,029	$	4.61	1,567,543	$	1.53	1,382,253	$	0.88
Granted	637,366		15.45	563,407		11.56	389,595		3.65
Exercised	218,428		1.61	267,150		0.94	111,496		0.89
Forfeited	120,233		10.25	87,771		5.44	92,809		1.53
Outstanding at end of year	2,074,734	$	7.92	1,776,029	$	4.61	1,567,543	$	1.53

The following table summarizes information related to the stock options outstanding at December 31, 2001:

Exercise price	Options outstanding	Options exercisable	Weighted- average remaining contractual life (years)
$0.20	39,075	39,075	3.17
$0.40	335,029	334,404	3.85
$1.40	354,417	273,060	5.92
$3.00	261,728	161,992	6.63
$8.60	244,805	128,646	8.09
$11.70	4,000	1,200	8.36
$12.00	9,750	2,063	8.82
$15.00	651,930	205,416	8.95
$17.00	169,000	—	9.74
$19.23	5,000	—	9.85
	2,074,734	1,145,856	7.17

At December 31, 2001, the number of options exercisable was 1,145,856 and the weighted-average exercise price of those options was $4.57.

On February 7, 2002, we granted an additional 806,383 options at an exercise price of $21.25.

We apply APB Opinion No. 25 and related interpretations in accounting for its stock plans. Accordingly, compensation cost related to stock options issued to employees would be recorded on the date of grant only if the current market price of the underlying stock exceeded the exercise price. During 2000, we recorded deferred charges of $1,833, representing the difference between the exercise price and the deemed fair value of our common stock for the options granted in 2000. The deferred compensation will be amortized to expense over the period the options vest, generally four to five years. We recognized $360 and $698 in non-cash compensation expense related to the amortization of deferred compensation during 2001 and 2000, respectively. Had compensation cost for our stock-based compensation plans been determined consistent with SFAS No. 123, our net income would have been decreased to $35,273, $25,745 and $11,219 in 2001, 2000 and 1999, respectively. Diluted net income per share would have been $2.04, $1.54 and $0.66 in 2001, 2000 and 1999, 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 no expected volatility for all years, risk-free interest rate of 4.3%,

56

5.1% and 6.7% and expected life of four, three and one-half and seven years for 2001, 2000 and 1999, respectively.

(10)     Earnings Per Share

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

	Years ended December 31,
	2001			2000			1999
Basic net income per share:
Net income	$	36,080		$	26,092		$	11,316
Less accretion of redeemable preferred stock dividends		(6,228	)		(7,284	)		(7,284	)
Net income attributable to common stockholders	$	29,852		$	18,808		$	4,032
Weighted average number of common shares     outstanding		3,694,844			796,409			567,146
Basic net income per share	$	8.08		$	23.62		$	7.11
Diluted net income per share:
Net income attributable to common stockholders	$	29,852		$	18,808		$	4,032
Plus: Accretion of convertible preferred stock dividends assuming conversion		4,782			5,740			5,740
Diluted net income attributable to common stockholders	$	34,634		$	24,548		$	9,772
Weighted average number of common shares outstanding		3,694,844			796,409			567,146
Dilutive effect of stock options and warrants (as determined by applying the treasury stock method) and convertible preferred stock		12,954,877			15,021,766			14,128,178
Weighted average number of common shares and potential dilutive common shares outstanding		16,649,721			15,818,175			14,695,324
Diluted net income per share	$	2.08		$	1.55		$	0.66

(11)     Fair Value of Financial Instruments

The fair value of a financial instrument is the amount at which the instrument could be exchanged in a current transaction between willing parties. The following methods and assumptions were used to estimate the fair value of each class of financial instruments:

Cash and cash equivalents, premium receivables, prepaid expenses and other current assets, accounts payable, accrued expenses and other current liabilities and claims payable: The carrying amounts approximate fair value because of the short maturity of these items.

Short-term investments, long-term investments and investments on deposit for licensure: The carrying amounts approximate fair value, which was determined based upon the relationship of the stated interest rates to the market interest rates over the maturity of the financial instrument.

57

(12)     Commitments and Contingencies

(a)     Minimum Reserve Requirements

Regulations governing our managed care operations in New Jersey, Texas, Illinois, Maryland and the District of Columbia require the applicable subsidiary to meet certain minimum net worth requirements. Each subsidiary was in compliance with their requirements at December 31, 2001.

(b)     Malpractice

We maintain professional liability coverage for certain claims which is provided by an independent carrier and is subject to annual coverage limits. Professional liability policies are on a claims-made basis and must be renewed or replaced with equivalent insurance if claims incurred during its term, but asserted after its expiration, are to be insured.

(c)     Operating Lease Agreements

We lease office space and certain office equipment under operating leases which expire at various dates through 2011. Future minimum payments by year and in the aggregate under all noncancelable operating leases consist of the following approximate amounts at December 31, 2001:

	Operating Leases
2002	$	3,845
2003		3,581
2004		2,821
2005		1,707
2006		1,380
Thereafter		4,298
	$	17,632

Total rent expense for all office space and office equipment under noncancelable operating leases was approximately $3,476, $2,077 and $1,900 in 2001, 2000 and 1999, respectively, and is included in selling, general and administrative expenses in the accompanying Consolidated Income Statements.

(d)     Deferred Compensation Savings Plan

Our employees have the option to participate in a deferred compensation plan sponsored by the company. All full-time and most part-time employees of AMERIGROUP Corporation and subsidiaries may elect to participate in this plan. This plan is exempt from income taxes under Section 401(k) of the Internal Revenue Code. Participants may contribute a certain percentage of their compensation subject to maximum federal and plan limits. We may elect to match a certain percentage of each employee's contributions up to specified limits. For the years ended December 31, 2001 and 2000, the matching contribution under the plan in total was $389 and $135, respectively. There were no matching contributions made for the year ended December 31, 1999.

(13)     Stockholders’ Equity

(a)     Increase in Authorized Common Shares and Preferred Shares and Authorization of Reverse Stock Split

On May 10, 2000, the Board of Directors approved amendments to our Articles of Incorporation increasing the authorized number of shares of common stock to 100,000,000 and authorizing an additional 10,000,000 shares of preferred stock to be issued contingent upon the successful completion of the Offering. On June 30, 2000, the Board of Directors and our stockholders approved a one-for-two reverse stock split of our common stock contingent upon the successful completion of the offering.

58

(b)     Series D Convertible Preferred Stock

During 1999, we issued 3,710,775 shares of Series D convertible preferred stock as consideration for purchasing the contracts and certain other assets of Prudential’s Medicaid line of business in the state of Maryland and the District of Columbia (note 5). The Series D preferred stock was convertible to common shares on a two-for-one basis, subject to adjustment for stock splits, at the option of the preferred stockholder. Concurrent with the offering, the Series D convertible preferred stock was converted into 1,855,387 shares of common stock. The Series D convertible preferred stock did not carry a stated dividend.

(c)     Employee Stock Purchase Plan

On February 15, 2001, the Board of Directors approved and we adopted an Employee Stock Purchase Plan, under which all employees are eligible to participate except any employee who has been employed for us less than 90 days, whose customary employment is less than 20 hours per week or any employee who owns five percent or more of our common stock. Eligible employees may join the plan every six months. Purchases of common stock are priced at the lower of the stock price less 15% on the first day of the six month period or the stock price less 15% on the last day of the six month period. We have reserved for issuance 600,000 shares of common stock under the Employee Stock Purchase Plan.

(14)     Quarterly Financial Data (unaudited)

	Three Months Ended
2001	March 31		June 30		September 30		December 31
Premium revenue	$	185,685	$	209,145	$	236,642	$	249,038
Health benefits		150,692		163,703		192,485		202,154
Selling, general and administrative expenses		24,098		28,112		27,442		30,170
Income before income taxes		12,001		17,594		16,543		16,069
Net income		7,081		10,084		9,595		9,320
Net income per common diluted share		0.42		0.61		0.58		0.48
Weighted average number of common shares and     potential dilutive shares outstanding		15,897,118		15,889,397		15,985,161		18,794,357
High and low stock price range							$	21.80/$18.10
	Three Months Ended
2000	March 31		June 30		September 30		December 31
Premium revenue	$	147,654	$	157,478	$	166,061	$	175,215
Health benefits		118,332		125,768		135,038		144,428
Selling, general and administrative expenses		17,088		23,409		22,270		22,347
Income before income taxes		13,383		9,656		10,590		10,150
Net income		7,848		5,760		6,432		6,052
Net income per common diluted share		0.48		0.34		0.38		0.36
Weighted average number of common shares and     potential dilutive shares outstanding		15,681,194		15,933,088		15,835,755		15,821,977

59

INDEPENDENT AUDITORS’ REPORT

The Board of Directors

AMERIGROUP Corporation

Under date of February 8, 2002, we reported on the consolidated balance sheets of AMERIGROUP Corporation and subsidiaries as of December 31, 2001 and 2000, and the related consolidated income statements and statements of stockholders’ equity (deficit) and cash flows for each of the years in the three-year period ended December 31, 2001, which are included herein. In connection with our audits of the aforementioned consolidated financial statements, we also audited the related consolidated financial statement schedule, Schedule II—Schedule of Valuation and Qualifying Accounts, which is also included herein. This financial statement schedule is the responsibility of the Company’s management. Our responsibility is to express an opinion on the financial statement schedule based on our audits.

In our opinion, the financial statement schedule, Schedule II—Schedule of Valuation and Qualifying Accounts, when considered in relation to the basic consolidated financial statements taken as a whole, present fairly, in all material respects, the information set forth therein.

/s/ KPMG LLP

February 8, 2002

Norfolk, Virginia

60

SCHEDULE OF VALUATION AND QUALIFYING ACCOUNTS

	Balance Beginning of Year		Additions- Amounts Charged to Expense		Deductions- Amounts Credited to Expense			Balance End of Year
Valuation Allowance on Deferred Tax Assets
Year Ended December 31, 2001	$	—	$	—	$	—		$	—
Year Ended December 31, 2000		—		—		—			—
Year Ended December 31, 1999		7,368		—		(7,368	)		—

61

Item 9.    Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

None.

PART III

Item 10.    Directors and Executive Off icers of the Company

The information regarding compliance with Section 16(a) of the Securities and Exchange Act of 1934 is incorporated herein by reference from the section entitled “Section 16(a) Beneficial Ownership Reporting Compliance” of the Company’s definitive Proxy Statement (the “Proxy Statement”) to be filed pursuant to Regulation 14A of the Securities and Exchange Act of 1934, as amended, for the Registrant’s Annual Meeting of Stockholders to be held on Tuesday, May 14, 2002. The Proxy Statement will be filed within 120 days after the end of the Company’s fiscal year ended December 31, 2001.

The information regarding Executive Officers is contained in Part I of this Report under the caption “Executive Officers of the Company.”

The information regarding directors is incorporated herein by reference from the section entitled “PROPOSAL #1: ELECTION OF DIRECTORS” of the Proxy Statement.

Item 11.    Executive Comp ensation

Information regarding executive compensation is incorporated herein by reference from the section entitled “Executive Officer Compensation” of the Proxy Statement.

Item 12.    Security Owners hip of Certain Beneficial Owners and Management

Information regarding security ownership of certain beneficial owners and management is incorporated herein by reference from the section entitled “Security Ownership of Certain Beneficial Owners and Management” of the Proxy Statement.

Item 13.    Certain Relationshi ps and Related Transactions

Information regarding certain relationships and related transactions is incorporated herein by reference from the section entitled “Certain Relationships and Related Transactions” of the Proxy Statement.

62

PART IV

Item 14.     Exhibits, Financial Statement Schedules and Reports on Form 8-K

(a)(1)     Financial Statements.

The following financial statements are filed: Independent Auditors’ Report, Consolidated Balance Sheets, Consolidated Income Statements, Consolidated Statements of Stockholders’ Equity (Deficit), Consolidated Statements of Cash Flows, and Notes to Consolidated Financial Statements.

(a)(2)     Financial Statement Schedules.

All applicable financial statement schedules have been omitted because the required information is included in the Consolidated Financial Statements included in Item 14(a)(1).

(b) Reports on Form 8-K.

No reports on Form 8-K were filed by the Company during the fourth quarter of the fiscal year ended December 31, 2001.

(c) Exhibits.

The following exhibits, which are furnished with this annual report or incorporated herein by reference, are filed as part of this annual report.

Exhibit Number	Description
3.1*	Form of Amended and Restated Certificate of Incorporation of the Company.
3.2*	Form of By-Laws of the Company.
3.3*	Form of share certificate for common stock.
3.4*	AMERIGROUP Corporation Second Restated Investor Rights Agreement, dated July 28, 1998.
3.5*	Silicon Valley Registration Rights Agreement, entered into as of May 15, 1998.
3.6*	Stock Restriction and Registration Rights Agreement, between AMERIGROUP Corporation and Prudential Health Care Plan, Inc.
3.7*	Form of warrant issued in connection with the sale of Series E Redeemable Preferred Stock.
3.8*	Common Stock Purchase Warrant Issued to Silicon Valley Bank, dated May 15, 1998.
10.1*	1999 Contract for Services between the Texas Department of Health (“TDH”) and HMO (Harris Service Area), dated August 9, 1999.
10.2*	1999 Contract For Services between the TDH and HMO (Tarrant Service Area), dated August 9, 1999.
10.3*	1999 Contract For Services between the TDH and HMO (Harris County Service Area STAR+PLUS Contract)
10.4*	2000 Contract For Services between TDH and HMO (Dallas Service Area) (replaces prior exhibit 10.4).
10.5*	Children’s Health Insurance Program Agreement for the Provision of Health Care Services between the Texas Department of Health and Human Services Commission and AMERICAID Texas, Inc., d/b/a Amerikids, dated January 19, 2000, as amended (replaces prior exhibit 10.5).
10.6*	Contract between State of New Jersey, Department of Human Services, Division of Medical Assistance and Health Services and [Americaid New Jersey, Inc.], Contractor (replaces prior exhibit 10.6).

63

Exhibit Number	Description
10.7*	State of Illinois, Department of Public Aid Contract for Furnishing Health Services by a Health Maintenance Organization, dated April 1, 2000.
10.8*	Managed Care Organization HealthChoice Provider Agreement, dated as of January 1, 2000.
10.9*	District of Columbia Medicaid Managed Care Program, Department of Health, Prepaid, Capital Risk Contract.
10.10*	1994 Stock Plan.
10.11*	Form of 2000 Equity Incentive Plan.
10.12*	Form of Employee Stock Purchase Plan.
10.13*	Form of 2000 Cash Incentive Plan.
10.14*	Second Amended and Restated Employment Agreement of Jeffrey L. McWaters, dated October 2, 2000 (replaces prior exhibit 10.14).
10.15*	Employment Agreement of Lorenzo Childress, Jr., M.D.
10.16*	Form of Officer and Director Indemnification Agreement.
10.17*	CCPN and HMO Medicaid Agreement By and Between Americaid Texas Inc., d/b/a Americaid Community Care, and Cook Children’s Physician Network, A Texas 5.01 Non-profit Corporation, dated as of October 9, 1997, as amended.
10.18*	Third Medical Assistance Medical Services Agreement between Prudential Health Care Plan, Inc. and Johns Hopkins Medical Services Corporation, dated August 2, 1996, assigned to the Company pursuant to the Amendment and Assignment of Third Medical Assistance Medical Service Agreement, as of April 30, 1999.
10.19*	Loan and Security Agreement, between AMERIGROUP Corporation, as borrower, and the Financial Institutions Party Thereto From Time to Time, as Lender and Fleet Capital Corporation, as Agent, dated November 9, 1999.
10.20*	Amendment, dated September 1, 2001, to the 1999 Contract for Services between TDH and HMO (Harris County Service Area, STAR+PLUS Contract).
10.21	Credit and Guaranty Agreement, between AMERIGROUP Corporation, as borrower and Bank of America N.A., administrative agent, UBS Warburg LLC and CIBC World Markets Corp., as lenders, dated December 14, 2001.
21.1	List of Subsidiaries.
23.1	Consent of KPMG LLP with respect to the financial statements of the registrant.

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

64

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Virginia Beach, Commonwealth of Virginia, on March 12, 2002.

AMERIGROUP CORPORATION
By:	/S/ SCOTT M. TABAKIN
	Name:  Scott M. Tabakin Title:    Senior Vice President and  Chief Financial Officer

Pursuant to the requirements of the Securities Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.

Signatures	Title	Date
/s/ Jeffrey L. McWaters Jeffrey L. McWaters	Chairman, Chief Executive Officer and President	March 12, 2002
/s/ Scott M. Tabakin     Scott M. Tabakin	Chief Financial Officer	March 12, 2002
/s/ Kathleen K. Toth     Kathleen K. Toth	Chief Accounting Officer	March 12, 2002
/s/ Carlos A. Ferrer     Carlos A. Ferrer	Director	March 12, 2002
/s/ C. Sage Givens     C. Sage Givens	Director	March 12, 2002
/s/ William J. McBride     William J. McBride	Director	March 12, 2002
/s/ Charles W. Newhall III     Charles W. Newhall III	Director	March 12, 2002

65

EX-10.21

Exhibit 10.21

CREDIT AND GUARANTY AGREEMENT

Dated as of December 14, 2001

among

AMERIGROUP CORPORATION,

as Borrower,

CERTAIN SUBSIDIARIES AND AFFILIATES OF THE BORROWER,

as Guarantors,

THE LENDERS NAMED HEREIN,

BANK OF AMERICA, N.A.,

as Administrative Agent

and

UBS WARBURG LLC AND CIBC WORLD MARKETS CORP.,

as Co-Syndication Agents

Arranged by:

BANC OF AMERICA SECURITIES LLC,

as Joint Lead Arranger and Sole Book Manager

and

UBS WARBURG LLC,

as Joint Lead Arranger

TABLE OF CONTENTS

		Page
	SECTION 1    DEFINITIONS	1
1.1	Definitions.	1
1.2	Computation of Time Periods.	24
1.3	Accounting Terms.	24
	SECTION 2    CREDIT FACILITIES	24
2.1	Commitments.	24
2.2	Method of Borrowing.	26
2.3	Interest.	27
2.4	Repayment.	27
2.5	Notes.	27
2.6	Additional Provisions relating to Letters of Credit.	27
2.7	Additional Provisions relating to Swingline Loans.	31
	SECTION 3    OTHER PROVISIONS RELATING TO CREDIT FACILITIES	32
3.1	Default Rate.	32
3.2	Continuation and Conversion.	32
3.3	Prepayments.	33
3.4	Reduction and Termination of Commitments.	33
3.5	Fees.	34
3.6	Capital Adequacy.	34
3.7	Limitation on Eurodollar Loans.	35
3.8	Illegality.	35
3.9	Requirements of Law.	35
3.10	Treatment of Affected Loans.	36
3.11	Taxes.	37
3.12	Funding Losses.	38
3.13	Pro Rata Treatment.	39
3.14	Sharing of Payments.	40
3.15	Payments, Computations, etc.	40
3.16	Evidence of Debt.	42
3.17	Replacement of Lender, Etc.	42
	SECTION 4    GUARANTY	43
4.1	The Guaranty.	43
4.2	Obligations Unconditional.	43
4.3	Reinstatement.	44
4.4	Certain Additional Waivers.	45
4.5	Remedies.	45
4.6	Rights of Contribution.	45
4.7	Guarantee of Payment; Continuing Guarantee.	46
	SECTION 5    CONDITIONS	46
5.1	Closing Conditions.	46
5.2	Conditions to all Extensions of Credit.	48
	SECTION 6    REPRESENTATIONS AND WARRANTIES	48
6.1	Financial Condition.	48

i

6.2	No Changes or Restricted Payments.	49
6.3	Organization; Existence; Compliance with Law.	49
6.4	Power; Authorization; Enforceable Obligations.	50
6.5	No Legal Bar.	50
6.6	No Material Litigation and Disputes.	50
6.7	No Defaults.	51
6.8	Ownership and Operation of Property.	51
6.9	Intellectual Property.	51
6.10	No Burdensome Restrictions.	51
6.11	Taxes.	51
6.12	ERISA.	52
6.13	Governmental Regulations, etc.	53
6.14	Subsidiaries.	53
6.15	Purpose of Extensions of Credit.	54
6.16	Environmental Matters.	54
6.17	No Material Misstatements.	55
6.18	Labor Matters.	55
6.19	Security Documents.	55
6.20	Location of Real Property and Leased Premises.	56
6.21	Fraud and Abuse.	56
6.22	Licensing and Accreditation.	56
	SECTION 7    AFFIRMATIVE COVENANTS	57
7.1	Information Covenants.	57
7.2	Preservation of Existence and Franchises.	60
7.3	Books and Records.	61
7.4	Compliance with Law.	61
7.5	Payment of Taxes and Other Indebtedness.	61
7.6	Insurance.	61
7.7	Maintenance of Property.	61
7.8	Performance of Obligations.	62
7.9	Use of Proceeds.	62
7.10	Audits/Inspections.	62
7.11	Financial Covenants.	62
7.12	Additional Guarantors.	63
7.13	Pledged Assets.	63
	SECTION 8    NEGATIVE COVENANTS	64
8.1	Indebtedness.	64
8.2	Liens.	65
8.3	Nature of Business.	65
8.4	Merger and Consolidation, Dissolution and Acquisitions.	65
8.5	Asset Dispositions.	66
8.6	Investments.	66
8.7	Restricted Payments.	67
8.8	Modifications and Payments in respect of Funded Debt.	67
8.9	Transactions with Affiliates.	67
8.10	Fiscal Year; Organizational Documents.	68
8.11	Limitation on Restricted Actions; No Further Negative Pledges.	68
8.12	Ownership of Subsidiaries; Limitations on Borrower.	68
8.13	Sale Leasebacks.	68

ii

8.14	Operating Lease Obligations.	69
	SECTION 9    EVENTS OF DEFAULT	69
9.1	Events of Default.	69
9.2	Acceleration; Remedies.	71
	SECTION 10    ADMINISTRATIVE AND COLLATERAL AGENT	72
10.1	Appointment and Authorization.	72
10.2	Delegation of Duties.	72
10.3	Liability.	73
10.4	Reliance.	73
10.5	Notice of Default.	74
10.6	Credit Decision; Disclosure of Information.	74
10.7	Indemnification.	74
10.8	Individual Capacity.	75
10.9	Successor.	75
10.10	Other Agents; Lead Managers.	76
	SECTION 11    MISCELLANEOUS	76
11.1	Notices.	76
11.2	Right of Set-Off; Adjustments.	77
11.3	Successors and Assigns.	77
11.4	No Waiver; Remedies Cumulative.	80
11.5	Expenses; Indemnification.	80
11.6	Amendments, Waivers and Consents.	81
11.7	Counterparts.	82
11.8	Headings.	82
11.9	Survival.	82
11.10	Governing Law; Submission to Jurisdiction; Venue.	82
11.11	Severability.	83
11.12	Entirety.	83
11.13	Binding Effect; Termination.	83
11.14	Confidentiality.	83
11.15	Source of Funds.	84
11.16	Conflict.	85

iii

SCHEDULES

Schedule 2.1(a)	Lenders and Commitments
Schedule 2.1(d)	Form of Lender Joinder Agreement
Schedule 2.2(a)(i)	Form of Notice of Borrowing
Schedule 2.2(a)(ii)	Form of Notice of Request of Letter of Credit
Schedule 2.5	Form of Revolving Note
Schedule 2.6(b)	Existing Letters of Credit
Schedule 3.2	Form of Notice of Continuation/Conversion
Schedule 5.1(g)(v)	Form of Officer’s Certificate
Schedule 6.6	Litigation
Schedule 6.8	Liens
Schedule 6.9	Intellectual Property
Schedule 6.14	Subsidiaries
Schedule 6.18	Labor Matters
Schedule 6.20(a)	Locations of Owned and Leased Real Property
Schedule 6.20(b)	Locations of Tangible Personal Property
Schedule 6.20(c)	Locations of Chief Executive Office/Principal Place of Business
Schedule 7.1(c)	Form of Officer’s Compliance Certificate
Schedule 7.6	Insurance
Schedule 7.12	Form of Joinder Agreement
Schedule 8.1	Indebtedness
Schedule 8.6	Investments
Schedule 11.1	Lenders’ Addresses
Schedule 11.3(b)	Form of Assignment and Acceptance

iv

CREDIT AND GUARANTY AGREEMENT

THIS CREDIT AND GUARANTY AGREEMENT, dated as of December 14, 2001 (the “Credit Agreement”), is by and among AMERIGROUP CORPORATION, a Delaware corporation (the “Borrower”), certain Subsidiaries and Affiliates of the Borrower identified as Guarantors herein (the “Guarantors”), the lenders identified herein (the “Lenders”), BANK OF AMERICA, N.A., as Administrative Agent for the Lenders (in such capacity, the “Administrative Agent”), and UBS WARBURG LLC and CIBC WORLD MARKETS CORP., as Co-Syndication Agents for the Lenders.

WITNESSETH

WHEREAS, the Credit Parties have requested that the Lenders provide $60 million in credit facilities for the purposes hereinafter set forth; and

WHEREAS, the Lenders have agreed to make the requested credit facilities available to the Borrower on the terms and conditions hereinafter set forth;

NOW, THEREFORE, IN CONSIDERATION of the premises and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto agree as follows:

SECTION 1 DEFINITIONS

1.1    Definitions.

As used in this Credit Agreement, the following terms shall have the meanings specified below unless the context otherwise requires:

“Acquisition”, by any Person, means the purchase or acquisition by such Person of any Capital Stock of another Person other than a Credit Party or all or any substantial portion of the Property (other than Capital Stock) of another Person other than a Credit Party, whether or not involving a merger or consolidation with such other Person.

“Adjusted Base Rate” means the Base Rate plus the Applicable Percentage.

“Adjusted Eurodollar Rate” means the Eurodollar Rate plus the Applicable Percentage.

“Administrative Agent” shall have the meaning provided in the heading hereof, together with any successors or assigns.

“Administrative Agent’s Fee Letter” means that certain letter agreement, dated as of October 24, 2001, between the Administrative Agent and the Borrower, as amended, modified, restated or supplemented from time to time.

“Administrative Services Agreements” means any and all administrative services, consulting, corporate allocation, management, tax allocation and similar agreements between or among the Borrower and the HMO Subsidiaries.

1

“Affiliate” means, with respect to any Person, any other Person (i) directly or indirectly controlling or controlled by or under direct or indirect common control with such Person or (ii) directly or indirectly owning or holding ten percent (10%) or more of the Capital Stock in such Person. For purposes of this definition, “control” when used with respect to any Person means the power to direct the management and policies of such Person, directly or indirectly, whether through the ownership of voting securities, by contract or otherwise; and the terms “controlling” and “controlled” have meanings correlative to the foregoing.

“Affiliate Employment Agreement” means any agreement between an Affiliate of the Borrower and the Borrower or any of its Subsidiaries that provides for the provision of employment, consulting or management services by such Affiliate.

“Agent-Related Persons” means the Administrative Agent (including any successor administrative agent), together with its Affiliates (including, in the case of Bank of America in its capacity as the Administrative Agent, BAS), and the officers, directors, employees, agents and attorneys-in-fact of such Persons and Affiliates.

“Aggregate Revolving Committed Amount” shall have the meaning provided in Section 2.1(a).

“Applicable Lending Office” means, for each Lender, the office of such Lender (or of an Affiliate of such Lender) as such Lender may from time to time specify to the Administrative Agent and the Borrower by written notice as the office by which its Eurodollar Loans are made and maintained.

“Applicable Percentage” means, for any day, the rate per annum set forth below opposite the applicable Consolidated Total Leverage Ratio then in effect, it being understood that the Applicable Percentage for (i) Base Rate Loans shall be the percentage set forth under the column titled “Base Rate Margin”, (ii) Eurodollar Loans shall be the percentage set forth under the column titled “Eurodollar Margin and Letter of Credit Fee”, (iii) the Letter of Credit Fee shall be the percentage set forth under the column titled “Eurodollar Margin and Letter of Credit Fee”, and (iv) the Commitment Fee shall be the percentage set forth under the column titled “Commitment Fee”:

Pricing Level	Consolidated Total Leverage Ratio	Base Rate Margin	Eurodollar Margin and Letter of Credit Fee	Commitment Fee
I	> 2.0:1.0	1.5%	2.5%	0.5%
II	> 1.5:1.0 but < 2.0:1.0	1.25%	2.25%	0.5%
III	<1.5:1.0	1.0%	2.0%	0.5%

The Applicable Percentage shall be determined and adjusted on each of the following dates (each a “Rate Determination Date”) (a) five Business Days after the date by which annual and quarterly compliance certificates and related financial statements and information are required in accordance with the provisions of Sections 7.1(a), (b) and (c), as appropriate, and (b) five Business Days after the date on which any Permitted Acquisition closes; provided that:

(i)    the initial Applicable Percentages shall be based on pricing level III and shall remain in effect at such pricing level (or any higher (more expensive) pricing level as would otherwise apply) until the first Rate Determination Date to occur in connection with the delivery of the quarterly financial statements and appropriate compliance certificate for the most recent fiscal quarter ending after the Closing Date, and

2

(ii)    notwithstanding the foregoing, in the event an annual or quarterly compliance certificate and related financial statements and information are not delivered timely to the Administrative Agent and the Lenders by the date required by Section 7.1(a), (b) or (c), as appropriate, the Applicable Percentages shall be based on pricing level I until the date five Business Days after the appropriate compliance certificate and related financial statements and information are delivered, whereupon the applicable pricing level shall be adjusted based on the information contained in such compliance certificate and related financial statements and information.

Subject to the qualifications set forth above, each Applicable Percentage shall be effective from a Rate Determination Date until the next Rate Determination Date. The Administrative Agent shall determine the appropriate Applicable Percentages in the pricing matrix promptly upon receipt of the quarterly or annual compliance certificate and related financial information and shall promptly notify the Borrower and the Lenders of any change thereof. Such determinations by the Administrative Agent shall be conclusive absent manifest error. Adjustments in the Applicable Percentages shall be effective as to existing Extensions of Credit as well as new Extensions of Credit made thereafter.

“Approved Fund” means any Fund that is administered or managed by (a) a Lender, (b) an Affiliate of a Lender or (c) an entity or an Affiliate of an entity that administers or manages a Lender.

“Asset Disposition” shall mean and include (i) the sale, lease or other disposition of any Property by any member of the Consolidated Group (including the Capital Stock of a Subsidiary), but for purposes hereof shall not include, in any event, (A) the sale or other disposition of inventory and Permitted Investments in the ordinary course of business, (B) the sale, lease or other disposition of machinery and equipment no longer used or useful in the conduct of business, (C) a sale, lease, transfer or disposition of Property to a Credit Party, and (D) dispositions in connection with a Permitted Acquisition within sixty days thereof, and (ii) receipt by any member of the Consolidated Group of any cash insurance proceeds or condemnation award payable by reason of theft, loss, physical destruction or damage, taking or similar event with respect to any of its Property.

“Assignment and Acceptance” means an assignment and acceptance substantially in the form of Schedule 11.3(b) hereto executed and delivered in accordance with the provisions of Section 11.3.

“Bank of America” means Bank of America, N.A., and its successors.

“Bankruptcy Code” means the Bankruptcy Code in Title 11 of the United States Code, as amended, modified, succeeded or replaced from time to time.

“Bankruptcy Event” means, with respect to any Person, the occurrence of any of the following with respect to such Person: (i) a court or governmental agency having jurisdiction in the premises shall enter a decree or order for relief in respect of such Person in an involuntary case under any applicable bankruptcy, insolvency or other similar law now or hereafter in effect, or appointing a receiver, liquidator, assignee, custodian, trustee, sequestrator (or similar official) of such Person or for any substantial part of its Property or ordering the winding up or liquidation of its affairs; or (ii) there shall be commenced against such Person an involuntary case under any applicable bankruptcy, insolvency or other similar law now or hereafter in effect, or any case, proceeding or other action for

3

the appointment of a receiver, liquidator, assignee, custodian, trustee, sequestrator (or similar official) of such Person or for any substantial part of its Property or for the winding up or liquidation of its affairs, and such involuntary case or other case, proceeding or other action shall remain undismissed, undischarged or unbonded for a period of sixty consecutive days; or (iii) such Person shall commence a voluntary case under any applicable bankruptcy, insolvency or other similar law now or hereafter in effect, or consent to the entry of an order for relief in an involuntary case under any such law, or consent to the appointment or taking possession by a receiver, liquidator, assignee, custodian, trustee, sequestrator (or similar official) of such Person or for any substantial part of its Property or make any general assignment for the benefit of creditors; or (iv) such Person shall be unable to, or shall admit in writing its inability to, pay its debts generally as they become due.

“BAS” means Banc of America Securities LLC.

“Base Rate” means for any day a fluctuating rate per annum equal to the higher of (i) the Federal Funds Rate in effect on such day plus one half of one percent (0.5%) and (ii) the Prime Rate in effect on such day.

“Base Rate Loan” means any Loan bearing interest at a rate determined by reference to the Base Rate.

“Borrower” means AMERIGROUP Corporation, a Delaware corporation, its successors and permitted assigns.

“Borrower Cash Flow” means, for any period for the Borrower, the sum of (i) management fees accrued (to the extent received within ninety days), plus (ii) royalty fees accrued (to the extent received within ninety days), plus (iii) (A) with respect to the Borrower, investment income accrued and (B) investment income accrued by the Borrower with respect to members of the Consolidated Group (to the extent received within ninety days), minus (iv) sales and general and administrative expense, plus (v) dividends and distributions from members of the Consolidated Group, minus (vi) cash Investments made in members of the Consolidated Group and Affiliates during such period, in each case determined on an unconsolidated basis on the accrual basis of accounting in accordance with GAAP. Except as otherwise expressly provided, the applicable period shall be for the four consecutive fiscal quarters ending as of the date of determination.

“Business Day” means a day other than a Saturday, Sunday or other day on which commercial banks in Charlotte, North Carolina or New York, New York are authorized or required by law to close, except that, when used in connection with a Eurodollar Loan, such day shall also be a day on which dealings between banks are carried on in Dollar deposits in London, England.

“Capital Expenditures” means, for any Person for any period, without duplication, all expenditures (whether paid in cash or other consideration) during such period that, in accordance with GAAP, are or should be included in additions to property, plant and equipment or similar items (including capitalized software costs) reflected in the consolidated statement of cash flows for such period; provided that Capital Expenditures shall not include, for purposes hereof, expenditures of proceeds of insurance settlements, condemnation awards and other settlements in respect of lost, destroyed, damaged or condemned assets, equipment or other property to the extent such expenditures are made to replace or repair such lost, destroyed, damaged or condemned assets, equipment or other property or otherwise to acquire assets or properties useful in such Person’s business.

4

“Capital Lease” means, as applied to any Person, any lease of Property by such Person as lessee that, in accordance with GAAP, is or should be accounted for as a capital lease on the balance sheet of such Person.

“Capital Stock” means (i) in the case of a corporation, capital stock, (ii) in the case of an association or business entity, any and all shares, interests, participations, rights or other equivalents (however designated) of capital stock, (iii) in the case of a partnership, partnership interests (whether general or limited), (iv) in the case of a limited liability company, membership interests and (v) any other interest or participation that confers on a Person the right to receive a share of the profits and losses of, or distributions of assets of, the issuing Person.

“Cash Equivalents” means (a) securities issued or directly and fully guaranteed or insured by the United States or any agency or instrumentality thereof (provided that the full faith and credit of the United States is pledged in support thereof) having maturities of not more than twelve months from the date of acquisition, (b) Dollar denominated time deposits and certificates of deposit of (i) any Lender, (ii) any domestic commercial bank of recognized standing having capital and surplus in excess of $500 million or (iii) any bank whose short-term commercial paper rating from S&P is at least A-1 or the equivalent thereof or from Moody’s is at least P-1 or the equivalent thereof (any such bank being an “Approved Bank”), in each case with maturities of not more than 365 days from the date of acquisition, (c) commercial paper and variable or fixed rate notes issued by any Approved Bank (or by the parent company thereof) or any fixed rate, variable rate, or auction rate securities issued by, or guaranteed by, any domestic corporation or municipality rated A-1 (or the equivalent thereof) or better by S&P or P-1 (or the equivalent thereof) or better by Moody’s and maturing within six months of the date of acquisition, (d) repurchase agreements entered into by any Person with a bank or trust company (including any of the Lenders) or recognized securities dealer having capital and surplus in excess of $500 million for direct obligations issued by or fully guaranteed by the United States in which such Person shall have a perfected first priority security interest (subject to no other Liens) and having, on the date of purchase thereof, a fair market value of at least one hundred percent (100%) of the amount of the repurchase obligations, (e) Investments, classified in accordance with GAAP as current assets, in money market investment programs registered under the Investment Company Act of 1940, as amended, that are administered by reputable financial institutions having capital of at least $500 million and the portfolios of which are limited to Investments of the character described in the foregoing subdivisions (a) through (d), and (f) with respect to (i) the Borrower, marketable debt securities regularly traded on a national securities exchange or in the over-the-counter market, if and to the extent such debt security constitutes a permitted investment under the HMO Regulations applicable to any of the HMO Subsidiaries or (ii) any HMO Subsidiary, marketable debt securities regularly traded on a national securities exchange or in the over-the-counter market, if and to the extent such debt security constitutes a permitted investment under the HMO Regulations applicable to such HMO Subsidiary.

“CHAMPUS” means the United States Department of Defense Civilian Health and Medical Program of the Uniformed Services.

“Change of Control” means the occurrence of any of the following events: (i) any Person or two or more Persons acting in concert shall have acquired beneficial ownership, directly or indirectly, of, or shall have acquired by contract or otherwise, or shall have entered into a contract or arrangement that, upon consummation, will result in its or their acquisition of or control over, Voting Stock of the Borrower (or other securities convertible into such Voting Stock) representing twenty-five percent (25%) or more of the combined voting power of all Voting Stock of the Borrower, or (ii) during any period of up to twenty-four consecutive months, commencing after the Closing Date, individuals who at the beginning of such twenty-four month period were directors of the Borrower

5

(together with any new director whose election by the Borrower’s board of directors or whose nomination for election by the Borrower’s shareholders was approved by a vote of at least two-thirds of the directors then still in office who either were directors at the beginning of such period or whose election or nomination for election was previously so approved) cease for any reason to constitute a majority of the directors of the Borrower then in office. As used herein, “beneficial ownership” shall have the meaning provided in Rule 13d-3 of the Securities and Exchange Commission under the Securities Exchange Act.

“Closing Date” means the date hereof.

“Collateral” means a collective reference to the collateral that is identified in, and at any time will be covered by, the Collateral Documents.

“Collateral Agent” means the collateral agent for the Lenders as defined in the Security Agreement and the Pledge Agreement, together with any successors and assigns.

“Collateral Documents” means a collective reference to the Security Agreement, the Pledge Agreement and such other documents executed and delivered in connection with the attachment and perfection of the Administrative Agent’s security interests and liens arising thereunder, including, without limitation, UCC financing statements and patent and trademark filings.

“Commitment” means the Revolving Commitment, the LOC Commitment and the Swingline Commitment.

“Commitment Fee” shall have the meaning provided in Section 3.5(a).

“Commitment Period” means the period from and including the Closing Date to but not including the earlier of (i) the Termination Date or (ii) the date on which the Commitments terminate in accordance with the provisions of this Credit Agreement.

“Committed Amount” means any or all of the Revolving Committed Amount, the LOC Committed Amount and the Swingline Committed Amount.

“Company Action Level” means the Company Action Level risk-based capital threshold, as defined by NAIC.

“Consolidated Capital Expenditures” means Capital Expenditures of the Consolidated Group as determined in accordance with GAAP.

“Consolidated EBITDA” means, for any period for the Consolidated Group, the sum of (i) Consolidated Net Income, plus (ii) to the extent deducted in determining net income, (A) Consolidated Interest Expense, (B) taxes and (C) depreciation and amortization, in each case on a consolidated basis determined in accordance with GAAP. Except as otherwise expressly provided, the applicable period shall be the four consecutive fiscal quarters ending as of the date of determination.

“Consolidated Group” means the Borrower and its consolidated subsidiaries (including the Borrower), as determined in accordance with GAAP.

6

“Consolidated Interest Expense” means, for any period for the Consolidated Group, all interest expense, including the amortization of debt discount and premium, the interest component under Capital Leases and the implied interest component under Securitization Transactions, in each case on a consolidated basis determined in accordance with GAAP. Except as expressly provided otherwise, the applicable period shall be the four consecutive fiscal quarters ending as of the date of determination.

“Consolidated Net Income” means, for any period for the Consolidated Group, net income (or loss) determined on a consolidated basis in accordance with GAAP, but excluding for purposes of determining the Consolidated Total Leverage Ratio, any extraordinary gains or losses and related tax effects thereon. Except as otherwise expressly provided, the applicable period shall be the four consecutive fiscal quarters ending as of the date of determination.

“Consolidated Net Worth” means, as of any date, consolidated shareholders’ equity or net worth of the Consolidated Group as determined in accordance with GAAP.

“Consolidated Total Funded Debt” means Funded Debt of the Consolidated Group determined on a consolidated basis in accordance with GAAP.

“Consolidated Total Leverage Ratio” means, as of the last day of each fiscal quarter, the ratio of Consolidated Total Funded Debt on such day to Consolidated EBITDA.

“Continue”, “Continuation”, and “Continued” shall refer to the continuation pursuant to Section 3.2 hereof of a Eurodollar Loan from one Interest Period to the next Interest Period.

“Contract Provider” means any Person or any employee, agent or subcontractor of such Person who provides professional health care services under or pursuant to any contract with any member of the Consolidated Group.

“Contractual Obligation” means, as to any Person, any provision of any security issued by such Person or of any material agreement, instrument or undertaking to which such Person is a party or by which it or any of its property is bound.

“Convert”, “Conversion”, and “Converted” shall refer to a conversion pursuant to Section 3.2 or Sections 3.7 through 3.12, inclusive, of a Base Rate Loan into a Eurodollar Loan.

“Credit Documents” means, collectively, this Credit Agreement, the Notes, the LOC Documents, the Collateral Documents, the Administrative Agent’s Fee Letter, and all other related agreements and documents issued or delivered hereunder or thereunder or pursuant hereto or thereto.

“Credit Party” means any or all of the Borrower and the Guarantors.

“Debt Transaction” means, with respect to any member of the Consolidated Group, any sale, issuance, placement, assumption or guaranty of Funded Debt, whether or not evidenced by promissory note or other written evidence of indebtedness, except for Funded Debt permitted to be incurred pursuant to clauses (a) through (j) of Section 8.1.

“Default” means any event, act or condition that with notice or lapse of time, or both, would constitute an Event of Default.

7

“Defaulting Lender” means, at any time, any Lender that (a) has failed to make a Loan or purchase a Participation Interest required pursuant to the terms of this Credit Agreement within one Business Day of when due, (b) other than as set forth in (a) above, has failed to pay to the Administrative Agent or any Lender an amount owed by such Lender pursuant to the terms of this Credit Agreement within one Business Day of when due, unless such amount is subject to a good faith dispute or (c) has been deemed insolvent or has become subject to a bankruptcy or insolvency proceeding or with respect to which (or with respect to any of the assets of which) a receiver, trustee or similar official has been appointed.

“Dollars” and “$” means dollars in lawful currency of the United States.

“Domestic Credit Party” means a Credit Party that is incorporated or organized under the laws of any state of the United States or the District of Columbia.

“Domestic Subsidiary” means any Subsidiary that is incorporated or organized under the laws of any state of the United States or the District of Columbia.

“Eligible Assignee” means (i) a Lender; (ii) an Affiliate of a Lender; (iii) an Approved Fund; and (iv) any other Person (other than a natural Person) approved by the Administrative Agent and, unless (A) such Person is taking delivery of an assignment in connection with physical settlement of a credit derivatives transaction or (B) an Event of Default has occurred and is continuing, the Borrower (each such approval not to be unreasonably withheld or delayed).

“Eligible Domestic Subsidiary” means any Domestic Subsidiary of the Borrower other than (i) a Subsidiary that is an HMO or (ii) a Subsidiary that has no assets.

“Environmental Laws” means any and all lawful and applicable federal, state, local and foreign statutes, laws, regulations, ordinances, rules, judgments, orders, decrees, permits, concessions, grants, franchises, licenses, agreements and other governmental restrictions relating to the environment or to emissions, discharges, releases or threatened releases of Materials of Environmental Concern into the environment including, without limitation, ambient air, surface water, ground water, or land, or otherwise relating to the manufacture, processing, distribution, use, treatment, storage, disposal, transport, or handling of Materials of Environmental Concern.

“Equity Transaction” means, with respect to any member of the Consolidated Group, any issuance or sale of shares of its capital stock or other equity interest, other than an issuance (i) to a member of the Consolidated Group, (ii) in connection with a conversion of debt securities to equity, (iii) in connection with exercise by a present or former employee, officer, consultant or director under a stock incentive plan, stock option plan or other equity-based compensation plan or arrangement and (iv) of Capital Stock of the Borrower in connection with a Permitted Acquisition.

“ERISA” means the Employee Retirement Income Security Act of 1974, as amended, and any successor statute thereto, as interpreted by the rules and regulations thereunder, all as the same may be in effect from time to time. References to sections of ERISA shall be construed also to refer to any successor sections.

“ERISA Affiliate” means an entity that is under common control with any member of the Consolidated Group within the meaning of Section 4001(a)(14) of ERISA, or is a member of a group that includes any member of the Consolidated Group and that is treated as a single employer under Sections 414(b) or (c) of the Internal Revenue Code.

8

“ERISA Event” means (i) with respect to any Plan, the occurrence of a Reportable Event or the substantial cessation of operations (within the meaning of Section 4062(e) of ERISA); (ii) the withdrawal by any member of the Consolidated Group or any ERISA Affiliate from a Multiple Employer Plan during a plan year in which it was a substantial employer (as such term is defined in Section 4001(a)(2) of ERISA), or the termination of a Multiple Employer Plan; (iii) the distribution of a notice of intent to terminate or the actual termination of a Plan pursuant to Section 4041(a)(2) or 4041A of ERISA; (iv) the institution of proceedings to terminate or the actual termination of a Plan by the PBGC under Section 4042 of ERISA; (v) any event or condition that is determined by the PBGC to constitute grounds under Section 4042 of ERISA for the termination of, or the appointment of a trustee to administer, any Plan; (vi) the complete or partial withdrawal of any member of the Consolidated Group or any ERISA Affiliate from a Multiemployer Plan; (vii) the conditions for imposition of a lien under Section 302(f) of ERISA exist with respect to any Plan; or (viii) the adoption of an amendment to any Plan requiring the provision of security to such Plan pursuant to Section 307 of ERISA.

“Eurodollar Loan” means any Loan bearing interest at a rate determined by reference to the Eurodollar Rate.

“Eurodollar Rate” means, for any Eurodollar Loan for any Interest Period therefor, the rate per annum (rounded upwards, if necessary, to the nearest 1/100 of one percent (0.01%) determined by the Administrative Agent to be equal to the quotient obtained by dividing (i) the Interbank Offered Rate for such Eurodollar Loan for such Interest Period by (ii) one minus the Eurodollar Reserve Requirement for such Eurodollar Loan for such Interest Period.

“Eurodollar Reserve Requirement” means, at any time, the maximum rate at which reserves (including, without limitation, any marginal, special, supplemental, or emergency reserves) are required to be maintained under regulations issued from time to time by the Board of Governors of the Federal Reserve System (or any successor) by member banks of the Federal Reserve System against “Eurocurrency liabilities” (as such term is used in Regulation D). Without limiting the effect of the foregoing, the Eurodollar Reserve Requirement shall reflect any other reserves required to be maintained by such member banks with respect to (i) any category of liabilities that includes deposits by reference to which the Eurodollar Rate is to be determined, or (ii) any category of extensions of credit or other assets that include Eurodollar Loans. The Eurodollar Rate shall be adjusted automatically on and as of the effective date of any change in the Eurodollar Reserve Requirement.

“Event of Default” shall have the meaning provided in Section 9.1.

“Exclusion Event” means an event or related events resulting in the exclusion of one or more members of the Consolidated Group from participation in any Medical Reimbursement Program.

“Existing Letters of Credit” means the letters of credit outstanding on the Closing Date and identified on Schedule 2.6(b).

“Extension of Credit” means, as to any Lender, the making of, or participation in, a Loan by such Lender (including Continuations and Conversions thereof) or the issuance or extension of, or participation in, a Letter of Credit by such Lender.

“Federal Funds Rate” means, for any day, the rate per annum (rounded upwards, if necessary, to the nearest 1/100^th of one percent (0.01%)) equal to the weighted average of the

9

rates on overnight federal funds transactions with members of the Federal Reserve System arranged by federal funds brokers on such day, as published by the Federal Reserve Bank on the Business Day next succeeding such day; provided that (a) if such day is not a Business Day, the Federal Funds Rate for such day shall be such rate on such transactions on the next preceding Business Day as so published on the next succeeding Business Day, and (b) if no such rate is so published on such next succeeding Business Day, the Federal Funds Rate for such day shall be the average rate charged to Bank of America on such day on such transactions as determined by the Administrative Agent.

“Fees” means all fees payable pursuant to Section 3.5.

“Fixed Charge Coverage Ratio” means, for any period, the ratio of (i) Borrower Cash Flow to (ii) Fixed Charges.

“Fixed Charges” means, for any period for the Borrower, the sum of (i) interest expense, plus (ii) scheduled principal payments on Funded Debt, plus (iii) Restricted Payments paid by the Borrower to any Person (other than a member of the Consolidated Group), in each case determined on an unconsolidated basis in accordance with GAAP. Except as otherwise expressly provided, the applicable period shall be for the four consecutive fiscal quarters ending as of the date of determination.

“Foreign Subsidiary” means a Subsidiary that is not a Domestic Subsidiary.

“Fund” means any Person (other than a natural Person) that is or will be engaged in making, purchasing, holding or otherwise investing in commercial loans and similar extensions of credit in the ordinary course of its business.

“Funded Debt” means, with respect to any Person, without duplication, all (i) obligations for borrowed money, (ii) obligations evidenced by bonds debentures, notes or similar instruments or upon which interest payments are customarily made, (iii) purchase money indebtedness (including, for purposes hereof, indebtedness and obligations in respect of conditional sales and title retention agreements relating to property purchased (other than customary reservation or title retention arrangements under agreements entered into in the ordinary course of business with suppliers), and the deferred purchase price of property or services acquired (other than trade debt incurred in the ordinary course of business and due within six months of the incurrence thereof) that would constitute, and be accounted for as, a liability under GAAP, (iv) the attributed principal amount of obligations owing under Capital Leases, (v) the maximum amount available to be drawn under standby letters of credit and bankers’ acceptances issued or created for its account, (vi) the attributed principal amount of Securitization Transactions, (vii) the attributed principal amount of obligations owing under Synthetic Leases, (viii) all preferred stock or comparable equity interests providing for mandatory redemption, sinking fund or other like payments, (ix) the Funded Debt of any partnership or joint venture or other similar entity in which such Person is a general partner or joint venturer and, as such, has personal liability for such obligations, but only to the extent there is recourse to such Person for payment thereof, (x) Support Obligations in respect of Funded Debt of another Person, (xi) Funded Debt of another Person secured by a Lien on any of its Property, whether or not such Funded Debt has been assumed, provided, however, for purposes hereof, the amount of such Funded Debt shall be limited to the amount of Funded Debt as to which there is recourse or to the fair market value of the property that is the subject of such lien, if less, and (xii) the maximum amount of all contingent obligations (including, without limitation, obligations to make earn-out payments) incurred in connection with Acquisitions.

10

“GAAP” means generally accepted accounting principles in the United States applied on a consistent basis and subject to the terms of Section 1.3.

“Governmental Authority” means any federal, state, local or foreign court or governmental agency, authority, instrumentality or regulatory body.

“Governmental Reimbursement Program Cost” means with respect to and payable by the Borrower and its Subsidiaries the sum of:

(i)    all amounts (including punitive and other similar amounts) agreed to be paid or payable (A) in settlement of claims or (B) as a result of a final, non-appealable judgment, award or similar order, in each case, relating to participation in Medical Reimbursement Programs;

(ii)    all final, non-appealable fines, penalties, forfeitures or other amounts rendered pursuant to criminal indictments or other criminal proceedings relating to participation in Medical Reimbursement Programs; and

(iii)    the amount of final, non-appealable recovery, damages, awards, penalties, forfeitures or similar amounts rendered in any litigation, suit, arbitration, investigation or other legal or administrative proceeding of any kind relating to participation in Medical Reimbursement Programs.

“Guaranteed Obligations” means, without duplication, (i) all of the obligations of the Borrower to the Lenders (including the Issuing Lender and the Swingline Lender), the Administrative Agent and the Collateral Agent, whenever arising, under this Credit Agreement, the Notes, the Collateral Documents or any of the other Credit Documents (including, without limitation, any interest accruing after the occurrence of a Bankruptcy Event with respect to any Credit Party, regardless of whether such interest is an allowed claim under the Bankruptcy Code) and (ii) all liabilities and obligations owing from any Credit Party to any Lender, or any Affiliate of a Lender, whenever arising, under any Hedging Agreement relating to the Obligations to the extent permitted hereunder.

“Guarantor” means each Person identified as a “Guarantor” on the signature pages hereto and each other Person that joins as a Guarantor pursuant to Section 7.12, together with their successors and permitted assigns.

“HCFA” means the United States Health Care Financing Administration and any successor thereof, including the Centers for Medicare and Medicaid Services.

“HHS” means the United States Department of Health and Human Services and any successor thereof.

“Hedging Agreements” means any interest rate protection agreement or foreign currency exchange agreement.

“HMO” means any health maintenance organization, managed care organization, any Person doing business as a health maintenance organization or managed care organization, or any Person required to qualify or be licensed as a health maintenance organization or managed care

11

organization under applicable federal or state law (including, without limitation, HMO Regulations).

“HMO Business” means the business of owning and operating an HMO or other similar regulated entity or business.

“HMO Event” means any material non-compliance by the Borrower or any of its Subsidiaries with any of the terms and provisions of the HMO Regulations pertaining to its fiscal soundness, solvency or financial condition; or the assertion in writing, after the date hereof, by an HMO Regulator that it intends to take administrative action against the Borrower or any of its Subsidiaries to revoke or modify any license, charter or permit or to enforce the fiscal soundness, solvency or financial provisions or requirements of the HMO Regulations against the Borrower or any of its Subsidiaries.

“HMO Regulations” means all laws, regulations, directives and administrative orders applicable under federal or state law to any HMO Subsidiary (and any regulations, orders and directives promulgated or issued pursuant to any of the foregoing) and Subchapter XI of Title 42 of the United States Code Annotated (and any regulations, orders and directives promulgated or issued pursuant thereto, including, without limitation, Part 417 of Chapter IV of 42 Code of Federal Regulations (1990)).

“HMO Regulator” means any Person charged with the administration, oversight or enforcement of an HMO Regulation, whether primarily, secondarily or jointly.

“HMO Subsidiary” means each of the Subsidiaries of the Borrower identified as an HMO Subsidiary on Schedule 6.14 hereto, and any other existing or future Subsidiary of the Borrower that is capitalized or licensed as an HMO, conducting HMO Business or providing managed care services.

“Indebtedness” means, with respect to any Person, without duplication, all (i) Funded Debt, (ii) obligations under take-or-pay or similar arrangements or under commodities agreements, (iii) obligations under Hedging Agreements, (iv) the maximum amount of contingent obligations (including earn-out and like payments) owing in respect of Acquisitions or dispositions or divestitures, (v) Indebtedness of any partnership or joint venture or other similar entity in which such Person is a general partner or joint venturer and, as such, has personal liability for such obligations, but only to the extent there is recourse to such Person for payment thereof, (vi) Support Obligations in respect of Indebtedness of another Person, and (vii) Indebtedness of another Person secured by a Lien on any of its Property, whether or not such Indebtedness has been assumed.

“Indemnified Liabilities” shall have the meaning provided in Section 11.5.

“Indemnitees” shall have the meaning provided in Section 11.5.

“Interbank Offered Rate” means, for any Eurodollar Loan for any Interest Period therefor, the rate per annum (rounded upwards, if necessary, to the nearest 1/100^th of one percent (0.01%)) in each case determined by the Administrative Agent to be equal to:

(a)    the offered rate that appears on the Dow Jones Telerate Screen Page 3750 (or any successor page) that displays an average British Bankers Association Interest Settlement Rate for deposits in Dollars (for delivery on the first day of the

12

applicable Interest Period) for a term equivalent to the applicable Interest Period at approximately 11:00 A.M. (London, England time) two Business Days prior to the first day of the applicable Interest Period; or

(b)    if for any reason the foregoing rate in clause (a) is unavailable or undeterminable, the offered rate on such other page or other service that displays an average British Bankers Association Interest Settlement Rate for deposits in Dollars (for delivery on the first day of the applicable Interest Period) for a term equivalent to the applicable Interest Period at approximately 11:00 A.M. (London, England time) two Business Days prior to the first day of the applicable Interest Period; or

(c)    if for any reason the foregoing rates in clauses (a) and (b) are unavailable or undeterminable, the rate of interest at which deposits in Dollars for delivery on the first day of the applicable Interest Period in same day funds in the approximate amount of the applicable Eurodollar Loan for a term equivalent to the applicable Interest Period would be offered by the London branch of Bank of America to major banks in the offshore Dollar market at approximately 11:00 A.M. (London, England time) two Business Days prior to the first day of the applicable Interest Period.

“Interest Payment Date” means (i) as to any Base Rate Loan and any Swingline Loan, the last day of each March, June, September and December, and the Termination Date, and (ii) as to any Eurodollar Loan, the last day of each Interest Period for such Loan, the date of repayment of principal of such Loan and the Termination Date, and in addition where the applicable Interest Period is more than three months, then also on the date three months from the beginning of the Interest Period, and each three months thereafter. If an Interest Payment Date falls on a date that is not a Business Day, such Interest Payment Date shall be deemed to be the next succeeding Business Day.

“Interest Period” means (i) as to any Eurodollar Loan, a period of one, two, three or six months duration, as the Borrower may elect, in each case commencing on the date of the borrowing (including Conversions, Continuations and renewals) and (ii) as to any Swingline Loan, a period of such duration as the Borrower may request and the Swingline Lender may agree in accordance with the provisions hereof, in each case commencing on the date of borrowing; provided, however, (A) if any Interest Period would end on a day that is not a Business Day, such Interest Period shall be extended to the next succeeding Business Day (except in the case of Eurodollar Loans where the next succeeding Business Day falls in the next succeeding calendar month, then on the next preceding Business Day), (B) no Interest Period shall extend beyond the Termination Date, and (C) in the case of Eurodollar Loans, where an Interest Period begins on a day for which there is no numerically corresponding day in the calendar month in which the Interest Period is to end, such Interest Period shall end on the last day of such calendar month.

“Internal Revenue Code” means the Internal Revenue Code of 1986, as amended, and any successor statute thereto, as interpreted by the rules and regulations issued thereunder, in each case as in effect from time to time. References to sections of the Internal Revenue Code shall be construed also to refer to any successor sections.

“Investment” in any Person means (i) the acquisition (whether for cash, property, services, assumption of Indebtedness, securities or otherwise) of Capital Stock, bonds, notes, debentures, partnership, joint ventures or other ownership interests or other securities of such Person, (ii) any deposit with, or advance, loan or other extension of credit to, such Person (other than deposits made in connection with the purchase of equipment or other assets in the ordinary course of business) or

13

(iii)    any other capital contribution to or investment in such Person, including, without limitation, any Support Obligations (including any support for a letter of credit issued on behalf of such Person in the maximum amount available to be drawn under such letter of credit) incurred for the benefit of such Person, but excluding any Restricted Payment to such Person.

“IPO” means the initial public offering by the Borrower in November, 2001.

“Issuing Lender” means Bank of America.

“Issuing Lender Fee” shall have the meaning provided in Section 3.5(b).

“Joinder Agreement” means a joinder agreement substantially in the form of Schedule 7.12 hereto executed and delivered by a Subsidiary in accordance with the provisions of Section 7.12.

“Lenders” means each of the Persons identified as a “Lender” on the signature pages hereto and each other Person that joins as a Lender pursuant to Section 2.1(d), together with their successors and assigns.

“Letter of Credit” means any Existing Letter of Credit and any standby letter of credit issued by the Issuing Lender for the account of the Borrower in accordance with the terms of Section 2.1(b).

“Letter of Credit Fee” shall have the meaning provided in Section 3.5(b).

“Licenses” means all licenses, permits and other grants of authority obtained or required to be obtained from any Governmental Authorities in connection with the management or operation of the business of the members of the Consolidated Group or the ownership, lease, license or use of any Property of the members of the Consolidated Group.

“Lien” means any mortgage, pledge, hypothecation, assignment, deposit arrangement, security interest, encumbrance, lien (statutory or otherwise), preference, priority or charge of any kind (including any agreement to give any of the foregoing, any conditional sale or other title retention agreement, any financing or similar statement or notice filed under the Uniform Commercial Code as adopted and in effect in the relevant jurisdiction or other similar recording or notice statute, and any lease in the nature thereof).

“Loan” or “Loans” means any or all of the Revolving Loans and the Swingline Loans, and the Base Rate Loans and Eurodollar Loans comprising such Loans.

“LOC Commitment” means, with respect to the Issuing Lender, the commitment of the Issuing Lender to issue, and to honor payment obligations under, Letters of Credit and, with respect to each Lender, the commitment of such Lender to purchase Participation Interests in the Letters of Credit up to such Lender’s LOC Committed Amount.

“LOC Committed Amount” shall have the meaning provided in Section 2.1(b).

“LOC Documents” means, with respect to any Letter of Credit, such Letter of Credit, any amendments thereto, any documents delivered in connection therewith, any application therefor, and any agreements, instruments, guarantees or other documents (whether general in application or applicable only to such Letter of Credit) governing or providing for (i) the rights and obligations of the parties concerned or at risk or (ii) any collateral security for such obligations.

14

“LOC Obligations” means, at any time, the sum of (i) the maximum amount that is, or at any time thereafter may become, available to be drawn under Letters of Credit then outstanding, assuming compliance with all requirements for drawings referred to in such Letters of Credit plus (ii) the aggregate amount of all drawings under Letters of Credit honored by the Issuing Lender but not yet reimbursed.

“Material Adverse Effect” means a material adverse effect on (i) the condition (financial or otherwise), operations, business, assets, liabilities or prospects of the Consolidated Group taken as a whole, (ii) the ability of any member of the Consolidated Group to perform any material obligation under any Credit Document to which it is a party or (iii) the material rights and remedies of the Administrative Agent and the Lenders under the Credit Documents.

“Materials of Environmental Concern” means any gasoline or petroleum (including crude oil or any fraction thereof) or petroleum products or any hazardous or toxic substances, materials or wastes, defined or regulated as such in or under any Environmental Laws, including, without limitation, asbestos, polychlorinated biphenyls and urea-formaldehyde insulation.

“Medicaid” means that means-tested entitlement program under Title XIX, P.L. 89-87, of the Social Security Act, which provides federal grants to states for medical assistance based on specific eligibility criteria, as set forth at Section 1396, et seq. of Title 42 of the United Sates Code, as amended.

“Medicaid Regulations” means, collectively, (i) all federal statutes (whether set forth in Title XIX of the Social Security Act or elsewhere) affecting the medical assistance program established by Title XIX of the Social Security Act and any statutes succeeding thereto; (ii) all applicable provisions of all federal rules, regulations, manuals and orders of all Governmental Authorities promulgated pursuant to or in connection with the statutes described in clause (i) above and all federal administrative, reimbursement and other guidelines of all Governmental Authorities having the force of law promulgated pursuant to or in connection with the statutes described in clause (i) above; (iii) all state statutes and plans for medical assistance enacted in connection with the statutes and provisions described in clauses (i) and (ii) above; and (iv) all applicable provisions of all rules, regulations, manuals and orders of all Governmental Authorities promulgated pursuant to or in connection with the statutes described in clause (iii) above and all state administrative, reimbursement and other guidelines of all Governmental Authorities having the force of law promulgated pursuant to or in connection with the statutes described in clause (ii) above, in each case as may be amended, supplemented or otherwise modified from time to time.

“Medical Reimbursement Programs” means a collective reference to the Medicare, Medicaid and CHAMPUS programs and any other health care program operated by or financed in whole or in part by any foreign or domestic federal, state or local government.

“Medicare” means that government-sponsored entitlement program under Title XVIII, P.L. 89-87, of the Social Security Act, which provides for a health insurance system for eligible elderly and disabled individuals, as set forth at Section 1395, et seq. of Title 42 of the United States Code, as amended.

“Medicare Regulations” means, collectively, all federal statutes (whether set forth in Title XVIII of the Social Security Act or elsewhere) affecting the health insurance program for the aged and disabled established by Title XVIII of the Social Security Act and any statutes succeeding thereto; together with all applicable provisions of all rules, regulations, manuals and

15

orders and administrative, reimbursement and other guidelines having the force of law of all Governmental Authorities (including, without limitation, HCFA, the OIG, HHS, or any person succeeding to the functions of any of the foregoing) promulgated pursuant to or in connection with any of the foregoing having the force of law, as each may be amended, supplemented or otherwise modified from time to time.

“Moody’s” means Moody’s Investors Service, Inc., or any successor or assignee of the business of such company in the business of rating securities.

“Multiemployer Plan” means a Plan that is a “multiemployer plan” as defined in Section 4001(a)(3) of ERISA.

“Multiple Employer Plan” means a Plan (other than a Multiemployer Plan) to which any member of the Consolidated Group or any ERISA Affiliate and at least one employer other than the members of the Consolidated Group or any ERISA Affiliate are contributing sponsors.

“NAIC” means the National Association of Insurance Commissioners, a national organization of insurance regulators.

“Net Cash Proceeds” means the aggregate proceeds paid in cash or Cash Equivalents received by any member of the Consolidated Group in connection with any Asset Disposition, Extraordinary Receipts, Equity Transaction or Debt Transaction, net of (a) direct costs (including, without limitation, legal, accounting and investment banking fees, and sales commissions) and (b) taxes paid or payable as a result thereof; it being understood that “Net Cash Proceeds” shall include, without limitation, any cash or Cash Equivalents received upon the sale or other disposition of any non-cash consideration received by any such member of the Consolidated Group in any Asset Disposition, Extraordinary Receipts, Equity Transaction or Debt Transaction.

“Note” or “Notes” means any or all of the Revolving Notes.

“Notice of Borrowing” means a written notice of borrowing in substantially the form of Schedule 2.2(a)(i), as required by Section 2.2(a).

“Notice of Continuation/Conversion” means the written notice of Continuation or Conversion in substantially the form of Schedule 3.2, as required by Section 3.2.

“Obligations” means the Revolving Loans, LOC Obligations and Swingline Loans.

“OIG” means the Office of Inspector General of HHS and any successor thereof.

“Operating Lease” means, as applied to any Person, any lease (including, without limitation, leases that may be terminated by the lessee at any time) of any Property that is not a Capital Lease other than any such lease in which that Person is the lessor.

“Other Taxes” shall have the meaning provided in Section 3.11.

“Participation Interest” means the purchase by a Lender of a participation in LOC Obligations as provided in Section 2.6(b), in Swingline Loans as provided in Section 2.7 and in Loans as provided in Section 3.14.

16

“PBGC” means the Pension Benefit Guaranty Corporation established pursuant to Subtitle A of Title IV of ERISA and any successor thereof.

“Permitted Acquisition” means any Acquisition by a member of the Consolidated Group; provided that (i) the Person to be acquired is in the HMO Business or a healthcare-related business and is located in the United States of America, (ii) the Property acquired (or the Property of the Person acquired) in such Acquisition shall be used or useful in the same or similar line of business as the members of the Consolidated Group on the Closing Date, (iii) all Property to be acquired in connection with such Acquisition shall be located in the United States of America, (iv) in the case of an Acquisition of the Capital Stock of another Person, the board of directors (or other comparable governing body) of such other Person shall have duly approved such Acquisition, (v) no Default or Event of Default shall exist immediately after giving effect to such Acquisition, (vi) if the Acquisition involves an interest in a partnership and a requirement that a member of the Consolidated Group be a general partner, the general partner shall be a newly formed special purpose Subsidiary of the Borrower, (vii) the Credit Parties shall, and shall cause the party that is the subject of the Acquisition to, execute and deliver such joinder and pledge agreements and take such other actions as may be necessary for compliance with the provisions of Sections 7.12 and 7.13, (viii) with respect to any Acquisition (or series of related Acquisitions) for which the aggregate consideration (including cash and non-cash consideration, the maximum amount of any contingent payment (including, without limitation, obligations to make earn-out payments), the fair value of any Capital Stock of the Borrower issued in connection therewith, and Indebtedness assumed) paid in connection therewith exceeds $10 million, the Borrower shall have delivered to the Administrative Agent (A) a compliance certificate signed by a Responsible Officer demonstrating compliance with the financial covenants hereunder after giving effect to the subject Acquisition on a Pro Forma Basis and reaffirming that the representations and warranties made hereunder are true and correct in all material respects as of such date and (B) a certificate of a Responsible Officer of the Borrower describing the Person to be acquired, including, without limitation, the location and type of operations, key management and HMO assets of such Person, if any, and (ix) with respect to any Acquisition (or series of related Acquisitions) for which the aggregate consideration (including cash and non-cash consideration, the maximum amount of any contingent payment (including, without limitation, obligations to make earn-out payments), the fair value of any Capital Stock of the Borrower issued in connection therewith, and Indebtedness assumed) paid in connection therewith exceeds $25 million, the compliance certificate delivered by the Borrower in connection therewith shall demonstrate the maintenance of a Consolidated Leverage Ratio of less than 2.0:1.0 on a Pro Forma Basis after giving effect thereto.

“Permitted Investments” means Investments that are (i) cash and Cash Equivalents; (ii) accounts receivable created, acquired or made in the ordinary course of business and payable or dischargeable in accordance with customary trade terms (including, without limitation, risk-sharing incentive payments and similar items); (iii) Investments consisting of Capital Stock, obligations, securities, promissory notes and other non-cash consideration or other Property received in settlement of accounts receivable (created and regularly accepted in the ordinary course of business) from bankrupt obligors; (iv) Investments made prior to the Closing Date and set forth in Schedule 8.6; (v) advances or loans to directors, officers and employees that do not exceed $5 million in the aggregate at any one time outstanding; (vi) advances or loans to customers and suppliers in the ordinary course of business that do not exceed $2 million in the aggregate at any one time outstanding; (vii) Investments existing on the Closing Date by members of the Consolidated Group in their Subsidiaries and Affiliates, (viii) Investments by members of the Consolidated Group in and to Domestic Credit Parties, (ix) Investments in HMO Subsidiaries; (x) Investments that constitute Permitted Acquisitions and (xi) Investments of a nature not contemplated in the foregoing subsections in an amount not to exceed $25 million in the aggregate at any time outstanding.

17

“Permitted Liens” means:

(i)    Liens in favor of the Administrative Agent to secure the obligations of the Credit Parties under the Credit Documents;

(ii)    Liens in favor of a Lender or an Affiliate of a Lender pursuant to a Hedging Agreement permitted hereunder, but only (A) to the extent such Liens secure obligations under such agreements permitted under Section 8.1, (B) to the extent such Liens are on the same collateral as to which the Lenders hereunder also have a Lien, and (C) so long as the obligations under such Hedging Agreement and the loans and obligations hereunder and under the other Credit Documents shall share pari passu in the collateral subject to such Liens;

(iii)    Liens (other than Liens created or imposed under ERISA) for taxes, assessments or governmental charges or levies not yet due or Liens for taxes being contested in good faith by appropriate proceedings for which adequate reserves determined in accordance with GAAP have been established (and as to which the Property subject to any such Lien is not yet subject to foreclosure, sale or loss on account thereof);

(iv)    statutory Liens of landlords and Liens of carriers, warehousemen, mechanics, materialmen and suppliers and other Liens imposed by law or pursuant to customary reservations or retentions of title arising in the ordinary course of business, provided that such Liens secure only amounts not yet due and payable or, if due and payable, are unfiled and no other action has been taken to enforce the same or are being contested in good faith by appropriate proceedings for which adequate reserves determined in accordance with GAAP have been established (and as to which the Property subject to any such Lien is not yet subject to foreclosure, sale or loss on account thereof);

(v)    Liens (other than Liens created or imposed under ERISA) incurred or deposits made by any member of the Consolidated Group in the ordinary course of business in connection with workers’ compensation, unemployment insurance and other types of social security, or to secure the performance of tenders, statutory obligations, bids, leases, government contracts, performance and return-of-money bonds and other similar obligations (exclusive of obligations for the payment of borrowed money);

(vi)    Liens in connection with attachments or judgments (including judgment or appeal bonds), provided that the judgments secured shall, within thirty days after the entry thereof, have been discharged or execution thereof stayed pending appeal, or shall have been discharged within thirty days after the expiration of any such stay;

(vii)    easements, rights-of-way, covenants, restrictions (including zoning restrictions), minor defects or irregularities in title and other similar charges or encumbrances not, in any material respect, impairing the use of the encumbered Property for its intended purposes;

(viii)    Liens on Property of any Person securing purchase money and sale/leaseback Indebtedness (including Capital Leases and Synthetic Leases) of such Person to the extent permitted under Section 8.1(c), provided that any such Lien attaches only to the Property financed or leased and such Lien attaches concurrently with or within ninety days after the acquisition thereof;

18

(ix)    leases or subleases granted to others not interfering in any material respect with the business of any member of the Consolidated Group;

(x)    any interest or title of a lessor under, and Liens arising from UCC financing statements (including precautionary UCC financing statements and any other equivalent filings, registrations or agreements in foreign jurisdictions) relating to, leases permitted by this Credit Agreement;

(xi)    Liens in favor of customs and revenue authorities arising as a matter of law to secure payment of customs duties in connection with the importation of goods;

(xii)    Liens deemed to exist in connection with Investments in repurchase agreements that constitute Permitted Investments;

(xiii)    normal and customary rights of setoff upon deposits of cash in favor of banks or other depository institutions;

(xiv)    Liens of a collection bank arising under Section 4-210 of the Uniform Commercial Code on items in the course of collection;

(xv)    Liens created or deemed to exist by the establishment of trusts for the purpose of satisfying (A) Governmental Reimbursement Program Costs and (B) other actions or claims pertaining to the same or related matters, provided that the Borrower, in each case, shall have established adequate reserves for such claims or actions;

(xvi)    Liens existing as of the Closing Date and set forth on Schedule 6.8, provided that (A) no such Lien shall at any time be extended to or cover any Property other than the Property subject thereto on the Closing Date and (B) the principal amount of the Indebtedness secured by such Liens shall not be increased and shall not be extended, renewed, refunded or refinanced on terms and conditions less favorable to the Credit Parties than for such existing Indebtedness; and

(xvii)    Liens (other than blanket liens on any class of Property) on specific items of Property not otherwise permitted by the foregoing clauses hereof securing Indebtedness in an aggregate principal amount at any time outstanding not to exceed $5 million.

“Person” means any individual, partnership, joint venture, firm, corporation, limited liability company, association, trust or other enterprise (whether or not incorporated) or any Governmental Authority.

“Plan” means any employee benefit plan (as defined in Section 3(3) of ERISA) that is covered by Title IV of ERISA and with respect to which any member of the Consolidated Group or any ERISA Affiliate is (or, if such plan were terminated at such time, would under Section 4069 of ERISA be deemed to be) an “employer” within the meaning of Section 3(5) of ERISA.

“Pledge Agreement” means the pledge agreement dated as of the Closing Date given by the Credit Parties to the Collateral Agent to secure the obligations of the Credit Parties under the Credit Documents, as such pledge agreement may be amended and modified from time to time.

“Prime Rate” means, for any day, the rate per annum in effect for such day as publicly announced from time to time by Bank of America as its “prime rate.” Such rate is a rate set by Bank of America based upon various factors including Bank of America’s costs and desired

19

return, general economic conditions and other factors, and is used as a reference point for pricing some loans, which may be priced at, above, or below such announced rate. Any change in such rate announced by Bank of America shall take effect at the opening of business on the day specified in the public announcement of such change.

“Pro Forma Basis” means, for purposes of determining the applicable pricing level under the definition of “Applicable Percentage” and determining compliance with any financial covenant or test hereunder, that the subject transaction shall be deemed to have occurred as of the first day of the period of four consecutive fiscal quarters ending as of the end of the most recent fiscal quarter for which annual or quarterly financial statements shall have been delivered in accordance with the provisions hereof. Further, for purposes of making calculations on a “Pro Forma Basis” hereunder, (i) in the case of an Asset Disposition, (A) income statement items (whether positive or negative) attributable to the property, entities or business units that are the subject of the disposition shall be excluded to the extent relating to any period prior to the date of subject transaction, and (B) Indebtedness paid or retired in connection with the subject transaction shall be deemed to have been paid and retired as of the first day of the applicable period; and (ii) in the case of an Acquisition, (A) income statement items (whether positive or negative) attributable to the property, entities or business units that are the subject of the acquisition shall be included to the extent relating to any period prior to the date of subject transaction, and (B) Indebtedness incurred in connection with the subject transaction shall be deemed to have been incurred as of the first day of the applicable period (and interest expense shall be imputed for the applicable period assuming prevailing interest rates hereunder); provided in each case that additional pro forma adjustments may be included if, and to the extent, such adjustments are (1) quantifiable based on the underlying accounting records of such property, entity or business unit, (2) factually supportable, and (3) reasonably acceptable to the Administrative Agent.

“Property” means any interest in any kind of property or asset, whether real, personal or mixed, or tangible or intangible.

“Rate Determination Date” shall have the meaning provided in the definition of “Applicable Percentage”.

“Register” shall have the meaning provided in Section 11.3(c).

“Regulation D, O, T, U, or X” means Regulation D, O, T, U or X, respectively, of the Board of Governors of the Federal Reserve System as from time to time in effect and any successor to all or a portion thereof.

“Reportable Event” means any of the events set forth in Section 4043(c) of ERISA, other than those events as to which the notice requirement has been waived by regulation.

“Required Financial Information” means the annual and quarterly compliance certificates and related financial statements and information required by the provisions of Sections 7.1(a), (b) and (c).

“Required Lenders” means, at any time, Lenders having at least sixty-six and two-thirds (66-2/3%) of the Commitments or, if the Commitments have been terminated, Lenders having at least sixty-six and two-thirds (66-2/3%) of the aggregate principal amount of the Obligations outstanding (taking into account in each case Participation Interests or obligations to participate therein); provided that the Commitments of, and outstanding principal amount of Obligations (taking into account Participation Interests or obligations to participate therein) owing to, a

20

Defaulting Lender shall be excluded for purposes hereof in making a determination of Required Lenders.

“Requirement of Law” means, as to any Person, the certificate of incorporation and by-laws or other organizational or governing documents of such Person, and any law, treaty, rule, regulation or ordinance (including, without limitation, Environmental Laws) or determination of an arbitrator or a court or other Governmental Authority, in each case applicable to or binding upon such Person or to which any of its material Property is subject.

“Responsible Officer” of any Person means any of the chief executive officer, chief operating officer, president, chief financial officer or treasurer of such Person.

“Restricted Payment” means (i) any dividend or other payment or distribution, direct or indirect, on account of any shares of any class of Capital Stock of any member of the Consolidated Group, now or hereafter outstanding (including, without limitation, any payment in connection with any dissolution, merger, consolidation or disposition involving any member of the Consolidated Group), or to the holders, in their capacity as such, of any shares of any class of Capital Stock of any member of the Consolidated Group, now or hereafter outstanding (other than dividends or distributions payable in the same class of Capital Stock of the applicable Person or dividends or distributions payable to any Credit Party (directly or indirectly through Subsidiaries)), (ii) any redemption, retirement, sinking fund or similar payment, purchase or other acquisition for value, direct or indirect, of any shares of any class of Capital Stock of any member of the Consolidated Group, now or hereafter outstanding, and (iii) any payment made to retire, or to obtain the surrender of, any outstanding warrants, options or other rights to acquire shares of any class of Capital Stock of any member of the Consolidated Group, now or hereafter outstanding.

“Revolving Commitment” means, with respect to each Lender, the commitment of such Lender to make Revolving Loans in an aggregate principal Dollar amount up to such Lender’s Revolving Commitment Percentage at such time of the Aggregate Revolving Committed Amount at such time.

“Revolving Commitment Percentage” means, for each Lender, a fraction (expressed as a percentage) the numerator of which is the Revolving Committed Amount of such Lender at such time and the denominator of which is the Aggregate Revolving Committed Amount at such time. The initial Revolving Commitment Percentage of each Lender is set forth on Schedule 2.1(a).

“Revolving Committed Amount” means, with respect to each Lender, the amount of such Lender’s Revolving Commitment. The initial Revolving Committed Amount of each Lender is set forth on Schedule 2.1(a).

“Revolving Loans” shall have the meaning provided in Section 2.1(a).

“Revolving Note” or “Revolving Notes” means the promissory notes in favor of each of the Lenders evidencing the Revolving Loans and Swingline Loans in substantially the form attached as Schedule 2.5, individually or collectively, as appropriate, as such promissory notes may be amended, modified, supplemented, extended, renewed or replaced from time to time.

“Risk-Based Capital” means, with respect to each HMO Subsidiary, at any time, the Company Action Level Risk-Based Capital (as defined by the NAIC on the date of determination and as determined in accordance with SAP) of such HMO Subsidiary.

21

“S&P” means Standard & Poor’s Ratings Group, a division of The McGraw Hill Companies, Inc., or any successor or assignee of the business of such division in the business of rating securities.

“Sale and Leaseback Transaction” means any arrangement pursuant to which any member of the Consolidated Group, directly or indirectly, becomes liable as lessee, guarantor or other surety with respect to any lease, whether an Operating Lease or a Capital Lease, of any Property that such member of the Consolidated Group (i) has sold or transferred (or is to sell or transfer) to, or arranged the purchase by, a Person that is not a member of the Consolidated Group or (ii) intends to use for substantially the same purpose as any other Property that has been sold or transferred (or is to be sold or transferred) by such member of the Consolidated Group to another Person that is not a member of the Consolidated Group in connection with such lease.

“SAP” means, with respect to each HMO Subsidiary, the statutory accounting principles and procedures prescribed or permitted by applicable HMO Regulations for such HMO Subsidiary, applied on a consistent basis.

“Securities Exchange Act” means the Securities Exchange Act of 1934.

“Securitization Transaction” means any financing transaction or series of financing transactions, including factoring transactions, that have been or may be entered into by a member of the Consolidated Group pursuant to which such member of the Consolidated Group may sell, convey or otherwise transfer to (i) a Subsidiary or Affiliate (a “Securitization Subsidiary”), or (ii) any other Person, or may grant a security interest in, any accounts receivable, notes receivable, rights to future lease payments or residuals or other similar rights to payment (the “Securitization Receivables”) (whether such Securitization Receivables are then existing or arising in the future) of such member of the Consolidated Group, and any assets related thereto, including, without limitation, all security interests in merchandise or services financed thereby, the proceeds of such Securitization Receivables, and other assets that are customarily sold or in respect of which security interests are customarily granted in connection with securitization or factoring transactions involving such assets.

“Security Agreement” means the security agreement dated as of the Closing Date given by the Credit Parties to the Collateral Agent to secure the obligations of the Credit Parties under the Credit Documents, as such security agreement may be amended and modified from time to time.

“Single Employer Plan” means any Plan that is covered by Title IV of ERISA, but that is not a Multiemployer Plan or a Multiple Employer Plan.

“Social Security Act” means the Social Security Act of 1965 as set forth in Title 42 of the United States Code, as amended, and any successor statute thereto, as interpreted by the rules and regulations issued thereunder, in each case as in effect from time to time. References to sections of the Social Security Act shall be construed to refer to any successor sections.

“Stark I and II” means Section 1877 of the Social Security Act as set forth at Section 1395nn of Title 42 of the United States Code, as amended, and any successor statute thereto, as interpreted by the rules and regulations issued thereunder, in each case as in effect from time to time.

“Subordinated Debt” means any Indebtedness of a member of the Consolidated Group that by its terms is expressly subordinated in right of payment to the prior payment of the obligations of

22

the Credit Parties under the Credit Documents on terms and conditions and evidenced by documentation satisfactory to the Administrative Agent and the Required Lenders.

“Subsidiary” means, as to any Person at any time, (a) any corporation more than fifty percent (50%) of whose Voting Stock of any class or classes having by the terms thereof ordinary voting power to elect a majority of the directors of such corporation (irrespective of whether or not at such time, any class or classes of such corporation shall have or might have voting power by reason of the happening of any contingency) is at such time owned by such Person directly or indirectly through Subsidiaries, and (b) any partnership, association, joint venture or other entity of which such Person directly or indirectly through Subsidiaries owns at such time more than fifty percent (50%) of the Voting Stock. Unless otherwise provided, “Subsidiary” shall refer to a Subsidiary of the Borrower.

“Support Obligations” means, with respect to any Person, without duplication, any obligations of such Person (other than endorsements in the ordinary course of business of negotiable instruments for deposit or collection) guaranteeing or intended to guarantee any Indebtedness of any other Person in any manner, whether direct or indirect, and including, without limitation, any obligation, whether or not contingent, (i) to purchase any such Indebtedness or any Property constituting security therefor, (ii) to advance or provide funds or other support for the payment or purchase of any such Indebtedness or to maintain working capital, solvency or other balance sheet condition of such other Person (including, without limitation, keep-well agreements, maintenance agreements, comfort letters or similar agreements or arrangements) for the benefit of any holder of Indebtedness of such other Person, (iii) to lease or purchase Property, securities or services primarily for the purpose of assuring the holder of such Indebtedness, or (iv) to otherwise assure or hold harmless the holder of such Indebtedness against loss in respect thereof. The amount of any Support Obligation hereunder shall (subject to any limitations set forth therein) be deemed to be an amount equal to the outstanding principal amount (or maximum principal amount, if larger) of the Indebtedness in respect of which such Support Obligation is made.

“Swingline Commitment” means, with respect to the Swingline Lender, the commitment of the Swingline Lender to make Swingline Loans in an aggregate principal amount at any time outstanding up to the Swingline Committed Amount and, with respect to each Lender, the commitment of such Lender to purchase Participation Interests in Swingline Loans up to such Lender’s Revolving Commitment Percentage.

“Swingline Committed Amount” shall have the meaning provided in Section 2.1(c).

“Swingline Lender” means Bank of America.

“Swingline Loan” shall have the meaning provided in Section 2.1(c).

“Synthetic Lease” means any synthetic lease, tax retention operating lease, off-balance sheet loan or similar off-balance sheet financing product where such transaction is considered borrowed money indebtedness for tax purposes but is classified as an Operating Lease under GAAP.

“Taxes” shall have the meaning provided in Section 3.11.

“Termination Date” means December 14, 2004 or such later date as to which all of the Lenders may in their sole discretion by written consent agree.

23

“Total Adjusted Capital” means, with respect to each HMO Subsidiary, at any time, the Total Adjusted Capital (as defined by the NAIC on the date of determination and as determined in accordance with SAP) of such HMO Subsidiary.

“Voting Stock” means, with respect to any Person, Capital Stock issued by such Person the holders of which are ordinarily, in the absence of contingencies, entitled to vote for the election of directors (or persons performing similar functions) of such Person, even though the right so to vote has been suspended by the happening of such a contingency.

“Wholly Owned Subsidiary” of any Person means any Subsidiary one hundred percent (100%) of whose Voting Stock (other than, with respect to Foreign Subsidiaries, Capital Stock held pursuant to director’s qualifying share requirements under applicable law) is at the time owned by such Person directly or indirectly through other Wholly Owned Subsidiaries.

1.2    Computation of Time Periods.

For purposes of computation of periods of time hereunder, the word “from” means “from and including” and the words “to” and “until” each mean “to but excluding”.

1.3    Accounting Terms.

Except as otherwise expressly provided herein, all accounting terms used herein shall be interpreted, and all financial statements and certificates and reports as to financial matters required to be delivered to the Lenders hereunder shall be prepared, in accordance with GAAP applied on a consistent basis. All calculations made for the purposes of determining compliance with this Credit Agreement shall (except as otherwise expressly provided herein) be made by application of GAAP applied on a basis consistent with the most recent annual or quarterly financial statements delivered pursuant to Section 7.1 (or, prior to the delivery of the first financial statements pursuant to Section 7.1, consistent with the annual audited financial statements referenced in Section 6.1(a)); provided, however, if (a) the Borrower shall object to determining such compliance on such basis at the time of delivery of such financial statements due to any change in GAAP or the rules promulgated with respect thereto or (b) the Administrative Agent or the Required Lenders shall so object in writing within sixty days after delivery of such financial statements, then such calculations shall be made on a basis consistent with the most recent financial statements delivered by the Credit Parties to the Lenders as to which no such objection shall have been made.

Notwithstanding anything herein to the contrary, determinations of (i) the applicable pricing level under the definition of “Applicable Percentage” and (ii) compliance with the financial covenants hereunder shall be made on a Pro Forma Basis.

SECTION 2

CREDIT FACILITIES

2.1    Commitments.

(a)    Revolving Commitment.    During the Commitment Period, subject to the terms and conditions hereof, each Lender severally agrees to make revolving credit loans (the “Revolving Loans”) to the Borrower from time to time in the amount of such Lender’s Revolving Commitment Percentage of such Revolving Loans for the purposes hereinafter set forth; provided that (i) with regard to the Lenders collectively, the aggregate principal amount of Obligations outstanding at any time shall not exceed

24

SIXTY MILLION DOLLARS ($60,000,000) (as such amount may be increased or reduced from time to time in accordance with the provisions hereof, the “Aggregate Revolving Committed Amount”), and (ii) with regard to each Lender individually, such Lender’s Revolving Commitment Percentage of Obligations outstanding at any time shall not exceed such Lender’s Revolving Committed Amount. Revolving Loans may consist of Base Rate Loans or Eurodollar Loans, or a combination thereof, as the Borrower may request, and may be repaid and reborrowed in accordance with the provisions hereof.

(b)    Letter of Credit Commitment.    During the Commitment Period, in reliance upon the agreements of the Lenders set forth in Section 2.6 and subject to the terms and conditions hereof and of the LOC Documents, if any, and such other terms and conditions that the Issuing Lender may reasonably require, the Issuing Lender shall issue, and the Lenders shall participate in, such Letters of Credit as the Borrower may request for its own account or for the account of another Credit Party as provided herein, in a form acceptable to the Issuing Lender, for the purposes hereinafter set forth; provided that (i) the aggregate principal amount of LOC Obligations shall not at any time exceed FIFTEEN MILLION DOLLARS ($15,000,000) (as such amount may be reduced from time to time in accordance with the provisions hereof, the “LOC Committed Amount”), (ii) with regard to the Lenders collectively, the aggregate principal amount of Obligations outstanding at any time shall not exceed the Aggregate Revolving Committed Amount, and (iii) with regard to each Lender individually, such Lender’s Revolving Commitment Percentage of Obligations outstanding at any time shall not exceed such Lender’s Revolving Committed Amount. Letters of Credit shall not have an original expiry date more than one year from the date of issuance or extension. No Letter of Credit shall have an expiry date, whether as originally issued or by extension, extending beyond the date five Business Days prior to the Termination Date. Each Letter of Credit shall comply with the related LOC Documents. The issuance date of each Letter of Credit shall be a Business Day.

(c)    Swingline Commitment.    During the Commitment Period, subject to the terms and conditions hereof, the Swingline Lender agrees to make certain revolving credit loans (the “Swingline Loans”) to the Borrower from time to time for the purposes hereinafter set forth; provided that (i) the aggregate principal amount of Swingline Loans shall not at any time exceed FIVE MILLION DOLLARS ($5,000,000) (as such amount may be reduced from time to time in accordance with the provisions hereof, the “Swingline Committed Amount”), and (ii) with regard to the Lenders collectively, the aggregate principal amount of Obligations outstanding at any time shall not exceed the Aggregate Revolving Committed Amount. Swingline Loans shall consist of Base Rate Loans, and shall be repaid and may be reborrowed in accordance with the provisions hereof.

(d)    Increase in Revolving Commitments.    Subject to the terms and conditions set forth herein, the Borrower may, at any time, upon written notice to the Administrative Agent, increase the Aggregate Revolving Committed Amount to not more than SEVENTY-FIVE MILLION DOLLARS ($75,000,000); provided that:

(i)    the Borrower shall obtain commitments for the amount of the increase from existing Lenders or other commercial banks or financial institutions reasonably acceptable to the Administrative Agent, which other commercial banks and financial institutions shall join in this Credit Agreement as Lenders by joinder agreement substantially in the form of Schedule 2.1(d) attached hereto or other arrangement reasonably acceptable to the Administrative Agent,

(ii)    any such increase shall be in a minimum aggregate principal amount of $5 million and integral multiples of $1 million in excess thereof (or the remaining amount, if less),

(iii)    if any Revolving Loans are outstanding at the time of any such increase, the Borrower shall make such payments and adjustments on the Revolving Loans (including payment

25

of any break-funding amounts owing under Section 3.12) as may be necessary to give effect to the revised commitment percentages and commitment amounts, and

(iv)    the conditions to the making of a Revolving Loan set forth in Section 5.2 shall be satisfied.

In connection with any such increase in the Revolving Commitments, Schedule 2.1(a) shall be revised to reflect the modified commitments and commitment percentages of the Lenders, and the Borrower shall provide supporting corporate resolutions, legal opinions, promissory notes and other items as may be reasonably requested by the Administrative Agent and the Lenders in connection therewith.

2.2    Method of Borrowing.

(a)    Notice of Request for Extensions of Credit. The Borrower shall request an Extension of Credit by written notice (or telephonic notice promptly confirmed in writing) as follows:

(i)    Revolving Loans. In the case of Revolving Loans, to the Administrative Agent not later than 11:00 A.M. (Charlotte, North Carolina time) on the Business Day prior to the date of the requested borrowing in the case of Base Rate Loans, and on the third Business Day prior to the date of the requested borrowing in the case of Eurodollar Loans. Each such request for borrowing shall be irrevocable and shall specify (A) that a Revolving Loan is requested, (B) the date of the requested borrowing (which shall be a Business Day), (C) the aggregate principal amount to be borrowed, and (D) whether the borrowing shall be comprised of Base Rate Loans, Eurodollar Loans or a combination thereof, and if Eurodollar Loans are requested, the Interest Period(s) therefor. A form of Notice of Borrowing is attached as Schedule 2.2(a)(i). The Administrative Agent shall give notice to each Lender promptly upon receipt of each Notice of Borrowing pursuant to this Section 2.2(a)(i), the contents thereof and each Lender’s share of any borrowing to be made pursuant thereto.

(ii)    Letters of Credit.    In the case of Letters of Credit, to the Issuing Lender with a copy to the Administrative Agent not later than 11:00 A.M. (Charlotte, North Carolina time) on the third Business Day prior to the date of the requested issuance or extension (or such shorter period as may be agreed by the Issuing Lender). Each such request for issuance or extension of a Letter of Credit shall be irrevocable and shall specify, among other things, (A) that a Letter of Credit is requested, (B) the date of the requested issuance or extension, (C) the type, amount, expiry date and terms on which the Letter of Credit is to be issued or extended, and (D) the beneficiary. A form of Notice of Request for Letter of Credit is attached as Schedule 2.2(a)(ii).

(iii)    Swingline Loans.    In the case of Swingline Loans, to the Swingline Lender with a copy to the Administrative Agent not later than 11:00 A.M. (Charlotte, North Carolina time) on the Business Day of the requested borrowing. Each such request for borrowing shall be irrevocable and shall specify (A) that a Swingline Loan is requested, (B) the date of the requested borrowing (which shall be a Business Day), (C) the aggregate principal amount to be borrowed, and (D) the interest rate option and maturity requested therefor. A form of Notice of Borrowing is attached as Schedule 2.2(a)(i). Each Swingline Loan shall have a maturity date as the Borrower may request and the Swingline Lender may agree.

(b)    Minimum Amounts.    Each Revolving Loan advance shall be (i) in the case of Eurodollar Loans, in a minimum principal amount of $2 million and integral multiples of $250,000 in excess thereof and (ii) in the case of Base Rate Loans, $1 million (or, if less, the remaining Aggregate Revolving Committed Amount) and integral multiples of $250,000 in excess thereof. Each Swingline Loan advance

shall be in a minimum principal amount of $500,000 and integral multiples of $100,000 in excess thereof (or the remaining amount of the Swingline Committed Amount, if less).

(c)    Information Not Provided.    If in connection with any such request for a Revolving Loan, the Borrower shall fail to specify (i) an applicable Interest Period in the case of a Eurodollar Loan, the Borrower shall be deemed to have requested an Interest Period of one month, or (ii) the type of loan requested, the Borrower shall be deemed to have requested a Base Rate Loan.

26

(d)    Maximum Number of Eurodollar Loans.    Revolving Loans may be comprised of no more than five Eurodollar Loans outstanding at any time. For purposes hereof, Eurodollar Loans with separate or different Interest Periods will be considered as separate Eurodollar Loans even if their Interest Periods expire on the same date.

2.3    Interest.

Subject to Section 3.1, the Loans shall bear interest at a per annum rate, payable in arrears on each applicable Interest Payment Date (or at such other times as may be specified herein), as follows:

(a)    Base Rate Loans.    During such periods as the Loans shall be comprised of Base Rate Loans, the Adjusted Base Rate; and

(b)    Eurodollar Loans.    During such periods as the Loans shall be comprised of Eurodollar Loans, the Adjusted Eurodollar Rate.

2.4    Repayment.

(a)    Revolving Loans.    The principal amount of all Revolving Loans shall be due and payable in full on the Termination Date.

(b)    Swingline Loans.    The principal amount of all Swingline Loans shall be due and payable in full on the earlier of (A) the maturity date agreed to by the Swingline Lender and the Borrower with respect to such Swingline Loan, or (B) the Termination Date.

2.5    Notes.

The Revolving Loans and the Swingline Loans shall be evidenced by the Revolving Notes.

2.6    Additional Provisions relating to Letters of Credit.

(a)    Reports.    The Issuing Lender will provide to the Administrative Agent for dissemination to the Lenders at least quarterly, and more frequently upon request, a detailed summary report on its Letters of Credit and the activity thereon, including, among other things, the Credit Party for whose account the Letter of Credit is issued, the beneficiary, the face amount, and the expiry date. The Issuing Lender will provide copies of the Letters of Credit to the Administrative Agent and the Lenders promptly upon request.

(b)    Participation. Each Lender, with respect to the Existing Letters of Credit, hereby purchases a Participation Interest in Existing Letters of Credit, and with respect to Letters of Credit issued on or after the Closing Date, upon issuance of a Letter of Credit, shall be deemed to have purchased without recourse a risk participation from the Issuing Lender in such Letter of Credit and the obligations arising thereunder, in each case in an amount equal to its pro rata share of the obligations under such Letter of Credit (based on the

27

respective Revolving Commitment Percentages of the Lenders) and shall absolutely, unconditionally and irrevocably assume, as primary obligor and not as surety, and be obligated to pay to the Issuing Lender therefor and discharge when due, its pro rata share of the obligations arising under such Letter of Credit. Without limiting the scope and nature of each Lender’s participation in any Letter of Credit, to the extent that the Issuing Lender has not been reimbursed as required hereunder or under any such Letter of Credit, each Lender shall pay to the Issuing Lender its pro rata share of such unreimbursed drawing in same day funds on the day of notification by the Issuing Lender of an unreimbursed drawing pursuant to the provisions of subsection (d) hereof. The obligation of each Lender to so reimburse the Issuing Lender shall be absolute and unconditional and shall not be affected by the occurrence of a Default, an Event of Default or any other occurrence or event. Any such reimbursement shall not relieve or otherwise impair the obligation of the Borrower to reimburse the Issuing Lender under any Letter of Credit, together with interest as hereinafter provided.

(c)    Reimbursement.    In the event of any drawing under any Letter of Credit, the Issuing Lender will promptly notify the Borrower. Unless the Borrower shall immediately notify the Issuing Lender that the Borrower intends to otherwise reimburse the Issuing Lender for such drawing, the Borrower shall be deemed to have requested that the Lenders make a Revolving Loan in the amount of the drawing as provided in subsection (d) hereof on the related Letter of Credit, the proceeds of which will be used to satisfy the related reimbursement obligations. The Borrower promises to reimburse the Issuing Lender on the day of drawing under any Letter of Credit (either with the proceeds of a Revolving Loan obtained hereunder or otherwise) in same day funds. If the Borrower shall fail to reimburse the Issuing Lender as provided hereinabove, the unreimbursed amount of such drawing shall bear interest at a per annum rate equal to the Adjusted Base Rate plus two percent (2%). The Borrower’s reimbursement obligations hereunder shall be absolute and unconditional under all circumstances irrespective of any rights of setoff, counterclaim or defense to payment the Borrower may claim or have against the Issuing Lender, the Administrative Agent, the Lenders, the beneficiary of the Letter of Credit drawn upon or any other Person, including, without limitation, any defense based on any failure of the Borrower or any other Credit Party to receive consideration or the legality, validity, regularity or unenforceability of the Letter of Credit. The Issuing Lender will promptly notify the Administrative Agent (who will promptly notify the other Lenders) of the amount of any unreimbursed drawing and each Lender shall promptly pay to the Administrative Agent for the account of the Issuing Lender in Dollars and in immediately available funds, the amount of such Lender’s Revolving Commitment Percentage of such unreimbursed drawing. Such payment shall be made on the day such notice is received by such Lender from the Issuing Lender if such notice is received at or before 2:00 P.M. (Charlotte, North Carolina time) otherwise such payment shall be made at or before 12:00 Noon (Charlotte, North Carolina time) on the Business Day next succeeding the day such notice is received. If such Lender does not pay such amount to the Issuing Lender in full upon such request, such Lender shall, on demand, pay to the Administrative Agent for the account of the Issuing Lender interest on the unpaid amount during the period from the date of such drawing until such Lender pays such amount to the Issuing Lender in full at a rate per annum equal to, if paid within two Business Days of the date that such Lender is required to make payments of such amount pursuant to the preceding sentence, the Federal Funds Rate and thereafter at a rate equal to the Base Rate. Each Lender’s obligation to make such payment to the Issuing Lender, and the right of the Issuing Lender to receive the same, shall be absolute and unconditional, shall not be affected by any circumstance whatsoever and without regard to the termination of this Credit Agreement or the Commitments hereunder, the existence of a Default or Event of Default or the acceleration of the obligations of the Borrower hereunder and shall be made without any offset, abatement, withholding or reduction whatsoever. Simultaneously with the making of each such payment by a Lender to the Issuing Lender, such Lender shall, automatically and without any further action on the part of the Issuing Lender or such Lender, acquire a participation in an amount equal to such payment (excluding the portion of such payment constituting interest owing to the Issuing Lender) in the related unreimbursed drawing portion of the LOC Obligation and in the interest thereon and in the related LOC Documents, and shall have a claim against the Borrower with respect thereto.

28

(d)    Repayment with Revolving Loans.    On any day on which the Borrower shall have requested, or been deemed to have requested, a Revolving Loan advance to reimburse a drawing under a Letter of Credit, the Administrative Agent shall give notice to the Lenders that a Revolving Loan has been requested or deemed requested by the Borrower to be made in connection with a drawing under a Letter of Credit, in which case a Revolving Loan advance comprised of Base Rate Loans (or Eurodollar Loans to the extent the Borrower has complied with the procedures of Section 2.2(a)(i) with respect thereto) shall be promptly made to the Borrower by all Lenders (notwithstanding any termination of the Commitments pursuant to Section 9.2) prorata based on the respective Revolving Commitment Percentages of the Lenders (determined before giving effect to any termination of the Commitments pursuant to Section 9.2) and the proceeds thereof shall be paid directly to the Issuing Lender for application to the respective LOC Obligations. Each such Lender hereby irrevocably agrees to make its Revolving Commitment Percentage of each such Revolving Loan promptly upon any such request or deemed request in the amount, in the manner and on the date specified in the preceding sentence notwithstanding (i) the amount of such borrowing may not comply with the minimum amount for advances of Revolving Loans otherwise required hereunder, (ii) whether any conditions specified in Section 5.2 are then satisfied, (iii) whether a Default or an Event of Default then exists, (iv) failure for any such request or deemed request for Revolving Loan to be made by the time otherwise required hereunder, (v) whether the date of such borrowing is a date on which Revolving Loans are otherwise permitted to be made hereunder or (vi) any termination of the Commitments relating thereto immediately prior to or contemporaneously with such borrowing. In the event that any Revolving Loan cannot for any reason be made on the date otherwise required above (including, without limitation, as a result of the commencement of a proceeding under the Bankruptcy Code with respect to any Credit Party), then each such Lender hereby agrees that it shall forthwith purchase (as of the date such borrowing would otherwise have occurred, but adjusted for any payments received from the Borrower on or after such date and prior to such purchase) from the Issuing Lender such participation in the outstanding LOC Obligations as shall be necessary to cause each such Lender to share in such LOC Obligations ratably (based upon the respective Commitment Percentages of the Lenders (determined before giving effect to any termination of the Commitments pursuant to Section 9.2)), provided that in the event such payment is not made on the day of drawing, such Lender shall pay in addition to the Issuing Lender interest on the amount of its unfunded Participation Interest at a rate equal to, if paid within two Business Days of the date of drawing, the Federal Funds Rate, and thereafter at the Base Rate.

(e)    Designation of other Credit Parties as Account Parties.    Notwithstanding anything to the contrary set forth in this Credit Agreement, including, without limitation, Sections 2.1(c) and 2.2(a)(ii) hereof, a Letter of Credit issued hereunder may contain a statement to the effect that such Letter of Credit is issued for the account of a Credit Party other than the Borrower, provided that notwithstanding such statement, the Borrower shall be the actual account party for all purposes of this Credit Agreement for such Letter of Credit and such statement shall not affect the Borrower’s reimbursement obligations hereunder with respect to such Letter of Credit.

(f)    Renewal, Extension.    The renewal or extension of any Letter of Credit shall, for purposes hereof, be treated in all respects the same as the issuance of a new Letter of Credit hereunder.

(g)    Applicability of ISP98 and UCP.    Unless otherwise expressly agreed by the Issuing Lender and the Borrower when a Letter of Credit is issued, the rules of the “International Standby Practices 1998” published by the Institute of International Banking Law & Practice (or such later version thereof as may be in effect at the time of issuance) shall apply to each Letter of Credit.

29

(h)    Indemnification; Nature of Issuing Lender’s Duties.

(i)    In addition to its other obligations under this Section 2.6, the Borrower hereby agrees to protect, indemnify, pay, save and hold the Issuing Lender and the Lenders harmless from and against any and all claims, demands, liabilities, damages, losses, costs, charges and expenses (including reasonable attorneys’ fees and expenses and the allocated cost of internal counsel) that the Issuing Lender or any Lender may incur or be subject to as a consequence, direct or indirect, of (A) the issuance of any Letter of Credit or (B) the failure of the Issuing Lender to honor a drawing under a Letter of Credit as a result of any act or omission, whether rightful or wrongful, of any present or future de jure or de facto government or governmental authority (all such acts or omissions, herein called “Government Acts”).

(ii) As between the Borrower and the Issuing Lender, the Borrower shall assume all risks of the acts, omissions or misuse of any Letter of Credit by the beneficiary thereof. The Issuing Lender shall not be responsible: (A) for the form, validity, sufficiency, accuracy, genuineness or legal effect of any document submitted by any party in connection with the application for and issuance of any Letter of Credit, even if it should in fact prove to be in any or all respects invalid, insufficient, inaccurate, fraudulent or forged; (B) for the validity or sufficiency of any instrument transferring or assigning or purporting to transfer or assign any Letter of Credit or the rights or benefits thereunder or proceeds thereof, in whole or in part, that may prove to be invalid or ineffective for any reason; (C) for errors, omissions, interruptions or delays in transmission or delivery of any messages, by mail, cable, telegraph, telex or otherwise, whether or not they be in cipher; (D) for any loss or delay in the transmission or otherwise of any document required in order to make a drawing under a Letter of Credit or of the proceeds thereof; and (E) for any consequences arising from causes beyond the control of the Issuing Lender, including, without limitation, any Government Acts. None of the above shall affect, impair, or prevent the vesting of the Issuing Lender’s rights or powers hereunder.

(iii)    In furtherance and extension and not in limitation of the specific provisions hereinabove set forth, any action taken or omitted by the Issuing Lender, under or in connection with any Letter of Credit or the related certificates, if taken or omitted in good faith, shall not put such Issuing Lender under any resulting liability to the Borrower or any other Credit Party. It is the intention of the parties that this Credit Agreement shall be construed and applied to protect and indemnify the Issuing Lender against any and all risks involved in the issuance of the Letters of Credit, all of which risks are hereby assumed by the Borrower (on behalf of itself and each of the other Credit Parties), including, without limitation, any and all Government Acts. The Issuing Lender shall not, in any way, be liable for any failure by the Issuing Lender or anyone else to pay any drawing under any Letter of Credit as a result of any Government Acts or any other cause beyond the control of the Issuing Lender.

(iv)    Nothing in this subsection (h) is intended to limit the reimbursement obligations of the Borrower contained in subsection (d) above. The obligations of the Borrower under this subsection (h) shall survive the termination of this Credit Agreement. No act or omissions of any current or prior beneficiary of a Letter of Credit shall in any way affect or impair the rights of the Issuing Lender to enforce any right, power or benefit under this Credit Agreement.

(v)    Notwithstanding anything to the contrary contained in this subsection (h), the Borrower shall have no obligation to indemnify the Issuing Lender in respect of any liability incurred by the Issuing Lender (A) arising solely out of the gross negligence or willful misconduct of the Issuing Lender, as determined by a court of competent jurisdiction, or (B) caused by the Issuing Lender’s failure to pay under any Letter of Credit after presentation to it of a request strictly

30

complying with the terms and conditions of such Letter of Credit, as determined by a court of competent jurisdiction, unless such payment is prohibited by any law, regulation, court order or decree.

(i)    Responsibility of Issuing Lender.    It is expressly understood and agreed that the obligations of the Issuing Lender hereunder to the Lenders are only those expressly set forth in this Credit Agreement and that the Issuing Lender shall be entitled to assume that the conditions precedent set forth in Section 5.2 have been satisfied unless it shall have acquired actual knowledge that any such condition precedent has not been satisfied; provided, however, that nothing set forth in this Section 2.6 shall be deemed to prejudice the right of any Lender to recover from the Issuing Lender any amounts made available by such Lender to the Issuing Lender pursuant to this Section 2.6 in the event that it is determined by a court of competent jurisdiction that the payment with respect to a Letter of Credit constituted gross negligence or willful misconduct on the part of the Issuing Lender.

(j)    Limitation on Obligation of the Issuing Lender.    Notwithstanding anything contained herein to the contrary, the Issuing Lender shall not be under any obligation to issue, renew or extend any Letter of Credit if (i) any order, judgment or decree of any Governmental Authority or arbitrator shall by its terms purport to enjoin or restrain the Issuing Lender from issuing a Letter of Credit, or any applicable law, rule or regulation or any request or directive (whether or not having the force of law) from any Governmental Authority with jurisdiction over the Issuing Lender shall prohibit, or request that the Issuing Lender refrain from, the issuance of letters of credit generally or any such Letter of Credit in particular, or shall impose upon the Issuing Lender with respect to any such Letter of Credit any restriction, reserve or capital requirement (for which the Issuing Lender is not otherwise compensated hereunder) not in effect on the Closing Date, or shall impose upon the Issuing Lender any unreimbursed loss, costs or expense that was not applicable on the Closing Date and that the Issuing Lender should deem material to it in good faith, or (ii) the issuance, renewal or extension would violate or otherwise contravene its internal policy.

(k)    Conflict with LOC Documents.    In the event of any conflict between this Credit Agreement and any LOC Document (including any letter of credit application), this Credit Agreement shall control.

2.7    Additional Provisions relating to Swingline Loans.

The Swingline Lender may, at any time, in its sole discretion, by written notice to the Borrower and the Lenders, demand repayment of its Swingline Loans by way of a Revolving Loan advance, in which case the Borrower shall be deemed to have requested a Revolving Loan advance comprised solely of Base Rate Loans in the amount of such Swingline Loans; provided, however, that any such demand shall be deemed to have been given one Business Day prior to the Termination Date and on the date of the occurrence of any Event of Default described in Section 9.1 and upon acceleration of the indebtedness hereunder and the exercise of remedies in accordance with the provisions of Section 9.2. Each Lender hereby irrevocably agrees to make its Revolving Commitment Percentage of each such Revolving Loan in the amount, in the manner and on the date specified in the preceding sentence notwithstanding (a) the amount of such borrowing may not comply with the minimum amount for advances of Revolving Loans otherwise required hereunder, (b) whether any conditions specified in Section 5.2 are then satisfied, (c) whether a Default or an Event of Default then exists, (d) failure of any such request or deemed request for Revolving Loan to be made by the time otherwise required hereunder, (e) whether the date of such borrowing is a date on which Revolving Loans are otherwise permitted to be made hereunder or (f) any termination of the Commitments relating thereto immediately prior to or contemporaneously with such borrowing. In the event that any Revolving Loan cannot for any reason be made on the date otherwise required above (including, without limitation, as a result of the commencement of a proceeding under the Bankruptcy Code with respect to the Borrower or any other Credit Party), then each Lender hereby agrees that it shall forthwith purchase (as of the date such

31

borrowing would otherwise have occurred, but adjusted for any payments received from the Borrower on or after such date and prior to such purchase) from the Swingline Lender such Participation Interests in the outstanding Swingline Loans as shall be necessary to cause each such Lender to share in such Swingline Loans ratably based upon its Revolving Commitment Percentage (determined before giving effect to any termination of the Commitments pursuant to Section 3.4), provided that (i) all interest payable on the Swingline Loans shall be for the account of the Swingline Lender until the date as of which the respective Participation Interest is funded and (ii) at the time any purchase of Participation Interests pursuant to this sentence is actually made, the purchasing Lender shall be required to pay to the Swingline Lender, to the extent not paid to the Swingline Lender by the Borrower in accordance with the terms of Section 2.4(b), interest on the principal amount of Participation Interests purchased for each day from and including the day upon which such borrowing would otherwise have occurred to but excluding the date of payment for such Participation Interests, at the rate equal to the Federal Funds Rate.

SECTION 3

OTHER PROVISIONS RELATING TO CREDIT FACILITIES

3.1    Default Rate.

Upon the occurrence, and during the continuance, of an Event of Default, (i) the principal of and, to the extent permitted by law, interest on the Loans and any other amounts owing hereunder or under the other Credit Documents shall bear interest, payable on demand, at a per annum rate two percent (2%) greater than the rate that would otherwise be applicable (or if no rate is applicable, whether in respect of interest, fees or other amounts, then the Adjusted Base Rate plus two percent (2%)) and (ii) the Letter of Credit Fee shall accrue at a per annum rate two percent (2%) greater than the rate that would otherwise be applicable.

3.2    Continuation and Conversion.

The Borrower shall have the option, on any Business Day, to extend existing Loans into a subsequent permissible Interest Period or to convert Loans into Loans of another interest rate type; provided, however, that (i) except as provided in Section 3.8, Eurodollar Loans may be converted into Base Rate Loans or extended as Eurodollar Loans for new Interest Periods only on the last day of the Interest Period applicable thereto, (ii) Eurodollar Loans may be extended, and Base Rate Loans may be converted into Eurodollar Loans, only if the conditions precedent set forth in Section 5.2 are satisfied on the date of Continuation or Conversion, (iii) Loans extended as, or converted into, Eurodollar Loans shall be subject to the terms of the definition of “Interest Period” and shall be in such minimum amounts as provided in Section 2.2(b), and (iv) any request for Continuation or Conversion of a Eurodollar Loan that shall fail to specify an Interest Period shall be deemed to be a request for an Interest Period of one month. Each such Continuation or Conversion shall be effected by the Borrower by giving a Notice of Continuation/Conversion (or telephonic notice promptly confirmed in writing) to the office of the Administrative Agent specified in Section 11.1, or at such other office as the Administrative Agent may designate in writing, prior to 11:00 A.M. (Charlotte, North Carolina time), on the Business Day of, in the case of the Conversion of a Eurodollar Loan into a Base Rate Loan, and on the third Business Day prior to, in the case of the Continuation of a Eurodollar Loan as, or Conversion of a Base Rate Loan into, a Eurodollar Loan, the date of the proposed Continuation or Conversion, specifying the date of the proposed Continuation or Conversion, the Loans to be so extended or converted, the types of Loans into which such Loans are to be converted and, if appropriate, the applicable Interest Periods with respect thereto. Each request for Continuation or Conversion shall be irrevocable and shall constitute a representation and warranty by the Borrower of the matters specified in Section 5.2. In the event the Borrower fails to request Continuation or Conversion of any Eurodollar Loan in accordance with this Section, or any such Conversion or Continuation is not permitted or required by this Section, then such

32

Eurodollar Loan shall be automatically converted into a Base Rate Loan at the end of the Interest Period applicable thereto. The Administrative Agent shall give each Lender notice as promptly as practicable of any such proposed Continuation or Conversion affecting any Revolving Loan.

3.3    Prepayments.

(a)    Voluntary Prepayments.    The Loans may be repaid in whole or in part without premium or penalty; provided that (i) Eurodollar Loans may be prepaid only upon three Business Days prior written notice to the Administrative Agent and must be accompanied by payment of any amounts owing under Section 3.12, and (ii) partial prepayments shall be minimum principal amounts of $5 million, in the case of Eurodollar Loans, and $1 million, in the case of Base Rate Loans, and in integral multiples of $250,000 in excess thereof.

(b)    Mandatory Prepayments.

(i)    Committed Amounts.    If at any time (A) the aggregate principal amount of Obligations shall exceed the Aggregate Revolving Committed Amount, (B) the aggregate amount of LOC Obligations shall exceed the LOC Committed Amount or (C) the aggregate principal amount of Swingline Loans shall exceed the Swingline Committed Amount, the Borrower shall promptly, and in any event within five days, make payment on the Revolving Loans, on the Swingline Loans and/or to a cash collateral account in respect of the LOC Obligations, in an amount sufficient to eliminate the difference.

(ii)    Asset Dispositions.    The Obligations shall be promptly, and in any event within five days, prepaid as hereafter provided in an amount equal to one hundred percent (100%) of the Net Cash Proceeds received from any Asset Disposition to the extent (A) such Net Cash Proceeds are not reinvested or committed to be reinvested in the same or similar property or assets or in Permitted Acquisitions within nine months of the date of such Asset Disposition, and (B) the aggregate amount of such Net Cash Proceeds not reinvested in accordance with the foregoing clause (A) shall exceed $2 million in any fiscal year.

(iii)    Debt Transactions.    The Obligations shall be promptly, and in any event within five days, prepaid as hereafter provided in an amount equal to one hundred percent (100%) of the Net Cash Proceeds received from any Debt Transaction.

(iv)    Equity Transactions.    The Obligations shall be promptly, and in any event within five days, prepaid as hereafter provided in an amount equal to one hundred percent (100%) of the Net Cash Proceeds received from any Equity Transaction other than the IPO.

(c)    Application.    Voluntary prepayments shall be applied as specified by the Borrower or, if not so specified, first to Base Rate Loans, then to Eurodollar Loans in direct order of Interest Period maturities and then to a cash collateral account to secure LOC Obligations. Mandatory prepayments shall be applied first to Base Rate Loans, then to Eurodollar Loans in direct order of Interest Period maturities and then to a cash collateral account to secure LOC Obligations.

3.4    Reduction and Termination of Commitments.

(a)    Voluntary Reduction of Commitments.    The Commitments may be terminated or permanently reduced in whole or in part by the Borrower upon three Business Days prior written notice to the Administrative Agent, provided that (i) after giving effect to any voluntary reduction the aggregate amount of Obligations shall not exceed the Aggregate Revolving Committed Amount, as reduced, and (ii)

33

partial reductions shall be in a minimum principal amount of $2 million, and in integral multiples of $250,000 in excess thereof.

(b)    Termination of Commitments.    The Commitments shall terminate on the Termination Date.

3.5    Fees.

(a)    Commitment Fee.    In consideration of the Revolving Commitments, the Borrower agrees to pay to the Administrative Agent for the ratable benefit of the Lenders a commitment fee (the “Commitment Fee”) equal to the Applicable Percentage per annum on the average daily unused amount of the Aggregate Revolving Committed Amount for the applicable period. The Commitment Fee shall be payable quarterly in arrears on the last day of each March, June, September and December for the immediately preceding quarter (or a portion thereof). If the last day of such month is not a Business Day, such fee shall be paid on the next succeeding Business Day. For purposes of computation of the Commitment Fee, (i) Swingline Loans shall not be counted toward or considered usage of the Aggregate Revolving Committed Amount and (ii) LOC Obligations shall be counted toward and considered usage of the Aggregate Revolving Committed Amount.

(b)    Letter of Credit Fees.

(i)    Letter of Credit Issuance Fee.    In consideration of the issuance of Letters of Credit, the Borrower promises to pay to the Administrative Agent for the account of each Lender a fee (the “Letter of Credit Fee”) on such Lender’s Revolving Commitment Percentage of the average daily maximum amount available to be drawn under each such Letter of Credit computed at a per annum rate for each day from the date of issuance to the date of expiration equal to the Applicable Percentage. The Letter of Credit Fee shall be payable quarterly in arrears on the last day of each March, June, September and December for the immediately preceding quarter (or a portion thereof). If the last day of such month is not a Business Day, such fee shall be paid on the next succeeding Business Day.

(ii)    Issuing Lender Fees.    In addition to the Letter of Credit Fee, the Borrower promises to pay to the Administrative Agent for the account of the Issuing Lender without sharing by the other Lenders (i) a letter of credit fronting fee (the “Issuing Lender Fee”) of one-eighth of one percent (0.125%) on the average daily maximum amount available to be drawn under each Letter of Credit computed at a per annum rate for each day from the date of issuance to the date of expiration and (ii) the customary charges from time to time of the Issuing Lender with respect to the issuance, amendment, transfer, administration, cancellation and conversion of, and drawings under, such Letters of Credit. The Issuing Lender Fee hereunder shall be payable quarterly in arrears on the last day of each March, June, September and December for the immediately preceding quarter (or portion thereof) and on the Termination Date. If the last day of such month is not a Business Day, such fee shall be paid on the next succeeding Business Day.

(c)    Administrative Fees.    The Borrower agrees to pay to the Administrative Agent, for its own account, the fees referred to in the Administrative Agent’s Fee Letter.

3.6    Capital Adequacy.

If any Lender has determined, after the date hereof, that the adoption or the becoming effective of, or any change in, or any change by any Governmental Authority, central bank or comparable agency charged with the interpretation or administration thereof in the interpretation or administration of, any applicable law,

34

rule or regulation regarding capital adequacy, or compliance by such Lender with any request or directive regarding capital adequacy (whether or not having the force of law) of any such authority, central bank or comparable agency, has or would have the effect of reducing the rate of return on such Lender’s (including, for purposes hereof, the parent company of such Lender) capital or assets as a consequence of its commitments or obligations hereunder to a level below that which such Lender could have achieved but for such adoption, effectiveness, change or compliance (taking into consideration such Lender’s policies with respect to capital adequacy), then, upon fifteen Business Days notice from such Lender to the Borrower, the Borrower shall be obligated to pay to such Lender such additional amount or amounts as will compensate such Lender for such reduction. Each determination by any such Lender of amounts owing under this Section shall, absent manifest error, be conclusive and binding on the parties hereto.

3.7    Limitation on Eurodollar Loans.

If on or prior to the first day of any Interest Period for any Eurodollar Loan:

(a)  the Administrative Agent determines (which determination shall be conclusive) that by reason of circumstances affecting the relevant market, adequate and reasonable means do not exist for ascertaining the Eurodollar Rate for such Interest Period; or

(b)  the Required Lenders determine (which determination shall be conclusive) and notify the Administrative Agent that the Eurodollar Rate will not adequately and fairly reflect the cost to the Lenders of funding Eurodollar Loans for such Interest Period;

then the Administrative Agent shall give the Borrower prompt notice thereof, and so long as such condition remains in effect, the Lenders shall be under no obligation to make additional Eurodollar Loans, Continue Eurodollar Loans, or to Convert Base Rate Loans into Eurodollar Loans with respect to the affected currency.

3.8    Illegality.

Notwithstanding any other provision of this Credit Agreement, in the event that it becomes unlawful for any Lender (or its Applicable Lending Office) to make, maintain, or fund Eurodollar Loans hereunder, then such Lender shall promptly notify the Borrower thereof and such Lender’s obligation to make or Continue Eurodollar Loans and to Convert Base Rate Loans into Eurodollar Loans shall be suspended until such time as such Lender may again make, maintain, and fund Eurodollar Loans (in which case the provisions of Section 3.10 shall be applicable). Such Lender will use reasonable efforts to change the jurisdiction of its Applicable Lending Office so as to make it lawful for such Lender or its Applicable Lending Office to make, maintain or fund Eurodollar Loans hereunder if such change, in the judgment of such Lender, is not otherwise disadvantageous to such Lender.

3.9    Requirements of Law.

If, after the date hereof, the adoption of any applicable law, rule, or regulation, or any change in any applicable law, rule, or regulation, or any change in the interpretation or administration thereof by any Governmental Authority, central bank, or comparable agency charged with the interpretation or administration thereof, or compliance by any Lender (or its Applicable Lending Office) with any request or directive (whether or not having the force of law) of any such Governmental Authority, central bank, or comparable agency:

(a)  shall subject such Lender (or its Applicable Lending Office) to any tax, duty, or other charge with respect to any Eurodollar Loans, its Notes, or its obligation to make Eurodollar Loans, or change the basis of taxation of any amounts payable to such Lender (or its Applicable

35

Lending Office) under this Credit Agreement or its Notes in respect of any Eurodollar Loans (other than taxes imposed on the overall net income of such Lender by the jurisdiction in which such Lender has its principal office or such Applicable Lending Office);

(b)  shall impose, modify, or deem applicable any reserve, special deposit, assessment, or similar requirement (other than the Eurodollar Reserve Requirement utilized in the determination of the Eurodollar Rate) relating to any extensions of credit or other assets of, or any deposits with or other liabilities or commitments of, such Lender (or its Applicable Lending Office), including the Commitment of such Lender hereunder; or

(c)  shall impose on such Lender (or its Applicable Lending Office) or the London interbank market any other condition affecting this Credit Agreement or its Notes or any of such extensions of credit or liabilities or commitments;

and the result of any of the foregoing is to increase the cost to such Lender (or its Applicable Lending Office) of making, Converting into, Continuing, or maintaining any Eurodollar Loans or to reduce any sum received or receivable by such Lender (or its Applicable Lending Office) under this Credit Agreement or its Notes with respect to any Eurodollar Loans, then the Borrower shall pay to such Lender on demand such amount or amounts as will compensate such Lender for such increased cost or reduction. If any Lender requests compensation by the Borrower under this Section 3.9, the Borrower may, by notice to such Lender (with a copy to the Administrative Agent), suspend the obligation of such Lender to make or Continue Eurodollar Loans, or to Convert Base Rate Loans into Eurodollar Loans, until the event or condition giving rise to such request ceases to be in effect (in which case the provisions of Section 3.10 shall be applicable); provided that such suspension shall not affect the right of such Lender to receive the compensation so requested. Each Lender shall promptly notify the Borrower and the Administrative Agent of any event of which it has knowledge, occurring after the date hereof, that will entitle such Lender to compensation pursuant to this Section 3.9 and will designate a different Applicable Lending Office if such designation will avoid the need for, or reduce the amount of, such compensation and will not, in the judgment of such Lender, be otherwise disadvantageous to it. Any Lender claiming compensation under this Section 3.9 shall furnish to the Borrower and the Administrative Agent a statement setting forth the additional amount or amounts to be paid to it hereunder which shall be conclusive in the absence of manifest error. In determining such amount, such Lender may use any reasonable averaging and attribution methods.

3.10    Treatment of Affected Loans.

If the obligation of any Lender to make any Eurodollar Loan or to Continue, or to Convert Base Rate Loans into, Eurodollar Loans shall be suspended pursuant to Section 3.8 or 3.9 hereof, such Lender’s Eurodollar Loans shall be automatically Converted into Base Rate Loans on the last day(s) of then-current Interest Period(s) for such Eurodollar Loans (or, in the case of a Conversion required by Section 3.8 hereof, on such earlier date as such Lender may specify to the Borrower with a copy to the Administrative Agent) and, unless and until such Lender gives notice as provided below that the circumstances specified in Section 3.8 or 3.9 hereof that gave rise to such Conversion no longer exist:

(a)  to the extent that such Lender’s Eurodollar Loans have been so Converted, all payments and prepayments of principal that would otherwise be applied to such Lender’s Eurodollar Loans shall be applied instead to its Base Rate Loans; and

(b)  all Loans that would otherwise be made or Continued by such Lender as Eurodollar Loans shall be made or Continued instead as Base Rate Loans, and all Base Rate Loans of such Lender that would otherwise be Converted into Eurodollar Loans shall remain as Base Rate Loans.

36

If such Lender gives notice to the Borrower (with a copy to the Administrative Agent) that the circumstances specified in Section 3.8 or 3.9 hereof that gave rise to the Conversion of such Lender’s Eurodollar Loans pursuant to this Section 3.10 no longer exist (which such Lender agrees to do promptly upon such circumstances ceasing to exist) at a time when Eurodollar Loans made by other Lenders are outstanding, such Lender’s Base Rate Loans shall be automatically Converted, on the first day(s) of the next succeeding Interest Period(s) for such outstanding Eurodollar Loans, to the extent necessary so that, after giving effect thereto, all Loans held by the Lenders holding Eurodollar Loans and by such Lender are held pro rata (as to principal amounts, interest rate basis, and Interest Periods) in accordance with their respective Commitments.

3.11    Taxes.

(a)  Any and all payments by any Credit Party to or for the account of any Lender or the Administrative Agent hereunder or under any other Credit Document shall be made free and clear of and without deduction for any and all present or future taxes, duties, levies, imposts, deductions, charges or withholdings, and all liabilities with respect thereto, excluding, in the case of each Lender and the Administrative Agent, taxes imposed on its income, and franchise taxes imposed on it, by the jurisdiction under the laws of which such Lender (or its Applicable Lending Office) or the Administrative Agent (as the case may be) is organized or any political subdivision thereof (all such non-excluded taxes, duties, levies, imposts, deductions, charges, withholdings, and liabilities being hereinafter referred to as “Taxes”). If any Credit Party shall be required by law to deduct or withhold any Taxes from or in respect of any sum payable under this Credit Agreement or any other Credit Document to any Lender or the Administrative Agent, (i) the sum payable shall be increased as necessary so that after making all required deductions and withholdings (including deductions and withholdings applicable to additional sums payable under this Section 3.11) such Lender or the Administrative Agent receives an amount equal to the sum it would have received had no such deductions been made, (ii) such Credit Party shall make such deductions and withholdings, (iii) such Credit Party shall pay the full amount deducted or withheld to the relevant taxation authority or other authority in accordance with applicable law, and (iv) such Credit Party shall furnish to the Administrative Agent, at its address referred to in Section 11.1, the original or a certified copy of a receipt evidencing payment thereof.

(b)  In addition, the Borrower agrees to pay any and all present or future stamp or documentary taxes and any other excise or property taxes or charges or similar levies that arise from any payment made under this Credit Agreement or any other Credit Document or from the execution or delivery of, or otherwise with respect to, this Credit Agreement or any other Credit Document (hereinafter referred to as “Other Taxes”).

(c)  The Borrower agrees to indemnify each Lender and the Administrative Agent for the full amount of Taxes and Other Taxes (including, without limitation, any Taxes or Other Taxes imposed or asserted by any jurisdiction on amounts payable under this Section 3.11) paid by such Lender or such Administrative Agent (as the case may be) and any liability (including penalties, interest, and expenses) arising therefrom or with respect thereto.

(d)  Each Lender that is not a United States person under Section 7701(a)(30) of the Internal Revenue Code, on or prior to the date of its execution and delivery of this Credit Agreement in the case of each Lender listed on the signature pages hereof and on or prior to the date on which it becomes a Lender in the case of each other Lender, and from time to time thereafter if requested in writing by the Borrower or the Administrative Agent (but only so long as such Lender remains lawfully able to do so), shall provide the Borrower and the Administrative Agent with (i) Internal Revenue Service Form W-8 BEN or W-8 ECI, as appropriate, or any successor form prescribed by the Internal Revenue Service, certifying that such Lender is entitled to benefits under an income tax treaty to which the United States is a party that reduces to zero the rate of withholding tax on payments of interest or certifying that the income receivable pursuant to this Credit Agreement is effectively connected with the conduct of a trade or

37

business in the United States, (ii) Internal Revenue Service Form W-8 or W-9, as appropriate, or any successor form prescribed by the Internal Revenue Service, and/or (iii) any other form or certificate required by any taxing authority (including any certificate required by Sections 871(h) and 881(c) of the Internal Revenue Code), certifying that such Lender is entitled to an exemption from tax on payments pursuant to this Credit Agreement or any of the other Credit Documents.

(e)  For any period with respect to which a Lender has failed to provide the Borrower and the Administrative Agent with the appropriate form pursuant to Section 3.11(d) (unless such failure is due to a change in treaty, law, or regulation occurring subsequent to the date on which a form originally was required to be provided), such Lender shall not be entitled to indemnification under Section 3.11(a) or 3.11(b) with respect to Taxes imposed by the United States; provided, however, that should a Lender that is otherwise exempt from or subject to a reduced rate of withholding tax, become subject to Taxes because of its failure to deliver a form required hereunder, the Borrower shall take such steps as such Lender shall reasonably request to assist such Lender to recover such Taxes.

(f)  If any Credit Party is required to pay additional amounts to or for the account of any Lender pursuant to this Section 3.11, then such Lender will agree to use reasonable efforts to change the jurisdiction of its Applicable Lending Office so as to eliminate or reduce any such additional payment that may thereafter accrue if such change, in the judgment of such Lender, is not otherwise disadvantageous to such Lender.

(g)  Within thirty days after the date of any payment of Taxes, the applicable Credit Party shall furnish to the Administrative Agent the original or a certified copy of a receipt evidencing such payment.

(h)  Without prejudice to the survival of any other agreement of the Credit Parties hereunder, the agreements and obligations of the Credit Parties contained in this Section 3.11 shall survive the repayment of the Loans, LOC Obligations and other obligations under the Credit Documents and the termination of the Commitments hereunder.

3.12    Funding Losses.

Upon demand of any Lender (with a copy to the Administrative Agent) from time to time, the Borrower shall promptly compensate such Lender for and hold such Lender harmless from any loss, cost or expense incurred by it as a result of:

(a)  any continuation, conversion, payment or prepayment of any Loan other than a Base Rate Loan on a day other than the last day of the Interest Period for such Loan (whether voluntary, mandatory, automatic, by reason of acceleration, or otherwise); or

(b)  any failure by the Borrower (for a reason other than the failure of such Lender to make a Loan) to prepay, borrow, continue or convert any Loan other than a Base Rate Loan on the date or in the amount notified by the Borrower;

including any loss or expense arising from the liquidation or reemployment of funds obtained by it to maintain such Loan or from fees payable to terminate the deposits from which such funds were obtained. The Borrower shall also pay any customary administrative fees charged by such Lender in connection with the foregoing. For purposes of calculating amounts payable by the Borrower to the Lenders under this Section 3.12, each Lender shall be deemed to have funded each Eurodollar Loan made by it at the Interbank Offered Rate for such Loan by a matching deposit or other borrowing in the applicable offshore

38

Dollar interbank market for a comparable amount and for a comparable period, whether or not such Eurodollar Loan was in fact so funded.

3.13    Pro Rata Treatment.

Except to the extent otherwise provided herein:

(a)    Loans.    Each Revolving Loan advance, each payment or prepayment of principal of any Revolving Loan (other than Swingline Loans) or reimbursement obligations arising from drawings under Letters of Credit, each payment of interest on any Revolving Loan, and each payment of interest thereon, each payment of the Commitment Fee, each payment of the Letter of Credit Fee, each reduction of Aggregate Revolving Committed Amount, and each conversion or extension of Revolving Loan shall be allocated pro rata among the Lenders according to the respective Revolving Commitment Percentages of the Lenders.

(b)    Advances.

(i)  No Lender shall be responsible for the failure or delay by any other Lender in its obligation to make its ratable share of a borrowing hereunder; provided, however, that the failure of any Lender to fulfill its obligations hereunder shall not relieve any other Lender of its obligations hereunder.

(ii)  Unless the Borrower or any Lender has notified the Administrative Agent prior to the date any payment is required to be made by it to the Administrative Agent hereunder, that the Borrower or such Lender, as the case may be, will not make such payment, the Administrative Agent may assume that the Borrower or such Lender, as the case may be, has timely made such payment and may (but shall not be so required to), in reliance thereon, make available a corresponding amount to the Person entitled thereto. If and to the extent that such payment was not in fact made to the Administrative Agent in immediately available funds, then:

(A)  if the Borrower failed to make such payment, each Lender shall forthwith on demand repay to the Administrative Agent the portion of such assumed payment that was made available to such Lender in immediately available funds, together with interest thereon in respect of each day from and including the date such amount was made available by the Administrative Agent to such Lender to the date such amount is repaid to the Administrative Agent in immediately available funds, at the Federal Funds Rate from time to time in effect; and

(B)  if any Lender failed to make such payment, such Lender shall forthwith on demand pay to the Administrative Agent the amount thereof in immediately available funds, together with interest thereon for the period from the date such amount was made available by the Administrative Agent to the Borrower to the date such amount is recovered by the Administrative Agent (the “Compensation Period”) at a rate per annum equal to the Federal Funds Rate from time to time in effect. If such Lender does not pay such amount forthwith upon the Administrative Agent’s demand therefor, the Administrative Agent may make a demand therefor upon the Borrower, and the Borrower shall pay such amount to the Administrative Agent, together with interest thereon for the Compensation Period at a rate per annum equal to the rate of interest applicable

39

to the applicable Borrowing. Nothing herein shall be deemed to relieve any Lender from its obligation to fulfill its Commitment or to prejudice any rights that the Administrative Agent or the Borrower may have against any Lender as a result of any default by such Lender hereunder. A notice of the Administrative Agent to any Lender with respect to any amount owing under this subsection (b)(ii)(B) shall be conclusive, absent manifest error.

3.14    Sharing of Payments.

(a)    Lenders.    The Lenders agree that, in the event that any Lender shall obtain payment in respect of any Revolving Loan, LOC Obligation or any other obligation owing to such Lender under this Credit Agreement through the exercise of a right of setoff, banker’s lien or counterclaim, or pursuant to a secured claim under Section 506 of the Bankruptcy Code or other security or interest arising from, or in lieu of, such secured claim, received by such Lender under any applicable bankruptcy, insolvency or other similar law or otherwise, or by any other means, in excess of its pro rata share of such payment as provided in this Credit Agreement, such Lender shall promptly purchase from the other Lenders a Participation Interest in such Revolving Loan, LOC Obligation and other obligations in such amounts, and make such other adjustments from time to time, as shall be equitable to the end that all the Lenders share such payment in accordance with the respective Revolving Commitment Percentages of the Lenders, as provided in this Credit Agreement. The Lenders further agree that if payment to any such Lender obtained by such Lender through the exercise of a right of setoff, banker’s lien, counterclaim or other event as aforesaid shall be rescinded or must otherwise be restored, each Lender that shall have shared the benefit of such payment shall, by repurchase of a Participation Interest theretofore sold, return its share of that benefit (together with its share of any accrued interest payable with respect thereto) to each such Lender whose payment shall have been rescinded or otherwise restored. The Borrower agrees that any Lender so purchasing such a participation may, to the fullest extent permitted by law, exercise all rights of payment, including setoff, banker’s lien or counterclaim, with respect to such participation as fully as if such Lender were a holder of such Revolving Loan, LOC Obligation or other obligation in the amount of such participation. If under any applicable bankruptcy, insolvency or other similar law, any Lender receives a secured claim in lieu of a setoff to which this Section 3.14 applies, such Lender shall, to the extent practicable, exercise its rights in respect of such secured claim in a manner consistent with the rights of the Lenders under this Section 3.14 to share in the benefits of any recovery on such secured claim.

(b)    Lenders and Administrative Agent.    Except as otherwise expressly provided in this Credit Agreement, if any Lender or the Administrative Agent shall fail to remit to the Administrative Agent or any other Lender an amount payable by such Lender or the Administrative Agent to the Administrative Agent or such other Lender pursuant to this Credit Agreement on the date when such amount is due, such payments shall be made together with interest thereon for each date from the date such amount is due until the date such amount is paid to the Administrative Agent or such other Lender at a rate per annum equal to the Federal Funds Rate.

3.15    Payments, Computations, etc.

(a)    Generally.    Except as otherwise specifically provided herein, all payments shall be made to the Administrative Agent in Dollars in immediately available funds, and shall be made without condition or deduction for any counterclaim, defense, recoupment or setoff, at the Administrative Agent’s office specified in Section 11.1 not later than 2:00 P.M. (Charlotte, North Carolina time). Payments received after such time shall be deemed to have been received on the next succeeding Business Day. The Administrative Agent may (but shall not be obligated to) debit the amount of any such payment that is not made by such time to any ordinary deposit account of the Borrower maintained with such Administrative Agent (with notice to the Borrower). The Borrower shall, at the time it makes any payment under this Credit Agreement, specify to

40

the Administrative Agent the Loans, LOC Obligations, Fees, interest or other amounts payable by the Borrower hereunder to which such payment is to be applied (and in the event that it fails so to specify, or if such application would be inconsistent with the terms hereof, the Administrative Agent shall distribute such payment to the Lenders in such manner as the Administrative Agent may determine to be appropriate in respect of obligations owing by the Borrower hereunder, subject to the terms of Section 3.14(a) and Section 3.15(b)). The Administrative Agent will distribute such payments to the Lenders if any such payment is received prior to 12:00 Noon (Charlotte, North Carolina time or London, England time, as appropriate) on a Business Day in like funds as received prior to the end of such Business Day and otherwise such Administrative Agent will distribute such payment to the Lenders entitled thereto on the next succeeding Business Day. Whenever any payment hereunder shall be stated to be due on a day that is not a Business Day, the due date thereof shall be extended to the next succeeding Business Day (subject to accrual of interest and Fees for the period of such extension). Except as expressly provided otherwise herein, all computations of interest and fees shall be made on the basis of the actual number of days elapsed over a year of 360 days, except with respect to computation of interest on Base Rate Loans determined by reference to the Prime Rate, which shall be calculated based on a year of 365 or 366 days, as appropriate. Interest shall accrue from and include the date of borrowing, but exclude the date of payment.

(b)    Allocation of Payments After Event of Default.    Notwithstanding any other provisions of this Credit Agreement to the contrary, after the occurrence and during the continuance of an Event of Default, all amounts collected or received on or in respect of the Obligations (or other amounts owing under the Credit Documents in connection therewith) shall be paid over or delivered as follows:

FIRST, to the payment of all reasonable out-of-pocket costs and expenses (including, without limitation, reasonable attorneys’ fees and expenses and the allocated cost of internal counsel) of the collateral agent incurred in connection with the execution of its duties as collateral agent in exercising or attempting to exercise rights and remedies in respect of the collateral and all protective advances made with respect thereto;

SECOND, to the payment of all reasonable out-of-pocket costs and expenses (including, without limitation, reasonable attorneys’ fees and expenses and the allocated cost of internal counsel) of the Administrative Agent in connection with enforcing the rights and remedies of the Lenders under the Credit Documents and any protective advances made with respect thereto;

THIRD, to payment of any fees owed to the Administrative Agent;

FOURTH, to the payment of all reasonable out-of-pocket costs and expenses (including, without limitation, reasonable attorneys’ fees and expenses and the allocated cost of internal counsel) of each of the Lenders hereunder in connection with enforcing its rights under the Credit Documents or otherwise with respect to the Obligations owing to such Lender;

FIFTH, to the payment of all accrued interest and fees on or in respect of the Obligations;

SIXTH, to the payment of the outstanding principal amount of the Obligations (including the payment or cash collateralization of the outstanding LOC Obligations);

SEVENTH, to all other Obligations and other obligations that shall have become due and payable under the Credit Documents otherwise and not repaid pursuant to clauses “FIRST” through “SIXTH” above; and

41

EIGHTH, to the payment of the surplus, if any, to whoever may be lawfully entitled to receive such surplus.

In carrying out the foregoing, (i) amounts received shall be applied in the numerical order provided until exhausted prior to application to the next succeeding category; and (ii) except as otherwise provided, the Lenders shall receive amounts ratably in accordance with their respective pro rata share (based on the proportion that then outstanding Obligations held by such Lenders bears to the aggregate amount of Obligations then outstanding) of amounts available to be applied pursuant to clauses “FOURTH”, “FIFTH”, “SIXTH” and “SEVENTH” above; and (iii) to the extent that any amounts available for distribution pursuant to clause “SIXTH” above are attributable to the issued but undrawn amount of outstanding Letters of Credit, such amounts shall be held by the Administrative Agent in a cash collateral account and applied (A) first, to reimburse the Issuing Lender for any drawings under such Letters of Credit and (B) then, following the expiration of all Letters of Credit, to all other obligations of the types described in clauses “FIFTH” and “SIXTH” above in the manner provided in this Section 3.15(b).

3.16    Evidence of Debt.

(a)  Each Lender shall maintain an account or accounts evidencing each Revolving Loan made by such Lender to the Borrower from time to time, including the amounts of principal and interest payable and paid to such Lender from time to time under this Credit Agreement. Each Lender will make reasonable efforts to maintain the accuracy of its account or accounts and to promptly update its account or accounts from time to time, as necessary.

(b)  The Administrative Agent shall maintain the Register pursuant to Section 11.3(c), and a subaccount for each Lender, in which Register and subaccounts (taken together) shall be recorded (i) the amount, type and Interest Period of each such Revolving Loan hereunder, (ii) the amount of any principal or interest due and payable or to become due and payable to each Lender hereunder and (iii) the amount of any sum received by the Administrative Agent hereunder from or for the account of the Borrower and each Lender’s share thereof. The Administrative Agent will make reasonable efforts to maintain the accuracy of the subaccounts referred to in the preceding sentence and to promptly update such subaccounts from time to time, as necessary.

(c)  The entries made in the accounts, Register and subaccounts maintained pursuant to subsection (b) of this Section 3.16 (and, if consistent with the entries of the Administrative Agent, subsection (a)) shall be prima facie evidence of the existence and amounts of the obligations of the Credit Parties therein recorded; provided, however, that the failure of any Lender or the Administrative Agent to maintain any such account, such Register or such subaccount, as applicable, or any error therein, shall not in any manner affect the obligation of the Credit Parties to repay the Obligations and other amounts owing hereunder to such Lender.

3.17    Replacement of Lender, Etc.

In the event any Lender delivers to the Borrower any notice in accordance with Section 3.6, 3.7, 3.8, 3.9, 3.10 or 3.11 or the Administrative Agent notifies the Borrower that a Lender has not made its ratable share of a Loan borrowing available in accordance with the terms of this Credit Agreement, then the Borrower shall have the right, if no Default or Event of Default then exists, to replace such Lender (the “Replaced Lender”) with one or more additional banks or financial institutions (collectively, the “Replacement Lender”), provided, that (a) the Replacement Lender is reasonably acceptable to the Administrative Agent, (b) at the time of any replacement pursuant to this Section 3.17, the Replacement Lender shall enter into one or more Assignment and Acceptance agreements pursuant to, and in accordance with the terms of, Section 11.3(b) (and with all processing and recordation fees payable pursuant to said Section 11.3(b) to be paid by the Replacement Lender or, at its option, the Borrower) pursuant to which the Replacement Lender shall acquire all of the rights and obligations of the Replaced Lender hereunder and, in connection therewith, shall pay to the Replaced Lender in respect thereof an amount equal to the sum of (i) the principal of, and all accrued interest on, all outstanding Loans of the Replaced Lender, and (ii) all accrued, but theretofore unpaid, fees owing to the Replaced Lender pursuant to Section 3.5, (c) all other obligations of the Borrower owing to the Replaced Lender (including all other obligations, if any, owing pursuant to Sections 3.6, 3.9, 3.11 and 3.12) shall be paid in full to such Replaced Lender concurrently with such replacement and (d) the Administrative Agent and the Lenders shall not be obligated to assist the Borrower in identifying or obtaining any Replacement Lender.

42

SECTION 4 

GUARANTY

4.1    The Guaranty.

(a)  Each of the Guarantors hereby jointly and severally guarantees to the Administrative Agent and to each of the holders of Guaranteed Obligations, as hereinafter provided, as primary obligor and not as surety, the prompt payment of the Guaranteed Obligations in full when due (whether at stated maturity, as a mandatory prepayment, by acceleration, as a mandatory cash collateralization or otherwise) strictly in accordance with the terms thereof. Each of the Guarantors hereby further agrees that if any of the Guaranteed Obligations are not paid in full when due (whether at stated maturity, as a mandatory prepayment, by acceleration, as a mandatory cash collateralization or otherwise), the Guarantors will, jointly and severally, promptly pay the same, without any demand or notice whatsoever, and that in the case of any extension of time of payment or renewal of any of the Guaranteed Obligations, the same will be promptly paid in full when due (whether at extended maturity, as a mandatory prepayment, by acceleration, as a mandatory cash collateralization or otherwise) in accordance with the terms of such extension or renewal.

(b)  Notwithstanding any provision to the contrary contained herein or in any other of the Credit Documents or Hedging Agreements, to the extent the obligations of a Guarantor shall be adjudicated to be invalid or unenforceable for any reason (including, without limitation, because of any applicable state, provincial or federal law relating to fraudulent conveyances or transfers or the granting of financial assistance) then the obligations of each Guarantor under this Credit Agreement and the other Credit Documents shall be limited to the maximum amount that is permissible under applicable law (whether federal, state or provincial and including, without limitation, the Bankruptcy Code). In such case or otherwise at the request of the Administrative Agent, each Credit Party shall take such action and shall execute and deliver all such further documents required by the Administrative Agent to cause the obligations of such Guarantor to be enforceable to the extent required by this Credit Agreement.

4.2    Obligations Unconditional.

The obligations of the Guarantors under Section 4.1 are joint and several, absolute and unconditional, irrespective of the value, genuineness, validity, regularity or enforceability of any of the Credit Documents or Hedging Agreements, or any other agreement or instrument referred to therein, or any substitution, release, impairment or exchange of any other guarantee of or security for any of the Guaranteed Obligations, and, to the fullest extent permitted by applicable law, irrespective of any other circumstance whatsoever that might otherwise constitute a legal or equitable discharge or defense of a surety or guarantor, it being the intent of this Section 4.2 that the obligations of the Guarantors hereunder shall be absolute and unconditional under

43

any and all circumstances. Each Guarantor agrees that such Guarantor shall have no right of subrogation, indemnity, reimbursement or contribution against the Borrower or any other Guarantor for amounts paid under this Section 4 until such time as the holders of the Guaranteed Obligations have been paid in full in respect of all Guaranteed Obligations, all Commitments under this Credit Agreement have been terminated and no Person or Governmental Authority shall have any right to request any return or reimbursement of funds from the Lenders in connection with monies received under the Credit Documents or Hedging Agreements between any member of the Consolidated Group and any Lender, or any Affiliate of a Lender. Without limiting the generality of the foregoing, it is agreed that, to the fullest extent permitted by law, the occurrence of any one or more of the following shall not alter or impair the liability of any Guarantor hereunder, which shall remain absolute and unconditional as described above:

(a)  at any time or from time to time, without notice to any Guarantor, the time for any performance of or compliance with any of the Guaranteed Obligations shall be extended, or such performance or compliance shall be waived;

(b)  any of the acts mentioned in any of the provisions of any of the Credit Documents, any Hedging Agreement between any member of the Consolidated Group and any Lender or any Affiliate of a Lender, or any other agreement or instrument referred to in the Credit Documents or such Hedging Agreements shall be done or omitted;

(c)  the maturity of any of the Guaranteed Obligations shall be accelerated, or any of the Guaranteed Obligations shall be modified, supplemented or amended in any respect, or any right under any of the Credit Documents, any Hedging Agreement between any member of the Consolidated Group and any Lender or any Affiliate of a Lender, or any other agreement or instrument referred to in the Credit Documents or such Hedging Agreements shall be waived or any other guarantee of any of the Guaranteed Obligations or any security therefor shall be released, impaired or exchanged in whole or in part or otherwise dealt with;

(d)  any Lien granted to, or in favor of, the Administrative Agent or any Lender or Lenders as security for any of the Guaranteed Obligations shall fail to attach or be perfected; or

(e)  any of the Guaranteed Obligations shall be determined to be void or voidable (including, without limitation, for the benefit of any creditor of any Guarantor) or shall be subordinated to the claims of any Person (including, without limitation, any creditor of any Guarantor).

With respect to its obligations hereunder, each Guarantor hereby expressly waives diligence, presentment, demand of payment, protest and all notices whatsoever, and any requirement that the Administrative Agent or any Lender exhaust any right, power or remedy or proceed against any Person under any of the Credit Documents, any Hedging Agreement between any member of the Consolidated Group and any Lender, or any Affiliate of a Lender, or any other agreement or instrument referred to in the Credit Documents or such Hedging Agreements, or against any other Person under any other guarantee of, or security for, any of the Guaranteed Obligations.

4.3    Reinstatement.

The obligations of the Guarantors under this Section 4 shall be automatically reinstated if and to the extent that for any reason any payment by or on behalf of any Person in respect of the Guaranteed Obligations is rescinded or must be otherwise restored by any holder of any of the Guaranteed Obligations, whether as a result of any proceedings in bankruptcy or reorganization or otherwise, and each Guarantor agrees that it will indemnify the Administrative Agent and each Lender on demand for all reasonable costs

44

and expenses (including, without limitation, reasonable attorneys’ fees and expenses and the allocated cost of internal counsel) incurred by the Administrative Agent or such Lender in connection with such rescission or restoration, including any such costs and expenses incurred in defending against any claim alleging that such payment constituted a preference, fraudulent transfer or similar payment under any bankruptcy, insolvency or similar law.

4.4    Certain Additional Waivers.

Each Guarantor agrees that such Guarantor shall have no right of recourse to security for the Guaranteed Obligations, except through the exercise of rights of subrogation pursuant to Section 4.2 and through the exercise of rights of contribution pursuant to Section 4.6.

4.5    Remedies.

The Guarantors agree that, to the fullest extent permitted by law, as between the Guarantors, on the one hand, and the Administrative Agent and the Lenders, on the other hand, the Guaranteed Obligations may be declared to be forthwith due and payable as provided in Section 9.2 (and shall be deemed to have become automatically due and payable in the circumstances provided in said Section 9.2) for purposes of Section 4.1 notwithstanding any stay, injunction or other prohibition preventing such declaration (or preventing the Guaranteed Obligations from becoming automatically due and payable) as against any other Person and that, in the event of such declaration (or the Guaranteed Obligations being deemed to have become automatically due and payable), the Guaranteed Obligations (whether or not due and payable by any other Person) shall forthwith become due and payable by the Guarantors for purposes of Section 4.1. The Guarantors acknowledge and agree that their obligations hereunder are secured in accordance with the terms of the Collateral Documents and that the Lenders may exercise their remedies thereunder in accordance with the terms thereof.

4.6    Rights of Contribution.

The Guarantors hereby agree, as among themselves, that if any Guarantor shall become an Excess Funding Guarantor (as defined below), each other Guarantor shall, on demand of such Excess Funding Guarantor (but subject to the succeeding provisions of this Section 4.6), pay to such Excess Funding Guarantor an amount equal to such Guarantor’s Pro Rata Share (as defined below and determined, for this purpose, without reference to the properties, assets, liabilities and debts of such Excess Funding Guarantor) of such Excess Payment (as defined below). The payment obligation of any Guarantor to any Excess Funding Guarantor under this Section 4.6 shall be subordinate and subject in right of payment to the prior payment in full of the obligations of such Guarantor under the other provisions of this Section 4, and such Excess Funding Guarantor shall not exercise any right or remedy with respect to such excess until payment and satisfaction in full of all of such obligations. For purposes hereof, (a) “Excess Funding Guarantor” shall mean, in respect of any obligations arising under the other provisions of this Section 4 (hereafter, the “Guaranty Obligations”), a Guarantor that has paid an amount in excess of its Pro Rata Share of the Guaranty Obligations; (b) “Excess Payment” shall mean, in respect of any Guaranty Obligations, the amount paid by an Excess Funding Guarantor in excess of its Pro Rata Share of such Guaranty Obligations; and (c) “Pro Rata Share”, for the purposes of this Section 4.6, shall mean, for any Guarantor, the ratio (expressed as a percentage) of (i) the amount by which the aggregate present fair saleable value of all of its assets and properties exceeds the amount of all debts and liabilities of such Guarantor (including contingent, subordinated, unmatured, and unliquidated liabilities, but excluding the obligations of such Guarantor hereunder) to (ii) the amount by which the aggregate present fair saleable value of all assets and other properties of the Borrower and all of the Guarantors exceeds the amount of all of the debts and liabilities (including contingent, subordinated, unmatured, and unliquidated liabilities, but excluding the obligations of the Borrower and the Guarantors hereunder) of the Borrower and all of the Guarantors, all as of the Closing

45

Date (if any Guarantor becomes a party hereto subsequent to the Closing Date, then for the purposes of this Section 4.6 such subsequent Guarantor shall be deemed to have been a Guarantor as of the Closing Date and the information pertaining to, and only pertaining to, such Guarantor as of the date such Guarantor became a Guarantor shall be deemed true as of the Closing Date).

4.7    Guarantee of Payment; Continuing Guarantee.

The guarantee in this Section 4 is a guaranty of payment and not of collection, is a continuing guarantee, and shall apply to all Guaranteed Obligations whenever arising.

SECTION 5

CONDITIONS

5.1    Closing Conditions.

The obligation of the Lenders to enter into this Credit Agreement and to make the initial Extensions of Credit shall be subject to satisfaction of the following conditions (in form and substance acceptable to the Lenders):

(a)    Executed Credit Documents.    Receipt by the Administrative Agent of (i) multiple counterparts of this Credit Agreement, (ii) a Revolving Note for each Lender and (iii) multiple counterparts of the Collateral Documents, in each case executed by a duly authorized officer of each party thereto and in each case conforming to the requirements of this Credit Agreement.

(b)    Legal Opinions.    Receipt by the Administrative Agent of multiple counterparts of opinions of counsel for the Credit Parties relating to the Credit Documents and the transactions contemplated therein, in form and substance satisfactory to the Administrative Agent and the Lenders, and including, among other things, opinions regarding enforceability of the Credit Documents and the perfection of the security interests created thereby.

(c)    Personal Property Collateral.    Receipt by the Administrative Agent of the following:

(i)    UCC Financing Statements.    UCC financing statements for each jurisdiction as is necessary or appropriate, in the Collateral Agent’s discretion, to perfect the security interests in the Collateral.

(ii)    Certificated Interests.    Original certificates evidencing the Capital Stock pledged pursuant to the Collateral Documents, together with undated stock transfer powers executed in blank.

(iii)    Intellectual Property.    Such patent, trademark and copyright notices and filings as necessary or appropriate, in the Collateral Agent’s discretion, to perfect the security interests in Intellectual Property.

(iv)    Landlord Consents.    Landlord consents, estoppel letters or consents and waivers in respect of Collateral held on leased premises as reasonably required by the Collateral Agent.

46

(d)    Evidence of Insurance.    Receipt by the Administrative Agent of copies of insurance policies or certificates of insurance of the members of the Consolidated Group evidencing liability and casualty insurance meeting the requirements set forth in the Credit Documents, including, without limitation, naming the Collateral Agent as additional insured (in the case of liability insurance) or sole loss payee (in the case of hazard insurance) on behalf of the Lenders.

(e)    Absence of Legal Proceedings.    There shall not exist any action, suit, investigation or proceeding pending in any court or before any arbitrator or Governmental Authority that would reasonably be expected to have a Material Adverse Effect.

(f)    Corporate Documents.    Receipt by the Administrative Agent of the following (or the equivalent):

(i)    Charter Documents.    For each of member of the Consolidated Group, copies of the articles or certificates of incorporation or other charter documents of such Person certified to be true and complete as of a recent date by the appropriate Governmental Authority of the state or other jurisdiction of its incorporation and certified by a secretary or assistant secretary of such Person to be true and correct as of the Closing Date.

(ii)    Bylaws.    For each member of the Consolidated Group, a copy of the bylaws, operating agreement or equivalent of such Person certified by a secretary or assistant secretary of such Person to be true and correct and in force and effect as of the Closing Date.

(iii)    Resolutions.    For each Credit Party, copies of resolutions of the board of directors of such Credit Party approving and adopting the Credit Documents to which it is a party, the transactions contemplated therein and authorizing execution and delivery thereof, certified by a secretary or assistant secretary of such Credit Party to be true and correct and in force and effect as of the Closing Date.

(iv)    Good Standing.    For each member of the Consolidated Group, certificates of good standing, existence or its equivalent of such Person certified as of a recent date by the appropriate governmental authorities of the state of incorporation and each other state in which the failure to so qualify and be in good standing would be reasonably likely to have a material adverse effect on the business or operations in such state.

(v)    Officer’s Certificate.    An officer’s certificate for each of the Credit Parties dated as of the Closing Date substantially in the form of Schedule 5.1(f)(v) with appropriate insertions and attachments.

(g)    Priority of Liens.    The Administrative Agent shall have received satisfactory evidence that (i) the Collateral Agent, on behalf of the Lenders, holds a perfected, first priority Lien on all Collateral and (ii) none of the Collateral is subject to any Liens other than Permitted Liens.

(h)    Governmental Consents.    Receipt by the Administrative Agent of evidence of receipt of all required governmental and third party consents and approvals, if any, with respect to the Credit Documents and the transactions contemplated thereby (or, to the extent such consents and approvals are pending, the status of such consents and approvals).

47

(i)    Fees and Expenses.    Payment by the Credit Parties of all fees and expenses owed by them to the Lenders, the Administrative Agent and the Collateral Agent, including, without limitation, payment to the Administrative Agent of the fees set forth in the Administrative Agent’s Fee Letter.

5.2    Conditions to all Extensions of Credit.

The obligation of each Lender to make any Extension of Credit hereunder (including the initial Extension of Credit to be made hereunder) is subject to the satisfaction of the following conditions precedent:

(a)    Representations and Warranties.    The representations and warranties made by the Credit Parties herein and in the other Credit Documents and that are contained in any certificate furnished at any time under or in connection herewith shall be true and correct in all material respects on and as of the date of such Extension of Credit as if made on and as of such date (except for those that expressly relate to an earlier date).

(b)    No Default or Event of Default.    No Default or Event of Default shall have occurred and be continuing on the date of such Extension of Credit or after giving effect to such Extension of Credit unless such Default or Event of Default shall have been waived in accordance with this Credit Agreement.

(c)    Other Conditions.    The Borrower shall have satisfied the conditions set forth in Section 2 and, in the case of Continuations and Conversions, Section 3.2.

Each request for an Extension of Credit (including Continuations and Conversions) and each acceptance by the Borrower of an Extension of Credit (including Continuations and Conversions) shall be deemed to constitute a representation and warranty by the Borrower as of the date of such Extension of Credit that the applicable conditions in this Section 5.2 have been satisfied.

SECTION 6

REPRESENTATIONS AND WARRANTIES

To induce the Lenders to enter into this Credit Agreement and to make the Extensions of Credit hereunder, each of the Credit Parties hereby represents and warrants to the Administrative Agent and to each Lender that:

6.1    Financial Condition.

Each of the financial statements described below (copies of which have heretofore been provided to the Administrative Agent for distribution to the Lenders) have been prepared in accordance with GAAP (or, as applicable with respect to HMO Subsidiaries, SAP) consistently applied throughout the periods covered thereby, are complete and correct in all material respects and present fairly the financial condition (including disclosure of all material liabilities, contingent or otherwise) and results from operations of the entities and for the periods specified, subject in the case of interim company-prepared statements to normal year-end adjustments and the absence of footnotes:

(a)  the audited consolidated balance sheets of the Borrower and its consolidated subsidiaries dated as of December 31, 1998, December 31, 1999 and December 31, 2000,

48

together with the related audited statements of income, stockholders’ equity and cash flows for the respective fiscal years then ended, certified by KPMG LLP, certified public accountants;

(b)  the unaudited, company-prepared balance sheets of the Borrower and its consolidated subsidiaries dated as of September 30, 2001, together with the related unaudited, company-prepared statements of income, stockholders’ equity and cash flows for the fiscal quarter then ended; and

(c)  after the Closing Date, the annual and quarterly financial statements provided in accordance with Sections 7.1(a) and (b).

6.2    No Changes or Restricted Payments.

Since the date of the most recent annual audited financial statements referenced in Section 6.1(a):

(a)  for the period to the Closing Date, except as previously disclosed in writing to the Administrative Agent and the Lenders, (i) there have been no material sales, transfers or other dispositions of any material part of the business or property of the members of the Consolidated Group, nor have there been any material purchases or other acquisitions of any business or property (including the Capital Stock of any other person) by the members of the Consolidated Group, that are not reflected in the annual audited or company-prepared quarterly financial statements referenced in Section 6.1(a) and (b) hereof, and (ii) no Restricted Payments have been declared or paid by members of the Consolidated Group; and

(b)  there has been no circumstance, development or event relating to or affecting the members of the Consolidated Group that has had or would reasonably be expected to have a Material Adverse Effect.

6.3    Organization; Existence; Compliance with Law.

Each of the members of the Consolidated Group (a) is duly organized, validly existing in good standing under the laws of the jurisdiction of its incorporation or organization, (b) has the corporate or other necessary power and authority, and the legal right to own and operate its Property, to lease the Property it operates as lessee and to conduct the business in which it is currently engaged, (c) is duly qualified as a foreign entity and in good standing under the laws of each jurisdiction where its ownership, lease or operation of Property or the conduct of its business requires such qualification, other than in such jurisdictions where the failure to be so qualified and in good standing would not, in the aggregate, have a Material Adverse Effect, and (d) is in compliance with all HMO Regulations, Medicare Regulations, Medicaid Regulations and all Requirements of Law (including without limitation Environmental Laws) applicable to it, or to its properties, except to the extent that the failure to comply therewith would not, in the aggregate, be reasonably expected to have a Material Adverse Effect. Without limiting the generality of the foregoing, with respect to each member of the Consolidated Group:

(i)  there is (A) no member of the Consolidated Group or individual employed by any member of the Consolidated Group that would reasonably be expected to have criminal culpability or to be excluded from participation in any Medical Reimbursement Program for corporate or individual actions or failures to act where such culpability or exclusion has resulted or could reasonably be expected to result in an Exclusion Event; and (B) no officer continuing to be employed by the Consolidated Group who may reasonably be expected to have individual culpability for matters under investigation by the OIG or other Governmental Authority unless such officer has been, within a reasonable period of time after discovery of such actual or

49

potential culpability, either suspended or removed from positions of responsibility related to those activities under challenge by the OIG or other Governmental Authority;

(ii)  current billing policies, arrangements, protocols and instructions comply with requirements of Medical Reimbursement Programs and are administered by properly trained personnel, except where any such failure to comply would not reasonably be expected to result in an Exclusion Event;

(iii)  current medical director compensation arrangements comply with state and federal anti-kick back, fraud and abuse, and Stark I and II requirements, except where any such failure to comply would not reasonably be expected to result in an Exclusion Event.

6.4    Power; Authorization; Enforceable Obligations.

Each of the Credit Parties has the corporate or other necessary power and authority, and the legal right, to make, deliver and perform the Credit Documents to which it is a party and has taken all necessary corporate or other action to authorize the execution, delivery and performance by it of the Credit Documents to which it is a party. No consent or authorization of, filing with, notice to or other act by or in respect of, any Governmental Authority or any other Person is required in connection with acceptance of Extensions of Credit or the making of the guaranties hereunder or with the execution, delivery or performance of any Credit Documents by the Credit Parties (other than those that have been obtained, such filings as are required by the Securities and Exchange Commission and to fulfill other reporting requirements with Governmental Authorities) or with the validity or enforceability of any Credit Document against the Credit Parties (except such filings as are necessary in connection with the perfection of the Liens created by such Credit Documents). Each Credit Document to which it is a party constitutes a legal, valid and binding obligation of such Credit Party enforceable against such Credit Party in accordance with its terms, except as enforceability may be limited by applicable bankruptcy, insolvency, reorganization, moratorium or similar laws affecting the enforcement of creditors’ rights generally and by general equitable principles (whether enforcement is sought by proceedings in equity or at law).

6.5    No Legal Bar.

The execution, delivery and performance of the Credit Documents, the borrowings hereunder and the use of the Extensions of Credit will not violate any Requirement of Law or any Contractual Obligation of any member of the Consolidated Group (except those as to which waivers or consents have been obtained), and will not result in, or require, the creation or imposition of any Lien on any of its respective properties or revenues pursuant to any Requirement of Law or Contractual Obligation other than the Liens arising under or contemplated in connection with the Credit Documents.

6.6    No Material Litigation and Disputes.

(a) No claim, litigation, investigation or proceeding of or before any arbitrator or Governmental Authority is pending or, to the best knowledge of the Credit Parties, threatened by or against, any members of the Consolidated Group or against any of their respective properties or revenues that (i) relate to the Credit Documents or any of the transactions contemplated hereby or thereby or (ii) if adversely determined, would reasonably be expected to have a Material Adverse Effect. Set forth on Schedule 6.6 is a summary of all claims, litigation, investigations and proceedings pending or, to the knowledge of the Credit Parties, threatened by or against the members of the Consolidated Group or against any of their respective properties or revenues, and none of such actions, individually or in the aggregate, would reasonably be expected to have a Material Adverse Effect.

50

(b)  No default exists and, to the knowledge of the Credit Parties, no default has been asserted, under any Contractual Obligations to which any members of the Consolidated Group are party that, individually or in the aggregate, would reasonably be expected to have a Material Adverse Effect.

6.7    No Defaults.

No Default or Event of Default has occurred and is continuing.

6.8    Ownership and Operation of Property.

Each of the members of the Consolidated Group (i) has good record and marketable title to, or a valid leasehold interest in, all its material real property, and good title to, or a valid leasehold interest in, all its other material property, and none of such property is subject to any Lien, except for Permitted Liens, and (ii) has obtained all material licenses, permits, franchises or other certifications, consents, approvals and authorizations, governmental or private, necessary to the ownership of its Property and to the conduct of its business.

6.9    Intellectual Property.

Each of the members of the Consolidated Group owns, or has the legal right to use, all United States trademarks, tradenames, copyrights, patents, technology, know-how and processes, if any, necessary for each of them to conduct its business as currently conducted (the “Intellectual Property”) except for those the failure to own or have such legal right to use would not be reasonably expected to have a Material Adverse Effect. Set forth on Schedule 6.9 is a list of all patents, patent applications, trademarks, trademark applications and registered copyrights owned or used by any member of the Consolidated Group. No claim has been asserted and is pending by any Person challenging or questioning the use by any member of the Consolidated Group of any of its Intellectual Property or the validity or enforceability of any such Intellectual Property, nor does any Credit Party know of any such threatened claim, and to the best knowledge of the Credit Parties, the use of such Intellectual Property by the members of the Consolidated Group does not infringe on the rights of any Person, except for such claims and infringements that, in the aggregate, would not be reasonably expected to have a Material Adverse Effect.

6.10    No Burdensome Restrictions.

No Requirement of Law or Contractual Obligation of the members of the Consolidated Group would be reasonably expected to have a Material Adverse Effect.

6.11    Taxes.

Each of the members of the Consolidated Group has filed or caused to be filed all income tax returns (federal, state, local and foreign) and all other material tax returns that are required to be filed and has paid (i) all amounts shown therein to be due (including interest and penalties) and (ii) all other taxes, fees, assessments and other governmental charges (including mortgage recording taxes, documentary stamp taxes and intangibles taxes) owing, except for such taxes that are not yet delinquent or as are being contested in good faith by appropriate proceedings for which adequate reserves determined in accordance with GAAP have been established unless the failure to make any such payment could give rise to an immediate right to foreclose on a Lien securing such amounts. No tax claim or assessment has been asserted against members of the Consolidated Group that if adversely determined would reasonably be expected to have a Material Adverse Effect.

51

6.12    ERISA.

Except as would not reasonably be expected to have a Material Adverse Effect:

(a)  During the three-year period prior to the date on which this representation is made or deemed made: (i) no ERISA Event has occurred, and, to the best knowledge of the Credit Parties, no event or condition has occurred or exists as a result of which any ERISA Event would reasonably be expected to occur, with respect to any Plan; (ii) no “accumulated funding deficiency,” as such term is defined in Section 302 of ERISA and Section 412 of the Internal Revenue Code, whether or not waived, has occurred with respect to any Plan; (iii) each Plan has been maintained, operated, and funded in material compliance with its own terms and with the provisions of ERISA, the Internal Revenue Code, and any other applicable federal or state laws; and (iv) no lien in favor of the PBGC or a Plan has arisen or is reasonably likely to arise on account of any Plan.

(b)  The actuarial present value of all “benefit liabilities” (as defined in Section 4001(a)(16) of ERISA), whether or not vested, under each Single Employer Plan, as of the last annual valuation date prior to the date on which this representation is made or deemed made (determined, in each case, in accordance with Financial Accounting Standards Board Statement 87, utilizing the actuarial assumptions used in such Plan’s most recent actuarial valuation report), did not exceed as of such valuation date the fair market value of the assets of such Plan.

(c)  No member of the Consolidated Group nor any ERISA Affiliate has incurred, or, to the best knowledge of the Credit Parties, could be reasonably expected to incur, any withdrawal liability under ERISA to any Multiemployer Plan or Multiple Employer Plan. No member of the Consolidated Group nor any ERISA Affiliate would become subject to any withdrawal liability under ERISA if any member of the Consolidated Group or any ERISA Affiliate were to withdraw completely from all Multiemployer Plans and Multiple Employer Plans as of the valuation date most closely preceding the date on which this representation is made or deemed made. No member of the Consolidated Group nor any ERISA Affiliate has received any notification that any Multiemployer Plan is in reorganization (within the meaning of Section 4241 of ERISA), is insolvent (within the meaning of Section 4245 of ERISA), or has been terminated (within the meaning of Title IV of ERISA), and no Multiemployer Plan is, to the best knowledge of the Credit Parties, reasonably expected to be in reorganization, insolvent, or terminated.

(d)  No prohibited transaction (within the meaning of Section 406 of ERISA or Section 4975 of the Internal Revenue Code) or breach of fiduciary responsibility has occurred with respect to a Plan that has subjected or may subject any member of the Consolidated Group or any ERISA Affiliate to any liability under Sections 406, 409, 502(i), or 502(l) of ERISA or Section 4975 of the Internal Revenue Code, or under any agreement or other instrument pursuant to which any member of the Consolidated Group or any ERISA Affiliate has agreed or is required to indemnify any person against any such liability.

(e)  No member of the Consolidated Group nor any ERISA Affiliate has any material liability with respect to “expected post-retirement benefit obligations” within the meaning of the Financial Accounting Standards Board Statement 106.

(f)  Neither the execution and delivery of this Credit Agreement nor the consummation of the financing transactions contemplated thereunder will involve any transaction that is subject to the prohibitions of Sections 404, 406 or 407 of ERISA or in connection with which a tax could be imposed pursuant to Section 4975 of the Internal Revenue Code. The representation by the Credit Parties in the preceding sentence is made in reliance upon and subject to the accuracy of the Lenders’

52

representation in Section 11.15 with respect to their source of funds and is based on the assumption, (i) in the event that the source of the funds used by a Lender in connection with this transaction is an insurance company’s general asset account, (A) that all applicable provisions of Prohibited Transaction Class Exemption 95-60, 60 Fed. Reg. 35,925 (1995) are satisfied, (B) that such Lender is in compliance with the regulations issued under Section 401(c)(1)(A) of ERISA, or (C) that there has occurred the issuance of any other prohibited transaction exemption or similar relief, in the case of either clause (A) or (B), to the effect that assets in an insurance company’s general asset account do not constitute assets of an “employee benefit plan” within the meaning of Section 3(3) of ERISA or a “plan” within the meaning of Section 4975(e)(1) of the Internal Revenue Code and (ii) in the event that the source of funds used by a Lender in connection with the transaction is an insurance company’s separate account, that all applicable provisions of Prohibited Transaction Class Exemption 90-1, 55 Fed. Reg. 2891 (1990) are satisfied.

6.13    Governmental Regulations, etc.

(a)    No part of the proceeds of the Extensions of Credit hereunder will be used, directly or indirectly, for the purpose of purchasing or carrying any “margin stock” within the meaning of Regulation U, or for the purpose of purchasing or carrying or trading in any other securities. If requested by any Lender or the Administrative Agent, the Borrower will furnish to the Administrative Agent and each Lender a statement to the foregoing effect in conformity with the requirements of FR Form U-1 referred to in said Regulation U. No indebtedness being reduced or retired out of the proceeds of the Extensions of Credit hereunder was or will be incurred for the purpose of purchasing or carrying any “margin stock” within the meaning of Regulation U or any “margin security” within the meaning of Regulation T. “Margin stock” (within the meaning of Regulation U) does not constitute more than twenty-five percent (25%) of the value of the consolidated assets of the Borrower and its Subsidiaries. None of the transactions contemplated by this Credit Agreement (including, without limitation, the direct or indirect use of the proceeds of the Loans) will violate or result in a violation of the Securities Act of 1933, as amended, or the Securities Exchange Act of 1934, as amended, or regulations issued pursuant thereto, or Regulation T, U or X.

(b)    None of the members of the Consolidated Group is subject to regulation under the Public Utility Holding Company Act of 1935, the Federal Power Act or the Investment Company Act of 1940, each as amended. In addition, none of the members of the Consolidated Group is (i) an “investment company” registered or required to be registered under the Investment Company Act of 1940, as amended, and is not controlled by such a company, or (ii) a “holding company”, or a “subsidiary company” of a “holding company”, or an “affiliate” of a “holding company” or of a “subsidiary” of a “holding company”, within the meaning of the Public Utility Holding Company Act of 1935, as amended.

(c)    No director, executive officer or principal shareholder of any member of the Consolidated Group is a director, executive officer or principal shareholder of any Lender. For the purposes hereof the terms “director”, “executive officer” and “principal shareholder” (when used with reference to any Lender) have the respective meanings assigned thereto in Regulation O.

6.14    Subsidiaries.

Set forth on Schedule 6.14 are all of the Subsidiaries of the Borrower, including the jurisdiction of organization, classes of Capital Stock (including options, warrants, rights of subscription, conversion and exchangeability and other similar rights), ownership and ownership percentages thereof. The outstanding shares of Capital Stock shown have been validly issued, fully paid and are non-assessable and owned free of Liens other than Permitted Liens. The outstanding shares of Capital Stock shown are not the subject of buy-sell, voting trust or other shareholder agreement except as identified on Schedule 6.14.

53

6.15    Purpose of Extensions of Credit.

Extensions of Credit hereunder will be used by the Borrower solely (i) to refinance existing Funded Debt, (ii) to finance the fees and expenses incurred in connection with this Credit Agreement and (iii) to finance working capital, capital expenditures and other corporate purposes of the Borrower and its Subsidiaries (including, without limitation, Permitted Acquisitions).

6.16    Environmental Matters.

Except as would not reasonably be expected to have a Material Adverse Effect, to the knowledge of the Borrower:

(a)    Each of the facilities and properties owned, leased or operated by the members of the Consolidated Group (the “Subject Properties”) and all operations at the Subject Properties are in compliance with all applicable Environmental Laws, and there is no violation of any Environmental Law with respect to the Subject Properties or the businesses operated by the members of the Consolidated Group (the “Businesses”), and there are no conditions relating to the Businesses or Subject Properties that could give rise to liability under any applicable Environmental Laws.

(b)    None of the Subject Properties contains, or has previously contained, any Materials of Environmental Concern at, on or under the Subject Properties in amounts or concentrations that constitute or constituted a violation of, or could give rise to liability under, Environmental Laws.

(c)    None of the members of the Consolidated Group has received any written or verbal notice of, or inquiry from any Governmental Authority regarding, any violation, alleged violation, non-compliance, liability or potential liability regarding environmental matters or compliance with Environmental Laws with regard to any of the Subject Properties or the Businesses, nor does any member of the Consolidated Group have knowledge or reason to believe that any such notice will be received or is being threatened.

(d)    Materials of Environmental Concern have not been transported or disposed of from the Subject Properties, or generated, treated, stored or disposed of at, on or under any of the Subject Properties or any other location, in each case by or on behalf any members of the Consolidated Group in violation of, or in a manner that would be reasonably likely to give rise to liability under, any applicable Environmental Law.

(e)    No judicial proceeding or governmental or administrative action is pending or, to the best knowledge of any Credit Party, threatened, under any Environmental Law to which any member of the Consolidated Group is or will be named as a party, nor are there any consent decrees or other decrees, consent orders, administrative orders or other orders, or other administrative or judicial requirements outstanding under any Environmental Law with respect to any member of the Consolidated Group, the Subject Properties or the Businesses.

(f)    There has been no release or, threat of release of Materials of Environmental Concern at or from the Subject Properties, or arising from or related to the operations (including, without limitation, disposal) of any member of the Consolidated Group in connection with the Subject Properties or otherwise in connection with the Businesses, in violation of or in amounts or in a manner that could give rise to liability under Environmental Laws.

54

6.17    No Material Misstatements.

None of the information, reports, financial statements, exhibits or schedules, taken as a whole, furnished by or on behalf of any member of the Consolidated Group to the Administrative Agent or any Lender in connection with the negotiation of the Credit Documents or included therein or delivered pursuant thereto contained, contains or will contain any material misstatement of fact or omitted, omits or will omit to state any material fact necessary to make the statements therein, in light of the circumstances under which they were, are or will be made, not materially misleading, provided that to the extent any such information, report, financial statement, exhibit or schedule was based upon or constitutes a forecast or projection, each of the Credit Parties represents only that it acted in good faith and utilized reasonable assumptions and due care in the preparation of such information, report, financial statement, exhibit or schedule, it being understood that forecasts and projections are subject to significant uncertainties and contingencies, many of which are beyond the Credit Parties’ control, and no assurance can be given that any forecasts or projections will be realized.

6.18    Labor Matters.

Except as would not reasonably be expected to have a Material Adverse Effect:

(a)    There are no strikes or lockouts against any members of the Consolidated Group pending or, to the best knowledge of the Credit Parties, threatened;

(b)    The hours worked by and payments made to employees of the Consolidated Group have not been in violation of the Fair Labor Standards Act or any other applicable federal, state, local or foreign law dealing with such matters in any case where a Material Adverse Effect would reasonably be expected to occur as a result of the violation thereof;

(c)    All payments due from members of the Consolidated Group, or for which any claim may be made against a member of the Consolidated Group, on account of wages and employee health and welfare insurance and other benefits, have been paid or accrued as a liability on the books of the respective members of the Consolidated Group; and

(d)    None of the members of the Consolidated Group is party to a collective bargaining agreement.

Set forth on Schedule 6.18 is a summary of all labor matters pending or, to the best knowledge of the Credit Parties, threatened by or against the members of the Consolidated Group, and none of such labor matters, individually or in the aggregate, would reasonably be expected to have a Material Adverse Effect.

6.19    Security Documents.

(a)    Security Agreement.    The Security Agreement is effective to create in favor of the Collateral Agent, for the ratable benefit of the holders of the Secured Obligations identified therein, a legal, valid and enforceable security interest in the Collateral identified therein owned by the Credit Parties and, when financing statements in appropriate form are filed in the appropriate offices for the locations specified in the schedules to the Security Agreement, the Security Agreement shall constitute a fully perfected Lien on, and security interest in, all right, title and interest of the grantors thereunder in such Collateral that may be perfected by filing, recording or registering a financing statement under the Uniform Commercial Code as in effect, in each case prior and superior in right to any other Lien on any Collateral other than Permitted Liens.

55

(b)    Pledge Agreement.    The Pledge Agreement is effective to create in favor of the Collateral Agent, for the ratable benefit of the holders of the Secured Obligations identified therein, a legal, valid and enforceable security interest in the Collateral identified therein and, when such Collateral is delivered to the Collateral Agent, the Pledge Agreement shall constitute a fully perfected first priority Lien on, and security interest in, all right, title and interest of the pledgors thereunder in such Collateral, in each case prior and superior in right to any other Lien.

(c)    Intellectual Property.    The Security Agreement, together with the Notice of Grant of Security Interest in Trademarks and the Notice of Grant of Security Interest in Patents, when duly recorded in the United States Patent and Trademark Office, and the Notice of Grant of Security Interest in Copyrights, when duly recorded in the United States Copyright Office, will constitute a fully perfected Lien on, and security interest in, all right, title and interest of the grantors thereunder in all Patents and Patent Licenses, Trademarks and Trademark Licenses and Copyrights and Copyright Licenses (each as defined in the Security Agreement) owned by such grantors and in which a security interest may be perfected by filing, recording or registration of a Notice in the United States Patent and Trademark Office and the United States Copyright Office, in each case prior and superior in right to any other Lien other than Permitted Liens.

6.20    Location of Real Property and Leased Premises.

Set forth on Schedule 6.20(a) is a complete and correct list of all real property located in the United States and owned or leased by any member of the Consolidated Group with street address and state where located. Set forth on Schedule 6.20(b) is a list of all locations where any tangible personal property of any member of the Consolidated Group is located, including street address and state where located. Set forth on Schedule 6.20(c) is the chief executive office and principal place of business of each member of the Consolidated Group.

6.21    Fraud and Abuse.

To the knowledge of the Responsible Officers of the Credit Parties, no member of the Consolidated Group or any of their respective officers, directors or Contract Providers have engaged in any activities that are prohibited under Medicare Regulations or Medicaid Regulations or that are prohibited by binding rules of professional conduct.

6.22    Licensing and Accreditation.

(a)    Except to the extent it would not reasonably be expected to have a Material Adverse Effect, each member of the Consolidated Group and, to the knowledge of the Credit Parties, each Contract Provider, has, to the extent applicable: (i) obtained (or been duly assigned) all required certificates of need or determinations of need as required by the relevant state Governmental Authority for the acquisition, construction, expansion of, investment in or operation of its businesses as currently operated; (ii) obtained and maintains in good standing all required licenses; (iii) to the extent prudent and customary in the industry in which it is engaged, obtained and maintains accreditation from all generally recognized accrediting agencies; and (iv) entered into and maintains in good standing its status as a Medicare Supplier and as a Medicaid Supplier. To the knowledge of the Credit Parties, each Contract Provider is duly licensed by each state, state agency, commission or other Governmental Authority having jurisdiction over the provisions of such services by such Person in the locations where the members of the Consolidated Group conduct business, to the extent such licensing is required to enable such Person to provide the professional services provided by such Person and otherwise as is necessary to enable the Consolidated Group to operate as currently operated and as contemplated to be operated. To the

56

knowledge of the Credit Parties, all such required licenses are in full force and effect on the date hereof and have not been revoked or suspended or otherwise limited.

(b)    The Borrower will, and will cause each of its HMO Subsidiaries to, preserve and maintain (i) the licensing and certification of each HMO Subsidiary pursuant to the HMO Regulations, (ii) all certifications and authorizations necessary to ensure that the HMO Subsidiaries are eligible for all reimbursements available under the HMO Regulations to the extent applicable and (iii) all licenses, permits, authorizations and qualifications required under the HMO Regulations in connection with the ownership or operation of HMOs.

SECTION 7

AFFIRMATIVE COVENANTS

Each Credit Party hereby covenants and agrees that so long as this Credit Agreement is in effect or any amounts payable hereunder or under any other Credit Document shall remain outstanding or any Letter of Credit is outstanding, and until all of the Commitments hereunder shall have terminated:

7.1    Information Covenants.

The Credit Parties will furnish, or cause to be furnished, to the Administrative Agent and each of the Lenders:

(a)    Annual Financial Statements. As soon as available, and in any event within ninety days after the close of each fiscal year of the members of the Consolidated Group,

(i)    a consolidated balance sheet of the Consolidated Group as of the end of such fiscal year, together with related consolidated statements of income, stockholders’ equity and cash flows for such fiscal year, in each case setting forth in comparative form consolidated figures for the preceding fiscal year, all such financial information described above to be in reasonable form and detail and audited by independent certified public accountants of recognized national standing reasonably acceptable to the Administrative Agent and whose opinion shall be to the effect that such financial statements have been prepared in accordance with GAAP (except for changes with which such accountants concur) and shall not be limited as to the scope of the audit or qualified as to the status of the Consolidated Group as a going concern or any other material qualifications or exceptions, and

(ii)    with respect to each HMO Subsidiary, annual financial statements prepared in accordance with SAP.

(b)    Quarterly Financial Statements. As soon as available, and in any event within forty-five days after the close of each fiscal quarter of the members of the Consolidated Group (other than the fourth fiscal quarter, in which case ninety days after the end thereof),

(i)    a consolidated balance sheet of the Consolidated Group as of the end of such fiscal quarter, together with related consolidated statements of income, stockholders’ equity and cash flows for such fiscal quarter, in each case setting forth in comparative form consolidated figures for the corresponding period of the preceding fiscal year, all such financial information described above to be in reasonable form and detail and reasonably

57

acceptable to the Administrative Agent, and accompanied by a certificate of a Responsible Officer of the Borrower to the effect that such quarterly financial statements fairly present in all material respects the financial condition of the Consolidated Group and have been prepared in accordance with GAAP, subject to changes resulting from audit and normal year-end audit adjustments, and

(ii)    with respect to each HMO Subsidiary, quarterly financial statements prepared in accordance with SAP.

(c)    Officer’s Certificate.    At the time of delivery of the financial statements required by Sections 7.1(a) and 7.1(b) above, a certificate of a Responsible Officer of the Borrower substantially in the form of Schedule 7.1(c), (i) demonstrating compliance with the financial covenants contained in Section 7.11 by calculation thereof as of the end of each such fiscal period and (ii) stating that no Default or Event of Default exists, or if any Default or Event of Default does exist, specifying the nature and extent thereof and what action the Credit Parties propose to take with respect thereto.

(d)    Annual Business Plan and Budgets.    Within sixty days following the end of each fiscal year of the Borrower, beginning with the fiscal year ending December 31, 2001, an annual business plan and budget of the members of the Consolidated Group containing, among other things, summary pro forma financial information for the next fiscal year with respect to each calendar month thereof.

(e)    Auditor’s Reports.    Promptly upon receipt thereof, without duplication, a copy of any other report or “management letter” submitted by independent accountants to any member of the Consolidated Group (unless restricted by applicable professional standards) in connection with any annual, interim or special audit of the financial statements of such Person.

(f)    Reports.    Promptly upon transmission or receipt thereof, without duplication, (i) copies of any filings and registrations with, and reports to or from, the Securities and Exchange Commission, or any successor agency, and copies of all financial statements, proxy statements, notices and reports as any member of the Consolidated Group shall send to its shareholders or to a holder of any Indebtedness owed by any member of the Consolidated Group in its capacity as such a holder, and (ii) upon the request of the Administrative Agent, all reports and written information to and from the United States Environmental Protection Agency, or any state or local agency responsible for environmental matters, the United States Occupational Health and Safety Administration, or any state or local agency responsible for health and safety matters, or any successor agencies or authorities concerning environmental, health or safety matters.

(g)    Notices.    Upon any Responsible Officer of a Credit Party obtaining knowledge thereof, the Credit Parties will give written notice to the Administrative Agent immediately of (i) the occurrence of an event or condition consisting of a Default or Event of Default, specifying the nature and existence thereof and what action the Credit Parties propose to take with respect thereto, and (ii) except as would not reasonably be expected to result in a Material Adverse Effect, the occurrence of any of the following with respect to any member of the Consolidated Group: (A) the pendency or commencement of any litigation, arbitral or governmental proceeding against such Person that, if adversely determined, would reasonably be expected to have a Material Adverse Effect, (B) the institution of any proceedings against such Person with respect to, or the receipt of notice by such Person of potential liability or responsibility for violation, or alleged violation of any federal, state or local law, rule or regulation, including, without limitation, Environmental Laws, the violation of which would reasonably be expected to have a Material Adverse Effect, (C) the institution of any investigation or proceeding against such Person (or, to the knowledge of the Credit Parties, any

58

Contract Provider) to suspend, revoke or terminate (or that may result in the termination of) its status as a Medicaid Supplier or its status as a Medicare Supplier, or any such investigation or proceeding that may result in an Exclusion Event, (D) a copy of any notice of intent to exclude, any notice of proposal to exclude issued by the OIG or any other Exclusion Event, (E) all notices of loss or threatened loss of accreditation, loss of participation under any reimbursement program or loss of applicable health care license or certificate of authority of any HMO Subsidiary, and all other material deficiency notices, compliance orders or adverse reports issued by any HMO Regulator or other Governmental Authority or private insurance company pursuant to a provider agreement that, if not promptly complied with or cured, could result in the suspension or forfeiture of any license, certification, or accreditation necessary for such HMO Subsidiary to carry on its business as then conducted or the termination of any insurance or reimbursement program available to any HMO Subsidiary, or (F) all correspondence received by the Borrower or any of its Subsidiaries from an HMO Regulator asserting that the Borrower or any of its Subsidiaries is not in compliance in all material respects with HMO Regulations or threatening action against the Borrower or any of its Subsidiaries under the HMO Regulations.

(h)    HMO Investments.    Within the period for delivery of the quarterly financial statements provided in Section 7.1(b), written notification of Investments during such fiscal quarter by any member of the Consolidated Group in any HMO Subsidiary that, individually or in the aggregate in any fiscal year of the Borrower, exceed ten percent (10%) of the Company Action Level or the relevant state’s risk-based capital threshold, as applicable, (in each case as determined in accordance with SAP at the immediately preceding fiscal-year-end determination thereof) of such HMO Subsidiary; provided that, to the extent such Investments, individually or in the aggregate, materially deviate from the business plan and budget delivered pursuant to Section 7.1(d), written notification of such Investments shall be provided not later than fifteen days following the end of the calendar month during which such Investments are made.

(i)    ERISA.    Upon any Responsible Officer of a Credit Party obtaining knowledge thereof, the Credit Parties will give written notice to the Administrative Agent promptly (and in any event within five Business Days) of: (i) any event or condition, including, without limitation, any Reportable Event, that constitutes, or would reasonably be expected to result in, an ERISA Event; (ii) with respect to any Multiemployer Plan, the receipt of notice as prescribed in ERISA or otherwise of any withdrawal liability assessed against the Credit Parties or any ERISA Affiliates, or of a determination that any Multiemployer Plan is in reorganization or insolvent (both within the meaning of Title IV of ERISA); (iii) the failure to make full payment on or before the due date (including extensions) thereof of all amounts that any member of the Consolidated Group or any ERISA Affiliate is required to contribute to each Plan pursuant to its terms and as required to meet the minimum funding standard set forth in ERISA and the Internal Revenue Code with respect thereto; or (iv) any change in the funding status of any Plan that would reasonably be expected to have a Material Adverse Effect, together with a description of any such event or condition or a copy of any such notice and a statement by a Responsible Officer of the Borrower briefly setting forth the details regarding such event, condition, or notice, and the action, if any, that has been or is being taken or is proposed to be taken by the Credit Parties with respect thereto. Promptly upon request, the Credit Parties shall furnish the Administrative Agent and the Lenders with such additional information concerning any Plan as may be reasonably requested, including, without limitation, copies of each annual report/return (Form 5500 series), as well as all schedules and attachments thereto required to be filed with the Department of Labor and/or the Internal Revenue Service pursuant to ERISA and the Internal Revenue Code, respectively, for each “plan year” (within the meaning of Section 3(39) of ERISA).

59

(j)    Environmental.

(i)    Upon the reasonable written request of the Administrative Agent following the occurrence of any event or the discovery of any condition that the Administrative Agent or the Required Lenders reasonably believe has caused (or could be reasonably expected to cause) the representations and warranties set forth in Section 6.16 to be untrue in any material respect, the Credit Parties will furnish or cause to be furnished to the Administrative Agent, at the Credit Parties’ expense, a report of an environmental assessment of reasonable scope, form and depth, (including, where appropriate, invasive soil or groundwater sampling) by a consultant reasonably acceptable to the Administrative Agent as to the nature and extent of the presence of any Materials of Environmental Concern on any Subject Properties (as defined in Section 6.16) and as to the compliance by any member of the Consolidated Group with Environmental Laws at such Subject Properties. If the Credit Parties fail to deliver such an environmental report within seventy-five days after receipt of such written request then the Administrative Agent may arrange for same, and the members of the Consolidated Group hereby grant to the Administrative Agent and their representatives access to the Subject Properties to reasonably undertake such an assessment (including, where appropriate, invasive soil or groundwater sampling). The reasonable cost of any assessment arranged for by the Administrative Agent pursuant to this provision will be payable by the Credit Parties on demand and added to the obligations secured by the Collateral Documents.

(ii)    The members of the Consolidated Group will conduct and complete all investigations, studies, sampling, and testing and all remedial, removal, and other actions necessary to address all Materials of Environmental Concern on, from or affecting any of the Subject Properties to the extent necessary to be in compliance with all Environmental Laws and with the validly issued orders and directives of all Governmental Authorities with jurisdiction over such Subject Properties to the extent any failure could have a Material Adverse Effect.

(k)    Reinsurance Arrangements.    As soon as available, and in event within 120 days after the end of each fiscal year of the Borrower, a schedule setting forth in reasonable detail the reinsurance arrangements maintained by each of the HMO Subsidiaries of the Borrower as of the end of such fiscal year (with any changes subsequent to the end of such fiscal year described therein).

(l)    Other Information.    With reasonable promptness upon any such request, such other information regarding the business, properties or financial condition of any member of the Consolidated Group as the Administrative Agent or the Required Lenders may reasonably request.

7.2    Preservation of Existence and Franchises.

Each Credit Party will, and will cause each of its Subsidiaries to, continue to engage in business of the same general type as conducted by it on the date hereof and similar or related businesses, and except as a result of or in connection with a dissolution, merger or disposition of a Subsidiary permitted under Section 8.4 or 8.5, preserve, renew and keep in full force and effect its corporate existence and take all reasonable action to maintain all rights, privileges, licenses and franchises necessary or desirable in the normal conduct of its business.

60

7.3    Books and Records.

Each Credit Party will, and will cause each of its Subsidiaries to, keep complete and accurate books and records of its transactions in accordance with good accounting practices on the basis of GAAP (including the establishment and maintenance of appropriate reserves).

7.4    Compliance with Law.

Each Credit Party will, and will cause each of its Subsidiaries to, comply with all laws, rules, regulations and orders, and all applicable restrictions imposed by all Governmental Authorities, applicable to it and its Property if noncompliance with any such law, rule, regulation, order or restriction would reasonably be expected to have a Material Adverse Effect.

7.5    Payment of Taxes and Other Indebtedness.

Each Credit Party will, and will cause each of its Subsidiaries to, pay and discharge (a) all taxes, assessments and governmental charges or levies imposed upon it, or upon its income or profits, or upon any of its properties, before they shall become delinquent, (b) all lawful claims (including claims for labor, materials and supplies) that, if unpaid, might give rise to a Lien upon any of its properties, and (c) except as prohibited hereunder, all of its other Indebtedness as it shall become due; provided, however, that no member of the Consolidated Group shall be required to pay any such tax, assessment, charge, levy, claim or Indebtedness that is being contested in good faith by appropriate proceedings for which adequate reserves determined in accordance with GAAP have been established, unless the failure to make any such payment (i) could give rise to an immediate right to foreclose on a Lien securing such amounts or (ii) would reasonably be expected to have a Material Adverse Effect.

7.6    Insurance.

Each Credit Party will, and will cause each of its Subsidiaries to, at all times maintain in full force and effect insurance (including workers’ compensation insurance, liability insurance and casualty insurance) in such amounts, covering such risks and liabilities and with such deductibles or self-insurance retentions as are in accordance with normal industry practice (or as otherwise required by the Collateral Documents). The Collateral Agent shall be named as loss payee and/or additional insured with respect to any such insurance providing coverage in respect of any Collateral, and each provider of any such insurance shall agree, by endorsement upon the policy or policies issued by it or by independent instruments furnished to the Collateral Agent, that it will give the Collateral Agent thirty days prior written notice before any such policy or policies shall be altered or canceled, and that no act or default of any member of the Consolidated Group or any other Person shall affect the rights of the Collateral Agent or the Lenders under such policy or policies. The present insurance coverage of the members of the Consolidated Group is outlined as to carrier, policy number, expiration date, type and amount on Schedule 7.6.

7.7    Maintenance of Property.

Each Credit Party will, and will cause each of its Subsidiaries to, maintain and preserve its properties and equipment material to the conduct of its business in good repair, working order and condition, normal wear and tear and casualty and condemnation excepted, and will make, or cause to be made, in such properties and equipment from time to time all repairs, renewals, replacements, extensions, additions, betterments and improvements thereto as may be needed or proper, to the extent and in the manner customary for companies in similar businesses.

61

7.8    Performance of Obligations.

Each Credit Party will, and will cause each of its Subsidiaries to, perform in all material respects all of its obligations under the terms of all material agreements, indentures, mortgages, security agreements and other debt instruments to which it is a party or by which it is bound.

7.9    Use of Proceeds.

The Borrower will use the proceeds of Extensions of Credit solely for the purposes set forth in Section 6.15.

7.10    Audits/Inspections.

Upon reasonable notice and during normal business hours (or, following the occurrence and during the continuation of an Event of Default, at any time without notice), each Credit Party will, and will cause each of its Subsidiaries to, permit representatives appointed by the Administrative Agent, including, without limitation, independent accountants, agents, attorneys, and appraisers to visit and inspect its property, including its books and records, its accounts receivable and inventory, its facilities and its other business assets, and to make photocopies or photographs thereof and to write down and record any information such representative obtains and shall permit the Administrative Agent or its representatives to investigate and verify the accuracy of information provided to the Lenders and to discuss all such matters with the officers, employees and representatives of such Person.

7.11    Financial Covenants.

(a)    Consolidated Total Leverage Ratio. As of the end of each fiscal quarter, the Consolidated Total Leverage Ratio shall be not greater than 2.5:1.0.

(b)    Fixed Charge Coverage Ratio. As of the end of each fiscal quarter, the Fixed Charge Coverage Ratio shall be not less than:

Closing Date through December 31, 2002	2.25:1.0
January 1, 2003 through December 31, 2003	2.50:1.0
January 1, 2004 and thereafter	3.0:1.0

(c)    Consolidated Net Worth.    Beginning December 31, 2001, as of the end of each fiscal quarter, the Consolidated Net Worth shall be not less than the sum of (i) $22.5 million plus (ii) as of the end of such fiscal quarter and each preceding fiscal quarter to occur after the Closing Date, an amount equal to seventy-five percent (75%) of Consolidated Net Income (but not less than zero) for such fiscal quarter, such increases to be cumulative, plus (iii) an amount equal to one hundred percent (100%) of net proceeds from conversions of convertible stock to equity following September 30, 2001, plus (iv) an amount equal to one hundred percent (100%) of net proceeds from Equity Transactions occurring after the Closing Date, plus (v) eighty-five percent (85%) of net proceeds from the IPO.

(d)    Risk-Based Capital Ratio.    As of the end of each fiscal quarter of the Borrower:

(i)    With respect to HMO Subsidiaries operating in a state in which regulatory action may be taken against HMOs that do not maintain a minimum risk-based capital threshold at a level equal to or greater than Company Action Level, such HMO Subsidiary shall maintain a ratio of Total Adjusted Capital to Risk-Based Capital at a level equal to or greater than 1.25:1.0; and

62

(ii)    With respect to all other HMO Subsidiaries, such HMO Subsidiary shall maintain a ratio of Total Adjusted Capital to the applicable state’s risk-based capital threshold at a level equal to or greater than 1.5:1.0, provided that in no event will the amount required pursuant to this clause (ii) be greater than the amount which would be required if clause (i) were applicable to such HMO Subsidiary;

provided in each case that unrestricted cash-on-hand held by the Borrower and any unused availability hereunder may be included in the computation of Total Adjusted Capital, without duplication, if necessary to comply with the Risk-Based Capital Ratio. Compliance with the Risk-Based Capital Ratio will be determined at the end of each fiscal quarter (using as the denominator in each case, for the first three fiscal quarters of each year, the prescribed level as of the end of the preceding fiscal year, and for the last fiscal quarter of each year, the prescribed level as of the end of such fiscal year).

(e)    Capital Expenditures.    As of the end of each fiscal year of the Borrower set forth below, Capital Expenditures of the Borrower for such fiscal year shall not exceed:

Fiscal year 2001:	$40 million
Fiscal year 2002 and thereafter:	$40 million plus the lesser of (i) $40 million minus the actual Capital Expenditures of the Borrower for the immediately preceding fiscal year (but not less than zero) or (ii) $10 million

7.12    Additional Guarantors.

(a)    If any Person becomes a direct or indirect Eligible Domestic Subsidiary of any Credit Party, the Borrower shall (i) notify the Administrative Agent thereof within ten days after a Responsible Officer has knowledge thereof, and (ii) within forty-five days thereafter, (A) cause each such Eligible Domestic Subsidiary to become a Guarantor by execution of a Joinder Agreement, (B) deliver with the Joinder Agreement such supporting resolutions, incumbency certificates, corporate formation and organizational documentation and opinions of counsel as the Administrative Agent may reasonably request, and (C) deliver stock certificates and related pledge agreements or pledge joinder agreements evidencing the pledge of one hundred percent (100%) of the Capital Stock of each direct or indirect Domestic Subsidiary of the Borrower and sixty-six percent (66%) (or such greater percentage that would not result in material adverse tax consequences) of theissued and outstanding Capital Stock entitled to vote (within the meaning of Treas. Reg. Section 1.956-2(c)(2)) and one hundred percent (100%) of theissued and outstanding Capital Stock not entitled to vote (within the meaning of Treas. Reg. Section 1.956-2(c)(2)) of each Foreign Subsidiary directly owned by each such Eligible Domestic Subsidiary to secure the obligations of the Guarantors under the Credit Documents, together with undated stock transfer powers executed in blank.

(b)    Foreign Subsidiaries.    The Borrower will not form or acquire any Foreign Subsidiaries without the prior written consent of the Required Lenders.

7.13    Pledged Assets.

The Borrower will, and will cause each of its Eligible Domestic Subsidiaries to, cooperate with and assist the Administrative Agent and the Collateral Agent to establish and maintain a perfected first priority security interest (subject to Permitted Liens) in all of its personal property, assets and all proceeds and accessions therefrom (other than (i) fixed or capital assets and associated intangible assets that are the subject of financing and prior Liens permitted hereunder, the terms of which expressly prohibit the grant of a security interest in favor of any other party, and (ii) rights under leases of personal property,

63

contracts, licenses or other agreements, the terms of which expressly prohibit the grant of a security interest in favor of any other party) to secure the Guaranteed Obligations as contemplated herein and in the Collateral Documents.

SECTION 8

NEGATIVE COVENANTS

Each Credit Party hereby covenants and agrees that so long as this Credit Agreement is in effect or any amounts payable hereunder or under any other Credit Document shall remain outstanding or any Letter of Credit is outstanding, and until all of the Commitments hereunder shall have terminated:

8.1    Indebtedness.

The Credit Parties will not permit any member of the Consolidated Group to contract, create, incur, assume or permit to exist any Indebtedness, except:

(a)    Indebtedness existing or arising under this Credit Agreement or the other Credit Documents;

(b)    Indebtedness of the Borrower and its Subsidiaries existing on the Closing Date and set forth on Schedule 8.1, and renewals, refinancings and extensions thereof on terms and conditions no less favorable to such Person than such existing Indebtedness;

(c)    purchase money Indebtedness (including obligations in respect of Capital Leases or Synthetic Leases) hereafter incurred by the Borrower or any of its Subsidiaries to finance the purchase of fixed assets provided that (i) the total of all such Indebtedness for the Borrower and its Subsidiaries taken together shall not exceed an aggregate principal amount of $10 million at any one time outstanding; (ii) such Indebtedness when incurred shall not exceed the purchase price of the asset(s) financed; and (iii) no such Indebtedness shall be refinanced for a principal amount in excess of the principal balance outstanding thereon at the time of such refinancing;

(d)    obligations of the Borrower or any of its Subsidiaries owing under interest rate, commodities and foreign currency exchange protection agreements entered into in the ordinary course of business to manage existing or anticipated risks and not for speculative purposes;

(e)    unsecured intercompany Indebtedness owing by a member of the Consolidated Group to another member of the Consolidated Group (subject, however, to the limitations of Section 8.6 in the case of the member of the Consolidated Group extending the loan, advance or credit);

(f)    obligations to make contingent payments (including, without limitation, earn-out payments) incurred in connection with Permitted Acquisitions and Acquisitions consummated prior to the Closing Date provided that (i) the maximum amount of cash payments made in respect of such obligations shall not exceed $10 million in the aggregate and (ii) such obligations shall be expressly subordinated in right of payment to the prior payment of the loans and obligations under the Credit Agreement and the other Credit Documents on the terms and conditions and evidenced by documentation satisfactory to the Administrative Agent and the Required Lenders;

64

(g)    Support Obligations of any Subsidiary of the Borrower with respect to any Indebtedness of the Borrower permitted under this Section 8.1;

(h)    Indebtedness arising or existing with respect to Governmental Reimbursement Program Costs;

(i)    other secured Funded Debt of the Borrower and its Subsidiaries in an aggregate outstanding principal amount of up to $5 million at any time; and

(j)    other unsecured Funded Debt of the Borrower and its Subsidiaries in an aggregate outstanding principal amount of up to $5 million at any time.

8.2    Liens.

The Credit Parties will not permit any member of the Consolidated Group to contract, create, incur, assume or permit to exist any Lien with respect to any of its Property, whether now owned or after acquired, except for Permitted Liens.

8.3    Nature of Business.

The Credit Parties will not permit any member of the Consolidated Group to substantively alter the character or conduct of the business conducted by such Person as of the Closing Date.

8.4    Merger and Consolidation, Dissolution and Acquisitions.

(a)    No member of the Consolidated Group will enter into any transaction of merger or consolidation, except that:

(i)    a Credit Party other than the Borrower may be party to a transaction of merger or consolidation with another Credit Party other than the Borrower, provided that if the Borrower is a party to such transaction, it shall be the surviving entity;

(ii)    a Foreign Subsidiary may be party to a transaction of merger or consolidation with a Subsidiary of the Borrower, provided that (A) if a Domestic Subsidiary is a party thereto, it shall be the surviving entity and if such Domestic Subsidiary is not already a Credit Party, it shall execute and deliver such joinder and pledge agreements as may be necessary for compliance with the provisions of Sections 7.12 and 7.13, and (B) if a Foreign Subsidiary is a party thereto and a Domestic Subsidiary is not a party thereto, the surviving entity shall be a Foreign Subsidiary and the Borrower and its Subsidiaries shall be in compliance with the requirements of Sections 7.12 and 7.13;

(iii)    a Domestic Subsidiary of the Borrower may be a party to a transaction of merger or consolidation with a Person other than a member of the Consolidated Group, provided that (A) the surviving entity shall be a Domestic Subsidiary of the Borrower and shall execute and deliver such joinder and pledge agreements as may be necessary for compliance with the provisions of Sections 7.12 and 7.13, (B) no Default or Event of Default shall exist immediately after giving effect thereto, and (C) the transaction shall otherwise constitute a Permitted Acquisition;

(iv)    a Subsidiary of the Borrower may enter into a transaction of merger or consolidation in connection with an Asset Disposition permitted under Section 8.5.

65

(b)    No member of the Consolidated Group, other than a Wholly Owned Subsidiary of the Borrower (and then only if no Material Adverse Effect would reasonably be expected to result on account thereof), may dissolve, liquidate or wind up its affairs.

(c)    No member of the Consolidated Group shall make any Acquisition, unless:

(i)    in the case of an acquisition of Capital Stock of another Person, after giving effect to such acquisition,

(A)    if the Acquisition is not of a controlling interest in the subject Person such that after giving effect thereto the subject Person will not be a Subsidiary, then such Acquisition will constitute a Permitted Investment; and

(B)    if the Acquisition is of a controlling interest in the subject Person such that after giving effect thereto the subject Person will be a Subsidiary, then such Acquisition will constitute a Permitted Acquisition;

(ii)    in the case of an Acquisition of all or any substantial portion of the Property (other than Capital Stock) of another Person, then such Acquisition will constitute a Permitted Acquisition.

8.5    Asset Dispositions.

The Credit Parties will not permit any member of the Consolidated Group to make any Asset Disposition (including, without limitation, any Sale and Leaseback Transaction), unless (a) at least seventy-five percent (75%) the consideration paid therefor shall consist of cash and Cash Equivalents, (b) if the subject transaction is a Sale and Leaseback Transaction, such transaction shall be permitted by Section 8.13, (c) if the subject transaction involves Capital Stock of a Subsidiary, the subject transaction is of a controlling interest in such Subsidiary, (d) the aggregate net book value of all assets sold, leased or otherwise disposed of shall not exceed $5 million in any fiscal year, (e) no Default or Event of Default shall exist immediately after giving effect thereto, (f) the Borrower shall have delivered to the Administrative Agent a compliance certificate signed by a Responsible Officer demonstrating compliance with the financial covenants hereunder on a Pro Forma Basis after giving effect to the subject disposition and reaffirming that the representations and warranties made hereunder are true and correct in all material respects as of such date, and (g) the Borrower shall have given written notice to the Administrative Agent at least ten days in advance of the prospective disposition, and the terms thereof, in sufficient detail as to the book value and consideration to be paid, terms of disposition, and net proceeds expected therefrom and intended application thereof.

The Administrative Agent will promptly deliver to the Borrower upon request, at the Borrower’s expense, such release documentation (including delivery of applicable stock certificates) as may be reasonably requested to give effect to the release of subject Property from the security interests securing the obligations hereunder in connection with Asset Dispositions permitted hereunder.

8.6    Investments.

The Credit Parties will not permit any member of the Consolidated Group to make or permit to exist Investments in or to any Person, except for Permitted Investments.

66

8.7    Restricted Payments.

The Borrower will not make any Restricted Payment, provided that the Borrower may make Restricted Payments of up to $1 million in any fiscal year so long as (i) no Default or Event of Default shall exist immediately after giving effect thereto and (ii) the Borrower shall have delivered to the Administrative Agent a compliance certificate signed by a Responsible Officer demonstrating compliance with the financial covenants hereunder on a Pro Forma Basis after giving effect to the subject Restricted Payment and reaffirming that the representations and warranties made hereunder are true and correct in all material respects as of such date.

8.8    Modifications and Payments in respect of Funded Debt.

None of the members of the Consolidated Group will:

(a)    After the issuance thereof, amend or modify (or permit the amendment or modification of) the terms of any Funded Debt in a manner adverse to the interests of the Lenders (including specifically shortening any maturity or average life to maturity or requiring any payment sooner than previously scheduled or increasing the interest rate or fees applicable thereto);

(b)    Amend or modify, or permit or acquiesce to the amendment or modification (including waivers) of, any material provisions of any Subordinated Debt, including any notes or instruments evidencing any Subordinated Debt and any indenture or other governing instrument relating thereto;

(c)    Make any payment in contravention of the terms of any Subordinated Debt; or

(d)    Except in connection with a refinancing or refunding permitted hereunder, make any prepayment, redemption, defeasance or acquisition for value of (including, without limitation, by way of depositing money or securities with the trustee with respect thereto before due for the purpose of paying when due), or refund, refinance or exchange of any Funded Debt (other than the Indebtedness under the Credit Documents and intercompany Indebtedness permitted hereunder) other than regularly scheduled payments of principal and interest on such Funded Debt.

8.9    Transactions with Affiliates.

The Credit Parties will not permit any member of the Consolidated Group to enter into or permit to exist any transaction or series of transactions with any officer, director, shareholder, Subsidiary or Affiliate of such Person other than (a) advances of working capital to any Credit Party other than the Borrower, (b) transfers of cash and assets to any Credit Party other than the Borrower, (c) transactions permitted by Section 8.1, Section 8.4, Section 8.5, Section 8.6, or Section 8.7, (d) normal compensation and reimbursement of expenses of officers and directors and (e) except as otherwise specifically limited in this Credit Agreement, other transactions that are entered into in the ordinary course of such Person’s business on terms and conditions substantially as favorable to such Person as would be obtainable by it in a comparable arms-length transaction with a Person other than an officer, director, shareholder, Subsidiary or Affiliate; provided, however, other than in connection with transactions pursuant to the Administrative Services Agreements, the Affiliate Employment Agreements or any management incentive compensation program adopted by the stockholders of the Borrower after the date hereof, the Borrower shall not, and shall not permit any of its Subsidiaries to, enter into any transaction with an Affiliate if the amount to be paid to such Affiliate pursuant to such transaction, whether immediately or over time, exceeds $10 million in the aggregate.

67

8.10    Fiscal Year; Organizational Documents.

The Credit Parties will not permit any member of the Consolidated Group to change its fiscal year or amend, modify or change its articles of incorporation (or corporate charter or other similar organizational document) or bylaws (or other similar document) without the prior written consent of the Required Lenders.

8.11    Limitation on Restricted Actions; No Further Negative Pledges.

The Credit Parties will not permit any member of the Consolidated Group to, directly or indirectly, create or otherwise cause or suffer to exist or become effective any encumbrance or restriction on the ability of any such Person to (a) pay dividends or make any other distributions on its Capital Stock or with respect to any other interest or participation in, or measured by, its profits, (b) pay any Indebtedness or other obligation, (c) make loans, advances or capital contributions, (d) sell, lease or otherwise transfer any of its properties or assets, or (e) act as a guarantor or grant a Lien on or a pledge of its assets, except for such encumbrances or restrictions existing under or by reason of (i) this Credit Agreement and the other Credit Documents and (ii) pursuant to the terms of any purchase money Indebtedness permitted by Section 8.1(c) to the extent such limitations relate only to the property that is the subject of such financing.

8.12    Ownership of Subsidiaries; Limitations on Borrower.

Notwithstanding any other provisions of this Credit Agreement to the contrary:

(a)    The Credit Parties will not permit any member of the Consolidated Group to (i) permit any Person (other than the Borrower or any Wholly Owned Subsidiary of the Borrower) to own any Capital Stock of any Subsidiary of the Borrower, except (A) to qualify directors where required by applicable law or to satisfy other requirements of applicable law with respect to the ownership of Capital Stock of Foreign Subsidiaries or (B) as a result of or in connection with a dissolution, merger, consolidation or disposition of a Subsidiary permitted under Section 8.4 or Section 8.5, (ii) permit any Subsidiary of the Borrower to issue any shares of preferred Capital Stock, (iii) permit, create, incur, assume or suffer to exist any Lien on any Capital Stock of any Subsidiary of the Borrower, except for Permitted Liens, or (iv) become a general partner in any partnership.

(b)    The Borrower shall not (i) hold any assets other than the Capital Stock of the Borrower, (ii) have any liabilities other than (A) the liabilities under the Credit Documents, (B) tax liabilities in the ordinary course of business, (C) loans and advances permitted under Sections 8.1 and 8.6 and (D) corporate, administrative and operating expenses in the ordinary course of business or (iii) engage in any business other than (A) owning the Capital Stock of the Borrower and activities incidental or related thereto and (B) acting as a Guarantor hereunder and pledging its assets to the Collateral Agent, for the benefit of the Lenders, pursuant to the Collateral Documents to which it is a party.

8.13    Sale Leasebacks.

The Credit Parties will not permit any member of the Consolidated Group to enter into any Sale and Leaseback Transaction unless such Sale and Leaseback Transaction constitutes purchase money Indebtedness permitted by Section 8.1(c).

68

8.14    Operating Lease Obligations.

The Borrower will not enter into, assume or permit to exist any obligations for the payment of rent under Operating Leases that in the aggregate for the Borrower would exceed $5 million in any fiscal year.

SECTION 9

EVENTS OF DEFAULT

9.1    Events of Default.

An Event of Default shall exist upon the occurrence of any of the following specified events (each an “Event of Default”):

(a)    Payment.    There shall occur a:

(i)    default in the payment when due of any principal of any of the Loans or of any reimbursement obligations arising from drawings under Letters of Credit, or

(ii)    default, and such default shall continue for three or more Business Days, in the payment when due of any interest on the Loans or on any reimbursement obligations arising from drawings under Letters of Credit, or of any Fees or other amounts owing hereunder, under any of the other Credit Documents or in connection herewith or therewith; or

(b)    Representations.    Any representation, warranty or statement made or deemed to be made by any Credit Party herein, in any of the other Credit Documents, or in any statement or certificate delivered or required to be delivered pursuant hereto or thereto shall prove untrue in any material respect on the date as of which it was deemed to have been made; or

(c)    Covenants.    There shall occur a:

(i)    default in the due performance or observance of any term, covenant or agreement contained in Sections 7.2, 7.9, 7.11, 7.12, 7.13 or 8.1 through 8.14, inclusive;

(ii)    default in the due performance or observance of any term, covenant or agreement contained in Sections 7.1(a), (b) (c) or (d) and such default shall continue unremedied for a period of at least five days after the earlier of a Responsible Officer of a Credit Party becoming aware of such default or notice thereof by the Administrative Agent; or

(iii)    default in the due performance or observance by it of any term, covenant or agreement (other than those referred to in subsections (a), (b), (c)(i) or (c)(ii) of this Section 9.1) contained in this Credit Agreement or any other Credit Document and such default shall continue unremedied for a period of at least thirty days after the earlier of a Responsible Officer of a Credit Party becoming aware of such default or notice thereof by the Administrative Agent; or

(d)    Other Credit Documents.    (i) Any Credit Party shall default in the due performance or observance of any term, covenant or agreement in any of the other Credit Documents (subject to

69

applicable grace or cure periods, if any) or (ii) except as a result of or in connection with a dissolution, merger or disposition of a Subsidiary permitted under Section 8.4 or Section 8.5, any Credit Document shall fail to be in full force and effect or to give the Administrative Agent and/or the Lenders the Liens, rights, powers and privileges purported to be created thereby, or any Credit Party shall so state in writing; or

(e)    Guaranties.    Except as the result of or in connection with a dissolution, merger or disposition of a Subsidiary permitted under Section 8.4 or Section 8.5, the guaranty given by any Guarantor (including any Person that becomes a Guarantor after the Closing Date in accordance with Section 7.12) or any provision thereof shall cease to be in full force and effect, or any Guarantor (including any Person that becomes a Guarantor after the Closing Date in accordance with Section 7.12) or any Person acting by or on behalf of such Guarantor shall deny or disaffirm such Guarantor’s obligations under such guaranty, or any Guarantor shall default in the due performance or observance of any term, covenant or agreement on its part to be performed or observed pursuant to any guaranty; or

(f)    Bankruptcy, etc.    Any Bankruptcy Event shall occur with respect to any member of the Consolidated Group; or

(g)    Defaults under Other Agreements.    With respect to any Indebtedness (other than Indebtedness outstanding under this Credit Agreement) in excess of $5 million in the aggregate for the members of the Consolidated Group taken as a whole, (i) any member of the Consolidated Group shall (A) default in any payment (beyond the applicable grace period with respect thereto, if any) with respect to any such Indebtedness, or (B) the occurrence and continuance of a default in the observance or performance relating to such Indebtedness or contained in any instrument or agreement evidencing, securing or relating thereto, or any other event or condition shall occur or condition exist, the effect of which default or other event or condition is to cause, or to permit, the holder or holders of such Indebtedness (or trustee or agent on behalf of such holders) to cause (determined without regard to whether any notice or lapse of time is required), any such Indebtedness to become due prior to its stated maturity; or (ii) any such Indebtedness shall be declared due and payable, or required to be prepaid other than by a regularly scheduled required prepayment, prior to the stated maturity thereof; or

(h)    Judgments.    One or more judgments, settlements or decrees shall be entered against or agreed to by one or more of the members of the Consolidated Group involving a liability of $5 million or more in the aggregate (to the extent not paid or fully covered by insurance provided by a carrier who has acknowledged coverage and has the ability to perform) and any such judgments, settlements or decrees shall not have been vacated, discharged or stayed or bonded pending appeal within thirty days from the entry thereof; or

(i)    ERISA.    Any of the following events or conditions, if such event or condition would reasonably be expected to result in taxes, penalties, and other liabilities in an aggregate amount in excess of $5 million: (i) any “accumulated funding deficiency,” as such term is defined in Section 302 of ERISA and Section 412 of the Internal Revenue Code, whether or not waived, shall exist with respect to any Plan, or any lien shall arise on the assets of any member of the Consolidated Group or any ERISA Affiliate in favor of the PBGC or a Plan; (ii) an ERISA Event shall occur with respect to a Single Employer Plan, that is, in the reasonable opinion of the Administrative Agent, likely to result in the termination of such Plan for purposes of Title IV of ERISA; (iii) an ERISA Event shall occur with respect to a Multiemployer Plan or Multiple Employer Plan, that is, in the reasonable opinion of the Administrative Agent, likely to result in (A) the termination of such Plan for purposes of Title IV of ERISA, or (B) any member of the Consolidated Group or any ERISA Affiliate

70

incurring any liability in connection with a withdrawal from, reorganization of (within the meaning of Section 4241 of ERISA), or insolvency (within the meaning of Section 4245 of ERISA) of such Plan; or (iv) any prohibited transaction (within the meaning of Section 406 of ERISA or Section 4975 of the Internal Revenue Code) or breach of fiduciary responsibility shall occur that may subject any member of the Consolidated Group or any ERISA Affiliate to any liability under Sections 406, 409, 502(i), or 502(l) of ERISA or Section 4975 of the Internal Revenue Code, or under any agreement or other instrument pursuant to which any member of the Consolidated Group or any ERISA Affiliate has agreed or is required to indemnify any person against any such liability; or

(j)    Ownership.    There shall occur a Change of Control; or

(k)    HMO Event.    (i) An HMO Event shall remain unremedied for thirty days after the occurrence thereof (or such lesser period of time, if any, as the HMO Regulator administering the HMO Regulations shall have imposed for the cure of such HMO Event), or (ii) any HMO Subsidiary shall suffer the loss of twenty-five percent (25%) or more of the enrolled recipients for which it is responsible as measured from the beginning of the previous month or from the close of its immediately preceding fiscal-year end that would result in a Material Adverse Effect; or

(l)    Exclusion Event.    There shall occur an Exclusion Event that would result in a Material Adverse Effect.

9.2    Acceleration; Remedies.

Upon the occurrence of an Event of Default, and at any time thereafter unless and until such Event of Default has been waived by, or cured to the satisfaction of, the requisite Lenders (pursuant to the voting requirements of Section 11.6), the Administrative Agent shall, upon the request and direction of the Required Lenders, by written notice to the Credit Parties take any of the following actions:

(a)    Termination of Commitments.    Declare the Commitments terminated, whereupon the Commitments shall be immediately terminated.

(b)    Acceleration.    Declare the unpaid principal of and any accrued interest in respect of all Loans, any reimbursement obligations arising from drawings under Letters of Credit and any and all other indebtedness or obligations of any and every kind owing by the Credit Parties to the Administrative Agent and/or any of the Lenders hereunder to be due whereupon the same shall be immediately due and payable without presentment, demand, protest or other notice of any kind, all of which are hereby waived by the Credit Parties.

(c)    Cash Collateral.    Direct the Credit Parties to pay (and the Credit Parties agree that upon receipt of such notice, or upon the occurrence of an Event of Default under Section 9.1(f), they will immediately pay) to the Administrative Agent additional cash, to be held by the Administrative Agent, for the benefit of the Lenders, in a cash collateral account as additional security for the LOC Obligations in respect of subsequent drawings under all then-outstanding Letters of Credit in an amount equal to the maximum aggregate amount that may be drawn under all then-outstanding Letters of Credit.

(d)    Enforcement of Rights.    Enforce any and all rights and interests created and existing under the Credit Documents including, without limitation, all rights and remedies existing under the Collateral Documents, all rights and remedies against a Guarantor and all rights of set-off.

71

Notwithstanding the foregoing, if an Event of Default specified in Section 9.1(f) shall occur with respect to the Borrower, then the Commitments shall automatically terminate and all Loans, all reimbursement obligations arising from drawings under Letters of Credit, all accrued interest in respect thereof, all accrued and unpaid Fees and other indebtedness or obligations owing to the Administrative Agent and/or any of the Lenders hereunder automatically shall immediately become due and payable without the giving of any notice or other action by the Administrative Agent or the Lenders.

SECTION 10

ADMINISTRATIVE AND COLLATERAL AGENT

10.1    Appointment and Authorization.

(a)    Each Lender hereby irrevocably (subject to Section 10.9) appoints, designates and authorizes each of the Administrative Agent and the Collateral Agent to take such action on its behalf under the provisions of this Credit Agreement and each other Credit Document and to exercise such powers and perform such duties as are expressly delegated to it by the terms of this Credit Agreement or any other Credit Document, together with such powers as are reasonably incidental thereto. Each Lender further authorizes and directs each of the Administrative Agent and the Collateral Agent to execute and deliver releases (or similar agreements) to give effect to the provisions of this Credit Agreement and the other Credit Documents, including specifically, without limitation, the provisions of Section 8.1 and Section 8.5. Notwithstanding any provision to the contrary contained elsewhere herein or in any other Credit Document, neither the Administrative Agent nor the Collateral Agent shall have any duties or responsibilities, except those expressly set forth herein, and neither shall have or be deemed to have any fiduciary relationship with any Lender or participant, and no implied covenants, functions, responsibilities, duties, obligations or liabilities shall be read into this Credit Agreement or any other Credit Document or otherwise exist against either the Administrative Agent or the Collateral Agent. Without limiting the generality of the foregoing sentence, the use of the term “agent” herein and in the other Credit Documents with reference to the Administrative Agent or the Collateral Agent is not intended to connote any fiduciary or other implied (or express) obligations arising under agency doctrine of any applicable law. Instead, such term is used merely as a matter of market custom, and is intended to create or reflect only an administrative relationship between independent contracting parties.

(b)    The Issuing Lender shall act on behalf of the Lenders with respect to any Letters of Credit issued by it and the documents associated therewith until such time (and except for so long) as the Administrative Agent may agree at the request of the Required Lenders to act for the Issuing Lender with respect thereto; provided, however, that the Issuing Lender shall have all of the benefits and immunities (i) provided to the Administrative Agent in this Section 10 with respect to any acts taken or omissions suffered by the Issuing Lender in connection with Letters of Credit issued by it or proposed to be issued by it and the application and agreements for letters of credit pertaining to the Letters of Credit as fully as if the term “Administrative Agent” as used in this Section 10 included the Issuing Lender with respect to such acts or omissions, and (ii) as additionally provided herein with respect to the Issuing Lender.

10.2    Delegation of Duties.

Each of the Administrative Agent and the Collateral Agent may execute any of its duties under this Credit Agreement or any other Credit Document by or through agents, employees or attorneys-in-fact and shall be entitled to advice of counsel and other consultants or experts concerning all matters pertaining to such duties. Neither the Administrative Agent nor the Collateral Agent shall be responsible

72

for the negligence or misconduct of any agent or attorney-in-fact that it selects in the absence of gross negligence or willful misconduct.

10.3    Liability.

No Agent-Related Person shall (a) be liable for any action taken or omitted to be taken by any Agent-Related Person under or in connection with this Credit Agreement or any other Credit Document or the transactions contemplated hereby (except for its own gross negligence or willful misconduct in connection with its duties expressly set forth herein), or (b) be responsible in any manner to any Lender or participant for any recital, statement, representation or warranty made by any Credit Party or any officer thereof, contained herein or in any other Credit Document, or in any certificate, report, statement or other document referred to or provided for in, or received by the Administrative Agent or the Collateral Agent under or in connection with, this Credit Agreement or any other Credit Document, or the validity, effectiveness, genuineness, enforceability or sufficiency of this Credit Agreement or any other Credit Document, or for any failure of any Credit Party or any other party to any Credit Document to perform its obligations hereunder or thereunder. No Agent-Related Person shall be under any obligation to any Lender or participant to ascertain or to inquire as to the observance or performance of any of the agreements contained in, or conditions of, this Credit Agreement or any other Credit Document, or to inspect the properties, books or records of any Credit Party or any Affiliate thereof.

10.4    Reliance.

(a)    Each of the Administrative Agent and the Collateral Agent shall be entitled to rely, and shall be fully protected in relying, upon any writing, communication, signature, resolution, representation, notice, consent, certificate, affidavit, letter, telegram, facsimile, telex or telephone message, statement or other document or conversation believed by it to be genuine and correct and to have been signed, sent or made by the proper Person or Persons, and upon advice and statements of legal counsel (including counsel to any Credit Party), independent accountants and other experts selected by the Administrative Agent or the Collateral Agent. Each of the Administrative Agent and the Collateral Agent shall be fully justified in failing or refusing to take any action under any Credit Document unless it shall first receive such advice or concurrence of the Required Lenders as it deems appropriate and, if it so requests, it shall first be indemnified to its satisfaction by the Lenders against any and all liability and expense that may be incurred by it by reason of taking or continuing to take any such action. Each of the Administrative Agent and the Collateral Agent shall in all cases be fully protected in acting, or in refraining from acting, under this Credit Agreement or any other Credit Document in accordance with a request or consent of the Required Lenders or all the Lenders, if required hereunder, and such request and any action taken or failure to act pursuant thereto shall be binding upon all the Lenders and participants. Where this Credit Agreement expressly permits or prohibits an action unless the Required Lenders otherwise determine, the Administrative Agent or the Collateral Agent, as appropriate, shall, and in all other instances, the Administrative Agent or the Collateral Agent, as appropriate, may, but shall not be required to, initiate any solicitation for the consent or a vote of the Lenders.

(b)    For purposes of determining compliance with the conditions specified in Section 5.1, each Lender that has signed this Credit Agreement shall be deemed to have consented to, approved or accepted or to be satisfied with, each document or other matter either sent by the Administrative Agent or the Collateral Agent to such Lender for consent, approval, acceptance or satisfaction, or required thereunder to be consented to or approved by or acceptable or satisfactory to a Lender.

73

10.5    Notice of Default.

Neither the Administrative Agent nor the Collateral Agent shall be deemed to have knowledge or notice of the occurrence of any Default or Event of Default, except with respect to defaults in the payment of principal, interest and fees required to be paid to the Administrative Agent or the Collateral Agent, as appropriate, for the account of the Lenders, unless such agent shall have received written notice from a Lender or the Borrower referring to this Credit Agreement, describing such Default or Event of Default and stating that such notice is a “notice of default.” Such agent will notify the Lenders of its receipt of any such notice. Each of the Administrative Agent and the Collateral Agent shall take such action with respect to such Default or Event of Default as may be directed by the Required Lenders in accordance with Section 9; provided, however, that unless and until the Administrative Agent and the Collateral Agent have received any such direction, each of the Administrative Agent and the Collateral Agent may (but shall not be obligated to) take such action, or refrain from taking such action, with respect to such Default or Event of Default as it shall deem advisable or in the best interest of the Lenders.

10.6    Credit Decision; Disclosure of Information.

Each Lender acknowledges that no Agent-Related Person has made any representation or warranty to it, and that no act by the Administrative Agent or the Collateral Agent hereinafter taken, including any consent to and acceptance of any assignment or review of the affairs of any Credit Party or any Affiliate thereof, shall be deemed to constitute any representation or warranty by any Agent-Related Person to any Lender as to any matter, including whether Agent-Related Persons have disclosed material information in their possession. Each Lender represents to the Administrative Agent and the Collateral Agent that it has, independently and without reliance upon any Agent-Related Person and based on such documents and information as it has deemed appropriate, made its own appraisal of and investigation into the business, prospects, operations, property, financial and other condition and creditworthiness of the Credit Parties and their respective Subsidiaries, and all applicable bank or other regulatory laws relating to the transactions contemplated hereby, and made its own decision to enter into this Credit Agreement and to extend credit to the Borrower and the other Credit Parties hereunder. Each Lender also represents that it will, independently and without reliance upon any Agent-Related Person and based on such documents and information as it shall deem appropriate at the time, continue to make its own credit analysis, appraisals and decisions in taking or not taking action under this Credit Agreement and the other Credit Documents, and to make such investigations as it deems necessary to inform itself as to the business, prospects, operations, property, financial and other condition and creditworthiness of the Borrower and the other Credit Parties. Except for notices, reports and other documents expressly required to be furnished to the Lenders by the Administrative Agent or the Collateral Agent under the Credit Documents, neither the Administrative Agent nor the Collateral Agent shall have any duty or responsibility to provide any Lender with any credit or other information concerning the business, prospects, operations, property, financial and other condition or creditworthiness of any of the Credit Parties or any of their respective Affiliates that may come into the possession of any Agent-Related Person.

10.7    Indemnification.

Whether or not the transactions contemplated hereby are consummated, the Lenders shall indemnify upon demand each Agent-Related Person (to the extent not reimbursed by or on behalf of any Credit Party and without limiting the obligation of any Credit Party to do so), pro rata, and hold harmless each Agent-Related Person from and against any and all Indemnified Liabilities incurred by it; provided, however, that no Lender shall be liable for the payment to any Agent-Related Person of any portion of such Indemnified Liabilities resulting from such Person’s gross negligence or willful misconduct;

74

provided, however, that no action taken in accordance with the directions of the Required Lenders shall be deemed to constitute gross negligence or willful misconduct for purposes of this Section. Without limitation of the foregoing, each Lender shall reimburse each of the Administrative Agent and the Collateral Agent upon demand for its ratable share of any costs or out-of-pocket expenses (including reasonable attorneys’ fees and expenses and the allocated cost of internal counsel) incurred by it in connection with the preparation, execution, delivery, administration, modification, amendment or enforcement (whether through negotiations, legal proceedings or otherwise) of, or legal advice in respect of rights or responsibilities under, this Credit Agreement, any other Credit Document, or any document contemplated by or referred to herein, to the extent that the Administrative Agent or the Collateral Agent, as appropriate, is not reimbursed for such expenses by or on behalf of the Borrower. The undertaking in this Section shall survive termination of the Commitments, the payment of all Obligations hereunder and the resignation or replacement of either or both of the Administrative Agent and the Collateral Agent.

10.8    Individual Capacity.

Bank of America and its Affiliates may make loans to, issue letters of credit for the account of, accept deposits from, acquire equity interests in and generally engage in any kind of banking, trust, financial advisory, underwriting or other business with each of the Credit Parties and their respective Affiliates as though Bank of America were not the Administrative Agent, the Collateral Agent or the Issuing Lender hereunder and without notice to or consent of the Lenders. The Lenders acknowledge that, pursuant to such activities, Bank of America or its Affiliates may receive information regarding any Credit Party or its Affiliates (including information that may be subject to confidentiality obligations in favor of such Credit Party or such Affiliate) and acknowledge that each of the Administrative Agent, the Collateral Agent and the Issuing Lender shall be under no obligation to provide such information to them. With respect to its Loans, Bank of America shall have the same rights and powers under this Credit Agreement as any other Lender and may exercise such rights and powers as though it were not the Administrative Agent, the Collateral Agent or the Issuing Lender, and the terms “Lender” and “Lenders” include Bank of America in its individual capacity.

10.9    Successor.

Either or both of the Administrative Agent and the Collateral Agent may resign upon thirty days notice to the Lenders. If either the Administrative Agent or the Collateral Agent resigns, the Required Lenders shall appoint from among the Lenders a successor administrative agent or collateral agent, as appropriate, for the Lenders, which successor administrative agent or collateral agent shall be consented to by the Borrower at all times other than during the existence of an Event of Default (which consent of the Borrower shall not be unreasonably withheld or delayed). If no successor administrative agent or collateral agent is appointed prior to the effective date of the resignation of the Administrative Agent or the Collateral Agent, such resigning agent may appoint, after consulting with the Lenders and the Borrower, a successor administrative agent or collateral agent, as appropriate, from among the Lenders. Upon the acceptance of its appointment as successor administrative agent or collateral agent hereunder, such successor agent shall succeed to all the rights, powers and duties of the resigning Administrative Agent or Collateral Agent, as appropriate, and thereafter the term “Administrative Agent” or “Collateral Agent”, as appropriate, shall mean such successor administrative agent or collateral agent, as appropriate, and the resigning agent’s appointment, powers and duties as Administrative Agent or Collateral Agent shall be terminated. After any such resignation hereunder, the provisions of this Section 10 and Sections 11.4 and 11.9 shall inure to the benefit of such resigning agent as to any actions taken or omitted to be taken by it while it was Administrative Agent or Collateral Agent hereunder. If no successor has accepted appointment as administrative agent or collateral agent, as appropriate, by the date thirty days following such resigning agent’s notice of resignation, the resigning agent’s resignation shall nevertheless thereupon become effective and the Lenders shall perform all of the duties of the Administrative Agent or the

75

Collateral Agent, as appropriate, under the Credit Documents until such time, if any, as the Required Lenders appoint a successor agent as provided above.

10.10    Other Agents; Lead Managers.

None of the Lenders identified on the facing page or signature pages of this Credit Agreement as a “syndication agent”, “documentation agent”, “co-agent” or “lead manager” shall have any right, power, obligation, liability, responsibility or duty under this Credit Agreement other than those applicable to all Lenders as such. Without limiting the foregoing, none of the Lenders so identified shall have or be deemed to have any fiduciary relationship with any Lender. Each Lender acknowledges that it has not relied, and will not rely, on any of the Lenders so identified in deciding to enter into this Credit Agreement or in taking or not taking action hereunder.

SECTION 11

MISCELLANEOUS

11.1    Notices.

Except as otherwise expressly provided herein, all notices and other communications shall have been duly given and shall be effective (a) when delivered, (b) when transmitted via telecopy (or other facsimile device) to the number set out below, (c) the Business Day following the day on which the same has been delivered prepaid to a reputable national overnight air courier service, or (d) the third Business Day following the day on which the same is sent by certified or registered mail, postage prepaid, in each case to the respective parties at the address, in the case of the Credit Parties and the Administrative Agent, set forth below, and, in the case of the Lenders, set forth on Schedule 11.1, or at such other address as such party may specify by written notice to the other parties hereto:

if to any Credit Party:

AMERIGROUP Corporation

4425 Corporation Lane

Virginia Beach, Virginia 23462

Attn: Sherri E. Lee, SVP and Treasurer

Telephone: (757) 473-2714

Telecopy: (757) 473-2738

slee@amerigroupcorp.com

with a copy to:

AMERIGROUP Corporation

4425 Corporation Lane

Virginia Beach, Virginia 23462

Attn: Stanley F. Baldwin, SVP and General Counsel

Telephone: (757) 473-2732

Telecopy: (757) 557-6743

sbaldwin@amerigroupcorp.com

76

if to the Administrative Agent:

Bank of America, N.A., as Administrative Agent

Mail Code: CA5-701-05-19

1455 Market Street, 5^th Floor

San Francisco, California 94103

Attn: Mark Doherty

Agency Management #10831

Telephone: (415) 436-2776

Telecopy: (415) 503-5137

mark.doherty@bankofamerica.com

with a copy to:

Bank of America, N.A., as Administrative Agent

Bank of America Corporate Center

100 North Tryon Street, 17^th Floor

Charlotte, North Carolina 28255

Attn: Joseph L. Corah

Telephone: (704) 386-5976

Telecopy: (704) 388-6002

joseph.l.corah@bankofamerica.com

11.2    Right of Set-Off; Adjustments.

Upon the occurrence and during the continuance of any Event of Default, each Lender (and each of its Affiliates) is hereby authorized at any time and from time to time, to the fullest extent permitted by law, to set off and apply any and all deposits (general or special, time or demand, provisional or final) at any time held and other indebtedness at any time owing by such Lender (or any of its Affiliates) to or for the credit or the account of any Credit Party against any and all of the obligations of such Person now or hereafter existing under this Credit Agreement, under the Notes, under any other Credit Document or otherwise, irrespective of whether such Lender shall have made any demand under hereunder or thereunder and although such obligations may be unmatured. Each Lender agrees promptly to notify any affected Credit Party after any such set-off and application made by such Lender; provided, however, that the failure to give such notice shall not affect the validity of such set-off and application. The rights of each Lender under this Section 11.2 are in addition to other rights and remedies (including, without limitation, other rights of set-off) that such Lender may have.

11.3    Successors and Assigns.

(a)    The provisions of this Credit Agreement shall be binding upon and inure to the benefit of the parties hereto and their respective successors and assigns permitted hereby, except that the Borrower may not assign or otherwise transfer any of its rights or obligations hereunder without the prior written consent of each Lender (and any attempted assignment or transfer by the Borrower without such consent shall be null and void). Nothing in this Credit Agreement, expressed or implied, shall be construed to confer upon any Person (other than the parties hereto, their respective successors and assigns permitted hereby and, to the extent expressly contemplated hereby, the Indemnitees) any legal or equitable right, remedy or claim under or by reason of this Credit Agreement.

77

(b)    Any Lender may assign to one or more Eligible Assignees all or a portion of its rights and obligations under this Credit Agreement (including all or a portion of its Commitment and the Loans (including for purposes of this subsection (b), participations in LOC Obligations and in Swingline Loans) at the time owing to it); provided that (i) except in the case of an assignment of the entire remaining amount of the assigning Lender’s Commitment and the Loans at the time owing to it or in the case of an assignment to a Lender or an Affiliate of a Lender or an Approved Fund with respect to a Lender, the aggregate amount of the Commitment (which for this purpose includes Loans outstanding thereunder) subject to each such assignment, determined as of the date the Assignment and Acceptance with respect to such assignment is delivered to the Administrative Agent, shall not be less than $5 million unless each of the Administrative Agent and, so long as no Event of Default has occurred and is continuing, the Borrower otherwise consents (each such consent not to be unreasonably withheld or delayed), (ii) each partial assignment shall be made as an assignment of a proportionate part of all the assigning Lender’s rights and obligations under this Credit Agreement with respect to the Loans or the Commitment assigned, except that this clause (ii) shall not apply to rights in respect of outstanding Swingline Loans, and (iii) the parties to each assignment shall execute and deliver to the Administrative Agent an Assignment and Acceptance substantially in the form of Schedule 11.3(b) hereto, together with a processing and recordation fee of $3,500. Subject to acceptance and recording thereof by the Administrative Agent pursuant to subsection (c) of this Section, from and after the effective date specified in each Assignment and Acceptance, the Eligible Assignee thereunder shall be a party hereto and, to the extent of the interest assigned by such Assignment and Acceptance, have the rights and obligations of a Lender under this Credit Agreement, and the assigning Lender thereunder shall, to the extent of the interest assigned by such Assignment and Acceptance, be released from its obligations under this Credit Agreement (and, in the case of an Assignment and Acceptance covering all of the assigning Lender’s rights and obligations under this Credit Agreement, such Lender shall cease to be a party hereto but shall continue to be entitled to the benefits of Sections 11.5 and 11.9). Upon request, the Borrower (at its expense) shall execute and deliver new or replacement Notes to the assigning Lender and the assignee Lender. Any assignment or transfer by a Lender of rights or obligations under this Credit Agreement that does not comply with this subsection shall be treated for purposes of this Credit Agreement as a sale by such Lender of a participation in such rights and obligations in accordance with subsection (d) of this Section.

(c)    The Administrative Agent, acting solely for this purpose as an agent of the Borrower, shall maintain at its office in Charlotte, North Carolina a copy of each Assignment and Acceptance delivered to it and a register for the recordation of the names and addresses of the Lenders, and the Commitments of, and principal amount of the Loans and LOC Obligations owing to, each Lender pursuant to the terms hereof from time to time (the “Register”). The entries in the Register shall be conclusive absent manifest error, and the Borrower, the Administrative Agent and the Lenders may treat each Person whose name is recorded in the Register pursuant to the terms hereof as a Lender hereunder for all purposes of this Credit Agreement, notwithstanding notice to the contrary. The Register shall be available for inspection by the Borrower and any Lender, at any reasonable time and from time to time upon reasonable prior notice.

(d)    Any Lender may, without the consent of, or notice to, the Borrower or the Administrative Agent, sell participations to one or more banks or other entities (a “Participant”) in all or a portion of such Lender’s rights and/or obligations under this Credit Agreement (including all or a portion of its Commitment and/or the Loans (including such Lender’s participations in LOC Obligations and/or Swingline Loans) owing to it); provided that (i) such Lender’s obligations under this Credit Agreement shall remain unchanged, (ii) such Lender shall remain solely responsible to the other parties hereto for the performance of such obligations and (iii) the Borrower, the Administrative Agent and the other Lenders shall continue to deal solely and directly with such Lender in connection with such Lender’s rights and obligations under this Credit Agreement. Any agreement or instrument pursuant to which a Lender sells

78

such a participation shall provide that such Lender shall retain the sole right to enforce this Credit Agreement and to approve any amendment, modification or waiver of any provision of this Credit Agreement; provided that such agreement or instrument may provide that such Lender will not, without the consent of the Participant, agree to any amendment, waiver or other modification that would (i) postpone any date upon which any payment of money is scheduled to be paid to such Participant, (ii) reduce the principal, interest, fees or other amounts payable to such Participant, (iii) increase the amount of such Participant’s commitments hereunder or (iv) release all or substantially all of the Guarantors from their obligations under the Credit Documents. Subject to subsection (e) of this Section, the Borrower agrees that each Participant shall be entitled to the benefits of Sections 3.6, 3.9, 3.11 and 3.12 to the same extent as if it were a Lender and had acquired its interest by assignment pursuant to subsection (b) of this Section. To the extent permitted by law, each Participant also shall be entitled to the benefits of Section 11.2 as though it were a Lender, provided such Participant agrees to be subject to Section 3.14 as though it were a Lender.

(e)    A Participant shall not be entitled to receive any greater payment under Section 3.6, 3.9 or 3.11 than the applicable Lender would have been entitled to receive with respect to the participation sold to such Participant, unless the sale of the participation to such Participant is made with the Borrower’s prior written consent. A Participant that would be a foreign Lender if it were a Lender shall not be entitled to the benefits of Section 3.11 unless the Borrower is notified of the participation sold to such Participant and such Participant agrees, for the benefit of the Borrower, to comply with Section 3.11(d) as though it were a Lender.

(f)    Any Lender may at any time pledge or assign a security interest in all or any portion of its rights under this Credit Agreement (including under its Notes, if any) to secure obligations of such Lender, including any pledge or assignment to secure obligations to a Federal Reserve Bank; provided that no such pledge or assignment shall release a Lender from any of its obligations hereunder or substitute any such pledgee or assignee for such Lender as a party hereto.

(g)    If the consent of the Borrower to an assignment or to an Eligible Assignee is required hereunder (including a consent to an assignment that does not meet the minimum assignment threshold specified in clause (i) of the proviso to the first sentence of Section 11.3(b), the Borrower shall be deemed to have given its consent five Business Days after the date notice thereof has been delivered by the assigning Lender (through the Administrative Agent) unless such consent is expressly refused by the Borrower prior to such fifth Business Day.

(h)    Notwithstanding anything to the contrary contained herein, if at any time Bank of America assigns all of its Commitment and Loans pursuant to subsection (b) above, Bank of America may, (i) upon thirty days notice to the Borrower and the Lenders, resign as Issuing Lender and/or (ii) upon five Business Days notice to the Borrower, resign as Swingline Lender. In the event of any such resignation as Issuing Lender or as Swingline Lender, the Borrower shall be entitled to appoint from among the Lenders a successor Issuing Lender or Swingline Lender hereunder; provided, however, that no failure by the Borrower to appoint any such successor shall affect the resignation of Bank of America as Issuing Lender or as Swingline Lender, as the case may be. Bank of America shall retain all the rights and obligations of the Issuing Lender hereunder with respect to all Letters of Credit outstanding as of the effective date of its resignation as Issuing Lender and all LOC Obligations with respect thereto (including the right to require the Lenders to make Base Rate Loans or fund participations in Letters of Credit pursuant to Section 2.6(b)). If Bank of America resigns as Swingline Lender, it shall retain all the rights of the Swingline Lender provided hereunder with respect to Swingline Loans made by it and outstanding as of the effective date of such resignation, including the right to require the Lenders to make Base Rate Loans or fund participations in outstanding Swingline Loans pursuant to Section 2.7.

79

11.4    No Waiver; Remedies Cumulative.

No failure or delay on the part of the Administrative Agent or any Lender in exercising any right, power or privilege hereunder or under any other Credit Document and no course of dealing between the Administrative Agent or any Lender and any of the Credit Parties shall operate as a waiver thereof; nor shall any single or partial exercise of any right, power or privilege hereunder or under any other Credit Document preclude any other or further exercise thereof or the exercise of any other right, power or privilege hereunder or thereunder. The rights and remedies provided herein are cumulative and not exclusive of any rights or remedies that the Administrative Agent or any Lender would otherwise have. No notice to or demand on any Credit Party in any case shall entitle the Credit Parties to any other or further notice or demand in similar or other circumstances or constitute a waiver of the rights of the Administrative Agent or the Lenders to any other or further action in any circumstances without notice or demand.

11.5    Expenses; Indemnification.

(a)    The Borrower agrees to pay on demand all costs and expenses of the Administrative Agent in connection with the syndication, preparation, execution, delivery, administration, modification, and amendment of this Credit Agreement, the other Credit Documents, and the other documents to be delivered hereunder, including, without limitation, reasonable attorneys’ fees and expenses and the allocated cost of internal counsel for the Administrative Agent with respect thereto and with respect to advising the Administrative Agent as to its rights and responsibilities under the Credit Documents. The Borrower agrees to pay on demand all costs and expenses of the Administrative Agent and the Lenders, if any (including, without limitation, reasonable attorneys’ fees and expenses and the allocated cost of internal counsel), in connection with the enforcement, work-out or restructuring (whether through negotiations, legal proceedings, or otherwise) of the Credit Documents and the other documents to be delivered thereunder.

(b)    Whether or not the transactions contemplated hereby are consummated, the Borrower agrees to indemnify, save and hold harmless each Agent-Related Person, each Lender and their respective Affiliates, directors, officers, employees, counsel, agents and attorneys-in-fact (collectively the “Indemnitees”) from and against: (a) any and all claims, demands, actions or causes of action that are asserted against any Indemnitee by any Person (other than the Administrative Agent or any Lender) relating directly or indirectly to a claim, demand, action or cause of action that such Person asserts or may assert against any Credit Party, any Affiliate of any Credit Party or any of their respective officers or directors; (b) any and all claims, demands, actions or causes of action that may at any time (including at any time following repayment of the Obligations and the resignation or removal of the Administrative Agent or the replacement of any Lender) be asserted or imposed against any Indemnitee, arising out of or relating to, the Credit Documents, any predecessor Credit Documents, the Commitments, the use or contemplated use of the proceeds of any Extension of Credit, or the relationship of any Credit Party, the Administrative Agent and the Lenders under this Credit Agreement or any other Credit Document; (c) any administrative or investigative proceeding by any Governmental Authority arising out of or related to a claim, demand, action or cause of action described in subsection (a) or (b) above; and (d) any and all liabilities (including liabilities under indemnities), losses, costs or expenses (including reasonable fees and costs of counsel) that any Indemnitee suffers or incurs as a result of the assertion of any foregoing claim, demand, action, cause of action or proceeding, or as a result of the preparation of any defense in connection with any foregoing claim, demand, action, cause of action or proceeding, in all cases, whether or not arising out of the negligence of an Indemnitee, and whether or not an Indemnitee is a party to such claim, demand, action, cause of action or proceeding (all the foregoing, collectively, the “Indemnified Liabilities”); provided that no Indemnitee shall be entitled to indemnification for any claim caused by its own gross negligence or willful misconduct or for any loss asserted against it by another Indemnitee. The

80

agreements in this Section shall survive the termination of the Commitments and repayment of all the other Obligations.

(c)    Without prejudice to the survival of any other agreement of the Borrower hereunder, the agreements and obligations of the Borrower contained in this Section 11.5 shall survive the repayment of the Loans, LOC Obligations and other obligations under the Credit Documents and the termination of the Commitments hereunder.

11.6    Amendments, Waivers and Consents.

Neither this Credit Agreement nor any other Credit Document nor any of the terms hereof or thereof may be amended, changed, waived, discharged or terminated unless such amendment, change, waiver, discharge or termination is in writing entered into by, or approved in writing by, the Required Lenders and the Borrower, provided, however, that:

(a) without the consent of each Lender affected thereby, neither this Credit Agreement nor any other Credit Document may be amended to

(i) extend the Termination Date or the final maturity of any Loan or of any reimbursement obligation, or any portion thereof, arising from drawings under Letters of Credit,

(ii) reduce the rate or extend the time of payment of interest (other than as a result of waiving the applicability of any post-default increase in interest rates) thereon or Fees hereunder,

(iii) reduce or waive the principal amount of any Loan or of any reimbursement obligation, or any portion thereof, arising from drawings under Letters of Credit,

(iv) increase the Commitment of a Lender over the amount thereof in effect (it being understood and agreed that a waiver of any Default or Event of Default or mandatory reduction in the Commitments shall not constitute a change in the terms of any Commitment of any Lender),

(v) except as the result of or in connection with a dissolution, merger or disposition of a member of the Consolidated Group permitted under Section 8.4, release the Borrower or all or substantially all of the Guarantors from its or their obligations under the Credit Documents,

(vi) except as the result of or in connection with an Asset Disposition permitted under Section 8.5, release all or substantially all of the Collateral,

(vii) amend, modify or waive any provision of this Section 11.6 or Section 3.6, 3.7, 3.8, 3.9, 3.10, 3.11, 3.12, 3.13, 3.14, 3.15, 9.1(a), 11.2, 11.3, 11.5 or 11.9,

(viii) reduce any percentage specified in, or otherwise modify, the definition of Required Lenders, or

(ix) consent to the assignment or transfer by the Borrower or all or substantially all of the other Credit Parties of any of its or their rights and obligations under (or in respect of) the Credit Documents except as permitted thereby;

81

(b)    without the consent of the Administrative Agent and the Collateral Agent, no provision of Section 10 may be amended;

(c)    without the consent of the Issuing Lender, no provision of Section 2.1(b), 2.2(a)(ii) and 2.6 may be amended; and

(d)    without the consent of the Swingline Lender, no provision of Section 2.1(c), 2.2(a)(iii) and 2.7 may be amended.

Notwithstanding the fact that the consent of all the Lenders is required in certain circumstances as set forth above, each Lender is entitled to vote as such Lender sees fit on any bankruptcy reorganization plan that affects the Loans, and each Lender acknowledges that the provisions of Section 1126(c) of the Bankruptcy Code supersedes the unanimous consent provisions set forth herein.

11.7    Counterparts.

This Credit Agreement may be executed in any number of counterparts, each of which when so executed and delivered shall be an original, but all of which shall constitute one and the same instrument. It shall not be necessary in making proof of this Credit Agreement to produce or account for more than one such counterpart for each of the parties hereto. Delivery by facsimile by any of the parties hereto of an executed counterpart of this Credit Agreement shall be as effective as an original executed counterpart hereof and shall be deemed a representation that an original executed counterpart hereof will be delivered.

11.8    Headings.

The headings of the sections and subsections hereof are provided for convenience only and shall not in any way affect the meaning or construction of any provision of this Credit Agreement.

11.9    Survival.

All indemnities set forth herein, including, without limitation, in Section 2.6(h), 3.11, 3.12, 10.7 or 11.5 shall survive the execution and delivery of this Credit Agreement, the making of the Loans, the issuance of the Letters of Credit, the repayment of the Loans, LOC Obligations and other obligations under the Credit Documents and the termination of the Commitments hereunder, and all representations and warranties made by the Credit Parties herein shall survive delivery of the Notes and the making of the Loans hereunder.

11.10    Governing Law; Submission to Jurisdiction; Venue.

(a) THIS CREDIT AGREEMENT AND, UNLESS OTHERWISE EXPRESSLY PROVIDED THEREIN, THE OTHER CREDIT DOCUMENTS AND THE RIGHTS AND OBLIGATIONS OF THE PARTIES HEREUNDER AND THEREUNDER SHALL BE GOVERNED BY AND CONSTRUED AND INTERPRETED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK. Any legal action or proceeding with respect to this Credit Agreement or any other Credit Document may be brought in the state or federal courts located in Charlotte, North Carolina, and, by execution and delivery of this Credit Agreement, each of the Credit Parties hereby irrevocably accepts for itself and in respect of its property, generally and unconditionally, the nonexclusive jurisdiction of such courts. Each of the Credit Parties further irrevocably consents to the service of process out of any of the aforementioned courts in any such action or proceeding by the mailing of copies thereof by registered or certified mail, postage prepaid, to it at the address set out for notices pursuant to Section 11.1, such service to become effective three days after such mailing. Nothing herein shall affect the right of the Administrative Agent or any Lender to serve process in

82

any other manner permitted by law or to commence legal proceedings or to otherwise proceed against any Credit Party in any other jurisdiction.

(b)    Each of the Credit Parties hereby irrevocably waives any objection that it may now or hereafter have to the laying of venue of any of the aforesaid actions or proceedings arising out of or in connection with this Credit Agreement or any other Credit Document brought in the courts referred to in subsection (a) above and hereby further irrevocably waives and agrees not to plead or claim in any such court that any such action or proceeding brought in any such court has been brought in an inconvenient forum.

(c)    EACH PARTY TO THIS CREDIT AGREEMENT HEREBY EXPRESSLY WAIVES ANY RIGHT TO TRIAL BY JURY OF ANY CLAIM, DEMAND, ACTION OR CAUSE OF ACTION ARISING UNDER ANY CREDIT DOCUMENT OR IN ANY WAY CONNECTED WITH OR RELATED OR INCIDENTAL TO THE DEALINGS OF THE PARTIES HERETO OR ANY OF THEM WITH RESPECT TO ANY CREDIT DOCUMENT, OR THE TRANSACTIONS RELATED THERETO, IN EACH CASE WHETHER NOW EXISTING OR HEREAFTER ARISING, AND WHETHER FOUNDED IN CONTRACT OR TORT OR OTHERWISE; AND EACH PARTY HEREBY AGREES AND CONSENTS THAT ANY SUCH CLAIM, DEMAND, ACTION OR CAUSE OF ACTION SHALL BE DECIDED BY COURT TRIAL WITHOUT A JURY, AND THAT ANY PARTY TO THIS CREDIT AGREEMENT MAY FILE AN ORIGINAL COUNTERPART OR A COPY OF THIS SECTION WITH ANY COURT AS WRITTEN EVIDENCE OF THE CONSENT OF THE SIGNATORIES HERETO TO THE WAIVER OF THEIR RIGHT TO TRIAL BY JURY.

11.11    Severability.

If any provision of any of the Credit Documents is determined to be illegal, invalid or unenforceable, such provision shall be fully severable and the remaining provisions shall remain in full force and effect and shall be construed without giving effect to the illegal, invalid or unenforceable provisions.

11.12    Entirety.

This Credit Agreement together with the other Credit Documents represent the entire agreement of the parties hereto and thereto, and supersede all prior agreements and understandings, oral or written, if any, including any commitment letters or correspondence relating to the Credit Documents or the transactions contemplated herein and therein.

11.13    Binding Effect; Termination.

(a)    This Credit Agreement shall become effective at such time on or after the Closing Date when it shall have been executed by each Credit Party and the Administrative Agent, and the Administrative Agent shall have received copies hereof (telecopied or otherwise) which, when taken together, bear the signatures of each Lender, and thereafter this Credit Agreement shall be binding upon and inure to the benefit of each Credit Party, the Administrative Agent and each Lender and their respective successors and assigns.

(b)    The term of this Credit Agreement shall be until no Loans, LOC Obligations or any other amounts payable hereunder or under any of the other Credit Documents shall remain outstanding, no Letters of Credit shall be outstanding, all of the Guaranteed Obligations have been irrevocably satisfied in full and all of the Commitments hereunder shall have expired or been terminated.

11.14    Confidentiality.

83

Each of the Administrative Agent and the Lenders agrees to maintain the confidentiality of the Information (as defined below), except that Information may be disclosed (a) to its and its Affiliates’ directors, officers, employees and agents, including accountants, legal counsel and other advisors (it being understood that the Persons to whom such disclosure is made will be informed of the confidential nature of such Information and instructed to keep such Information confidential); (b) to the extent requested by any regulatory authority; (c) to the extent required by applicable laws or regulations or by any subpoena or similar legal process; (d) to any other party to this Credit Agreement; (e) in connection with the exercise of any remedies hereunder or any suit, action or proceeding relating to this Credit Agreement or the enforcement of rights hereunder; (f) subject to an agreement containing provisions substantially the same as those of this Section, to (i) any Eligible Assignee of or Participant in, or any prospective Eligible Assignee of or Participant in, any of its rights or obligations under this Credit Agreement or (ii) any direct or indirect contractual counterparty or prospective counterparty (or such contractual counterparty’s or prospective counterparty’s professional advisor) to any credit derivative transaction relating to obligations of the Borrower; (g) with the consent of the Borrower; (h) to the extent such Information (i) becomes publicly available other than as a result of a breach of this Section or (ii) becomes available to the Administrative Agent or any Lender on a nonconfidential basis from a source other than the Borrower; or (i) to the National Association of Insurance Commissioners or any other similar organization or any nationally recognized rating agency that requires access to information about a Lender’s or its Affiliates’ investment portfolio in connection with ratings issued with respect to such Lender or its Affiliates. For the purposes of this Section, “Information” means all information received from the Borrower relating to the Borrower or its business, other than any such information that is available to the Administrative Agent or any Lender on a nonconfidential basis prior to disclosure by the Borrower; provided that, in the case of information received from the Borrower after the date hereof, such information is clearly identified in writing at the time of delivery as confidential. Any Person required to maintain the confidentiality of Information as provided in this Section shall be considered to have complied with its obligation to do so if such Person has exercised the same degree of care to maintain the confidentiality of such Information as such Person would accord to its own confidential information.

11.15    Source of Funds.

Each of the Lenders hereby represents and warrants to the Borrower that at least one of the following statements is an accurate representation as to the source of funds to be used by such Lender in connection with the financing hereunder:

(a) no part of such funds constitutes assets allocated to any separate account maintained by such Lender in which any employee benefit plan (or its related trust) has any interest;

(b) to the extent that any part of such funds constitutes assets allocated to any separate account maintained by such Lender, such Lender has disclosed to the Borrower the name of each employee benefit plan whose assets in such account exceed ten percent (10%) of the total assets of such account as of the date of such purchase (and, for purposes of this subsection (b), all employee benefit plans maintained by the same employer or employee organization are deemed to be a single plan);

(c) to the extent that any part of such funds constitutes assets of an insurance company’s general account, such insurance company has complied with all of the requirements of the regulations issued under Section 401(c)(1)(A) of ERISA; or

(d) such funds constitute assets of one or more specific benefit plans that such Lender has identified in writing to the Borrower.

84

As used in this Section 11.15, the terms “employee benefit plan” and “separate account” shall have the respective meanings provided in Section 3 of ERISA.

11.16    Conflict.

To the extent that there is a conflict or inconsistency between any provision hereof, on the one hand, and any provision of any Credit Document, on the other hand, this Credit Agreement shall control.

[signature pages to follow]

85

IN WITNESS WHEREOF, each of the parties hereto has caused a counterpart of this Credit Agreement to be duly executed and delivered as of the date first above written.

BORROWER:	AMERIGROUP CORPORATION, a Delaware corporation
	By:
	Name: Title:
GUARANTORS:	[NONE AS OF THE CLOSING DATE]

86

AGENT:	BANK OF AMERICA, N.A., in its capacity as Administrative Agent and as Collateral Agent
	By:
	Name: Title:
LENDERS:	BANK OF AMERICA, N.A., individually in its capacity as a Lender, as Issuing Lender and as Swingline Lender
	By:
	Name: Title:
	UBS AG, STAMFORD BRANCH
	By:
	Name: Title:
	By:
	Name: Title:
	CIBC INC.
	By:
	Name: Title:

87

Schedule 2.1(a)

LENDERS AND COMMITMENTS

Revolving Commitments

Lender	Revolving Commitment Percentage		Revolving Committed Amount		LOC Committed Amount
Bank of America, N.A.	41.666667	%	$	25,000,000.00	$	6,250,000.05
UBS AG, Stamford Branch	33.333333	%	$	20,000,000.00	$	4,999,999.95
CIBC Inc.	25.000000	%	$	15,000,000.00	$	3,750,000.00
Total	100.00	%	$	60,000,000.00	$	15,000,000.00

88

Schedule 2.1(d)

Form of Lender Joinder Agreement

THIS LENDER JOINDER AGREEMENT (this “Agreement”) dated as of             , 200             to the Credit Agreement referenced below is by and among [NEW LENDER] (the “New Lender”), AMERIGROUP CORPORATION, a Delaware corporation (the “Borrower”), certain Subsidiaries and Affiliates of the Borrower, as Guarantors, and BANK OF AMERICA, N.A., as administrative agent (in such capacity, the “Administrative Agent”) for the Lenders. All of the defined terms of the Credit Agreement are incorporated herein by reference.

W I T N E S S E T H

WHEREAS, pursuant to that Credit and Guaranty Agreement dated as of December 14, 2001 (as amended and modified from time to time, the “Credit Agreement”) among the Borrower, the Guarantors, the Lenders and the Administrative Agent, the Lenders have agreed to provide the Borrower with a $60 million revolving credit facility;

WHEREAS, pursuant to Section 2.1(d) of the Credit Agreement, the Borrower has requested that the New Lender provide an additional Revolving Commitment under the Credit Agreement; and

WHEREAS, the New Lender has agreed to provide the additional Revolving Commitment on the terms and conditions set forth herein and to become a “Lender” under the Credit Agreement in connection therewith;

NOW, THEREFORE, IN CONSIDERATION of the premises and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto agree as follows:

1.    The New Lender hereby agrees to provide Commitments to the Borrower in the amounts set forth on Schedule 2.1(a) to the Credit Agreement as attached hereto. The Revolving Commitment Percentage of the New Lender shall be as set forth on Schedule 2.1(a).

2.    The New Lender shall be deemed to have purchased without recourse a risk participation from the Issuing Lender in all Letters of Credit issued or existing under the Credit Agreement (including Existing Letters of Credit) and the obligations arising thereunder in an amount equal to its pro rata share of the obligations under such Letters of Credit (based on the Revolving Commitment Percentages of the Lenders as set forth on Schedule 2.1(a) as attached hereto), and shall absolutely, unconditionally and irrevocably assume, as primary obligor and not as surety, and be obligated to pay to the Issuing Lender therefor and discharge when due, its pro rata share of the obligations arising under such Letter of Credit.

3.    The New Lender (a) represents and warrants that it is a commercial lender, other financial institution or other “accredited” investor (as defined in SEC Regulation D) that makes or acquires loans in the ordinary course of business and that it will make or acquire Loans for its own account in the ordinary course of business, (b) confirms that it has received a copy of the Credit Agreement, together with copies of the financial statements referred to in Section 7.1 thereof and such other documents and information as it has deemed appropriate to make its own credit analysis and decision to enter into this Agreement; (c) agrees that it will, independently and without reliance upon the Administrative Agent or any other Lender and based on such documents and information as it shall deem appropriate at the time, continue to make its own credit decisions in taking or not taking action under the Credit Agreement; (d) appoints and authorizes the Administrative Agent to take such action as agent on

89

its behalf and to exercise such powers and discretion under the Credit Agreement as are delegated to the Administrative Agent by the terms thereof, together with such powers and discretion as are reasonably incidental thereto; and (e) agrees that, as of the date hereof, the New Lender shall (i) be a party to the Credit Agreement and the other Credit Documents, (ii) be a “Lender” for all purposes of the Credit Agreement and the other Credit Documents, (iii) perform all of the obligations that by the terms of the Credit Agreement are required to be performed by it as a “Lender” under the Credit Agreement and (iv) shall have the rights and obligations of a Lender under the Credit Agreement and the other Credit Documents.

4.    Each of the Borrower and the Guarantors agrees that, as of the date hereof, the New Lender shall (i) be a party to the Credit Agreement and the other Credit Documents, (ii) be a “Lender” for all purposes of the Credit Agreement and the other Credit Documents, and (iii) have the rights and obligations of a Lender under the Credit Agreement and the other Credit Documents.

5.    The address of the New Lender for purposes of all notices and other communications is             ,             , Attention of              (Facsimile No.             ).

6.    This Agreement may be executed in any number of counterparts and by the various parties hereto in separate counterparts, each of which when so executed shall be deemed to be an original and all of which taken together shall constitute one contract. Delivery of an executed counterpart of this Agreement by telecopier shall be effective as delivery of a manually executed counterpart of this Agreement.

7.    This Agreement shall be governed by and construed and interpreted in accordance with the laws of the State of New York.

90

IN WITNESS WHEREOF, each of the parties hereto has caused this Agreement to be executed by a duly authorized officer as of the date first above written.

NEW LENDER:	[NEW LENDER], as New Lender
	By:
	Name: Title:
BORROWER:	AMERIGROUP CORPORATION, a Delaware corporation
	By:
	Name: Title:
GUARANTORS:	[ELIGIBLE DOMESTIC SUBSIDIARIES OF THE BORROWER]
	By:
	Name: Title:
	of each of the foregoing

Accepted and Agreed:

BANK OF AMERICA, N.A., 

as Administrative Agent

By:

Name:

Title:

91

Schedule 2.2(a)(i)

FORM OF NOTICE OF BORROWING

Bank of America, N.A., as Administrative Agent

101 N. Tryon Street, 15th Floor

NC1-001-15-04

Charlotte, North Carolina 28255

Attn: Agency Services

Re: Credit and Guaranty Agreement dated as of December 14, 2001 (as amended, modified, supplemented, increased and extended from time to time, the “Credit Agreement”) among AMERIGROUP Corporation, a Delaware corporation (the “Borrower”), certain Subsidiaries and Affiliates of the Borrower, as guarantors, the Lenders identified therein and Bank of America, N.A., as Administrative Agent. Terms used but not otherwise defined herein shall have the meanings provided in the Credit Agreement.

Ladies and Gentlemen:

The Borrower hereby gives notice pursuant to Section 2.2 of the Credit Agreement that it requests a [Revolving Loan] [Swingline Loan] advance under the Credit Agreement and in connection therewith sets forth below the terms on which such advance is requested to be made:

(A)	Date of Borrowing (which is a Business Day)
(B)	Principal Amount of Borrowing
(C)	Interest rate basis
(D)	Interest Period and the last day thereof

In accordance with the requirements of Section 5.2, the Borrower hereby represents and warrants that each of the conditions specified in Section 5.2 of the Credit Agreement have been satisfied as of the date hereof.

AMERIGROUP CORPORATION,

a Delaware corporation

By:

Name:

Title:

92

Schedule 2.2(a)(ii)

FORM OF NOTICE OF REQUEST OF LETTER OF CREDIT

Bank of America, N.A., as Administrative Agent

101 N. Tryon Street, 15th Floor

NC1-001-15-04

Charlotte, North Carolina 28255

Attn: Agency Services

Re: Credit and Guaranty Agreement dated as of December 14, 2001 (as amended, modified, supplemented, increased and extended from time to time, the “Credit Agreement”) among AMERIGROUP Corporation, a Delaware corporation (the “Borrower”), certain Subsidiaries and Affiliates of the Borrower, as guarantors, the Lenders identified therein and Bank of America, N.A., as Administrative Agent. Terms used but not otherwise defined herein shall have the meanings provided in the Credit Agreement.

Ladies and Gentlemen:

The Borrower hereby gives notice pursuant to Section 2.2 of the Credit Agreement that it requests a the issuance of a Letter of Credit under the Credit Agreement as follows:

(1)    Account Party:

(2)    For use by:

(3)    Beneficiary:

(4)    Face Amount of Letter of Credit:

(5)    Date of Issuance:

Delivery of Letter of Credit should be made as follows:

In accordance with the requirements of Section 5.2, the Borrower hereby represents and warrants that each of the conditions specified in Section 5.2 of the Credit Agreement have been satisfied as of the date hereof.

Very truly yours,

AMERIGROUP CORPORATION,

a Delaware corporation

By:

Name:

Title:

93

Schedule 2.5

FORM OF NOTE

December 14, 2001

FOR VALUE RECEIVED, undersigned Borrower hereby promises to pay to the order of             , its successors and assigns (the “Lender”), on or before the Termination Date to the office of the Administrative Agent in immediately available funds as provided in the Credit Agreement,

(i)    in the case of Revolving Loans, the Lender’s Revolving Committed Amount or, if less, the aggregate unpaid principal amount of all Revolving Loans owing to the Lender; and

(ii)    in the case of Swingline Loans, if the Lender is the Swingline Lender, the Swingline Committed Amount or, if less, the aggregate unpaid principal amount of all Swingline Loans owing to the Swingline Lender;

together with interest thereon at the rates and as provided in the Credit Agreement.

This Note is one of the Notes referred to in the Credit and Guaranty Agreement dated as of the date hereof (as amended, modified, supplemented, increased and extended from time to time, the “Credit Agreement”) among the Borrower, the Guarantors and Lenders identified therein, and Bank of America, N.A., as Administrative Agent. Capitalized terms used but not otherwise defined herein shall have the meanings provided in the Credit Agreement.

The holder may endorse and attach a schedule to reflect borrowings evidenced by this Note and all payments and prepayments thereon; provided that any failure to endorse such information shall not affect the obligation of the Borrower to pay amounts evidenced hereby.

Upon the occurrence of an Event of Default, all amounts evidenced by this Note may, or shall, become immediately due and payable as provided in the Credit Agreement without presentment, demand, protest or notice of any kind, all of which are waived by the Borrower. In the event payment of amounts evidenced by this Note is not made at any stated or accelerated maturity, the Borrower agrees to pay, in addition to principal and interest, all costs of collection, including reasonable attorneys’ fees and expenses and the allocated cost of internal counsel.

This Note and the Loans and amounts evidenced hereby may be transferred only as provided in the Credit Agreement.

This Note shall be governed by, and construed and interpreted in accordance with, the law of the State of New York.

94

IN WITNESS WHEREOF, the Borrower has caused this Note to be duly executed by its duly authorized officer as of the day and year first above written.

AMERIGROUP CORPORATION,

a Delaware corporation

By:

Name:

Title:

95

Schedule 3.2

FORM OF NOTICE OF CONTINUATION/CONVERSION

Bank of America, N.A., as Administrative Agent

101 N. Tryon Street, 15th Floor

NC1-001-15-04

Charlotte, North Carolina 28255

Attn:______________________

Agency Services

Re: Credit and Guaranty Agreement dated as of December 14, 2001 (as amended, modified, supplemented, increased and extended from time to time, the “Credit Agreement”) among AMERIGROUP Corporation a Delaware corporation (the “Borrower”), certain Subsidiaries and Affiliates of the Borrower, as guarantors, the Lenders identified therein and Bank of America, N.A., as Administrative Agent. Terms used but not otherwise defined herein shall have the meanings provided in the Credit Agreement.

Ladies and Gentlemen:

Pursuant to Section 3.2 of the Credit Agreement, the Borrower hereby requests an Continuation or Conversion of a Revolving Loan outstanding under the Credit Agreement, and in connection therewith sets forth below the terms on which such Continuation or Conversion is requested to be made:

(A)	Loan Type
(B)	Date of Continuation or Conversion (which is the last day of the applicable Interest Period)
(C)	Principal Amount of Continuation or Conversion
(D)	Interest rate basis
(E)	Interest Period and the last day thereof

In accordance with the requirements of Section 5.2, the Borrower hereby represents and warrants that each of the conditions specified in Section 5.2 of the Credit Agreement have been satisfied as of the date hereof.

AMERIGROUP CORPORATION,

a Delaware corporation

By:

Name:

Title:

96

Schedule 5.1(g)(v)

Form of Officer’s Certificate

Pursuant to Section 5.1(g)(v) of the Credit and Guaranty Agreement (the “Credit Agreement”), dated as of December 14, 2001, by and among AMERIGROUP Corporation, a Delaware corporation (the “Borrower”), certain Subsidiaries and Affiliates of the Borrower, as guarantors, the Lenders identified therein and BANK OF AMERICA, N.A., as Administrative Agent, the undersigned,             , Secretary of              (the “Corporation”), hereby certifies as follows:

1.    Attached hereto as Annex I is a true and complete copy of resolutions duly adopted by the board of directors of the Corporation on             , 200  . The attached resolutions have not been rescinded or modified and remain in full force and effect. The attached resolutions are the only corporate proceedings of the Corporation now in force relating to or affecting the matters referenced therein.

2.    Attached hereto as Annex II is a true and complete copy of the Bylaws of the Corporation as in effect on the date hereof.

3.    Attached hereto as Annex III is a true and complete copy of the Certificate of Incorporation of the Corporation and all amendments thereto as in effect on the date hereof.

4.    Each of the following persons is now a duly elected and qualified officer of the Corporation, holding the office(s) indicated, and the signature appearing opposite his/her name below is his/her true and genuine signature, and such officer is duly authorized to execute and deliver on behalf of the Corporation, the Credit Agreement, the Notes and the other Credit Documents and to act as a Responsible Officer on behalf of the Corporation under the Credit Agreement.

Name Title Signature

IN WITNESS WHEREOF, the undersigned has hereunto set his/her name and affixed the corporate seal of the Corporation.

Secretary

Date:

I,             , [Title] of the Corporation, hereby certify that             , whose genuine signature appears above, is, and has been at all times since             , a duly elected, qualified and acting Secretary of the Corporation.

[Title]

Date:

97

Schedule 7.1(c)

FORM OF OFFICER’S COMPLIANCE CERTIFICATE

For the fiscal quarter ended             ,             .

I,             , [Title] of AMERIGROUP Corporation (the “Borrower”) hereby certify that, to the best of my knowledge and belief, with respect to that certain Credit and Guaranty Agreement dated as of December 14, 2001 (as amended, modified, supplemented, increased and extended from time to time, the “Credit Agreement”; all of the defined terms in the Credit Agreement are incorporated herein by reference) among the Borrower, the Guarantors and Lenders party thereto, and Bank of America, N.A., as Administrative Agent:

(a) The company-prepared financial statements that accompany this certificate are true and correct in all material respects and have been prepared in accordance with GAAP applied on a consistent basis, subject to changes resulting from normal year-end audit adjustments.

(b) Since                     (the date of the last similar certification, or, if none, the Closing Date) no Default or Event of Default has occurred under the Credit Agreement.

Delivered herewith are detailed calculations demonstrating compliance by the Credit Parties with the financial covenants contained in Section 7.11 of the Credit Agreement as of the end of the fiscal period referred to above.

This              day of             , 200  .

AMERIGROUP CORPORATION,

a Delaware corporation

By:

Name:

Title:

98

Schedule 7.12

FORM OF JOINDER AGREEMENT

THIS JOINDER AGREEMENT (the “Agreement”), dated as of             ,             , is by and between             , a              (the “Subsidiary”), and Bank of America, N.A., in its capacity as Administrative Agent under that certain Credit and Guaranty Agreement (as amended, modified, supplemented, increased and extended from time to time, the “Credit Agreement”), dated as of December 14, 2001, among AMERIGROUP Corporation, a Delaware corporation (the “Borrower”), certain Subsidiaries and Affiliates of the Borrower, as guarantors, the Lenders identified therein and Bank of America, N.A., as Administrative Agent. All of the defined terms in the Credit Agreement are incorporated herein by reference.

The Credit Parties are required by Section 7.12 of the Credit Agreement to cause the Subsidiary to become a “Guarantor”.

Accordingly, the Subsidiary hereby agrees as follows with the Administrative Agent, for the benefit of the Lenders:

1.    The Subsidiary hereby acknowledges, agrees and confirms that, by its execution of this Agreement, the Subsidiary will be deemed to be a party to the Credit Agreement and a “Guarantor” for all purposes of the Credit Agreement, and shall have all of the obligations of a Guarantor thereunder as if it had executed the Credit Agreement. The Subsidiary hereby ratifies, as of the date hereof, and agrees to be bound by, all of the terms, provisions and conditions applicable to the Guarantors contained in the Credit Agreement. Without limiting the generality of the foregoing terms of this paragraph 1, the Subsidiary hereby jointly and severally together with the other Guarantors, guarantees to each Lender and the Administrative Agent, as provided in Section 4 of the Credit Agreement, the prompt payment and performance of the Guaranteed Obligations in full when due (whether at stated maturity, as a mandatory prepayment, by acceleration or otherwise) strictly in accordance with the terms thereof.

2.  The Subsidiary hereby acknowledges, agrees and confirms that, by its execution of this Agreement, the Subsidiary will be deemed to be a party to the Security Agreement, and shall have all the obligations of an “Grantor” (as such term is defined in the Security Agreement) thereunder as if it had executed the Security Agreement. The Subsidiary hereby ratifies, as of the date hereof, and agrees to be bound by, all of the terms, provisions and conditions contained in the Security Agreement. Without limiting generality of the foregoing terms of this paragraph 2, the Subsidiary hereby grants to the Administrative Agent, for the benefit of the Lenders, a continuing security interest in, and a right of set off against any and all right, title and interest of the Subsidiary in and to the Collateral (as such term is defined in Section 2 of the Security Agreement) of the Subsidiary. The Subsidiary hereby represents and warrants to the Administrative Agent that:

(i)    The Subsidiary’s chief executive office and chief place of business are (and for the prior four months have been) located at the locations set forth on Schedule 1 attached hereto and the Subsidiary keeps its books and records at such locations.

(ii)    The type of Collateral owned by the Subsidiary and the location of all Collateral owned by the Subsidiary is as shown on Schedule 2 attached hereto.

(iii)    The Subsidiary’s legal name is as shown in this Agreement and the Subsidiary has not in the past four months changed its name, been party to a merger, consolidation or other change in structure or used any tradename except as set forth in Schedule 3 attached hereto.

99

(iv)    The patents and trademarks listed on Schedule 4 attached hereto constitute all of the registrations and applications for the patents and trademarks owned by the Subsidiary.

3.    The Subsidiary hereby acknowledges, agrees and confirms that, by its execution of this Agreement, the Subsidiary will be deemed to be a party to the Pledge Agreement, and shall have all the obligations of a “Pledgor” thereunder as if it had executed the Pledge Agreement. The Subsidiary hereby ratifies, as of the date hereof, and agrees to be bound by, all the terms, provisions and conditions contained in the Pledge Agreement. Without limiting the generality of the foregoing terms of this paragraph 3, the Subsidiary hereby pledges and assigns to the Administrative Agent, for the benefit of the Lenders, and grants to the Administrative Agent, for the benefit of the Lenders, a continuing security interest in any and all right, title and interest of the Subsidiary in and to Pledged Shares (as such term is defined in Section 2 of the Pledge Agreement) listed on Schedule 5 attached hereto and the other Pledged Collateral (as such term is defined in Section 2 of the Pledge Agreement).

4.    The address of the Subsidiary for purposes of all notices and other communications is             ,             , Attention of              (Facsimile No.             ).

5.    The Subsidiary hereby waives acceptance by the Administrative Agent and the Lenders of the guaranty by the Subsidiary under Section 4 of the Credit Agreement upon the execution of this Agreement by the Subsidiary.

6.    This Agreement may be executed in two or more counterparts, each of which shall constitute an original but all of which when taken together shall constitute one contract.

7.    This Agreement shall be governed by and construed and interpreted in accordance with the laws of the State of New York.

IN WITNESS WHEREOF, the Subsidiary has caused this Joinder Agreement to be duly executed by its authorized officers, and the Administrative Agent, for the benefit of the Lenders, has caused the same to be accepted by its authorized officer, as of the day and year first above written.

[SUBSIDIARY]

By:

Name:

Title:

Acknowledged and accepted:

BANK OF AMERICA, N.A.,

as Administrative Agent

By:

Name:

Title:

100

Schedule 11.1

LENDERS’ ADDRESSES

CREDIT CONTACT	ADMINISTRATIVE CONTACT
BANK OF AMERICA, N.A.
Bank of America, N.A.	Bank of America, N.A.
Bank of America Corporate Center	Mail Code: CA5-701-05-19
100 North Tryon Street, 17th Floor	1455 Market Street, 5th Floor
Charlotte, North Carolina 28255	San Francisco, California 94103
Attn: Joseph L. Corah	Attn: Mark Doherty
Telephone: 704.386.5976	Agency Management #10831
Telecopy: 704.388.6002	Telephone: 415.436.2776
	Telecopy: 415.503.5137
UBS AG, STAMFORD BRANCH
UBS AG, Stamford Branch	UBS AG, Stamford Branch
677 Washington Blvd.	677 Washington Blvd.
Stamford, CT 06901	Stamford, CT 06901
Attention: Luke Goldsworthy	Attention: Luke Goldsworthy
Telephone: 203.719.0481	Telephone: 203.719.0481
Facsimile: 203.719.4176	Facsimile: 203.719.4176
CIBC INC.
CIBC World Markets	CIBC Inc.
425 Lexington Avenue	Two Paces West, Suite 1200
New York, New York 10017	2727 Paces Ferry Road
Attn: Terence Moore	Atlanta, Georgia 30339
Telephone: 212.856.3528	Attn: Kathryn S. McGovern
Facsimile: 212.856.3761	Telephone: 770.319.4821
	Facsimile: 770.319.4950

101

Schedule 11.3(b)

FORM OF ASSIGNMENT AND ACCEPTANCE

THIS ASSIGNMENT AND ACCEPTANCE, dated as of             , (this “Assignment”), is entered into between THE LENDER IDENTIFIED ON THE SIGNATURE PAGES AS THE “ASSIGNOR” (the “Assignor”) and THE PARTY IDENTIFIED ON THE SIGNATURE PAGES AS “ASSIGNEE” (“Assignee”).

Reference is made to the Credit and Guaranty Agreement dated as of December 14, 2001 (as amended, modified, supplemented, increased and extended from time to time, the “Credit Agreement”) among AMERIGROUP Corporation, a Delaware corporation (the “Borrower”), certain Subsidiaries and Affiliates of the Borrower, as guarantors, the Lenders identified therein and Bank of America, N.A., as Administrative Agent. Terms defined in the Credit Agreement are used herein with the same meanings.

1.    The Assignor hereby sells and assigns to the Assignee, without recourse and without representation or warranty except as expressly set forth herein, and the Assignee hereby purchases and assumes from the Assignor, effective as of the effective date set forth in paragraph 9(c) hereof (the “Effective Date”), those rights and interests of the Assignor under the Credit Agreement and the other Credit Documents identified on Schedule 1 hereto (the “Assigned Interests”), together with unpaid interest and fees relating to the Assigned Interests accruing from the Effective Date. After giving effect to such sale and assignment, the Commitment of, and the amount of the Loans owing to, the Assignor and the Assignee will be as set forth on Schedule 1 hereto. Schedule 2.1(a) is deemed modified and amended to the extent necessary to give effect to this Assignment.

2.    The Assignor (i) represents and warrants that it is the legal and beneficial owner of the interest being assigned by it hereunder and that such interest is free and clear of any adverse claim; (ii) makes no representation or warranty and assumes no responsibility with respect to any statements, warranties or representations made in or in connection with the Credit Documents or the execution, legality, validity, enforceability, genuineness, sufficiency or value of the Credit Documents or any other instrument or document furnished pursuant thereto; (iii) makes no representation or warranty and assumes no responsibility with respect to the financial condition of any Credit Party or the performance or observance by any Credit Party of any of its obligations under the Credit Documents or any other instrument or document furnished pursuant thereto; and (iv) attaches the Notes held by the Assignor and requests that the Administrative Agent exchange such Notes for new Notes payable to the order of the Assignee in an amount equal to the Commitment assumed by the Assignee pursuant hereto and to the Assignor in an amount equal to the Commitment retained by the Assignor, if any, as specified on Schedule 1 hereto.

3.    The Assignee (i) confirms that it has received a copy of the Credit Documents, together with copies of the financial statements referred to in Section 7.1 of the Credit Agreement and such other documents and information as it has deemed appropriate to make its own credit analysis and decision to enter into this Assignment; (ii) agrees that it will, independently and without reliance upon the Administrative Agent, the Assignor or any other Lender and based on such documents and information as it shall deem appropriate at the time, continue to make its own credit decisions in taking or not taking action under the Credit Agreement and the other Credit Documents; (iii) confirms that it is an Eligible Assignee; (iv) appoints and authorizes the Administrative Agent to take such action as agent on its behalf and to exercise such powers and discretion under the Credit Agreement and the other Credit Documents as are delegated to the Administrative Agent by the terms thereof, together with such powers and discretion as are reasonably incidental thereto; (v) agrees that it will perform in accordance with their

102

terms all of the obligations that by the terms of the Credit Agreement are required to be performed by it as a Lender; and (vi) attaches any U.S. Internal Revenue Service or other forms required under Section 3.11.

4.    Following the execution of this Assignment, it will be delivered to the Administrative Agent for acceptance and recording by the Administrative Agent. The effective date for this Assignment shall be the Effective Date.

5.    Upon such acceptance and recording by the Administrative Agent, as of the Effective Date, (i) the Assignee shall be a party to the Credit Agreement and, to the extent provided in this Assignment, have the rights and obligations of a Lender thereunder and (ii) the Assignor shall, to the extent provided in this Assignment, relinquish its rights and be released from its obligations under the Credit Agreement.

6.    Upon such acceptance and recording by the Administrative Agent, from and after the Effective Date, the Administrative Agent shall make all payments under the Credit Agreement and the Notes in respect of the interest assigned hereby (including, without limitation, all payments of principal, interest and commitment fees with respect thereto) to the Assignee. The Assignor and Assignee shall make all appropriate adjustments in payments under the Credit Agreement and the Notes for periods prior to the Effective Date directly between themselves.

7.    This Assignment shall be governed by, and construed in accordance with, the laws of the State of New York.

8.    This Assignment may be executed in any number of counterparts and by different parties hereto in separate counterparts, each of which when so executed shall be deemed to be an original and all of which taken together shall constitute one and the same agreement. Delivery of an executed counterpart of Schedule 1 to this Assignment by telecopier shall be effective as delivery of a manually executed counterpart of this Assignment.

9.    Terms of Assignment

(a)	Legal Name of Assignor:	SEE SIGNATURE PAGE
(b)	Legal Name of Assignee:	SEE SIGNATURE PAGE
(c)	Effective Date of Assignment:	,

See Schedule I attached for a description of the Loans, Obligations and Commitments (and the percentage interests therein and relating thereto) that are the subject of this Assignment.

10.    The fee payable to the Administrative Agent in connection with this Assignment is enclosed.

103

IN WITNESS WHEREOF, the Assignor and the Assignee have caused this Assignment to be executed by their officers thereunto duly authorized as of the date hereof.

                                                 , as Assignor

By:

Name:

Title:

                                                 , as Assignor

By:

Name:

Title:

Notice address of Assignee:

Attn:                                          

Telephone: (            )                                          

Telecopy:(            )                                         

CONSENTED TO AND ACCEPTED:

BANK OF AMERICA, N.A.,*

as Administrative Agent

By:

Name:

Title:

AMERIGROUP CORPORATION,

a Delaware corporation **

By:

Name:

Title:

* Required if the Assignee is an Eligible Assignee solely by reason of clause (iii) of the definition of “Eligible Assignee.”

** Required if no Event of Default has occurred and is continuing.

104

SCHEDULE I

TO ASSIGNMENT AND ACCEPTANCE

A.    REVOLVING LOANS AND LOC OBLIGATIONS PRIOR TO ASSIGNMENT:

	Revolving Commitment Percentage	Revolving Committed Amount	Revolving Loans Outstanding	LOC Committed Amount	LOC Obligations Outstanding
ASSIGNOR
ASSIGNEE
	%	$	$	$	$

B.    REVOLVING LOANS AND LOC OBLIGATIONS SUBJECT TO ASSIGNMENT:

	Revolving Commitment Percentage	Revolving Committed Amount	Revolving Loans Outstanding	LOC Committed Amount	LOC Obligations Outstanding
ASSIGNOR
ASSIGNEE
	%	$	$	$	$

C.    REVOLVING LOANS AND LOC OBLIGATIONS AFTER ASSIGNMENT:

	Revolving Commitment Percentage	Revolving Committed Amount	Revolving Loans Outstanding	LOC Committed Amount	LOC Obligations Outstanding
ASSIGNOR
ASSIGNEE
	%	$	$	$	$

105

EX-21

Exhibit 21.1

Entity	State of Incorporation	Date of Incorporation
AMERIGROUP California, Inc.	California*	03/05/02
AMERIGROUP Connecticut, Inc.	Connecticut*	03/05/02
AMERIGROUP Delaware, Inc.	Delaware*	03/01/02
AMERIGROUP Florida, Inc	Florida*	10/17/01
AMERIGROUP Georgia, Inc.	Georgia*	07/23/96
AMERIGROUP Illinois, Inc.	Illinois	06/14/95
AMERIGROUP Indiana, Inc.	Indiana*	03/04/02
AMERIGROUP Maryland, Inc.	Delaware	11/12/98
AMERIGROUP Massachusetts, Inc.	Massachusetts*	03/05/02
AMERIGROUP New Jersey, Inc.	New Jersey	04/03/05
AMERIGROUP New York, Inc.	New York*	09/14/01
AMERIGROUP Texas, Inc.	Texas	06/19/95

*non-active

1

EX-23.1

Exhibit 23.1

Independent Auditors’ Consent

The Board of Directors

AMERIGROUP Corporation:

We consent to the incorporation by reference in the registration statement (No. 333–37410) on post effective amendment No. 1 to Form S-1 on Form S-8 and in the registration statement (No. 333–745406) on Form S–8 of AMERIGROUP Corporation of our reports dated February 8, 2002, with respect to the consolidated balance sheets of AMERIGROUP Corporation as of December 31, 2001 and 2000, and the related consolidated income statements and statements of stockholders’ equity (deficit) and cash flows for each of the years in the three-year period ended December 31, 2001, and the related financial statement schedule, which reports appear herein.

Norfolk, Virginia

March 12, 2002

/s/ KPMG LLP